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Imperium Renewables Inc · IPO:  S-1 · On 5/23/07

Filed On 5/23/07, 4:03pm ET   ·   Accession Number 1193125-7-121562   ·   SEC File 333-143192

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 5/23/07  Imperium Renewables Inc           S-1                   18:3.9M                                   RR Donnelley/FA

Initial Public Offering (IPO):  Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1         Form S-1 Registration Statement                     HTML   1.56M 
 2: EX-3.1      Amended and Restated Articles of Incorporation      HTML    102K 
 3: EX-3.2      Form of Amended and Restated Articles of            HTML     27K 
                          Incorporation                                          
 4: EX-3.3      Amended and Restated Bylaws                         HTML    133K 
 5: EX-3.4      Form of Amended and Restated Bylaws                 HTML     80K 
 6: EX-10.1     Form of Indemnification Agreement                   HTML     69K 
14: EX-10.10    Lease Agreement                                     HTML     94K 
15: EX-10.11    Methanol Sales Agreement                            HTML     91K 
16: EX-10.12    Contract for the Supply of Rbd Palm Olein           HTML     66K 
 7: EX-10.2     Key Employee Agreement                              HTML     27K 
 8: EX-10.3     Second Amended and Restated Investor Rights         HTML    115K 
                          Agreement                                              
 9: EX-10.4     2005 Stock Option Plan and Related Agreements       HTML     98K 
10: EX-10.6     2007 Employee Stock Purchase Plan and Related       HTML    138K 
                          Agreements                                             
11: EX-10.7     Construction Agreement                              HTML    104K 
12: EX-10.8     Rental Agreement No. 1014                           HTML     92K 
13: EX-10.9     Lease Agreement                                     HTML    227K 
17: EX-21.1     Subsidiaries of the Registrant                      HTML      7K 
18: EX-23.1     Consent of Independent Registered Public            HTML      8K 
                          Accounting Firm                                        


S-1   —   Form S-1 Registration Statement
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Industry and Market Data
"Prospectus Summary
"Risk Factors
"Forward-Looking Statements
"Use of Proceeds
"Dividend Policy
"Conversion of Series B Preferred Stock
"Capitalization
"Dilution
"Selected Consolidated Financial and Operating Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Industry Background
"Business
"Management
"Compensation Discussion and Analysis
"Certain Relationships and Related Party Transactions
"Principal and Selling Shareholders
"Description of Certain Indebtedness
"Description of Capital Stock
"Shares Eligible for Future Sale
"U.S. Federal Income Tax Considerations for Non-U.S. Holders
"Underwriters
"Legal Matters
"Experts
"Where You Can Find More Information
"Index to Consolidated Financial Statements
"Report of Independent Registered Public Accounting Firm
"Consolidated Balance Sheets: As of December 31, 2005 and 2006
"Consolidated Statements of Operations: For the period from March 5, 2004 (inception) to December 31, 2004, and the years ended December 31, 2005 and 2006
"Consolidated Statements of Cash Flows: For the period from March 5, 2004 (inception) to December 31, 2004, and the years ended December 31, 2005 and 2006
"Notes to Consolidated Financial Statements
"Condensed Consolidated Balance Sheets: As of December 31, 2006 and March 31, 2007
"Condensed Consolidated Statements of Operations: For the three months ended March 31, 2006 and 2007
"Condensed Consolidated Statements of Cash Flows: For the three months ended March 31, 2006 and 2007
"Notes to Condensed Consolidated Financial Statements

This is an HTML Document rendered as filed.  [ Alternative Formats ]



  Form S-1 Registration Statement  
Table of Contents

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

Registration No. 333-            


UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


IMPERIUM RENEWABLES, INC.

(Exact name of registrant as specified in its charter)

 

Washington   2860   20-0852308

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

1418 Third Avenue, Suite 300

Seattle, Washington 98101

(206) 254-0203

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


MARTIN G. TOBIAS

Chief Executive Officer

Imperium Renewables, Inc.

1418 Third Avenue, Suite 300

Seattle, Washington 98101

(206) 254-0203

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

 

It is respectfully requested that the Securities and Exchange Commission send copies of all notices, orders and communications to:

MARK F. HOFFMAN, ESQ.

STEVEN R. YENTZER, ESQ.

TRENTON C. DYKES, ESQ.

DLA Piper US LLP

701 Fifth Avenue, Suite 7000

Seattle, Washington 98104

(206) 839-4800

 

PAUL C. PRINGLE, ESQ.

Sidley Austin LLP

555 California Street, Suite 2000

San Francisco, California 94104

(415) 772-1200


Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this registration statement becomes effective.

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, 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.  ¨

 

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

  $345,000,000   $10,592

(1)   Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)   Including shares of common stock that may be purchased by the underwriters to cover over-allotments, if any.

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 the Registration Statement shall become effective on such a date as the Commission, acting pursuant to said Section 8(a), may determine.

 



Table of Contents

The information in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS

(Subject To Completion) Issued May 23, 2007

 

Shares

 

LOGO

COMMON STOCK

 


 

Imperium Renewables, Inc. is offering                  shares of its common stock. This is our initial public offering, and no public market currently exists for our shares. We anticipate that the initial public offering price for our shares will be between $             and $             per share.

 


 

We have applied to list our common stock on the NASDAQ Global Market under the symbol “IMPR.”

 


 

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 9.

 


 

PRICE $             A SHARE

 


 

      

Price to

Public

    

Underwriting
Discounts

and
Commissions

    

Proceeds to

Imperium
Renewables

Per Share      $               $               $          
Total      $                          $                          $                    

 

We and the selling shareholders have granted the underwriters the right to purchase up to an additional                      shares and                      shares, respectively, to cover over-allotments. We will not receive any proceeds from the sale of shares by the selling shareholders.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares to purchasers on                     , 2007.

 


 

Morgan Stanley   Lehman Brothers
UBS Investment Bank
Jefferies & Company   Piper Jaffray   Calyon Securities (USA) Inc.

 

                    , 2007


Table of Contents

TABLE OF CONTENTS

 

     Page

Industry and Market Data

   ii

Prospectus Summary

   1

Risk Factors

   9

Forward-Looking Statements

   27

Use of Proceeds

   28

Dividend Policy

   28

Conversion of Series B Preferred Stock

   29

Capitalization

   30

Dilution

   32

Selected Consolidated Financial and Operating Data

   34

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

   36

Industry Background

   53
     Page

Business

   61

Management

   77

Compensation Discussion and Analysis

   81

Certain Relationships and Related Party Transactions

   91

Principal and Selling Shareholders

   93

Description of Certain Indebtedness

   96

Description of Capital Stock

   97

Shares Eligible for Future Sale

   100

U.S. Federal Income Tax Considerations for Non-U.S. Holders

   103

Underwriters

   107

Legal Matters

   111

Experts

   111

Where You Can Find More Information

   111

Index to Consolidated Financial Statements

   F-1

 


 

You should rely only on the information contained in this prospectus or in any related free writing prospectus filed with the Securities and Exchange Commission, or the SEC, and used or referred to in an offering to you of these securities. We and the selling shareholders have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We and the selling shareholders are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers or sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, and the information appearing in any free writing prospectus is accurate only as of the date of the free writing prospectus.

 

No action has been or will be taken in any jurisdiction by us or by any underwriter that would permit a public offering of the common stock or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. In this prospectus references to “dollars” and “$” are to United States dollars.

 

Until                     , 2007 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

i


Table of Contents

INDUSTRY AND MARKET DATA

 

We obtained the industry, market and competitive position data used throughout this prospectus from industry journals and publications, data on websites maintained by private and public entities, including independent industry associations, general publications and other publicly available information. We believe that all of these sources are reliable, but we have not independently verified any of this information and cannot guaranty its accuracy or completeness. In particular, we have based much of our discussion of the biodiesel industry, including government regulation relevant to the industry and forecasted growth in demand, on information published by the National Biodiesel Board, or NBB, the national trade association for the U.S. biodiesel industry, and by the Energy Information Administration, which provides the official energy statistics for the U.S. government. Independent industry publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Further, because the NBB is a trade organization for the biodiesel industry, they may present information in a manner that is more favorable to that industry than would be presented by an independent source. Forecasts are particularly likely to be inaccurate, especially over long periods of time. Unless the context requires otherwise, references to “diesel” in the U.S. are to distillate fuel oil, which includes numbers 1, 2 and 4 distillates, and references to “diesel” in Europe are to gas diesel oil, which includes diesel used for compression ignition, light heating oil for industrial and commercial uses, and other heavy gas oils.

 

ii


Table of Contents

PROSPECTUS SUMMARY

 

This summary highlights information included elsewhere in this prospectus. This summary is not complete and does not contain all the information that may be important to you. You should carefully read the entire prospectus, especially the risks set forth under the heading “Risk Factors” and our financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Unless the context requires otherwise, references in this prospectus to “Imperium,” “we,” “us,” and “our” refer to Imperium Renewables, Inc. and its subsidiaries and, as of dates and for periods on or prior to May 17, 2005, to our business while it was a part of Seattle Biodiesel LLC. When used in this prospectus, the term “nameplate capacity” means the annual production capacity of a biodiesel production facility for which it is designed and as certified by an independent design engineer.

 

IMPERIUM RENEWABLES, INC.

 

Overview

 

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

 

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

 

Increased use of biodiesel not only reduces dependence on petroleum oil but also combats the environmental impact of petroleum-based fuels. Biodiesel emits fewer exhaust materials that cause smog, particulate pollution and global warming than diesel. According to the U.S. Environmental Protection Agency, or EPA, pure biodiesel, or B100, emits 78% less carbon dioxide, 67% fewer unburned hydrocarbons, 48% less carbon monoxide, and 47% fewer particulates, than diesel. Given these benefits, federal and state governments are mandating or encouraging the use of biodiesel. The federal government provides distributors and blenders with an excise tax credit of $0.01 per percentage point of biodiesel blended with diesel, up to $1.00 per gallon. The

 

1


Table of Contents

2005 Energy Policy Act includes national targets for renewable fuel as a percentage of the overall fuel supply. Various states and local governments have also enacted renewable fuel standards mandating the use of biodiesel as a blend with diesel. The production of biodiesel may also generate emissions credits, which can be traded on exchanges pursuant to the Kyoto Protocol and other efforts.

 

We believe our biodiesel production process and technological innovations will enable us to produce biodiesel that exceeds industry quality standards with relatively lower capital expenditures and operating expenses than certain of our competitors. Although the process of making biodiesel is relatively simple, we believe we will be the first in the U.S. to efficiently and consistently produce high quality biodiesel on an industrial scale that can be transported long distances. We have optimized our biodiesel production process to incorporate new, internally-developed proprietary technology, and our production facilities are being designed and built to process biodiesel from multiple feedstocks simultaneously. This flexibility will allow us to shift into and out of feedstocks based on customer demand and market cost dynamics without hindering production or increasing our operating costs. In addition, our process recaptures methanol and does not create waste water, which reduces costs and environmental permitting requirements.

 

We employ in-house engineering, design and project management personnel in the construction process, which we believe enables us to decrease our time to market and reduce our construction costs. For example, we expect to construct our Grays Harbor production facility in 11 months at a total cost of approximately $73 million, or $0.73 per gallon of nameplate capacity, including facility construction, all transportation infrastructure and on-site storage facilities costs. Excluding the transportation infrastructure and on-site storage facilities, the total cost to construct our Grays Harbor production facility is expected to be approximately $34 million, or $0.34 per gallon of nameplate capacity.

 

We commenced operation of our first commercial biodiesel production facility in April 2005. We expect to complete construction of our second commercial production facility, located at Grays Harbor, Washington, in July 2007, the designs for which are certified at 100 MGY nameplate capacity. We are also developing three additional 100 MGY nameplate capacity facilities that are scheduled to be constructed by the end of 2008: two in the U.S. and one in Argentina. The U.S. production facilities will produce biodiesel primarily for the U.S. East and West Coast markets. The Argentina production facility will produce biodiesel primarily for export to Europe. Each of these production facilities will be based on the same technology, engineering and design that we are using at our Grays Harbor production facility. We expect to finance the construction of these three new facilities with the net proceeds we receive from this offering. We are also evaluating several sites for additional new production facilities, both overseas and in the U.S., that we may develop after 2008.

 

2


Table of Contents

 

The table below provides an overview, as of the date of this prospectus, of our biodiesel production facilities that are in operation or under development and expected to be constructed by the end of 2008.

 

Facility   Seattle   Grays
Harbor
  Hawaii   Argentina   U.S. East
Coast

Location

  Seattle,
Washington
  Grays Harbor,
Washington
  Oahu,
Hawaii
  Ramallo,
Argentina
  Philadelphia,
Pennsylvania

Actual or expected construction completion date

  April 2005   July 2007   Q3 2008   Q3 2008   Q4 2008

Actual or expected nameplate capacity (MGY)

  5   100   100   100   100

Primary target market

  Research and
development
and U.S. West
Coast
  U.S. West
Coast
  Hawaii   Europe   U.S. East
Coast

Current development status

  In operation   Under
construction
  In development   In development   In development

Actual or expected ownership

  100%   93%   100%   100%   100%

 

Competitive Strengths

 

Our competitive strengths include:

 

   

Industry-leading technology. We have developed our proprietary production technology and we will continue to invest in research and development. For example, we are able to convert more than 99% of the vegetable oil feedstock by volume into biodiesel and recapture approximately 99% of the unreacted methanol used in the biodiesel production process. We are continually evaluating new or improved feedstock sources and processing technologies in an effort to leverage our multi-feedstock capabilities and further reduce our production costs.

 

   

Sustainable first mover advantage. We believe our construction time and cost structure, and growing industry-leading production capacity, give us a competitive advantage in securing high-volume customers, favorable supply and distribution agreements and strategic site locations.

 

   

Superior logistics. We are locating our production facilities and distribution logistics in and around coastal deep water ports that provide us with multiple operating, cost and business model advantages compared to other industry participants.

 

   

Feedstock flexibility. Our production facilities are being designed to produce biodiesel simultaneously from multiple feedstocks, including canola, soybean, and palm oil, as well as jatropha, mustard and other feedstocks. This allows us to shift into and out of different feedstocks based on customer demand and market cost dynamics without hindering our production process or substantially increasing our operating costs.

 

   

In-house project management and engineering expertise. We have assembled an in-house project management and engineering staff that allows us to coordinate the design, engineering and construction of our production facilities. We believe our expertise and involvement in constructing and developing low-cost, large-scale production facilities allows us to complete new construction more quickly than many of our competitors.

 

3


Table of Contents
   

Well-capitalized balance sheet. We believe that the proceeds of this offering, together with our other sources of financing, cash on hand and cash from operations, will allow us to complete construction and commissioning of our Grays Harbor and three other new production facilities and to complete our business plan through at least the end of 2009. We believe our low leverage, strong cash position and strong credit profile will also allow us to pursue large-volume customers and enter into larger feedstock agreements at lower cost than our competitors.

 

   

Experienced and proven management team. Our management team has extensive public company experience, is entrepreneurial and growth oriented, and has a proven ability to manage high-growth businesses in rapidly changing environments.

 

Business Strategy

 

Our objective is to grow our leading market position in the U.S. biodiesel industry and become the biodiesel provider of choice. Key elements of our strategy include:

 

   

Establish strategically-located production facilities. We plan to capitalize on the growing U.S. and international demand for biodiesel by establishing our production facilities in strategic markets where there is strong demand for biodiesel and deep water port access to transport raw materials and biodiesel via barge.

 

   

Establish a global distribution network. We plan to expand the reach of our production facilities by growing our global storage and distribution capacity in key U.S. and international markets.

 

   

Build industrial-scale facilities. While much of the domestic biodiesel production capacity consists of facilities having a nameplate capacity of 10 MGY or less, we plan to build industrial-scale production facilities with a nameplate capacity of at least 100 MGY at each facility.

 

   

Promote broad-based adoption of biodiesel. We plan to continue our efforts to promote the adoption of biodiesel, through our lobbying and public relations efforts and will continue to explore new markets for biodiesel.

 

   

Continually improve our technology. We will continue to use our in-house research and development and engineering expertise to evaluate new process designs and techniques, emerging product opportunities, and industry developments to maintain our leadership in the biodiesel industry.

 

   

Manage feedstock costs. Feedstocks are the most expensive component of biodiesel, and we are implementing short and long-term strategies to minimize our feedstock costs.

 

Certain Risk Factors

 

Our business involves various risks, including the volatility and uncertainty of the prices of feedstocks, methanol, crude oil, diesel and biodiesel; our near-term dependence on a single production facility; our ability to secure new sites for, and build, new production facilities in furtherance of our growth strategy; problems with product quality or product performance; our ability to implement our expansion strategy as planned or at all; operational disruptions at our facilities; adverse public perception concerning the biodiesel market or our supply of feedstock; our limited operating history; our level of indebtedness and limitations and restrictions on our business activities imposed by any debt financing agreements; development of infrastructure related to the sale and distribution of biodiesel; our ability to compete effectively in our industry; our ability to implement a distribution network for our biodiesel; changes in or elimination of governmental laws, tariffs, trade or other controls or enforcement practices; environmental, health and safety laws, regulations and liabilities; the results of our hedging transactions and other risk mitigation strategies; our reliance on key management personnel; future technological advances; and our ability to raise additional capital and secure additional financing. See “Risk Factors” beginning on page 9.

 

4


Table of Contents

Our Corporate Information

 

Our corporate offices are located at 1418 Third Avenue, Suite 300, Seattle, Washington 98101. We were incorporated in Washington in May 2005. Until May 17, 2005, our business was part of Seattle Biodiesel LLC, at which time we merged Seattle Biodiesel LLC into a wholly-owned subsidiary, pursuant to which Seattle Biodiesel LLC became our subsidiary. Our website address is http://www.imperiumrenewables.com and our telephone number is (206) 254-0203. Information on our website is not incorporated into this prospectus and should not be relied upon in determining whether to make an investment in our common stock. Any logos or other trademarks mentioned in this prospectus are the property of their respective owners.

 

5


Table of Contents

THE OFFERING

 

Common stock offered by us

                shares

Common stock to be outstanding immediately after this offering

  

             shares, assuming no exercise of the underwriters’ over-allotment option

Over-allotment option offered by us

                shares

Over-allotment option offered by the selling shareholders

  

             shares

Use of proceeds

   We intend to use the net proceeds to us from this offering to finance the development and construction of three new production facilities and for general corporate purposes, including working capital. We will not receive any proceeds from the sale of shares by the selling shareholders. See “Use of Proceeds.”

Risk factors

   You should read the “Risk Factors” section of this prospectus for a discussion of some of the factors that you should consider carefully before deciding to invest in shares of our common stock.

Proposed NASDAQ Global Market symbol

   “IMPR”

 

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

 

   

2,805,337 shares of common stock issuable upon the exercise of options outstanding under our 2005 Stock Option Plan at a weighted-average exercise price of $4.39 per share; and

 

   

             shares of common stock in the aggregate reserved for future issuance under our 2007 Performance Incentive Plan and 2007 Employee Stock Purchase Plan, each of which will become effective upon effectiveness of this offering, subject to automatic annual increases and increases resulting from the rollover of terminated and expired options originally granted under our 2005 Stock Option Plan.

 

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the conversion of all of our outstanding shares of redeemable convertible preferred stock into 14,879,886 shares of common stock upon the consummation of this offering, assuming a one-to-one conversion ratio of our outstanding shares of our Series A and Series B redeemable convertible preferred stock. For more information concerning the conversion ratio for shares of Series B redeemable convertible preferred stock, see “Conversion of Series B Preferred Stock;”

 

   

the issuance of 2,385,069 shares of common stock issuable upon exercise of all of our outstanding warrants and an option issued outside of our 2005 Stock Option Plan;

 

   

no exercise of outstanding options under our 2005 Stock Option Plan;

 

   

a              for              stock split of our common stock that was effected on                     , 2007;

 

   

the filing of our amended and restated articles of incorporation with the Washington Secretary of State, which will occur on or prior to the consummation of this offering, and the effectiveness of our amended and restated bylaws; and

 

   

no exercise of the underwriters’ over-allotment option.

 

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Table of Contents

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following table presents summary consolidated financial and operating data as of the dates and for the periods indicated. The summary consolidated statement of operations data for the period from our inception on March 5, 2004 to December 31, 2004 and for the years ended December 31, 2005 and 2006 have been derived from the audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for the three months ended March 31, 2006 and 2007, and the balance sheet data as of March 31, 2007, have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary to state fairly our results of operations as of and for the periods presented. You should read the information contained in this table in conjunction with the “Selected Consolidated Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included elsewhere in this prospectus. Historical results of operations and financial position are not necessarily indicative of the results that may be expected for future periods.

 

    

March 5, 2004

(inception) to

December 31,

2004

    Years Ended December 31,    

Three Months
Ended

March 31,

 
             2005                 2006           2006     2007  
                       (unaudited)  
     (in thousands, except per share data)  

Statement of Operations Data:

          

Product sales

   $     $ 1,312     $ 4,982     $ 407     $ 1,400  

Cost of sales

           1,600       5,845       591       1,899  
                                        

Gross loss

           (288 )     (863 )     (184 )     (499 )

Operating expenses:

          

Research and development expenses

     30       101       268       2       108  

Selling, general and administrative expenses

     67       501       4,243       516       2,798  
                                        

Total operating expenses

     97       602       4,511       518       2,906  
                                        

Operating loss

     (97 )     (890 )     (5,374 )     (702 )     (3,405 )

Other income (expense), net:

          

Interest income

           28       659       86       937  

Interest expense

     (2 )     (83 )     (736 )     (1 )     (339 )
                                        

Total other income (expense), net

     (2 )     (55 )     (77 )     85       598  
                                        

Net loss

   $ (99 )   $ (945 )   $ (5,451 )   $ (617 )   $ (2,807 )
                                        

Net loss per basic and diluted common share

   $ (0.01 )   $ (0.07 )   $ (0.33 )   $ (0.04 )   $ (0.17 )

Shares used to compute net loss per basic and diluted common share

     8,125       13,440       16,560       16,560       16,560  

Pro forma net loss per basic and diluted share:(1)

          

Net loss

   $ (99 )   $ (945 )   $ (5,451 )   $ (617 )   $ (2,807 )

Pro forma net loss per basic and diluted share (unaudited)(1)

   $ (0.01 )   $ (0.07 )   $ (0.23 )   $ (0.03 )   $ (0.09 )

Shares used to compute pro forma net loss per basic and diluted share (unaudited)(1)

     8,125       13,635       23,333       22,502       32,115  

  (1)   Pro forma net loss per basic and diluted share is computed using the weighted-average number of shares of common stock outstanding, after giving effect to: (i) the conversion of all shares of our Series A and Series B redeemable convertible preferred stock outstanding as of March 31, 2007 into 14,879,886 shares of common stock upon the consummation of this offering, assuming a one-to-one conversion ratio; and (ii) the issuance of 2,385,069 shares of common stock issuable upon exercise of all outstanding warrants and an option issued outside of our 2005 Stock Option Plan.

 

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March 5, 2004

(inception) to

December 31,

2004

    Years Ended December 31,    

Three Months Ended

March 31,

 
           2005                 2006           2006     2007  
                       (unaudited)  
     (in thousands, except operating data)  

Other Financial Data:

          

Working capital (deficit)

   $ (22 )   $ 8,505     $ 28,496     $ 8,129     $ 74,215  

Capital expenditures

   $ 35     $ 547     $ 12,448     $ 131     $ 26,488  

Operating Data (per gallon of biodiesel):

          

Biodiesel sold (gallons, in thousands)

           409       1,550       125       429  

Average selling price of biodiesel sold

   $     $ 2.89     $ 3.19     $ 3.23     $ 3.24  

Average vegetable oil cost

   $     $ 2.35     $ 2.31     $ 2.70     $ 2.67  

Average methanol cost

   $     $ 0.28     $ 0.23     $ 0.26     $ 0.29  

Average gross loss

   $     $ (0.70 )   $ (0.56 )   $ (1.47 )   $ (1.16 )

 

     As of March 31, 2007
     Actual    As Adjusted(1)
     (unaudited)
     (in thousands)

Balance Sheet Data:

     

Cash, cash equivalents and short-term investments

   $ 67,435   

Restricted cash(2)

     16,870   

Property, plant and equipment, net

     1,092   

Construction in progress

     47,758   

Total assets

     139,282   

Long-term put note payable

     10,000   

Redeemable convertible preferred stock

     109,543   

Total shareholders’ equity

     8,300   

  (1)   The as adjusted data give effect to our sale of common stock in this offering and the application of the estimated net proceeds we receive therefrom, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as described under “Use of Proceeds” as if those transactions had occurred as of March 31, 2007. The as adjusted data have been prepared using an assumed initial public offering price of $             per share, which is the midpoint of the estimated price range appearing on the cover page of this prospectus, and also assumes that we will issue a number of shares of common stock in this offering equal to the number of shares appearing on the cover page of this prospectus. An increase or decrease in the assumed initial public offering price per share, or an increase or decrease in the number of shares that we issue in this offering, would increase or decrease, respectively, certain items appearing in the as adjusted column of the above table. For additional information, see “Use of Proceeds,” “Capitalization” and “Dilution” included elsewhere in this prospectus.
  (2)   At March 31, 2007, we had $16.9 million of cash equivalents, which were pledged as collateral against letters of credit in connection with commitments for the purchase of biodiesel and vegetable oil and were classified as restricted cash on our unaudited condensed consolidated balance sheet.

 

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RISK FACTORS

 

An investment in our common stock involves risks. You should carefully consider the risks described below as well as the other information contained in this prospectus before investing in our common stock. The risks and uncertainties described below are not the only ones we may face. The following risks, together with additional risks and uncertainties not currently known to us or that we may deem immaterial, could impair our business, financial condition and results of operations. The market price of our common stock could decline if one or more of these risks and uncertainties develop into actual events, and you may lose all or part of your investment.

 

Risks Relating to Our Business

 

Our financial condition and results of operations are highly dependent on vegetable oil prices, which are subject to significant volatility and uncertainty, so our financial results could fluctuate substantially.

 

Our financial results are substantially dependant on commodity prices, in particular the prices of soybean, canola and palm oils, which we refer to as vegetable oils or feedstock. Vegetable oil is currently the single largest cost in our production of a gallon of biodiesel. Vegetable oil costs for the year ended December 31, 2006 and for the quarter ended March 31, 2007 constituted approximately 56% and 60%, respectively, of our total cost of sales. At certain levels, the prices of vegetable oils may make biodiesel uneconomical when compared to the price of diesel. Because the prices for these items are volatile, our financial results may fluctuate substantially and we may experience periods of lower gross margins, which could result in operating losses. Although we may attempt to offset a portion of the effects of fluctuations in prices by entering into forward contracts to supply our feedstock, or by engaging in transactions that involve exchange-traded futures contracts, the amount and duration of these hedging and other risk mitigation activities may vary substantially over time and these activities also involve substantial risks. See “—We engage in hedging transactions and other risk mitigation strategies that could harm our financial results.”

 

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

 

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

 

Biodiesel prices are influenced by the supply and demand for crude oil and diesel. Historically, the price of biodiesel has correlated closely to the price of crude oil and diesel. The prices of crude oil and diesel fluctuate substantially and are difficult to forecast due to factors such as war, political unrest, worldwide economic conditions, seasonal weather conditions, changes in refining capacity, fluctuations in exchange rates and natural disasters. A perceived reduction of such threats could result in a significant reduction in crude oil prices.

 

Our gross margin depends principally on the spread between biodiesel and vegetable oil prices. The spread between biodiesel and vegetable oil prices can vary significantly. Because biodiesel is marketed both as a pure and blended substitute for diesel, a decrease in crude oil and diesel prices may reduce the price at which we can sell our biodiesel and materially and adversely affect our financial condition and results of operations.

 

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Our business is subject to seasonal fluctuations, which could adversely affect our financial results.

 

Our operating results could be influenced by seasonal fluctuations in the price of vegetable oils and the price of crude oil and diesel. The spot prices of vegetable oils tend to rise during the spring planting season in May and June and tend to decrease during the fall harvest in October and November. In addition, our biodiesel prices are substantially correlated with the price of crude oil and diesel. The price of crude oil and diesel tends to rise both in summer, due to the summer driving season, and in winter, due to home heating needs. Given our limited history, we do not know yet how these seasonal fluctuations will affect our financial results over time.

 

We will for the near future substantially depend on one new production facility, and any operational disruption could result in a reduction of our sales volumes and could cause us to incur substantial losses.

 

Nearly all of our anticipated revenue for at least the next 12 months will be derived from the sale of biodiesel that we plan to produce at our new 100 million gallon per year, or MGY, nameplate capacity facility in Grays Harbor, Washington that is scheduled to begin production in July 2007. Our operations would be subject to significant interruption if this production facility were to experience an accident or were damaged by severe weather or other natural disaster. In addition, our operations may be subject to labor disruptions and unscheduled downtime, or other operational hazards inherent in chemical manufacturing industries, such as equipment failures, fires, explosions, abnormal pressures, blowouts, pipeline ruptures and transportation accidents. Some of these operational hazards may cause personal injury or loss of life, severe damage to or destruction of property and equipment or environmental damage, and may result in suspension or termination of operations and the imposition of civil or criminal penalties. In addition, our insurance may not be adequate to fully cover the potential operational hazards described above, and we can provide no assurance that we will be able to renew our insurance on commercially reasonable terms or at all.

 

Operations at our new Grays Harbor production facility, or at our additional planned production facilities, may not achieve our expected results.

 

We expect to begin biodiesel production at our new Grays Harbor production facility in July 2007. Our Grays Harbor production facility will employ technology on a significantly larger scale than our much smaller Seattle production facility, and our technology has not been tested or proven on this scale. We have not yet demonstrated the production capacity of our Grays Harbor production facility and do not expect to achieve 100 MGY capacity until the first quarter of 2008, at the earliest. If the Grays Harbor production facility does not operate as planned, we may need to incur additional expense, and spend additional time, to commence or increase production at that facility, either of which would reduce our production capacity and increase our production costs. Any failure of our Grays Harbor production facility to produce biodiesel at anticipated cost and capacity levels, or to produce any biodiesel at all, would adversely affect our ability to build other planned production facilities, which will be based on the technology employed at our Grays Harbor production facility. Such failure would adversely affect our financial condition and results of operations.

 

Our business growth strategy substantially depends on our ability to build new production facilities to add to our Grays Harbor and Seattle production facilities. We may not be able to implement this expansion strategy as planned or at all.

 

We plan to grow our business by building three new 100 MGY nameplate capacity facilities, in addition to our Grays Harbor production facility, over the next 18 months at sites in Hawaii, in Argentina and on the U.S. East Coast. These three new production facilities are in various stages of planning and development. We are also currently evaluating several sites globally, including in Belgium, China and the Philippines, for possible additional production facilities. Development, construction and expansion of biodiesel production facilities is subject to a number of risks, any of which could prevent us from commencing operations at a particular facility as expected or at all, including adverse weather conditions, defects in materials and workmanship, labor and material shortages or delays, zoning delays, opposition from local groups, transportation constraints, construction change orders, site changes, labor issues and other unforeseen difficulties. For example, if the barge we have

 

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leased is not delivered on time, we may suffer delays in delivery of feedstock from suppliers and delivery of biodiesel to customers. We must also obtain numerous regulatory approvals and permits to construct and operate new production facilities. These requirements may not be satisfied in a timely manner or at all. In addition, as described below under “—Risks Relating to the Biodiesel Industry—We may be adversely affected by environmental, health and safety laws, regulations and liabilities,” federal and state governmental requirements may substantially increase our costs, which could have a material adverse effect on our results of operations and financial condition. Our expansion plans may also result in other adverse consequences, such as the diversion of management’s attention from our existing operations.

 

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

 

To the extent that proceeds from this offering or, if necessary, our cash on hand and cash generated from operations, are not sufficient to fund the construction costs of our production facilities in development, additional financing will be required. Additional financing may also be required in connection with the construction of our production facilities under evaluation. We may not have access to required financing or such financing may not be available to us on acceptable terms or at all. We may finance the expansion of our business with additional indebtedness or by issuing additional equity securities. We could face financial risks associated with incurring additional indebtedness, such as reducing our liquidity, cash flow and access to financial markets, and increasing the amount of cash flow required to service such indebtedness, or associated with issuing additional stock, such as dilution of ownership and earnings.

 

Our construction costs may also increase to levels that would make a new production facility too expensive to complete or unprofitable to operate. We have not yet entered into construction contracts for our three new planned production facilities or any other facilities that might limit our exposure to higher costs in developing and completing any new facilities. Contractors, engineering firms, construction firms and equipment suppliers also receive requests and orders from other biodiesel companies and, therefore, we may not be able to secure their services or products on a timely basis or on acceptable financial terms. We also have only limited experience with production facility construction, and we may suffer significant delays or cost overruns as a result of a variety of factors, such as shortages of workers or materials, increased cost of construction materials, transportation constraints, adverse weather conditions, unforeseen difficulties or labor issues, any of which could prevent us from commencing operations as expected at our production facilities.

 

The significant expansion of biodiesel production capacity currently underway in the U.S. and internationally may also impede our expansion strategy. As a result of this expansion, we believe that there is increasing competition for suitable sites for biodiesel production facilities, and we may not find suitable sites for construction of new production facilities or other suitable expansion opportunities. Even if we are able to identify suitable sites or opportunities, we may not be able to secure the services and products from the contractors, engineering firms, construction firms and equipment suppliers necessary to build our biodiesel production facilities on a timely basis or on acceptable economic terms.

 

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

 

We have entered into a biodiesel purchase agreement with a large industrial fuel user that provides for our delivery of approximately 18 million gallons of biodiesel to this user in 2007, which may increase by up to 10% per year through 2011. The purchase agreement with this user is currently the only major long-term biodiesel customer contract that we have, and we expect this contract to account for a substantial portion of our

 

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2007 and 2008 revenue. This user could terminate this agreement for any reason with six months’ prior written notice, subject to a termination fee, or in the event of our inability to perform our responsibilities, our insolvency, our uncured material breach of the agreements, including our inability to supply biodiesel at required specifications, or if any law, regulation, judgment or order makes our performance of any obligation under the agreement illegal or prohibited. The termination of, or a significant reduction in biodiesel purchased under, the purchase agreement would materially reduce our revenue and would harm our financial condition and results of operations.

 

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

 

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

 

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

 

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

 

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

 

Our future growth generally depends on our ability to establish and maintain relationships with third parties, including alliances with distributors and feedstock suppliers. For example, we currently rely on an agreement with Methanex Methanol Company, or Methanex, to supply methanol to us for our Grays Harbor production facility. However, we will need to enter into additional agreements with Methanex or other third parties to supply us with required quantities of methanol for our planned production facilities in Hawaii, in Argentina and on the U.S. East Coast. Further, we will need to enter into agreements with additional suppliers of vegetable oils. In addition, we will rely to a certain extent on third parties to sell and market our biodiesel. We cannot assure you

 

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that we will be able to establish strategic relationships with third parties on terms satisfactory to us or at all, or that any arrangements that we enter into will result in the type of collaborative relationship with the third party that we are seeking. Further, these third parties may not regard their relationship with us as important to their own business and operations and may not perform their obligations as agreed. Any failure to develop and maintain satisfactory relationships with distributors and feedstock suppliers would have a material adverse effect on our business.

 

We have a limited operating history and our business may not be as successful as we envision.

 

We began our business in 2004 and commenced commercial operations at our Seattle production facility in 2005, and plan to commence production at our Grays Harbor production facility in July 2007. Accordingly, we have a limited operating history from which you can evaluate our business and prospects. We have generated net losses and negative cash flow from operations since we commenced our operations. For example, for 2006 and the quarter ended March 31, 2007, we incurred net losses of approximately $5.5 million and $2.8 million, respectively, our net cash used in operating activities was approximately $3.8 million and $23.1 million, respectively, and, at March 31, 2007, our accumulated deficit was approximately $9.3 million. We expect to incur increasing net losses and negative cash flow from operations through at least the end of 2007 and possibly in future periods as we build new productions facilities, hire additional employees, apply for regulatory approvals, continue development of our technology, expand our operations and incur the additional costs of operating as a public company.

 

In addition, our prospects must be considered in light of the risks and uncertainties encountered by an early-stage company in the rapidly-evolving biodiesel market, where supply and demand may change significantly in a short amount of time.

 

Some of these risks relate to our potential inability to:

 

   

effectively manage our business and operations;

 

   

effectively respond to political and social factors concerning our supply of raw materials;

 

   

recruit and retain key personnel, including engineering personnel who are critical to our growth prospects;

 

   

successfully achieve a low-cost structure as we expand the scale of our business;

 

   

manage rapid growth in personnel, facilities and business operations; and

 

   

successfully address the other risks described throughout this prospectus.

 

If we cannot successfully address these risks, our business and financial condition would suffer.

 

Our level of indebtedness could adversely affect our ability to react to changes in our business, and we may be limited in our ability to use debt to fund future capital needs.

 

We expect to enter into a $101.2 million credit facility in June 2007 to provide financing for a portion of the cost of constructing our Grays Harbor production facility and to provide a working capital line of credit for this production facility. We expect our debt service requirements to increase substantially in the future in connection with this credit facility and future credit facilities that we may enter into for the purpose of funding future construction costs and working capital needs.

 

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Our expected substantial indebtedness could adversely affect our financial condition. Our level of indebtedness could:

 

   

require us to dedicate a substantial portion of our cash flow from operations to payments with respect to our indebtedness, thereby reducing the availability of our cash flow for working capital, capital expenditures and other general corporate expenditures;

 

   

increase our vulnerability to adverse general economic or industry conditions, including increases in prevailing interest rates;

 

   

limit our flexibility in planning for, or reacting to, competition or changes in our business or industry;

 

   

make us less attractive to potential sources of future debt or equity financing;

 

   

limit our ability to build new production facilities, make strategic acquisitions, introduce new products or services, or exploit business opportunities; and

 

   

place us at a competitive disadvantage relative to competitors that have less debt or greater financial resources.

 

Our ability to make payments on and refinance our indebtedness will depend on our ability to generate cash from our future operations. Our ability to generate cash from future operations is subject, in large part, to general economic, competitive, legislative and regulatory factors and other factors that are beyond our control. There can be no assurance that we will be able to generate enough cash flow from operations or that we will be able to obtain enough capital to service our debt or fund our planned capital expenditures. In addition, we may need to refinance some or all of our indebtedness on or before maturity. There can be no assurance that we will be able to refinance our indebtedness on commercially reasonable terms, or at all.

 

If we cannot service or refinance our indebtedness, we may have to take actions such as selling assets, seeking additional equity financing or reducing or delaying capital expenditures, including construction of planned new production facilities, strategic acquisitions or investments. We may not be able to take these actions, if necessary, on commercially reasonable terms or at all. In addition, lenders under our proposed credit facility could foreclose on and sell our assets at our Grays Harbor production facility if we default under our proposed credit facility.

 

We are a holding company and there may be limitations on our ability to receive distributions from our subsidiaries.

 

We conduct substantially all of our operations through subsidiaries and are dependent on dividends or other intercompany transfers of funds from our subsidiaries to meet our obligations. Moreover, our subsidiary that owns and will operate the Grays Harbor production facility is limited in its ability to pay dividends by the terms of its operating agreement and also, we expect, by the terms of the proposed credit facility we expect to enter into in June 2007.

 

Our ownership position in our Grays Harbor subsidiary and the supermajority provisions contained in the operating agreement that governs that subsidiary may restrict our ability to govern and manage our business.

 

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

 

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Grays Harbor, LLC for the greater of its $10,000,000 cash investment or 7% of the then fair market value of Imperium Grays Harbor, LLC. The obligation to purchase this interest may require that we obtain additional debt or equity financing, all of which could have a material adverse effect on our business, results of operations and financial condition or dilute to the interests of our shareholders.

 

We expect that our proposed credit facility will contain, and that any future debt financing agreements may contain, restrictive covenants that limit distributions and impose restrictions on the operation of our business. Our failure, or the failure of any of our subsidiaries, to comply with applicable debt financing covenants and agreements could adversely affect our business and financial condition.

 

We expect that our proposed credit facility will contain restrictive covenants that have important implications on our operations, including, among other things:

 

   

limiting our ability to obtain additional debt or equity financing;

 

   

limiting our ability to make cash dividends or other intercompany transfers of funds from our subsidiaries;

 

   

subjecting all or substantially all of our assets at our Grays Harbor production facility to liens, which means that there may be no substantial assets left for shareholders in the event of a liquidation; and

 

   

limiting our ability to make business and operational decisions regarding our business and our subsidiaries, including, among other things, limiting our ability to pay dividends to our shareholders, make capital improvements, sell or purchase assets or engage in transactions we deem to be appropriate and in our best interest.

 

The terms of our future debt financing agreements may also contain financial, maintenance, organizational, operational and other restrictive covenants. If we are unable to comply with these covenants or service our debt, we may lose control of our business and be forced to reduce or delay planned capital expenditures, sell assets, restructure our indebtedness or submit to foreclosure proceedings, all of which could result in a material adverse effect upon our business, results of operations and financial condition. Our debt arrangements may also include subordinated debt, which may contain even more restrictions and be on less favorable terms than our senior debt. To secure subordinated debt, we may have to give the lender warrants, put rights, conversion rights, the right to take control of our business in the event of a default or other rights and benefits as the lender may require. This could further dilute your ownership interest in us.

 

We may secure future debt financing directly or through subsidiaries. Regardless of the structure, our debt financing arrangements may contain various covenants and agreements and may contain cross-acceleration and cross-default provisions. Under these provisions, a default or acceleration of one debt agreement could result in the default and acceleration of our other debt agreements, regardless of whether we were in compliance with the terms of such other debt agreements, providing the lenders under such other debt agreements the right to accelerate the obligations due under such other debt agreements. Accordingly, a default, whether by us or any of our subsidiaries, could result in all of our outstanding debt becoming immediately due and payable. The application of cross-acceleration or cross-default provisions means that our compliance, and our subsidiaries’ compliance, with applicable debt covenants and agreements will be interdependent and one default, including a default by one of our subsidiaries, could have a material adverse effect on our business, results of operations and financial condition.

 

Our production facilities, storage facilities and terminals may have unknown environmental problems that could be expensive and time consuming to correct, which may delay or halt construction and operations and delay our ability to generate revenues and profits.

 

We may encounter hazardous conditions at or near each of our production facilities, storage facilities and terminals that may delay or prevent construction or operation of a particular facility. If we encounter a hazardous

 

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condition at or near a site or our operations result in contamination of the environment or expose individuals to hazardous substances, work may be suspended and we may be required to correct the condition prior to continuing construction or further production. The presence of a hazardous condition or contamination would likely delay or prevent construction of a particular production facility and may require significant expenditure of resources to correct the condition. If we encounter any hazardous condition during construction or our operations result in contamination of the environment or expose individuals to hazardous substances, estimated sales and profitability would likely be adversely affected.

 

We engage in hedging transactions and other risk mitigation strategies that could harm our financial results.

 

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

 

We may be unable to protect our intellectual property, which could negatively affect our ability to compete.

 

We rely or may rely on a combination of trademark, tradename, trade secrets, confidentiality agreements and other contractual restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality agreements with our employees, consultants and other third parties, and control access to and distribution of our confidential information. We have also filed a provisional patent application regarding our production technology but the patent has not yet been issued. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary information. Monitoring unauthorized use of our confidential information is difficult and we cannot be certain that the steps we take to prevent unauthorized use of our confidential information will be effective.

 

Litigation or other proceedings relating to intellectual property rights could result in substantial costs and liabilities and prevent us from selling our biodiesel.

 

We must operate in a way that does not infringe the intellectual property rights of others in the U.S. and foreign countries. Third parties may claim that our production process or related technologies infringe their patents or other intellectual property rights. Competitors may have filed patent applications or have issued patents and may obtain additional patents and proprietary rights related to production processes that are similar to ours. We may not be aware of all of the patents potentially adverse to our interests. We may need to participate in interference proceedings in the U.S. Patent and Trademark Office or in similar agencies of foreign governments to determine the priority of invention involving issued patents and pending applications of another entity.

 

The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, may cause us to incur significant expenses, divert the attention of our management and key personnel from other business concerns and, in certain cases, result in substantial additional expenses to license technologies from third parties. Some of our competitors may be able to sustain the costs of complex patent

 

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litigation more effectively than we can because they have substantially greater resources. An unfavorable outcome in an interference proceeding or patent infringement suit could require us to pay substantial damages, cease using the technology or to license rights, potentially at a substantial cost, from prevailing third parties. There is no guarantee that any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms. Even if we are able to obtain rights to a third party’s intellectual property, those rights may be non-exclusive and therefore our competitors may obtain access to the same intellectual property. Ultimately, we may be unable to produce and sell our biodiesel or may have to cease some of our business operations as a result of infringement claims, which could severely harm our business. We cannot guarantee that our biodiesel or technologies will not conflict with the intellectual property rights of others. Additionally, any involvement in litigation in which we are accused of infringement may result in negative publicity about us and injure our relations with any then-current or prospective customers or vendors.

 

We depend on our officers for management and direction, and the loss of any of these persons could harm our business.

 

We depend on our officers for implementation of our expansion strategy and execution of our business plan. The loss of any of our officers could harm our business. The employment of each of our officers or other key personnel is “at will” and each officer or other key employee can terminate his or her employment with us at any time. The loss of any of our officers could delay or prevent the achievement of our business objectives.

 

Potential future acquisitions could be difficult to find and integrate, divert the attention of key personnel, disrupt our business, dilute shareholder value and adversely affect our financial results.

 

As part of our business strategy, we may consider acquisitions of building sites, other biodiesel production facilities, storage or distribution facilities and selected infrastructure. We may not find suitable acquisition opportunities.

 

Acquisitions involve numerous risks, any of which could harm our business, including:

 

   

difficulties in integrating the operations, technologies, products, existing contracts, accounting processes and personnel of the target and realizing the anticipated synergies of the combined businesses;

 

   

difficulties in supporting and transitioning customers, if any, of the target company or assets;

 

   

diversion of financial and management resources from existing operations;

 

   

the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

 

   

risks of entering new markets or areas in which we have limited or no experience;

 

   

potential loss of key employees, customers and strategic alliances from either our current business or the business of the target;

 

   

assumption of unanticipated problems or latent liabilities, such as problems with the quality of the products of the target; and

 

   

inability to generate sufficient revenues to offset acquisition costs.

 

Acquisitions also frequently result in the recording of goodwill and other intangible assets, which are subject to potential future impairment that could harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing shareholders may be diluted, which could affect the market price of our common stock. As a result, if we fail properly to evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of those we anticipate. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

 

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Our business and financial condition may be adversely affected by technological advances if we are unable to adopt or incorporate such advances into our operations at reasonable costs.

 

The development and implementation of new technologies may result in a significant reduction in the costs of biodiesel production. For example, in the U.S. in 2006, approximately 90% of biodiesel was produced from soybean oil, although biodiesel can also be produced from canola, palm and other vegetable oils and animal fat. All of our biodiesel production facilities currently under development, including our Grays Harbor production facility, are being designed to be “multi-feedstock” production facilities, meaning that each facility will be able to produce biodiesel from multiple feedstock sources such as soybean, canola or palm oil. However, efforts to produce other feedstocks with higher yields, or volume of feedstock per acre, are ongoing, and our cost of production could increase if higher yield feedstocks were developed by us or our competitors that would require us to reconfigure our production facilities to operate on such new feedstocks. As refining technology develops, biodiesel producers may become less dependent on soybean oil as the primary feedstock, and technological advances by other biodiesel producers in methods to refine feedstocks into biodiesel could increase efficiency and decrease the cost of production, which could increase competition, decrease biodiesel prices and cause us to incur additional capital expenditures to modify our production methods to remain competitive. We cannot predict when new technologies may become available, the rate of acceptance of new technologies by our competitors or the costs associated with new technologies.

 

Advances and changes in biodiesel production technology may make the biodiesel production technology installed in our Grays Harbor production facility or any of our future production facilities, if any, inefficient, less desirable or obsolete. These advances may also allow competitors to produce biodiesel at a lower cost than us. We expect that technological advances in biodiesel production methods will continue to occur. On January 31, 2006, President Bush announced the Advanced Energy Initiative, which will fund additional research in biodiesel technology. New technologies may develop as a result of this or other initiatives that could become viable means of biodiesel production in the future. If we are unable to adopt or incorporate technological advances, our biodiesel production methods and processes could be less efficient than our competitors, which could reduce our cost competitiveness or cause us to become uncompetitive. If competitors develop, obtain or license technology that is superior to ours or that makes our technology obsolete, we may be required to incur significant costs to enhance or acquire new technology so that our biodiesel production remains competitive. Alternatively, we may be required to seek third-party licenses, which could also result in significant expenditures. There can be no assurance that third-party licenses will be available or, once obtained, will continue to be available on commercially reasonable terms. These costs could negatively affect our business and financial condition.

 

Expansion into international markets is important to our long-term success, and our inexperience in operations outside the U.S. increases the risk that our international operations may not be successful.

 

We believe that our future growth depends, in part, on constructing biodiesel production facilities in foreign countries, such as Argentina, and our ability to produce and sell biodiesel outside the U.S. While some of our executive officers have experience in international business from prior positions, we have no experience with operations outside the U.S. Our goal of selling biodiesel into international markets will require management attention and resources and is subject to inherent risks, which may adversely affect us, including:

 

   

unusual or burdensome foreign laws or regulations and unexpected changes in regulatory requirements, including potential restrictions on the transfer of funds;

 

   

foreign currency risks;

 

   

political and economic instability, including adverse changes in trade policies between countries in which we may maintain operations;

 

   

difficulties in staffing and managing foreign sales and support operations in locations with less developed infrastructures;

 

   

longer accounts receivable payment cycles and difficulties in collecting payments; and

 

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less effective protection of our intellectual property.

 

The noted factors and other factors could adversely affect our ability to execute our international production and marketing strategy or otherwise have a material adverse effect on our business.

 

Risks Relating to the Biodiesel Industry

 

We may not be able to compete effectively in our industry.

 

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

 

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

 

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

 

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

 

The elimination or a significant reduction in the biodiesel tax credit could have a material adverse effect on the price of biodiesel and on our financial condition and results of operations. Federal tax incentives make the cost of biodiesel production significantly more competitive with the price of diesel. Currently, under the American Jobs Creation Act of 2004 and the Energy Policy Act of 2005, or EPAct, producers of diesel/biodiesel blends can claim up to a $1.00 tax credit per gallon of biodiesel produced from virgin vegetable oils. This credit is currently scheduled to terminate on December 31, 2008, and there can be no assurance that it will be renewed on similar terms, if at all. In addition, this credit and other federal and state programs that benefit biodiesel generally are subject to U.S. government obligations under international trade agreements, including those under the World Trade Organization Agreement on Subsidies and Countervailing Measures, that might in the future be the subject of challenges. The elimination or significant reduction in the biodiesel tax credit or other programs could harm our results of operations and financial condition. See “Industry Background—Government Incentives for Biodiesel Production and Use.”

 

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The effect of federal renewable fuel standards is uncertain. The EPAct established minimum nationwide levels of renewable fuels, which includes biodiesel, ethanol and any liquid fuel produced from biomass or biogas, to be blended into fuel supply. By the year 2012, these standards require that the national volume of renewable fuels to be blended in fuel supply equal or exceed 7.5 billion gallons. While these renewable fuel standards should stimulate demand for renewable fuels generally, there can be no assurance of specific demand for biodiesel. Additionally, the U.S. Department of Energy, in consultation with the Secretary of Agriculture and the Secretary of Energy, may waive the renewable fuels mandate with respect to one or more states if the Administrator of the U.S. Environmental Protection Agency, or EPA, determines that implementing the requirements would severely harm the economy or the environment of a state, a region or the U.S., or that there is inadequate supply to meet the requirement. Any waiver of the renewable fuel standards could adversely impact the demand for biodiesel and may have a material adverse effect on our financial condition and results of operations.

 

The effect of state renewable fuel standards is uncertain. The State of Washington has mandated that, by no later than November 30, 2008, at least 2% of diesel sold in Washington be biodiesel, which will increase to 5% when the Director of the Washington State Department of Licensing determines that in-state oil seed crushing capacity and feedstock can satisfy 3% of the required biodiesel. Additionally, by June 1, 2009, 20% of the diesel that Washington State agencies purchase must be biodiesel. While these renewable fuel standards should stimulate demand for renewable fuels locally, only a few other states, including Illinois, Louisiana, Minnesota, Maryland, New Mexico and New York, have enacted similar laws and there can be no assurance that other states will do so. Any change in state renewable fuel standards could adversely impact the demand for biodiesel and may have a material adverse effect on our financial condition and results of operations.

 

Competition due to advances in alternative fuels may lessen the demand for biodiesel and negatively impact our profitability.

 

Alternative fuels, gasoline oxygenates, ethanol and biodiesel production methods are continually under development. A number of automotive, industrial and power generation manufacturers are developing alternative clean power systems using fuel cells or clean-burning gaseous fuels that, like biodiesel, may address increasing worldwide energy costs, the long-term availability of petroleum reserves and environmental concerns. Additionally, there is significant research and development being undertaken regarding the production of ethanol from cellulosic biomass, the production of methane from anaerobic digestors, and the production of electricity from wind and tidal energy systems, among other potential sources of renewable energy. If these alternative fuels continue to expand and gain broad acceptance, we may not be able to compete effectively. This additional competition could reduce the demand for biodiesel, which would adversely affect our business.

 

New production facilities under construction or decreases in the demand for biodiesel may result in excess production capacity in the biodiesel industry, which could cause the price at which we sell biodiesel, and our revenue, to decline.

 

According to the NBB, as of January 31, 2007, there were 105 biodiesel production facilities in operation in the U.S. with reported aggregate annual production capacity of approximately 864 million gallons and 85 facilities under construction or expansion with expected additional annual production capacity of approximately 1.7 billion gallons. Excess capacity in the biodiesel industry could result in lower sales prices for our biodiesel, adversely affecting our financial condition and results of operations. In a manufacturing industry with excess capacity, producers have an incentive to manufacture additional products for so long as the price exceeds the marginal cost of production. This incentive can result in the reduction of the market price of biodiesel to a level that is inadequate to generate sufficient cash flow to cover the costs of production. Excess capacity may also result from decreases in the demand for biodiesel, which could result from a number of factors, including regulatory developments that eliminate or reduce incentives for biodiesel use and reduced consumption of all types of diesel fuel. If the price at which we sell our biodiesel falls due to excess production, our revenues will likely decline, which would decrease our cash flow and negatively impact our operating results.

 

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Declines in the prices of biodiesel will have a significant negative impact on our financial performance.

 

Our revenue will be greatly affected by the price at which we can sell our biodiesel. These prices can be volatile as a result of a number of factors. These factors include the overall supply of and demand for biodiesel, the price of crude oil and diesel, the level of government support, and the availability and price of competing products. U.S. biodiesel prices generally parallel the movement of crude oil and diesel prices. Crude oil and diesel prices are difficult to forecast because the market reflects the global economy, which is subject to political upheaval, natural disasters, and other myriad factors. Even the slightest rumor of political instability can significantly affect the price of crude oil and diesel. Further, exchange rates play a key role in domestic oil pricing. Any lowering of crude oil or diesel prices will likely also lead to lower prices for biodiesel, which may decrease our biodiesel sales and reduce revenue.

 

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

 

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

 

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

 

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

 

   

additional deep-water port access and rail capacity;

 

   

additional terminal and storage facilities for biodiesel;

 

   

growth in use of pipelines to transport biodiesel, including the ability to transport biodiesel blends above 20%;

 

   

increases in truck fleets capable of effectively transporting biodiesel within localized markets; and

 

   

growth in the number of service stations equipped to distribute biodiesel.

 

Substantial investments required for these infrastructure changes and expansions may not be made or they may not be made on a timely basis. Any delay or failure in making the changes to or expansion of infrastructure could hurt the demand or prices for our products, impede our delivery of biodiesel, impose additional costs on us or otherwise have a material adverse effect on our financial condition. Our business depends on the continuing availability of infrastructure and any infrastructure disruptions could have a material adverse effect on our business.

 

We may be adversely affected by environmental, health and safety laws, regulations and liabilities.

 

We are subject to various federal, state, local and foreign environmental laws, regulations and permits, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials, and the health and safety of our employees. In addition, some of these laws and regulations require our facilities to operate under permits that are subject to renewal, modification or revocation. These laws, regulations and permits can often require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal

 

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sanctions, permit revocations and/or facility shutdowns. In addition, we have made, and expect to make, significant capital expenditures on an ongoing basis to comply with increasingly stringent environmental laws, regulations and permits.

 

We may be liable for the investigation and cleanup of environmental contamination at each of the properties that we own or operate and at off-site locations where a release or disposal of hazardous substances occurs and we are deemed to be a responsible party. We may be responsible for releases at our production facilities or at off-site locations under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, or other environmental laws for all or part of the costs of investigation and/or remediation, and for damages to natural resources. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from those properties. Some of these matters may require us to expend significant amounts for investigation, cleanup or other costs.

 

In addition, new environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement of existing laws or other developments could require us to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at our production facilities. Present and future environmental laws and regulations, and interpretations thereof, applicable to our operations, more vigorous enforcement policies and discovery of currently unknown conditions may require substantial expenditures that could have a material adverse effect on our financial condition.

 

The hazards and risks associated with producing and transporting our products, such as fires, natural disasters, explosions, abnormal pressures, blowouts and pipeline ruptures and the failure of pollution control equipment, also may result in personal injury claims or damage to property and third parties. As protection against operating hazards, we maintain insurance coverage against some, but not all, potential losses. Our coverage includes, but is not limited to, physical damage to assets, employer’s liability, commercial general liability, automobile liability and workers’ compensation. We do not carry environmental insurance. Notwithstanding any insurance we may carry, we could sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. Events that result in significant personal injury or damage to our property or third parties or other losses that are not fully covered by insurance could have a material adverse effect on our financial condition.

 

Changes in industry specification standards for biodiesel may increase production costs or require additional capital expenditures to upgrade and/or modify our biodiesel production facilities to meet them. Such upgrades and/or modifications may entail delays in or stoppages of production.

 

The American Society of Testing and Materials, or ASTM, is the recognized standard-setting body for fuels and additives in the U.S. ASTM’s specification for pure biodiesel, D 6751, has been adopted by the EPA, and compliance with such specification is required in order for our biodiesel to qualify as a legal motor fuel for sale and distribution. ASTM has modified its D 6751 specification in the past, and is expected to continue to modify the specification in the future as the use of biodiesel expands. There is no guarantee that our production facilities will be able to produce ASTM-compliant biodiesel in the event of changes to the specification, or that our production facilities will be able to produce biodiesel that complies with specifications used in other countries. We may need to invest significant capital resources to upgrade or modify our production facilities, which might cause delays in or stoppages of production and the resultant loss of revenue, or which might not be economically feasible at all. Any modifications to our production facilities or to the biodiesel ASTM specification or other specification with which we attempt to comply may entail increased production costs or reduced production capacity. These consequences could result in a negative impact on our financial performance.

 

Adverse public opinions concerning the source of our feedstocks could harm our business.

 

We plan to use significant amounts of palm oil from Southeast Asia, primarily Indonesia and Malaysia, in the production of biodiesel. Palm oil is currently the least expensive vegetable oil feedstock that we use.

 

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Environmental and other groups have recently expressed concern that the growing demand for palm oil may result in the clearing of rainforests in Southeast Asia and could threaten animal and plant species in that region. Palm oil growers, processors and environmental groups are working to develop regulations that would attempt to balance the supply of palm oil against these other ecological issues. Public concerns have also been raised concerning the use of soybeans as an alternative fuel feedstock. Historically soybeans have been used for food production, both domestically and as a significant export. The increased use of soybeans as a biodiesel feedstock contributes to the increasing price of soybeans, and could result in decreased availability of soybeans for food production, and could lead farmers to convert to soybean production from the production of other crops that contribute to domestic or international food production. Unfavorable public opinions concerning the use of palm oil, soybeans and other feedstocks, or negative publicity arising from such use, could reduce the global supply of such feedstocks, increase our production costs and reduce the global demand for biodiesel, any of which could harm our business and adversely affect our financial condition.

 

Adverse public opinions concerning the biodiesel industry in general could harm our business.

 

The biodiesel industry is new, and general public acceptance of biodiesel is uncertain. Public acceptance of biodiesel as a reliable, high-quality alternative to diesel may be limited or slower than anticipated due to several factors, including:

 

   

public perception that biodiesel is produced from waste vegetable oil or other lower-quality feedstocks, thereby resulting in low quality fuel;

 

   

public perception that the use of biodiesel will require excessive engine modifications, or that engines running biodiesel will not reliably start in cold conditions;

 

   

actual or perceived problems with biodiesel quality or performance; and

 

   

concern that using biodiesel will void engine warranties.

 

Such public perceptions or concerns, whether substantiated or not, may adversely affect the demand for our biodiesel, which in turn could decrease our sales, harm our business and adversely affect our financial condition.

 

Risks Relating to This Offering and Ownership of Our Common Stock

 

There is no existing market for our common stock and we do not know if one will develop. Even if a market does develop, the stock prices in the market may not exceed the offering price.

 

Before this offering, there has not been a public market for our common stock and there is a very limited number of public companies with biodiesel operations. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NASDAQ Global Market or otherwise, or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any shares that you buy.

 

The offering price for the common stock will be determined by negotiations among us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price you pay in this offering.

 

Our common stock price may be volatile and you may lose all or part of your investment.

 

The market price of our common stock could fluctuate significantly, and you may not be able to resell your shares at or above the offering price. Those fluctuations could be based on various factors in addition to those otherwise described in this prospectus, including:

 

   

our operating performance and the performance of our competitors;

 

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the public’s reaction to our press releases, our other public announcements and our SEC filings;

 

   

changes in earnings estimates or recommendations by research analysts who follow us or other companies in our industry;

 

   

public concern over the source of our raw materials;

 

   

the number of shares available for future sale;

 

   

the passage of legislation or other regulatory developments affecting us or our industry;

 

   

the arrival or departure of key personnel;

 

   

general economic, political and market conditions; and

 

   

other developments affecting us, our industry or our competitors.

 

A decline in the market price of our common stock could cause investors to lose some or all of their investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, shareholders may initiate securities class action lawsuits if the market price of our common stock drops significantly, which may cause us to incur substantial costs and could divert the time and attention of our management.

 

As a result of this offering, we will be subject to public company reporting and other requirements for which we will incur substantial costs and our accounting and other management systems and resources may not be adequately prepared.

 

As a result of this offering, we will become subject to public company reporting and other obligations under the Securities Exchange Act of 1934, as amended, including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. Section 404 requires that our management annually assess the effectiveness of our internal control over financial reporting and that our independent auditors report on management’s assessment. We expect that these requirements will be required beginning with our fiscal year ended December 31, 2008. These reporting and other obligations will place significant demands on our management, administrative, operational and accounting resources. We anticipate that we will need to upgrade our systems, implement additional financial and management controls, reporting systems and procedures, and hire additional accounting, internal audit and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. Further, during the course of our testing for compliance with Section 404, we may identify deficiencies which we may not be able to remediate in time to meet our deadline for compliance with Section 404, and we may also identify inaccuracies or deficiencies in our financial reporting that could require revisions to or restatement of prior period results. Any failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.

 

We will also incur significant additional legal, accounting, insurance and other expenses as a result of being a public company. For example, laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act and rules related to corporate governance and other matters subsequently adopted by the SEC and the NASDAQ Stock Market, will result in substantially increased costs to us, including legal and accounting costs, and may divert our management’s attention from other matters that are important to our business.

 

Our principal shareholders and management own a significant percentage of our stock and will be able to exercise significant influence over our affairs.

 

Our executive officers, directors and holders of five percent or more of our common stock, as of March 31, 2007, beneficially owned approximately 72% of our common stock. We expect that upon the closing of this offering, based on the shares outstanding as of March 31, 2007, that same group will continue to hold at least         % of our outstanding common stock. Consequently, even after this offering, these shareholders will likely

 

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be able to determine the composition of our board of directors, retain the voting power to approve some matters requiring shareholder approval and continue to have significant influence over our operations. The interests of these shareholders may be different than the interests of other shareholders on these matters. This concentration of ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce the price of our common stock.

 

If you purchase shares of common stock sold in this offering, you will experience immediate and substantial dilution.

 

Prior investors have paid substantially less per share for our common stock than the initial public offering price. Accordingly, if you purchase shares of our common stock in this offering at an assumed initial public offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, you will experience immediate and substantial dilution of $             in as adjusted net tangible book value per share of common stock, calculated as of March 31, 2007, because the price that you pay will be substantially greater than the as adjusted net tangible book value per share of common stock of the shares you acquire. See “Dilution.”

 

We have outstanding options that have the potential to dilute shareholder value and cause the price of our common stock to decline.

 

In the past, we have offered and we expect to continue to offer stock options and other forms of stock-based compensation to our directors, officers, employees and others. As of March 31, 2007, we had outstanding options to purchase 2,805,337 shares of our common stock under our 2005 Stock Option Plan at a weighted-average exercise price of $4.39 per share and after this offering will have an aggregate of                      additional shares of common stock reserved for future issuance under our 2007 Performance Incentive Plan and 2007 Employee Stock Purchase Plan, plus potential automatic annual increases in the number of shares of common stock reserved for future awards under each plan and increases in the number of shares of common stock reserved for future awards under our 2007 Performance Incentive Plan resulting from the rollover of terminated and expired options originally granted under our 2005 Stock Option Plan. To the extent that these options, awards or any additional options or warrants we issue in the future, are exercised and the shares issued on exercise are sold in the public market, the public market price of our common stock may decline.

 

A substantial number of shares of our common stock will become eligible for sale in the public market following this offering, which could cause the price of our common stock to decline.

 

All of our officers, directors, existing shareholders and option holders as of the date of this offering have agreed with the underwriters not to sell or otherwise dispose of any of their shares for a period of at least 180 days after the effective date of this prospectus. When these lock-up agreements expire, these shares, and the shares underlying any options held by these individuals, will become eligible for sale, in some cases subject only to the volume, manner of sale and notice requirements of Rule 144 of the Securities Act of 1933, as amended, or the Securities Act. Furthermore, immediately after completion of this offering and based on shares outstanding as of March 31, 2007, the holders of                    shares of our outstanding common stock will also have the right to require that we register those shares under the Securities Act and will also have the right to include those shares in any registration statement we file with the SEC, which would enable those shares to be sold in the public markets, subject to the restrictions under the lock-up agreements referred to above. Sales of a substantial number of these shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional equity securities. See “Shares Eligible for Future Sale” for further discussion of the shares that will be freely tradable following expiration of the lock-up agreements.

 

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Anti-takeover defenses of Washington law and that we have in place in our articles of incorporation and our bylaws could prevent or delay an acquisition of us that shareholders may consider favorable or a replacement or removal of our management that could be beneficial to our shareholders.

 

Provisions of our articles of incorporation and bylaws and applicable provisions of Washington law may make it more difficult or impossible for a third party to acquire control of us without the approval of our board of directors. These provisions:

 

   

limit who may call a special meeting of shareholders;

 

   

provide for a classified board of directors;

 

   

provide that our board of directors may only be removed for cause by the affirmative vote of our shareholders;

 

   

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on at shareholder meetings;

 

   

prohibit cumulative voting in the election of our directors; and

 

   

provide our board of directors the ability to designate the terms of and issue a new series of preferred stock without shareholder approval.

 

In addition, the Washington Business Corporation Act generally prohibits us from engaging in any business combination with certain persons who acquire 10% or more of our voting securities without the prior approval of our board of directors for a period of five years following the date such person acquires the shares. These provisions may have the effect of entrenching our management team and may deprive investors of the opportunity to sell their shares to potential acquirors at a premium over prevailing prices and could reduce the price of our common stock.

 

If we are or become a “United States real property holding corporation,” non-U.S. investors may be subject to U.S. federal income tax, including withholding tax, in connection with the disposition of our shares, and U.S. investors selling our shares may be required to certify as to their status in order to avoid withholding.

 

A non-U.S. holder of our common stock will generally be subject to withholding of U.S. federal income tax with respect to distributions made by us that are treated as dividends for U.S. federal income tax purposes. Moreover, a non-U.S. holder of our common stock not otherwise subject to U.S. federal income tax on gain from the sale or other disposition of our common stock may nevertheless be subject to U.S. federal income tax with respect to such sale or other disposition if we are, or have been, a United States real property holding corporation at any time within the five-year period preceding the disposition, or the non-U.S. holder’s holding period if shorter. Generally, a corporation is a “United States real property holding corporation” at any time the fair market value of its U.S. real property interests, as defined in the Internal Revenue Code of 1986, as amended, and applicable regulations, equals or exceeds 50% of the aggregate fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. Although we believe that we are not currently a United States real property holding corporation, and do not expect to become a United States real property holding corporation, no assurances can be made in this regard.

 

Certain non-U.S. holders of our common stock may be eligible for an exception to the general rule described above if our common stock is regularly traded on an established securities market during the calendar year in which the sale or disposition occurs and the non-U.S. holder holds no more than 5% of our outstanding common stock, directly or indirectly, during the relevant period, or the 5% exception. If we are a United States real property holding corporation during the relevant time period, and the 5% exception does not apply, the purchaser or other transferee of our common stock will generally be required to withhold tax at the rate of 10% on the sales price or other amount realized, unless the transferor furnishes an affidavit certifying that it is not a foreign person in the manner and form specified in the applicable U.S. Treasury regulations. See “U.S. Federal Income Tax Considerations for Non-U.S. Holders.”

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. In particular, statements that we make under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” relating to the energy and biodiesel industries, including prices of crude oil, diesel, biodiesel and vegetable oils, margin trends, anticipated production facilities and related capital expenditures and our strategies are forward-looking statements. When used in this prospectus, the words “may,” “will,” “could,” “should,” “target,” “potential,” “intend,” “anticipate,” “estimate,” “expect,” “project,” “believe,” “plan,” “seek” and similar expressions are intended to identify forward-looking statements.

 

These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. All forward-looking statements address matters that involve risks and uncertainties. Any forward-looking statements are not guarantees of our future performance and are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by any forward-looking statements. We are under no duty to update any forward-looking statements. Some of the factors that may cause actual results, developments, performance, business decisions and other events or circumstances to differ materially from those contemplated by any forward-looking statements include the risks and uncertainties discussed under the heading “Risk Factors.”

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds of $             million from the sale of the              shares of common stock offered by us in this offering, based upon an assumed initial public offering price of $             per share, which is the midpoint of the estimated 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.

 

We intend to use approximately $220 million of the net proceeds from this offering to finance the development and construction of three new production facilities in Hawaii, in Argentina and on the U.S. East Coast. The remaining net proceeds will be used for general corporate purposes, including working capital.

 

The amounts and timing of these expenditures will depend on numerous factors, including the federal, state and local permitting and licensing process, the construction schedules of our contractors, the delivery of goods and equipment by our suppliers and various other considerations typically associated with large-scale construction projects. Pending any use as described above, we plan to invest the net proceeds in investment-grade, short-term, interest-bearing securities.

 

The amount of our estimated net proceeds appearing above has been calculated using an assumed initial public offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus. A $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease, respectively, the estimated net proceeds to us from this offering, after deducting underwriting discounts and commissions, by approximately $            , in each case assuming that the number of shares offered by us as set forth on the cover page of this prospectus remains the same. Likewise, the amount of our estimated net proceeds appearing in the first paragraph above has been calculated assuming that we will issue              shares of common stock in this offering. A 100,000 share increase or decrease in the number of shares of common stock that we issue in this offering would increase or decrease, respectively, our estimated net proceeds by approximately $            , assuming an initial public offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.

 

To the extent the underwriters exercise their over-allotment option, we will not receive any of the proceeds from the sale of over-allotment shares by the selling shareholders.

 

DIVIDEND POLICY

 

We have never declared or paid cash dividends on our capital stock. The payment of dividends is within the discretion of our board of directors and will depend on our earnings, capital requirements and operating and financial position, among other factors. We expect to retain all of our earnings to finance the expansion and development of our business, and we currently have no plans to issue dividends in the foreseeable future. Our subsidiary that owns and operates the Grays Harbor production facility is limited in its ability to pay dividends by the terms of its operating agreement, and we expect that our proposed credit facility will limit, and that any future debt agreements may restrict, our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Description of Certain Indebtedness.”

 

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CONVERSION OF SERIES B PREFERRED STOCK

 

In connection with the consummation of this offering, all of our outstanding preferred stock will automatically convert into common stock. Each share of our outstanding Series A redeemable convertible preferred stock will convert into one share of our common stock and, if the public offering price of our common stock in this offering is $26.18 or more per share, subject to adjustment for stock splits, each share of our outstanding Series B redeemable convertible preferred stock will also convert into one share of our common stock. However, if the public offering price is less than $26.18 per share, subject to adjustment for stock splits, the number of shares of common stock issued upon conversion of each outstanding share of Series B redeemable convertible preferred stock will be increased and will be equal to the number obtained by dividing $13.0853, subject to adjustment for stock splits, by 50% of the public offering price per share in this offering. Therefore, depending on the price of the shares sold in this offering, the holders of the Series B redeemable convertible preferred stock may receive more than one share of common stock for each outstanding share of Series B redeemable convertible preferred stock. We will not know the conversion rate of our Series B redeemable convertible preferred stock until the actual public offering price is determined.

 

Upon completion of this offering, our existing shareholders will continue to have significant influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. Because only some of our shareholders own Series B redeemable convertible preferred stock, any increase in the conversion ratio of the Series B redeemable convertible preferred stock in connection with this offering will increase the relative ownership of our common stock by those shareholders upon completion of this offering.

 

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CAPITALIZATION

 

The following table sets forth, as of March 31, 2007, our cash, cash equivalents and capitalization:

 

   

On an actual basis; and

 

   

On an as adjusted basis to give effect to the receipt of 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, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and conversion of all outstanding shares of our redeemable convertible preferred stock into 14,879,886 shares of common stock.

 

You should read this table in conjunction with the consolidated financial statements and the related notes, “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this prospectus.

 

     As of March 31, 2007  
     Actual     As Adjusted(1)  
     (unaudited)  
     (in thousands)  

Cash, cash equivalents and short-term investments

   $ 67,435     $    
                

Restricted cash(2)

   $ 16,870    
                

Senior secured credit facility(3)

        

Long-term put note payable

     10,000    
                

Total long-term debt

   $ 10,000    
                

Redeemable convertible preferred stock, no par value per share, actual, $0.001 par value per share, as adjusted; 16,000,000 shares authorized, actual, 5,000,000 shares authorized, as adjusted; and 14,879,886 shares issued, actual, no shares issued, as adjusted.

     109,543        

Shareholders’ equity:

    

Common stock, no par value per share, actual, $0.001 par value per share, as adjusted; 129,000,000 shares authorized, actual, 300,000,000 shares authorized, as adjusted; and 16,559,920 shares issued, actual, and              shares issued, as adjusted.

     17,601    

Other comprehensive income

            

Accumulated deficit

     (9,301 )     (9,301 )
                

Total shareholders’ equity

     8,300    
                

Total capitalization

   $    127,843     $                   
                

  (1)   A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) each of cash, cash equivalents, and short-term investments, common stock, total shareholders’ equity and total capitalization 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 the estimated underwriting discounts and commissions. Likewise, a 100,000 share increase (decrease) in the number of shares of common stock that we issue in this offering would increase (decrease) each of cash, cash equivalents, and short-term investments, common stock, total shareholders’ equity and total capitalization by $             million, assuming an initial public offering of $             per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus. The as adjusted information discussed above is illustrative only and following completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.
  (2)   At March 31, 2007, we had $16.9 million of cash equivalents, which were pledged as collateral against letters of credit in connection with commitments for the purchase of biodiesel and vegetable oil and were classified as restricted cash on our unaudited condensed consolidated balance sheet.
  (3)   In June 2007, we expect to enter into a $101.2 million senior secured credit facility. In connection with the proposed credit facility, we expect to continue to have restricted cash equivalents similar to those explained in footnote 2 above.

 

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The table above excludes the following, as of March 31, 2007:

 

   

2,805,337 shares of common stock issuable upon the exercise of options outstanding under our 2005 Stock Option Plan at a weighted-average exercise price of $4.39 per share; and

 

   

                     shares of common stock in the aggregate reserved for future issuance under our 2007 Performance Incentive Plan and 2007 Employee Stock Purchase Plan, each of which will become effective upon effectiveness of this offering, subject to automatic annual increases and increases resulting from the rollover of terminated and expired options originally granted under our 2005 Stock Option Plan.

 

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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 public offering price per share of our common stock and the as adjusted net tangible book value per share of our stock after this offering. We calculate net tangible book value per share by dividing our net tangible book value, which equals total assets less intangible assets, total liabilities and total redeemable convertible preferred stock, by the number of shares of common stock outstanding as of March 31, 2007. Our net tangible book value at March 31, 2007 was approximately $8.3 million, or $0.25 per share, based on 33,824,875 shares outstanding.

 

After giving effect to the sale of              shares of common stock in this offering, based on an assumed initial public offering price of $             per share, after deducting the estimated underwriting discount and estimated offering expenses payable by us, our as adjusted net tangible book value as of March 31, 2007 would have been approximately $             million, or $             per share. This represents an immediate increase in net tangible book value attributable to this offering of $             per share to existing shareholders, and an immediate dilution in net tangible book value of $             per share to new investors, or approximately         % of the assumed initial public offering price of $             per share. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share

      $             

Net tangible book value per share as of March 31, 2007

   $ 0.25   

Increase in net tangible book value per share attributable to this offering

     
         

As adjusted net tangible book value per share after the offering

     
         

Dilution in net tangible book value per share to new investors

      $             
         

 

The information in the preceding table has been calculated using an assumed initial public offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus. A $1.00 increase or decrease in the assumed initial public offering price per share would decrease or increase, respectively, the pro forma net tangible book value per share of common stock after this offering by $             per share and increase or decrease, respectively, the dilution per share of common stock to new investors in this offering by $             per share, in each case calculated as described above and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. Likewise, the information in the preceding table has been calculated assuming that we issue a number of shares of common stock in this offering equal to the number of shares appearing on the cover of this prospectus. A 100,000 share increase or decrease in the number of shares of common stock that we issue in this offering would decrease or increase, respectively, the pro forma net tangible book value per share of common stock after this offering by $             per share and increase or decrease, respectively, the dilution per share of common stock to new investors in this offering by $             per share, in each case calculated as described above and assuming an initial public offering price of $             per share.

 

The following table shows on an as adjusted basis at March 31, 2007, the number and percentage of shares of common stock purchased from us by our existing shareholders and new investors purchasing shares in this offering, the total cash consideration paid to us and the average price per share paid by existing shareholders and by new investors in this offering before deducting estimated underwriting discounts and estimated offering expenses payable by us, based on an assumed initial public offering price of $             per share.

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
     Number    Percent     Amount    Percent    

Existing shareholders

   33,824,875             %   $ 128,890,778             %   $ 3.81

New investors

               %               %  
                  

Total

      100.0 %   $      100.0 %  
                  

 

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The table above excludes the following, as of March 31, 2007:

 

   

2,805,337 shares of common stock issuable upon the exercise of options outstanding under our 2005 Stock Option Plan at a weighted-average exercise price of $4.39 per share; and

 

   

                     shares of common stock in the aggregate reserved for future issuance under our 2007 Performance Incentive Plan and 2007 Employee Stock Purchase Plan, each of which will become effective upon effectiveness of this offering, subject to automatic annual increases and increases resulting from the rollover of terminated and expired options originally granted under our 2005 Stock Option Plan.

 

To the extent these options are exercised, investors purchasing common stock in this offering will experience further dilution. In addition, to the extent we issue new options or rights under any stock compensation plans or issue additional shares of common stock in the future, new investors will experience further dilution.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

 

The following table presents selected consolidated financial and operating data as of the dates and for the periods indicated. The selected consolidated statement of operations data for the period from our inception on March 5, 2004 to December 31, 2004 and for the years ended December 31, 2005 and 2006 and the selected consolidated balance sheet data as of December 31, 2005 and 2006, have been derived from the audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the three months ended March 31, 2006 and 2007, and the selected consolidated balance sheet data as of March 31, 2007, have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2004 have been derived from the audited consolidated financial statements that are not included in this prospectus. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary to state fairly our results of operations as of and for the periods presented. You should read the information contained in this table in conjunction with “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes included elsewhere in this prospectus. Historical results of operations and financial position are not necessarily indicative of the results that may be expected for future periods.

 

    

March 5, 2004

(inception) to

December 31,

2004

    Years Ended December 31,    

Three Months Ended

March 31,

 
             2005                 2006               2006             2007      
                       (unaudited)  
     (in thousands, except per share data)  

Statement of Operations Data:

          

Product sales

   $     $ 1,312     $ 4,982     $ 407     $ 1,400  

Cost of sales

           1,600       5,845       591       1,899  
                                        

Gross loss

           (288 )     (863 )     (184 )     (499 )

Operating expenses:

          

Research and development expenses

     30       101       268       2       108  

Selling, general and administrative expenses

     67       501       4,243       516       2,798  
                                        

Total operating expenses

     97       602       4,511       518       2,906  
                                        

Operating loss

     (97 )     (890 )     (5,374 )     (702 )     (3,405 )

Other income (expense), net:

          

Interest income

           28       659       86       937  

Interest expense

     (2 )     (83 )     (736 )     (1 )     (339 )
                                        

Total other income (expense), net

     (2 )     (55 )     (77 )     85       598  
                                        

Net loss

   $ (99 )   $ (945 )   $ (5,451 )   $ (617 )   $ (2,807 )
                                        

Net loss per basic and diluted common share

   $ (0.01 )   $ (0.07 )   $ (0.33 )   $ (0.04 )   $ (0.17 )

Shares used to compute net loss per basic and diluted common share

     8,125       13,440       16,560       16,560       16,560  

Pro forma net loss per basic and diluted share:(1)

          

Net loss

   $ (99 )   $ (945 )   $ (5,451 )   $ (617 )   $ (2,807 )

Pro forma net loss per basic and diluted share (unaudited)(1)

   $ (0.01 )   $ (0.07 )   $ (0.23 )   $ (0.03 )   $ (0.09 )

Shares used to compute pro forma net loss per basic and diluted share (unaudited)(1)

     8,125       13,635       23,333       22,502       32,115  

  (1)   Pro forma net loss per basic and diluted share is computed using the weighted-average number of shares of common stock outstanding, after giving effect to: (i) the conversion of all shares of our Series A and Series B redeemable convertible preferred stock outstanding as of March 31, 2007 into 14,879,886 shares of common stock upon the consummation of this offering, assuming a one-to-one conversion ratio; and (ii) the issuance of 2,385,069 shares of common stock issuable upon exercise of all outstanding warrants and an option issued outside of our 2005 Stock Option Plan.

 

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March 5, 2004

(inception) to

December 31,

2004

    Years Ended December 31,    

Three Months Ended

March 31,

 
            2005                 2006               2006             2007      
                      (unaudited)  
    (in thousands, except operating data)  

Other Financial Data:

         

Working capital (deficit)

  $ (22 )   $ 8,505     $ 28,496     $ 8,129     $ 74,215  

Capital expenditures

  $ 35     $ 547     $ 12,448     $ 131     $ 26,488  

Operating Data (per gallon of biodiesel):

         

Biodiesel sold (gallons, in thousands)

          409       1,550       125       429  

Average selling price of biodiesel sold

  $     $ 2.89     $ 3.19     $ 3.23     $ 3.24  

Average vegetable oil cost

  $     $ 2.35     $ 2.31     $ 2.70     $ 2.67  

Average methanol cost

  $     $ 0.28     $ 0.23     $ 0.26     $ 0.29  

Average gross loss

  $     $ (0.70 )   $ (0.56 )   $ (1.47 )   $ (1.16 )

 

     As of December 31,   

As of March 31,
2007

         2004             2005          2006     
                     (unaudited)
     (in thousands)

Balance Sheet Data:

          

Cash, cash equivalents and short-term investments

   $ 1     $ 8,697    $ 46,011    $ 67,435

Restricted cash(1)

                     16,870

Property, plant and equipment, net

     327       692      989      1,092

Construction in progress

                21,262      47,758

Total assets

     338       9,842      69,566      139,282

Notes payable to related parties, net of discount

     309            7,500     

Long-term put note payable

                10,000      10,000

Redeemable convertible preferred stock

           7,363      37,400      109,543

Total shareholders’ equity (deficit)

     (27 )     1,808      3,686      8,300

  (1)   At March 31, 2007, we had $16.9 million of cash equivalents, which were pledged as collateral against letters of credit in connection with commitments for the purchase of biodiesel and vegetable oil and were classified as restricted cash on our unaudited condensed consolidated balance sheet.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the “Selected Consolidated Financial and Operating Data” and the consolidated financial statements and accompanying notes included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. See “Forward-Looking Statements.” Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.” All references to years relate to the calendar year ended December 31 of the particular year or the period from March 5, 2004 (inception) to December 31, 2004. All dollar amounts set forth below that are derived from our audited and unaudited consolidated financial statements included in this prospectus reflect rounding for clarity of presentation.

 

Overview

 

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

 

Primary Components of Revenue and Expenses

 

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

 

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

 

   

The price of crude oil and diesel—the price of biodiesel over the long term has been correlated to the price of diesel, which closely follows the price of crude oil. The prices of both crude oil and diesel tend to increase in the summer, due to the summer driving season, and in winter, due to home heating needs. In addition, the prices of crude oil and diesel fluctuate substantially and are difficult to forecast due to factors such as war, political unrest, worldwide economic conditions, changes in refining capacity, fluctuations in exchange rates and natural disasters;

 

   

Federal and state renewable fuel standards and tax incentives—federal, state and local governments have sought to encourage biodiesel production and use in the U.S. through numerous regulations that either provide economic incentives for biodiesel producers and users or mandate the use of specified levels of biodiesel. Any change or elimination in such federal and state incentives could adversely impact the demand for biodiesel; and

 

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

 

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

 

LOGO

  (1)   Biodiesel prices are based on the monthly average of the daily closing price of U.S. average biodiesel rack prices quoted by the Alternative Fuels Index.
  (2)   Canola oil prices are based on the weekly average of the daily closing prices of canola seed futures quoted by the Winnipeg Commodity Exchange (WCE), at an average exchange rate of USD $1.00 = CD $1.1704 and assume a 40% conversion rate of seeds to oil and a conversion rate of 7.628 gallons per pound.
  (3)   Soybean oil prices are based on the weekly average of the daily closing prices of the Soybean Oil Futures quoted by the Chicago Board of Trade (CBOT) and assume a conversion rate of 7.745 gallons per pound.
  (4)   Palm oil prices are based on the monthly average of the daily closing prices of palm futures quoted by the Bursa Malaysia Derivatives Berhas Exchange Futures List (MDEX) at an average exchange rate of USD $1.00 = MYR 3.6911 and assume a conversion rate of 7.795 gallons per pound.

 

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

 

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

 

Selling, general and administrative expenses. Selling, general and administrative expenses consist of salaries and benefits paid to our corporate and administrative employees, payroll taxes, stock-based compensation related to our corporate and administrative employees, expenses relating to third-party services including legal, accounting and other professional services, insurance, travel, marketing and other miscellaneous overhead expenses. We expect selling, general and administrative expenses to increase significantly in connection with our expansion plans, which will require us to hire more personnel. We also anticipate incurring higher expenses as a public company following the completion of this offering as a result of additional legal and corporate governance expenses, including costs associated with compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and salary and payroll-related costs for additional accounting staff.

 

Other income (expense), net. Other income (expense), net includes interest income from our cash and investments, offset by the interest expense payable on our convertible promissory notes issued and an amortized portion of debt discount associated with warrants issued to certain investors related to our convertible promissory notes payable issued in 2006. We expect interest income to increase in 2007 as a result of increased cash and investments resulting from the proceeds we receive from the sale of shares of our common stock in this offering, which we plan to invest in investment-grade, short-term interest-bearing securities, pending use of such proceeds to finance the development and construction of three new production facilities as described under “Use of Proceeds.” We expect interest expense, net of interest capitalized as part of new production facility construction, to increase significantly as a result of our proposed $101.2 million credit facility that we expect to enter into in June 2007 and interest associated with our put note payable.

 

Results of Operations

 

Our historical operating results primarily reflect the operations of our Seattle production facility, where we commenced the production and sale of biodiesel in April 2005. Construction of our Grays Harbor production facility began in November 2006 and we expect to complete construction in July 2007. Expenses associated with our Grays Harbor production facility that are not capitalized as part of the cost of construction are included in our results for the year ended December 31, 2006 and the quarter ended March 31, 2007. The results for the historical periods presented are not representative of the results that we expect to achieve in the future, when we anticipate that our Grays Harbor production facility and our three additional planned production facilities will be in operation. We have generated substantial net losses and negative cash flows from operations since inception and

 

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we expect to incur additional net losses and negative cash flows from operations through at least the end of 2007 and possibly in future periods as we make capital expenditures, hire additional employees, apply for regulatory approvals, continue development of our technology, expand our operations and incur the additional costs of operating as a public company. In particular, capital expenditures are expected to increase substantially in the future, primarily due to the construction of additional production facilities, including those currently planned in Hawaii, in Argentina and on the U.S. East Coast. We also expect that our selling, general and administrative expenses will increase substantially from prior periods.

 

The following table sets forth, for the periods indicated, selected operating results, and the percentage relationship of such specified items in our consolidated statement of operations to total product sales:

 

    March 5, 2004
(inception) to
December 31,
2004
  Years Ended December 31,    

Three Months Ended

March 31,

 
      2005     2006     2006     2007  
                                      (unaudited)  
    (dollars in thousands)  

Product sales

  $         —   $ 1,312     100.0 %   $ 4,982     100.0 %   $ 407     100.0 %   $ 1,400     100.0 %

Cost of sales

            1,600     121.9       5,845     117.3       591     145.2       1,899     135.6  
                                                                   

Gross loss

            (288 )   (21.9 )     (863 )   (17.3 )     (184 )   (45.2 )     (499 )   (35.6 )

Operating expenses:

                   

Research and development expenses

    30         101     7.7       268     5.4       2     0.5       108     7.7  

Selling, general and administrative expenses

    67         501     38.2       4,243     85.2       516     126.8       2,798     199.9  
                                                                   

Total operating expenses

    97         602     45.9       4,511     90.6       518     127.3       2,906     207.6  

Operating loss

    (97 )       (890 )   (67.8 )     (5,374 )   (107.9 )     (702 )   (172.5 )     (3,405 )   (243.2 )

Other income (expense), net:

                   

Interest income

            28     2.1       659     13.2       86     21.1       937     66.9  

Interest expense

    (2 )       (83 )   (6.3 )     (736 )   (14.7 )     (1 )   (0.2 )     (339 )   (24.2 )
                                                                   

Total other income (expense), net

    (2 )       (55 )   (4.2 )     (77 )   (1.5 )     85     20.9       598     42.7  
                                                                   

Net loss

  $ (99 )     $ (945 )   (72.0 )%   $ (5,451 )   (109.4 )%   $ (617 )   (151.6 )%   $ (2,807 )   (200.5 )%
                                                                   

 

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased $2.3 million, or 442%, to $2.8 million in the first quarter of 2007 from $516,000 in the first quarter of 2006. The increase was primarily the result of significantly increasing our management and administrative staff over the prior period in anticipation of the expansion of our business due to construction of our Grays Harbor production facility and future facility expansion plans. Administrative salaries and benefits increased $800,000, or 400%, to $1.0 million in the first quarter of 2007 from $200,000 in the first quarter of 2006. Expense related to stock-based compensation included in selling, general and administrative expenses increased $656,000, to $657,000 in the first quarter of 2007 from $1,000 for the first quarter of 2006. The increase was primarily the result of our implementation of SFAS 123R effective January 1, 2006 and the resulting recognition of the vesting of performance-based stock options at an increased intrinsic value based on the increase in the valuation of our common stock.

 

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We expect that our selling, general and administrative expenses will continue to increase in future periods. We expect that these increases will primarily be related to increased personnel and related production facility costs necessary to support our growth and the related increase in stock-based compensation expense, increased sales and marketing costs incurred to build customer awareness and promote broad-based adoption of biodiesel and expenses for professional fees associated with public company reporting and compliance.

 

Other income (expense), net. Other income, net increased $513,000, or 604%, to $598,000 in the first quarter of 2007 from $85,000 for the first quarter of 2006. The increase was primarily the result of increased investment income from our increased cash and short-term investments resulting primarily from sales of our shares of Series B redeemable convertible preferred stock in the fourth quarter of 2006 and the first quarter of 2007. This increase was partially offset by increased interest expense related to interest costs on a note payable that was outstanding in the first quarter of 2007. We expect other income, net to increase in future periods as a result of increased investment income from investments of cash proceeds generated from this offering, pending use for construction of our three new planned production facilities, and cash generated by our operations. We expect the increase to be partially offset by increased interest expense related to our proposed $101.2 million credit facility beginning in June 2007.

 

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

 

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

 

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

 

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

 

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

 

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

 

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Magnesol costs increased $152,000, or 271%, to $208,000 in 2006 from $56,000 in 2005 and accounted for 4% of our cost of sales in 2006 and 2005. The increase is primarily attributable to the increase in our production of biodiesel in 2006. The relatively flat cost of magnesol as a percentage of our cost of sales was primarily attributable to increased efficiency in our production process offset by an increase in the average cost of magnesol of $0.01 per gallon, or 7.1%, to $0.15 per gallon in 2006 from $0.14 per gallon in 2005. As a result of our technological innovations in the production process, we do not expect to use magnesol in our biodiesel production process at our future production facilities.

 

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

 

During 2006 and 2005 we received compensation from the USDA under their Bioenergy Program. We received $70,000 in 2006 and $230,000 in 2005. The existing federal incentive income program terminated on June 30, 2006, and as a result we only received compensation for the first six months of 2006.

 

Research and development expenses. Research and development expenses increased $167,000, or 165%, to $268,000 in 2006 from $101,000 in 2005. The increase was primarily the result of our continued investments in enhancing our technologies and increasing the operating efficiency of our existing and future production facilities.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased $3.7 million, or 746%, to $4.2 million in 2006 from $501,000 in 2005. The increase was primarily the result of a significant increase in our management and administrative staff over the prior period in anticipation of the expansion of our business due to the construction of our Grays Harbor production facility and future facility expansion plans. Administrative salaries and benefits increased $1.5 million, or 498%, to $1.8 million in 2006 from $301,000 in 2005.

 

Expense related to stock-based compensation included in selling, general and administrative expense was $83,500 in 2006. We had no stock-based compensation expense in 2005. The increase was due to our implementation of SFAS 123R during 2006 and as a result, began to recognize stock-based compensation beginning on January 1, 2006.

 

Other income (expense), net. Other expense, net increased $22,000, or 40%, to $77,000 in 2006 from $55,000 for 2005. The increase was primarily the result of an increase in interest expense of $653,000 related to interest expense from our $7.5 million notes payable, partially offset by an increase in our interest income of $631,000 resulting from increased balances of our cash, cash equivalents and short-term investments.

 

Year Ended December 31, 2005 Compared to Period from March 5, 2004 (Inception) to December 31, 2004

 

Because our Seattle production facility did not commence operations until April 2005, we do not believe that comparisons of our results of operations for 2005 and 2004 are meaningful. As a result, the following discussion focuses primarily on the results achieved by our Seattle production facility in 2005.

 

Product sales. Our product sales in 2005 consisted of sales of biodiesel and our co-product, glycerin, from our Seattle production facility. Product sales were $1.3 million in 2005 from the sale of 409,000 gallons of biodiesel in 2005 at an average sales price of $2.89 per gallon. Net sales from glycerin were $8,000 in 2005. We did not produce or sell any biodiesel or glycerin in 2004.

 

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

 

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

 

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

 

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

 

Research and development expenses. Research and development expenses increased $71,000, or 237%, to $101,000 in 2005 from $30,000 in 2004. The increase was primarily the result of our continued investments in enhancing our technologies and increasing the operating efficiency of our Seattle production facility.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased $434,000, or 648%, to $501,000 in 2005 from $67,000 in 2004. The increase was primarily the result of increasing our management and administrative staff over the prior period. Administrative salaries and benefits were $301,000 in 2005.

 

Other income (expense), net. Other expense, net increased $53,000, or 2,650%, to $55,000 in 2005 from $2,000 in 2004. The increase was primarily the result of an increase in interest expense related to notes payable.

 

Liquidity and Capital Resources

 

Since inception, our activities have consisted primarily of developing our technology and constructing our biodiesel production facilities in Seattle and Grays Harbor, Washington. Our principal sources of liquidity consist of cash and cash equivalents provided by sales of our common stock and Series A and Series B redeemable convertible preferred stock, rather than cash from operations. In addition to funding operations, our principal uses of cash have been, and are expected to continue to be, the construction of new production facilities, other capital expenditures, debt service requirements and general corporate purposes. We also expect to enter into a $101.2 million senior secured credit facility in June 2007, which we will use to complete the construction of our Grays Harbor production facility and for working capital. We expect that the terms of such proposed credit facility will contain some limitations on the ability of our subsidiary that owns and operates the Grays Harbor production facility to pay dividends to us. This subsidiary is also limited in its ability to pay dividends by the terms of its operating agreement.

 

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The following table presents a summary of our cash flows and beginning and ending cash balances for the period from our inception on March 5, 2004 to December 31, 2004, for the years ended December 31, 2005 and 2006 and for the quarters ended March 31, 2006 and 2007:

 

    

March 5,
2004

(inception) to
December 31,
2004

    Years Ended December 31,    

Three Months Ended

March 31,

 
             2005                 2006                 2006                 2007        
                       (unaudited)  
     (in thousands)  

Net cash used in operating activities

   $ (20 )   $ (512 )   $ (3,779 )   $ (779 )   $ (23,136 )

Net cash used in investing activities

     (35 )     (547 )     (39,945 )     (7,381 )     (29,241 )

Net cash provided by financing activities

     56       9,755       53,474       294       71,115  
                                        

Net increase (decrease) in cash and cash equivalents

     1       8,696       9,750       (7,866 )     18,738  

Cash and cash equivalents at beginning of period

           1       8,697       8,697       18,447  
                                        

Cash and cash equivalents at end of period

   $ 1     $ 8,697     $ 18,447     $ 831     $ 37,185  
                                        

 

Operating Activities

 

Net cash used in operating activities increased $22.3 million to $23.1 million in the quarter ended March 31, 2007 compared to $779,000 for the quarter ended March 31, 2006. The increase was primarily due to the use of $16.9 million cash as collateral for letters of credit associated with the purchase of biodiesel and vegetable oil during the first quarter of 2007, which cash is classified as restricted cash. Furthermore, our increased selling, general and administrative expenses increased with our continuing expansion of our management and administrative staff over the prior period in anticipation of the expansion of our business due to construction of our Grays Harbor production facility and future production facility expansion plans.

 

Net cash used in operating activities increased $3.3 million to $3.8 million in 2006, from $512,000 in 2005. The increase was primarily due to operating costs associated with a full year of production at our Seattle production facility and the increased selling, general and administrative expenses associated with increasing our management and administrative staff over the prior period in anticipation of the expansion of our business due to construction of our Grays Harbor production facility and future production facility expansion plans.

 

Net cash used in operating activities increased $492,000 to $512,000 in 2005, from $20,000 in 2004. The increase was primarily due to the start of production in April 2005, whereas no production occurred in 2004 and the increased selling, general and administrative expenses resulting from the initial hiring of management and administrative staff.

 

Investing Activities

 

Net cash used in investing activities increased $21.9 million to $29.2 million in the quarter ended March 31, 2007 compared with $7.4 million for the quarter ended March 31, 2006. The increase was primarily due to the investment of the net proceeds we received from the sale of our Series B redeemable convertible preferred stock during the first quarter of 2007 in short-term investments.

 

Net cash used in investing activities increased $39.4 million to $39.9 million in 2006, from $547,000 in 2005. The increase was primarily due to the investment of the net proceeds we received from the sale of our Series A and Series B redeemable convertible preferred stock in short-term investments of $27.5 million in 2006. In addition, $11.7 million in capital expenditures were made toward construction of our Grays Harbor production facility in 2006.

 

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Net cash used in investing activities increased $512,000 to $547,000 in 2005, from $35,000 in 2004. The increase was primarily due to $547,000 of capital expenditures made toward construction of our Seattle production facility in 2005, as compared to $35,000 in 2004.

 

Financing Activities

 

Net cash provided by financing activities increased $70.8 million to $71.1 million in the quarter ended March 31, 2007 compared to $294,000 for the quarter ended March 31, 2006. The increase was primarily due to the sale of our Series B redeemable convertible preferred stock in the first quarter of 2007.

 

Net cash provided by financing activities increased $43.7 million to $53.5 million in 2006, from $9.8 million in 2005. The increase was primarily due to proceeds from the following activities during 2006: proceeds of $35.7 million from the sale of our Series B redeemable convertible preferred stock; proceeds of $10.0 million from the investment by a third party in our majority-owned subsidiary, Imperium Grays Harbor, LLC, which is recorded as a long-term put note payable on our consolidated balance sheet; and proceeds of $7.5 million from the issuance of convertible promissory notes. In 2005, we received proceeds of $1.5 million from the sale of common stock, proceeds of $7.1 million from the sale of our Series A redeemable convertible preferred stock, and proceeds of $1.0 million from the issuance of convertible notes.

 

Net cash provided by financing activities increased $9.7 million to $9.8 million in 2005, from $56,000 in 2004. The increase was primarily due to proceeds from the following activities during 2005: proceeds of $1.5 million from the sale of common stock; proceeds of $7.1 million from the sale of our Series A redeemable convertible preferred stock; and proceeds of $1.0 million from the issuance of convertible notes.

 

As of March 31, 2007 we had outstanding letters of credit in an aggregate amount of $16.1 million, which were secured by cash deposits by us at the related financial institution in the amount of $16.9 million. The deposits of $16.9 million are recorded as restricted cash on our unaudited condensed consolidated balance sheet as of March 31, 2007.

 

Our financial position and liquidity are, and will be, influenced by a variety of factors, including:

 

   

our ability to generate cash flows from operations;

 

   

the level of our outstanding indebtedness and the interest we are obligated to pay on this indebtedness;

 

   

our capital expenditure requirements, which consist primarily of production facility construction and the purchase of equipment for such production facilities; and

 

   

decisions by us to pursue the development of new feedstocks or production technologies or to make acquisitions or investments.

 

In addition to the construction of our Grays Harbor production facility, and our planned Hawaii, Argentina and U.S. East Coast production facilities described below, we will also consider additional opportunities for growing our production capacity, including the development of additional production facilities and the expansion of one or more of our existing production facilities. To finance any material acquisitions or joint ventures, expand our operations or make additional capital expenditures, however, we may need to seek additional sources of funding, including from the issuance of additional equity or debt. Acquisitions or further expansion of our operations could cause our indebtedness, and our ratio of debt to equity, to increase. Our ability to access such additional sources of capital may be restricted by the terms of our credit facility that we expect to enter into in June 2007.

 

We intend to fund our principal liquidity requirements through cash and cash equivalents, net proceeds we receive from this offering, cash provided by operations and, if necessary, borrowings under our proposed credit facility. We believe our sources of liquidity will be sufficient to meet the cash requirements of our operations for at least the next two years. However, we have based this estimate on our current budget and other assumptions that may be incorrect and, as a result, we may need to seek additional funding through public or private

 

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financing, which may include equity and debt financings. Delays or failures in obtaining regulatory approvals, setbacks in the construction of our production facilities, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to the need to obtain additional financing sooner than we expect. However, financing may not be available when we need it, or may not be available on acceptable terms.

 

Capital Expenditures

 

We expect to make capital expenditures of approximately $122 million and $154 million in 2007 and 2008, respectively, primarily for construction of our Grays Harbor, Hawaii, Argentina and U.S. East Coast production facilities. Additionally, we may also choose to make capital expenditures to expand our production capacity at our Seattle production facility.

 

Production Capacity Expansion

 

Set forth in the table below are the estimated construction costs, not including start-up working capital requirements, and the anticipated sources of funds to finance the construction costs of our biodiesel production facilities under construction or development as of March 31, 2007:

 

Facility

  Grays Harbor   Hawaii   Argentina   U.S.
East Coast
    (in millions)

Estimated completion date

    July 2007     Q3 2008     Q3 2008     Q4 2008

Total estimated construction costs

  $ 73   $ 90   $ 65   $ 65

Estimated remaining construction costs

  $ 25   $ 89   $ 65   $ 65

Borrowings under existing and committed credit facilities

  $ 41   $   $   $

Amount to be funded with the net proceeds of this offering

  $   $ 90   $ 65   $ 65

Amount to be funded with cash on hand and cash generated from operations

  $   $   $   $

 

Credit facility. In June 2007, we expect to enter into a $101.2 million senior secured credit facility with Société Générale and its U.S. subsidiary SG Americas Securities, LLC. Initially, we expect that the credit facility will consist of a $41.2 million construction term loan that we may use to finance the completion of construction of our Grays Harbor production facility and a $60.0 million senior secured revolving credit facility available for working capital purposes, including letters of credit for the bulk purchase of vegetable oil and biodiesel. Borrowings under the term loan and the revolving credit facility will bear interest at LIBOR plus the applicable margin of 3.5% during the construction of the Grays Harbor production facility and 3.25% thereafter. For a more detailed description of the proposed credit facility, see “Description of Certain Indebtedness.”

 

Grays Harbor production facility construction. We do not intend to use any of the proceeds from this offering to finance the construction of our Grays Harbor production facility. We commenced construction of our Grays Harbor production facility in November 2006 and expect to complete construction of the project in July of 2007.

 

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

 

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Contractual Obligations

 

The following summarizes our contractual obligations as of December 31, 2006. Our obligations are likely to increase significantly as we enter into agreements in connection with the operations at our Grays Harbor production facility, and construction of our Hawaii, Argentina and U.S. East Coast production facilities.

 

Type of Obligation

   2007    2008    2009    2010    2011    Thereafter    Total
     (in thousands)

Purchase obligations(1)

   $ 49,582    $ 19,148    $ 20,523    $ 10,279    $    $    $ 99,532

Operating lease obligations(2)

     1,408      5,204      4,674      1,074      1,083      8,701      22,144

Put note payable obligation(3)

               10,000                     10,000

Other purchase obligations(4)

     6,000                               6,000
                                                

Total contractual obligations

   $ 56,990    $ 24,352    $ 35,197    $ 11,353    $ 1,083    $ 8,701    $ 137,676
                                                

  (1)   Our purchase obligations relate to biodiesel, and vegetable oil and methanol to be used in the production of biodiesel.
  (2)   Our operating lease obligations relate to our Grays Harbor production facility and corporate headquarters office leases, as well as leases related to rail cars and a marine barge.
  (3)   Our put note payable obligation relates to a September 2006 unit purchase agreement with a third party. Under this agreement, the user purchased a 7% interest in Imperium Grays Harbor, LLC, or IGH, a subsidiary of ours, for $10.0 million. The agreement provides that, beginning September 30, 2009 or upon a change in control, at the option of the third party, we would be obligated to repurchase the 7% interest in IGH for the greater of: (i) $10.0 million, less any cash dividend distributions to the third party; or (ii) an amount equal to 7% of the then fair value of IGH. Our recorded obligation will be adjusted to the extent the fair value of IGH exceeds $10.0 million, less any cash dividend distributions.
  (4)   Our other purchase obligations relate to a marine tanker barge to be used for the distribution of our biodiesel and may be used to deliver vegetable oil to our production facilities.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Summary of Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements included elsewhere in this prospectus, which have been prepared in conformity with generally accepted accounting principles in the U.S., or GAAP. Note 1 to our audited consolidated financial statements included elsewhere in this prospectus contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions.

 

Accounting estimates are an integral part of the preparation of financial statements and are based on management’s current judgment. The process used by management encompasses its knowledge and experience about past and current events and certain assumptions concerning future events. The judgments and estimates concern the effects of matters that are inherently uncertain and that affect the carrying value of our assets and liabilities. We believe that of our significant accounting policies, the following are noteworthy because changes in these estimates or assumptions could materially affect our financial position and results of operations.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the evaluation of the collectibility of our trade accounts receivable, the determination of the carrying value of our inventories, the determination of the useful lives of property, plant and equipment, the determination of the fair value of our put note obligation and the fair value of equity-related transactions, including stock-based compensation, warrants issued in connection with our preferred stock and beneficial conversion features related to the issuance of convertible debt with related warrants.

 

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Revenue recognition. Revenue is recognized only when persuasive evidence of an arrangement exists, title and the risk and rewards of ownership have passed to the customer, the price is fixed and determinable, and collectibility is reasonably assured. The terms of our sales arrangements generally provide that title and the risks and rewards of ownership pass to the customer at the free on board shipping point. Shipping and handling costs invoiced to customers are included in product sales and the related costs are included in cost of sales.

 

Allowance for doubtful accounts. Our allowance for doubtful accounts represents our best estimate of the losses inherent in our trade accounts receivable as of the balance sheet date. We periodically evaluate the collectibility of our trade accounts receivables based on several factors, including our initial credit assessment of our customers, historical trends of aging of accounts, write-off experience and expectations of future performance. Delinquent accounts are written off when they are determined to be uncollectible.

 

Inventory. Inventory is stated at the lower of cost or market. The cost is determined using the first-in first-out method. The valuation of inventory, which is recorded at the lower of cost or market, requires us to estimate obsolete or excess inventory as well as inventory that is not of saleable quality. Product-specific facts and circumstances are reviewed in the inventory valuation process, including a review of the customer base, the stage of the product life cycle, consumer confidence, and customer acceptance of our products as well as an assessment of the average selling price of our product as compared to the average cost of production. Based on such analysis, if necessary, inventory is written down, which would have a negative impact on our gross profit (loss). We regularly review inventory for the presence of obsolete products attributed to age and quality. Inventory that is considered obsolete is written off, which would have a negative impact on our gross profit (loss). The determination of obsolete or excess inventory requires us to estimate the future demand for our products. To date, we have been able to sell all inventory produced; however, as new production facilities begin to produce larger volumes of inventory, we expect to assess such inventory levels with sales forecasts. If our sales forecasts for specific products are greater than actual demand and we fail to reduce manufacturing output accordingly, or if we fail to accurately forecast sales, we could be required to write down additional inventory, which would have a negative impact on our gross profit (loss).

 

Property, plant and equipment, net. Property, plant and equipment is stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets beginning at the point assets are placed in service. We capitalize costs of additions and improvements that increase the value or materially extend the life of the related assets, including direct costs of constructing property, plant and equipment and interest costs related to construction. Leasehold improvements are amortized over the lesser of the useful life or the term of the applicable lease using the straight-line method. Maintenance and repairs are expensed as incurred. Estimated asset lives at our Seattle production facility and corporate headquarters are as follows:

 

     Years

Manufacturing and production equipment

   4

Office equipment

   3–5

Leasehold improvements

   3–4

 

To date, recorded manufacturing and production equipment costs relate to our Seattle production facility, which is subject to a four-year operating lease. In accordance with SFAS No. 13, Accounting for Leases, the estimated useful lives of such assets have been recorded at the lesser of the estimated useful lives of the specific assets or the lease term. The four year estimated life of the manufacturing and production equipment at the Seattle production facility represents the remaining term of the operating lease. Assets related to future production facilities are expected to have estimated lives which may vary from those at our Seattle production facility.

 

Construction in progress of $21.3 million at December 31, 2006 and $47.8 million at March 31, 2007 represents costs associated with property, plant and equipment under construction at our Grays Harbor

 

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production facility. Construction in progress is stated at cost, which includes the cost of construction and other direct costs attributable to the production facility construction, including capitalized interest costs, and direct labor and related benefits. Such costs will be reclassified to an appropriate fixed asset classification and will begin being depreciated when the asset is placed into service. Site rental costs incurred during the construction period are recognized as rental expense in accordance with FASB Staff Position No. FAS 13-1, Accounting for Rental Costs Incurred During a Construction Period.

 

Asset retirement obligations. We account for asset retirement obligations in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations, or SFAS 143. SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation when there is a legal obligation associated with the retirement of a tangible long-lived asset and the liability can be reasonably estimated. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the estimated remaining term of the related lease. Under SFAS 143, present value techniques are generally used to establish the fair value of an asset retirement obligation and the resulting liability is accreted to its expected settlement amount using the interest method. The estimated liability is remeasured periodically as additional information becomes available.

 

Put note payable. In September 2006, IGH entered into a unit purchase agreement and an operating agreement with a third party. Under this agreement, the third party purchased a 7% interest in IGH for $10.0 million. The agreement provides that, beginning as of September 30, 2009, or upon a change in control, at the option of the third party, we would be obligated to repurchase the 7% interest in IGH for the greater of: (1) $10.0 million, less any cash dividend distributions to the third party; or (2) an amount equal to 7% of the then fair value of IGH. We have recorded the initial $10.0 million as a put note payable as of December 31, 2006 and March 31, 2007 and will adjust the recorded value of the note to its fair value to the extent the fair value exceeds $10.0 million, less any cash dividend distributions, with the change in the fair value of the obligation being recognized as interest in the period in which such change occurs. If the fair value of IGH changes significantly, the fair value of the put note payable may differ materially in the future from that recorded in the current period.

 

Stock-based compensation. We grant options to purchase shares of our common stock under our 2005 Stock Option Plan approved on June 9, 2005. No options were granted prior to the approval of this plan.

 

Prior to January 1, 2006, we measured stock-based compensation expense for our employee compensation plan using the intrinsic value method prescribed by APB 25, Accounting for Stock Issued to Employees, or APB 25. Under APB 25, when the exercise price of our employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recognized. We applied the disclosure provisions of SFAS 123, Accounting for Stock-Based Compensation, or SFAS 123, as amended by SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure as if the fair-value based method had been applied in measuring compensation expense. In accordance with SFAS 123, our 2005 pro forma fair value disclosures included an expected volatility rate of zero. Under APB 25, when the exercise price of our employee stock options was equal to the market price of the underlying stock on the date of the grant, no compensation expense was recognized.

 

Effective January 1, 2006, we adopted the provisions of, and began accounting for stock-based compensation in accordance with, SFAS No. 123—revised 2004, Share-Based Payment, or SFAS 123R, which replaced SFAS No. 123, Accounting for Stock-Based Compensation and superseded Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, or APB 25. Under the fair value provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense on a straight line basis over the requisite service period, which is the vesting period and is typically a period of four years. We use the Black-Scholes option pricing model to determine the fair value of stock-based awards under SFAS 123R. We expect to increase our option grants to attract and retain personnel as we expand our production facilities, and as such, we expect our stock-based compensation expense to differ materially in the future from that recorded historically.

 

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As we were a non public entity at the date of adoption of the 2005 Stock Option Plan and used the minimum value method for pro forma disclosures under SFAS 123R, we were required to apply the prospective transition method. For all options granted on or after January 1, 2006, we use the Black-Scholes option pricing model to determine the fair value of stock-based awards under SFAS 123R. If any of the assumptions used in the Black-Scholes option pricing model changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

 

The calculation of stock-based compensation expense involves complex and subjective assumptions, including our stock price volatility, expected term of the option grants, dividend yields and the applicable risk-free interest rate. During the year ended December 31, 2006, the expected stock price volatility we used was based on the average historical volatility of a comparable group of companies that are publicly traded. As a privately held company with minimal history, we deemed an assessment of stock price volatility associated with a comparable group of publicly traded companies within our industry as a reasonable measurement of stock price volatility. The expected term of the options represents the estimated period of time until exercise and is based on the simplified method prescribed in the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, which is the average of the vesting and contractual life of the option. Based on our limited operating history, we consider the expected term of the option grants, as calculated in accordance with SFAS 123R, as reasonable and expect to update such expected term upon the development of actual historical results. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a term equivalent to the expected term of the stock options. We have not paid dividends in the past.

 

Total stock-based compensation expense recorded during the year ended December 31, 2006, and the quarter ended March 31, 2007, was $85,071 and $658,000, respectively. No amounts related to stock-based compensation were capitalized as part of the cost of an asset as of December 31, 2006 or during the quarter ended March 31, 2007. As of March 31, 2007, approximately $5.7 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock options is expected to be recognized over a remaining weighted-average period of approximately three years, to be recognized as follows: $1.1 million in the last nine months of 2007, $1.5 million in 2008, $1.5 million in 2009, and $1.6 million in 2010. However, the actual amount of compensation expense relating to any of these options that we recognize in the future may be lower to the extent that actual forfeitures are different than management estimates. We intend to grant stock options and other stock-based compensation in the future and we may therefore recognize additional compensation expense in connection with these future grants.

 

Stock-based compensation expense for equity instruments granted to non-employees is determined in accordance with SFAS 123 and Emerging Issues Task Force, or EITF, Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, which provides for recognition of stock-based compensation expense equal to the fair value of the consideration received or the fair value of the equity instruments issued, whichever was more reliably measured. During 2006, we granted stock options to a third party for consulting services. The options were valued with a grant date fair value of $23,873, which is included in the total stock-based compensation of $85,071 for the year ended December 31, 2006. During the quarter ended March 31, 2007, we granted stock options to an individual that was not an employee for consulting services. The options were valued with a grant date fair value of $473,000, which is included in the total stock-based compensation of $658,000 for the quarter ended March 31, 2007. The fair value of equity instruments granted to nonemployees was measured as of the earlier of the performance commitment date or the date at which performance was complete. When it was necessary under GAAP to recognize these costs during financial reporting periods prior to the measurement date, the fair value of the equity instruments granted to nonemployees was periodically remeasured as the underlying instruments vested and were earned.

 

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New Accounting Pronouncements

 

In February 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159. SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value and to report in earnings unrealized gains and losses on those items for which the fair value option has been elected. SFAS 159 also requires entities to display the fair value of those assets and liabilities on the face of the balance sheet. SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS 159. We are currently evaluating the impact of this pronouncement on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of this pronouncement on our consolidated financial statements.

 

In June 2006, the FASB issued Interpretation, or FIN, No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of SFAS No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. In addition, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure related to uncertain income tax positions. FIN 48 is effective for the fiscal years beginning after December 15, 2006. Accordingly, we have adopted FIN 48 as of January 1, 2007. The adoption of FIN 48 did not have a significant impact on our consolidated financial statements.

 

Quantitative and Qualitative Disclosures about Market Risk

 

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

 

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

 

Put Note Payable

 

Our put note payable is susceptible to changes in the fair value of our subsidiary IGH. If the fair value of IGH changes significantly, the fair value of the put note payable may differ materially in the future from that recorded in the current period. An increase in the fair value of IGH resulting in an increase in our put note

 

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payable of 10% would result in additional interest expense of $1.0 million. For additional information see Note 7 to our audited consolidated financial statements included elsewhere in this prospectus.

 

Interest Rate Risk

 

Our available-for-sale securities are comprised primarily of fixed-income instruments. The primary objectives of these investments are to preserve capital and liquidity. The available-for-sale securities are investment grade and are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of other comprehensive income. We do not currently hedge the interest rate exposure on our available-for-sale short term securities and we consider the exposure to interest rate risk minimal due to the short term nature of such securities. We do not expect interest rate fluctuations to materially affect the aggregate value of our financial assets.

 

Inflation

 

Since our inception, inflation has not significantly affected our operating results. However, costs for construction, taxes, repairs, maintenance and insurance are all subject to inflationary pressures and could affect our ability to maintain our production facilities adequately, build new biodiesel production facilities and expand our existing facilities.

 

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INDUSTRY BACKGROUND

 

Biodiesel Overview

 

Biodiesel is a clean-burning alternative to traditional, hydrocarbon-based diesel. Biodiesel is manufactured from renewable feedstocks such as soybean, canola, palm and sunflower oil, as well as from animal fats, fish oils and recycled cooking oils. Biodiesel is produced by reacting feedstocks with methanol in the presence of a catalyst, which yields biodiesel and glycerin as a co-product. Unlike ethanol, which is not generally used as a direct substitute for gasoline, biodiesel is a direct replacement of diesel and can be blended between 1% and 99% with diesel. Biodiesel is primarily used in blends with diesel as a fuel for trucks and automobiles, and it can also be used as home heating oil and as an alternative fuel in a variety of other applications, including marine transportation, electrical generation, farming equipment and mining operations.

 

In 2006, according to the Energy Information Administration, or EIA, the U.S. consumed approximately 64 billion gallons of diesel, and Europe consumed approximately 95 billion gallons of diesel. The U.S. government, and many state and local governments, have enacted renewable fuel standards that require the use of alternative fuels, including biodiesel. For example, some states, including Washington and Minnesota, currently mandate 2% biodiesel blends. If all U.S. diesel were blended with 2% biodiesel, we believe the U.S. market demand for biodiesel would be approximately 1.3 billion gallons per year, or BGY, which is approximately 1.0 BGY greater than the approximately 250 million gallons of biodiesel consumed in the U.S. in 2006.

 

LOGO

 

In addition to the government incentives described below, the EPA’s new Ultra-Low Sulfur Diesel, or ULSD, regulation, which went into effect in 2006, and anticipated diesel import needs in the U.S. and Europe, are further driving biodiesel demand. The ULSD regulation requires all diesel fuel, diesel fuel additives and distillate fuels blended with diesel for on-road use to contain no more sulfur content than 15 parts per million, or ppm. Biodiesel serves as an alternative way to comply with ULSD regulations, as most biodiesel has less than 15 ppm of sulfur content. Blending biodiesel with ULSD, even at low levels (1 to 2%), also provides added lubricity, which improves engine performance.

 

Additionally, Europe imported approximately 14.8 billion gallons of diesel in 2006. Europe is a net importer of diesel and, according to the European Biodiesel Board, this growing diesel deficit has been fueled by an increase in new diesel car purchases. We believe that this provides us with opportunities to sell our biodiesel to Europe. We believe our planned Argentina production facility and possible additional production facilities in Western Europe will enhance these efforts. The U.S. has also been a net importer of petroleum products. In 2006, the U.S. West Coast imported approximately 483.9 million gallons of diesel, and the U.S. East Coast imported approximately 4.6 billion gallons of diesel. In addition, U.S. petroleum refining capacity has been operating at more than 90% capacity for more than a decade. We expect that large diesel imports in the U.S. and Europe will continue to generate strong biodiesel market opportunities.

 

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Benefits of Biodiesel

 

Biodiesel has gained popularity as an alternative fuel due to several advantages over traditional and other renewable energy sources, including:

 

   

Extending diesel fuel supplies and reducing dependence on foreign oil. Since biodiesel can be used in most diesel engines, it can directly reduce domestic dependence on foreign and domestic oil resources. Diesel supply is limited by, among other things, an increasing shortage of refining capacity both in Europe and in the U.S. The EIA expects U.S. demand for refined products to increase more rapidly than U.S. refining capacity. Additionally, the U.S. has been and is expected to remain a net importer of liquid fuels, primarily petroleum, according to the EIA. We believe that increased pressure on U.S. refining capacity will result in greater demand for biodiesel.

 

   

Superior environmental characteristics. The use of biodiesel in a conventional diesel engine results in a substantial reduction of unburned hydrocarbons, carbon monoxide, carbon dioxide and particulate matter. According to the EPA, the use of biodiesel, compared to diesel, results in a 78% reduction in carbon dioxide emissions. Furthermore, the ozone-forming potential of biodiesel hydrocarbons is 50% less than diesel fuel. Exhaust emissions of carbon monoxide, particulate matter and total hydrocarbons from biodiesel are on average 48%, 47% and 67% lower, respectively, than comparative emissions from diesel. Biodiesel also reduces the health risks associated with diesel because it contains 50% to 90% lower levels of certain potential carcinogens than diesel.

 

   

Lower investment by consumers and distributors required. Biodiesel can be used as a pure, unblended fuel or be blended with diesel up to 99%. Unlike ethanol, using biodiesel in blends of 10% or higher in most diesel engines does not require any significant engine modifications. Biodiesel can also be stored in diesel terminal and storage facilities and supplied to end consumers through existing rail, marine and truck infrastructure.

 

   

Improved engine performance. Government requirements for reduced sulfur in diesel often result in reduced engine lubricity, which increases equipment wear and the risk of premature breakdown. Blending biodiesel with ULSD has been shown to improve engine lubricity. Biodiesel also has a higher cetane number than most diesel fuel, resulting in shorter ignition delay periods, more consistent engine starting, and fewer engine deposits that cause smoke, emissions and engine wear. Such increased performance attributes may make biodiesel a preferred blending stock with diesel. Additionally, the ability to produce biodiesel from multiple feedstocks, including feedstocks better suited for colder environments, can reduce the risk that diesel engines are unable to start at lower temperatures.

 

   

Greater energy efficiency. Biodiesel yields 3.24 units of energy for each unit of energy used to produce it, according to the U.S. Department of Energy. This is comparable to the energy efficiency of diesel. In contrast, corn-based ethanol yields up to 1.67 units of energy for each unit of energy it takes to produce it, according to the U.S. Department of Energy. Additionally, a gallon of ethanol delivers approximately 67% of the energy output of a gallon of gasoline. In contrast, a gallon of biodiesel delivers at least 91% of the energy output of a gallon of diesel.

 

   

Multiple renewable feedstock sources. Biodiesel is produced from a variety of feedstocks, including soybean, palm, canola and sunflower oil, and from animal fats, fish oils and recycled cooking oils. In the U.S., most biodiesel producers currently employ single-feedstock production designs and technology, typically using soybean oil, and most European biodiesel production technology relies on either canola or sunflower oil. Most U.S. ethanol facilities are also designed to use a single feedstock, such as corn, and require additional time and capital expenditures to be able to use alternative feedstocks, such as sugarcane. The ability to produce biodiesel from multiple feedstocks allows biodiesel producers that are strategically located to diversify their dependence on a single commodity and thereby mitigate adverse supply cost and pricing risk.

 

   

Numerous incentives from federal, state and local governments. Due to the economic and environmental benefits of biodiesel, federal, state and local governments have sought to encourage

 

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biodiesel production and use in the U.S. through numerous regulations that either provide economic incentives for biodiesel producers and users or mandate the use of specified levels of biodiesel. For instance, the EPA has established a credit trading program that allows entities subject to renewable fuel volume requirements, such as gasoline refiners, to acquire credits toward those requirements. The program awards 1.5 credits for blending biodiesel into motor fuel as opposed to 1 credit for blending ethanol. For a more complete discussion of the various incentives for biodiesel production and use, see “—Government Incentives for Biodiesel Production and Use” below.

 

U.S. Market Opportunity for Biodiesel

 

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

 

LOGO

 

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

 

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

 

LOGO

 

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

 

International Market Opportunity for Biodiesel

 

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

 

Government Incentives for Biodiesel Production and Use

 

In recent years, federal, state and local governments have enacted legislative incentives and mandates to encourage the production and use of biodiesel. The present strong bipartisan support for renewable fuels is driven by an increased embrace of the economic, environmental and security benefits of renewable fuels. Key regulatory initiatives include:

 

Energy Policy Act of 1992. This act establishes a goal of 30% alternative fuel usage in government fleets by 2010. Biodiesel is an alternative fuel and credits can be earned for blends of 20% or greater. The act also requires the federal government, alternative fuel providers, state and local governments, and private fleets to purchase vehicles that employ alternative fuels. Since 2000, 75% of all light-duty vehicles acquired by covered fleets of federal agencies have been required to have alternative fuel capabilities.

 

Energy Conservation and Re-Authorization Act of 1998. This act allows vehicle fleets that are required to purchase alternative fuel vehicles, or AFVs, to generate credits toward fulfilling this requirement by purchasing and using biodiesel in conventional-fuel vehicles. Since there are few cost-effective options for purchasing heavy-duty AFVs, federal and state fleet providers can meet up to 50% of the heavy-duty AFV purchase requirements by generating biodiesel fuel use credits.

 

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

 

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

 

In his State of the Union Address on January 23, 2007, President Bush called for an increase in the renewable fuels standard to require 35 billion gallons of renewable and alternative fuels in 2017, which is nearly five times the present 2012 mandate of 7.5 billion gallons. An alternative proposal was introduced by Senators Tom Harkin and Richard Lugar in the Biofuels Security Act of 2007, which would set the RFS at 10 BGY by 2010, 30 BGY by 2020 and 60 BGY by 2030. The Renewable Fuels and Energy Independence Promotion Act of 2007 introduced in the U.S. House of Representatives would make the $1.00 per gallon biodiesel tax credit permanent. Additionally, the Energy Independence Through Biodiesel Act introduced in the U.S. House of Representatives in May 2007 would require that, by 2012, all diesel motor vehicle fuel sold to consumers in the contiguous U.S. contain at least 2% biodiesel.

 

LOGO

 

State and local biodiesel mandates. There are over 50 state and local statutes, regulations and ordinances that encourage or mandate the use of alternative fuels, including biodiesel. As of May 2007, tax credits or incentives for the use of renewable fuels, including biodiesel, were available in at least 35 states. Renewable fuel requirements, including requirements only applicable to government vehicles, have been enacted in at least 18 states. Additionally, renewable fuel grant or loan programs, such as production facility construction loans or research grants, have been adopted in at least 26 states.

 

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The map below shows states with current and proposed state biodiesel mandates and tax incentives programs:

 

LOGO

 

State Biodiesel Mandates

 

Jurisdiction

  

Description

Arizona

   Requires that 75% of local government fleets, and 90% of state and federal government fleets, operate on alternative and clean burning fuels, in certain metropolitan areas.

California

   In-state targets for production of a minimum of 20% of its biofuels, including biodiesel, by 2010, 40% by 2020 and 75% by 2050.

Colorado

   Requires that all state diesel vehicles use B20 by January 2007, where available and if biodiesel is not $0.10 per gallon more than the price of diesel.

Hawaii

   Grants state procurement preference of $0.05 per gallon of B100, proportionately reduced for lower blends. Requires that government acquire, at increasing annual percentages, energy-efficient vehicles, which acquisitions may be offset by using biodiesel at a rate of one vehicle for each 450 gallons of B100 used.

Illinois

   Requires that state, county and local government diesel vehicles use at least B2 beginning July 2006.

Iowa

   Requires that bulk state diesel purchases are B5 by 2007, B10 by 2008, and B20 by 2010. Requires that at least 10% of new light-duty vehicles purchased by certain state agencies to be capable of using alternative fuels.

Kansas

   Requires that state diesel vehicles and equipment use at least B2, where available and if biodiesel is not $0.10 per gallon more than the price of diesel.

Kentucky

   Requires that certain state procurement contracts maximize the market availability of biodiesel and ethanol. Requires employees using state fleet vehicles to use either B2 or E10 as their primary fueling option.

Louisiana

   Requires B2, once sufficient capacity is built in-state.

Maryland

   Requires that at least 50% of state diesel vehicles use at least B5.

Minnesota

   Requires B2.

 

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Jurisdiction

  

Description

Missouri

   Requires that at least 75% of the state transportation agency diesel fleet vehicles use B20 or higher biodiesel blends, where available and if biodiesel is not $0.25 per gallon more than the price of diesel.

Nebraska

   Requires state fleets to use B2 whenever practical.

Nevada

   Requires 90% of state fleet vehicles to be AFVs and that state agencies with more than 10 vehicles acquire AFVs.

New Mexico

   Requires that all diesel sold to state agencies, political subdivisions, and public schools for use in motor vehicles contain B5 after July 2010 and before July 2012. Requires that all diesel sold to consumers for use in motor vehicles contain B5 after July 2012.

New York

   Requires that at least 2% of fuels used in the state fleet be biodiesel by 2007 increasing to at least 10% by 2012.

Ohio

   Requires that state transportation agency fleet use at least one million gallons of biodiesel blends in fleet vehicles each year.

Portland, Oregon

   Requires B5 beginning by July 2007 and B10 by July 2010.

Washington

   Requires B2 by November 2008, to increase to B5 once in-state biodiesel production is 3% of state diesel demand.

 

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

 

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

 

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

 

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would set a limit on the overall emissions of a given gas from a specified group of sources, such as power plants. Sources that emit more than their allowance must buy credits from those who emit less than their allowance, thus creating a financial incentive for sources to reduce their own emissions. California’s governor has also issued an executive order to create a market-based compliance program that permits trading with the European Union, the RGGI and other jurisdictions. Biodiesel will also benefit from global cap-and-trade systems established by international agreements like the Kyoto Protocol, which 168 nations plus the European Union have ratified as of December 2006. Currently, the Protocol’s largest emissions trading scheme is the European Union’s Emissions Trading System, which covers more than 11,500 energy-intensive facilities that emit approximately 45% of the EU’s carbon dioxide emissions. Since biodiesel can be used in diesel power plants and reduces carbon dioxide emissions by up to 78%, carbon cap-and-trade programs represent a meaningful market opportunity for biodiesel.

 

Other. In addition to greenhouse gas and clean air legislation, a variety of government programs specifically assist the biodiesel industry. Certain notable programs that support the biodiesel industry include:

 

   

The Renewable Energy and Energy Efficiency Program, administered by the Rural Business Cooperative Service of the U.S. Department of Agriculture, which provides grants, loans and loan guarantees for the development of renewable energy products.

 

   

The Biomass Research and Development Initiative, administered jointly by the U.S. Department of Energy and U.S. Department of Agriculture through the National Biomass Coordination Office, provides grants for biomass research, development and demonstration projects.

 

   

Project grants administered by the U.S. Department of Energy’s Office of Energy Efficiency and Renewable Energy provide bioprocessing facility project funding for cooperative biomass research and development for the production of fuels, electric power, chemicals and other products.

 

   

The Loan Guarantee Program, administered by the U.S. Department of Energy, provides loan guarantees for energy projects that reduce air pollutants and greenhouse gas emissions, including biofuels projects.

 

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BUSINESS

 

Overview

 

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

 

We believe our biodiesel production process and technological innovations will enable us to produce biodiesel that exceeds industry quality standards with relatively lower capital expenditures and operating expenses than certain of our competitors. Although the process of making biodiesel is relatively simple, we believe we will be the first in the U.S. to efficiently and consistently produce high quality biodiesel on an industrial scale that can be transported long distances. We have optimized our biodiesel production process to incorporate new, internally-developed proprietary technology, and our production facilities are being designed and built to process biodiesel from multiple feedstocks simultaneously. This flexibility will allow us to shift into and out of feedstocks based on customer demand and market cost dynamics without hindering production or substantially increasing our operating costs. In addition, our process recaptures methanol and does not create waste water, which reduces costs and environmental permitting requirements.

 

We employ in-house engineering, design and project management personnel in the construction process, which we believe enables us to decrease our time to market and reduce our construction costs. For example, we expect to construct our Grays Harbor production facility in 11 months at a total cost of approximately $73 million, or $0.73 per gallon of nameplate capacity, including facility construction, all transportation infrastructure and on-site storage facilities costs. Excluding the transportation infrastructure and on-site storage facilities, the total cost to construct our Grays Harbor production facility is expected to be approximately $34 million, or $0.34 per gallon of nameplate capacity.

 

We commenced operation of our first commercial biodiesel production facility in April 2005. We expect to complete construction of our second commercial production facility, located at Grays Harbor, Washington, in July 2007, the designs for which are certified at 100 MGY nameplate capacity. We are also developing three additional 100 MGY nameplate capacity facilities that are scheduled to be constructed by the end of 2008: two in the U.S. and one in Argentina. The U.S. facilities will produce biodiesel primarily for the U.S. East and West Coast markets. The Argentina production facility will produce biodiesel primarily for export to Europe. Each of these production facilities will be based on the same technology, engineering and design that we are using at our Grays Harbor production facility. We expect to finance the construction of these three new production facilities with the net proceeds we receive from this offering. We are also evaluating several sites for additional new production facilities, both overseas and in the U.S., that we may develop after 2008.

 

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The table below provides an overview, as of the date of this prospectus, of our biodiesel production facilities that are in operation or under development and expected to be constructed by the end of 2008.

 

Facility    Seattle   Grays
Harbor
  Hawaii   Argentina   U.S. East
Coast

Location

   Seattle,
Washington
  Grays
Harbor,
Washington
  Oahu,
Hawaii
  Ramallo,
Argentina
  Philadelphia,
Pennsylvania

Actual or expected construction completion date

   April 2005   July 2007   Q3 2008   Q3 2008   Q4 2008

Actual or expected nameplate capacity (MGY)

   5   100   100   100   100

Primary target market

   Research
and
development
and U.S.
West Coast
  U.S. West
Coast
  Hawaii   Europe   U.S. East
Coast

Current development status

   In operation   Under
construction
  In development   In development   In development

Actual or expected ownership

   100%   93%   100%   100%   100%

 

Competitive Strengths

 

Our competitive strengths include the following:

 

Industry-leading technology. Through our proprietary production technology, which we have developed and implemented at our Seattle production facility and are incorporating into our new Grays Harbor production facility, we are able to convert more than 99% of the vegetable oil feedstock by volume into biodiesel. We are able to recapture approximately 99% of the unreacted methanol used in the production process, which we recycle into the production process, further reducing our production costs. We are also continually evaluating new or improved feedstock sources, such as jatropha, mustard and algae, in an effort to leverage our multi-feedstock capabilities and further reduce our production costs. Our in-house research and development team continually evaluates technological advancements and implements new production technology with a high degree of flexibility and cost containment.

 

Sustainable first mover advantage. We believe our construction time and cost structure, and growing industry-leading production capacity, give us a competitive advantage in securing high-volume customers, favorable supply and distribution agreements and strategic site locations. We have been producing and selling biodiesel since 2005. We are currently building the largest biodiesel production facility in the U.S., according to the NBB. We intend to add to our capacity with new production facilities in Hawaii, in Argentina and on the U.S. East Coast, which, when completed, should increase our aggregate nameplate capacity to approximately 405 MGY, with on-site potential for further expansion. With our in-house design and project management expertise, as well as our relationship with an experienced construction firm, we believe we can build new production facilities in less than 12 months once permits are obtained and at a lower cost than our competitors. We believe that these competitive advantages will position us as a leader in the U.S. biodiesel industry.

 

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Superior logistics. We are locating our production facilities and plan to lease terminals in coastal deep water ports that provide us with multiple operating, cost and business model advantages compared to other industry participants. Our locations will allow us to:

 

   

purchase higher volumes of vegetable oil feedstocks and methanol from a broader pool of domestic and international suppliers at a lower cost than can be obtained by rail delivery alone;

 

   

receive raw materials and deliver biodiesel globally via ship, and also throughout North America via rail and truck;

 

   

utilize our deep water ports to deliver fuel directly to ships and to receive supplies without the added cost, complexity, and time constraint of transporting materials from ships to shore via transport barges;

 

   

access large U.S. diesel consumers at lower distribution costs than our U.S. Midwest competitors. For example, biodiesel can be delivered to Long Beach, California for $0.11 per gallon via ship from Grays Harbor, compared to $0.22 per gallon from the U.S. Midwest via railcar, while avoiding rail line congestion that could delay transport time; and

 

   

supply biodiesel to customers in Europe from our planned Argentina production facility by processing low-cost, local soybeans.

 

Feedstock flexibility. Our production facilities are being designed to produce biodiesel simultaneously from multiple feedstocks, including canola, soybean and palm oil, as well as jatropha, mustard and other feedstocks. Unlike many of our competitors who depend on soybean oil, our technological flexibility and strategically-located facilities allow us to shift into and out of different feedstocks based on customer demand and market cost dynamics without hindering our production process or substantially increasing operating costs.

 

In-house project management and engineering expertise. We have assembled a 13-member in-house project management and engineering staff that allows us to coordinate the design, engineering and construction of our production facilities. We believe our expertise and involvement in constructing and developing low-cost, large-scale production facilities allows us to complete new construction more quickly than many of our competitors, many of whom we believe are not as involved in the design and construction process and typically contract for more costly “turn-key” projects. In addition, because our production process recaptures methanol and does not create waste water, our production facilities reduce environmental permitting. We are negotiating with JH Kelly, the same construction firm that is building our Grays Harbor production facility, to build our proposed Hawaii and other production facilities, and the firm is precluded from performing services for other biodiesel or glycerin producers until approximately July 2008.

 

Well-capitalized balance sheet. We believe that the proceeds of this offering, together with our other sources of financing, cash on hand and cash from operations, will allow us to complete construction and commissioning of our Grays Harbor and three other new production facilities and to complete our business plan through at least the end of 2009. Being well capitalized provides our customers and vendors with the confidence that we are a creditworthy supplier of biodiesel and reduces our cost of credit. The gross proceeds from our $117.4 million private equity financing that we completed in February 2007, which we believe was one of the largest biodiesel fundings to date, together with the proposed $101.2 million credit facility, will enable us to complete construction of our Grays Harbor production facility, to manage our liquidity, to make capital expenditures, and to grow our business. We believe our low leverage, strong cash position and strong credit profile will allow us to pursue large-volume customers and enter into larger feedstock agreements at lower cost than our competitors.

 

Experienced and proven management team. Our management team has extensive experience leading public companies in both the domestic and international business communities. Our management team is entrepreneurial and growth oriented, and it has a proven ability to manage high growth, rapidly changing business environments, commodities, application of cutting edge technology and delivery of high quality products at low cost.

 

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Business Strategy

 

Our objective is to grow our leading market position in the U.S. biodiesel industry and become the biodiesel provider of choice. Key elements of our strategy include:

 

   

Establish strategically-located production facilities. We plan to capitalize on the growing U.S. and international demand for biodiesel by establishing our production facilities in strategic markets. Our Grays Harbor and planned U.S. East Coast production facilities will allow us to supply biodiesel to the large U.S. West and East Coast markets, which together cover approximately 50% of U.S. diesel consumption, while utilizing low-cost feedstocks from Southeast Asia and South America. Locating our production facilities in these coastal markets we believe significantly reduces our delivery costs compared to our U.S. Midwest competitors, which must rely primarily on rail transportation. Our planned Hawaii production facility will allow us direct access to the Hawaiian diesel market, which is estimated at 332 MGY, or 729 MGY if residual fuel oil is included, and where more than 75% of electricity is generated utilizing petroleum products. We also believe that our planned Hawaii production facility will allow us direct access to the growing Asian markets. Our planned Argentina production facility will allow us to ship biodiesel directly to the rapidly-growing European market and ultimately supply the Argentinean market using low-cost, locally grown soybeans.

 

   

Establish a global distribution network. We plan to expand the reach of our production facilities by growing our global storage and distribution capacity in key U.S. and international markets. We intend to lease off-site biodiesel storage facilities and terminal access at key ports, including Portland, the San Francisco Bay Area, Long Beach and Seattle in the U.S., Antwerp, Belgium and Vancouver, British Columbia. These facilities will allow us to store and blend large volumes of biodiesel directly “off the rack” to customers at the point of delivery, without the need for an intermediary distributor. We also intend to purchase or lease rail cars and barges, which will allow us to leverage lower-cost barge shipping for the global distribution of our biodiesel. We believe a global distribution network will enable us to access large-volume biodiesel customers while reducing our overall transportation and feedstock acquisition costs.

 

   

Build industrial-scale facilities. We plan to build industrial-scale production facilities with a nameplate capacity of at least 100 MGY at each facility. While much of the domestic biodiesel production capacity consists of facilities having a nameplate capacity of 10 MGY or less, we plan to utilize our in-house project management and engineering expertise to build high-volume production facilities at lower capital costs by utilizing a smaller physical plant design than our competitors. We believe our large production capacity will enable us to enter long-term contracts with large-volume customers.

 

   

Promote broad-based adoption of biodiesel. We plan to continue our efforts to promote the adoption of biodiesel, through our lobbying and public relations efforts aimed at maintaining or supporting new renewable fuel standards and other governmental support for the industry and our participation in trade organizations. We also will continue to explore new markets for biodiesel outside the transportation industry, including in the marine, power generation and mining industries.

 

   

Continually improve our technology. We will continue to use our in-house research and development and engineering expertise to evaluate new process designs and techniques, emerging product opportunities, and industry developments to maintain our leadership in the biodiesel industry. We are researching new or improved commercial feedstock sources to leverage our multi-feedstock production capacity, including jatropha, mustard and algae. We plan to spend or invest more than $6.0 million on our feedstock research and development efforts in 2007. We believe these efforts, in combination with our in-house engineering expertise, will enable us to rapidly adopt new technological advancements and to offer a broader array of consistently high quality products and grades than our competitors.

 

   

Manage feedstock costs. Feedstocks are the most expensive component of biodiesel and are subject to substantial price fluctuations. In addition to our internal research and development efforts to develop more efficient and less expensive feedstock sources, we are implementing three other strategies to minimize our feedstock costs. First, we will continue to use advanced hedging principles to reduce the

 

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cost of our feedstocks to maintain the lowest possible supply and conversion costs available. Second, we plan to reduce our feedstock costs over the next 18 to 36 months by seeking to license rights to proprietary oil seeds that we believe have the potential to produce more than 140 gallons of feedstock oil per acre, compared to 30 to 40 gallons per acre for soybeans. We plan to work with licensors to develop seeds and, if successful, plan to grow and harvest seeds ourselves, thereby reducing our feedstock acquisition cost. Third, we intend to reduce our feedstock costs over the long-term by seeking to acquire rights to, or investing in companies that are developing, algae, which we believe has the potential to produce more than 1,500 gallons of feedstock oil per acre.

 

Our Biodiesel Production Process

 

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

 

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

 

We employ in-house research and development teams and design and construction engineering staff that create and implement our new technology processes. We believe that the technology we are employing at our new Grays Harbor production facility will enable us to produce biodiesel that meets the ASTM standard for biodiesel, which is called ASTM D 6751, with approximately 99% efficiency. This means that approximately 99% of the vegetable oil feedstock by volume will be converted into biodiesel. We recapture approximately 99% of the unreacted methanol used in the production process, which we recycle for later use, further reducing our production costs.

 

Within the production process, we have made significant innovations in the three areas described below:

 

LOGO

 

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

 

Methanol Recovery System. We have designed a highly-efficient methanol recovery process that is capable of recovering approximately 99% of unreacted methanol for re-use in the production process. Methanol is the second most expensive raw material used in the biodiesel production process. Roughly 17% methanol by volume is introduced in the biodiesel production process to cause a complete reaction. Many biodiesel facilities boil off the excess methanol and expel it into the atmosphere, which is an inefficient use of a costly material, harms the environment and raises environmental permitting compliance costs.

 

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

 

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Production Facilities

 

The table below provides an overview, as of the date of this prospectus, of our biodiesel production facilities currently in operation or under development and expected to be constructed by the end of 2008.

 

Facility    Seattle    Grays
Harbor
   Hawaii    Argentina    U.S. East
Coast

Location

   Seattle, Washington    Grays Harbor, Washington    Oahu, Hawaii    Ramallo, Argentina    Philadelphia, Pennsylvania

Actual or expected construction completion date

   April 2005    July 2007    Q3 2008    Q3 2008    Q4 2008

Actual or expected nameplate capacity (MGY)

   5    100    100    100    100

Actual or expected on-site storage capacity (gallons)

   84,000    18,000,000    19,000,000    18,000,000    18,000,000

Designed to refine multiple feedstocks simultaneously

   Yes    Yes    Yes    Yes    Yes

On-site logistics

   Road and rail    Road, rail and marine    Road, rail and marine    Road, rail and marine    Road, rail and marine

Primary target market

   Research and development and U.S. West Coast    U.S. West Coast    Hawaii    Europe    U.S. East Coast

Current development status

   In operation    Under construction    In development    In development    In development

Site identified

   ü    ü    ü    ü    ü

Permits submitted

   ü    ü    ü          

Permits obtained

   ü    ü               

Ground broken

   ü    ü               

Facility framed

   ü    ü               

Mechanical completion

   ü                    

Commissioned

   ü                    

 

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

 

Seattle production facility

 

Overview. Our Seattle production facility has been in operation since April 2005 and produces ASTM-grade biodiesel, primarily from soybean or canola oil. We sell biodiesel from our Seattle production facility to bus, truck, marine and other commercial fleet customers. The Seattle production facility is located on an 8,841 square foot site. We have upgraded this production facility to incorporate our latest engineering advances and production techniques. We lease our Seattle production facility under a lease agreement with an initial four-year term with one option to renew for an additional five-year term. The initial term expires on May 31, 2008. We currently intend to exercise our renewal option.

 

Our Seattle production facility is a BQ-9000 certified producer of biodiesel. BQ-9000 is a quality assurance designation established by the NBB that requires a producer to demonstrate the ability to produce biodiesel that meets the ASTM standard for biodiesel. Our Seattle production facility also produces glycerin, which we sell for use as fuel in industrial boilers.

 

Capacity. The current annual nameplate capacity of our Seattle production facility is up to 5 MGY. However, we use the Seattle production facility for research and development activities and intend to increase

 

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such activities at our Seattle facility, which will reduce the amount of commercially-produced biodiesel at that facility.

 

Feedstock delivery, transportation and logistics. Our Seattle production facility can receive feedstock and transport biodiesel by rail and truck. Logistics include on-site rail loading and truck loading systems. Our Seattle production facility is limited by size and footprint, and we intend to transfer the bulk of our production to the Grays Harbor production facility when it is operational. We will use our Seattle production facility for the production of customer-specific blends of biodiesel as well as our research and development efforts.

 

Grays Harbor production facility

 

Overview. Construction of our Grays Harbor production facility is scheduled to be completed in July 2007 and capable of operating at full production capacity by the first quarter of 2008. The production facility is located in Grays Harbor, Washington on a 12-acre site. We have leased the site from the Port of Grays Harbor, or Port, for a term of 25 years with our option for three five-year renewal terms. The site has deep water port access and is strategically located to receive multiple feedstocks from less expensive international suppliers, and to supply biodiesel to current and future U.S. West Coast customers faster and at lower cost by using barge transportation. We initially intend to produce biodiesel from soybean, canola or palm oil at this production facility, and we expect that our technology will enable us to produce biodiesel from these feedstocks separately, or blended together, further increasing our production efficiency and reducing production costs.

 

Capacity. We have incorporated our latest engineering advances and production processes in this facility to increase production yields and quality. Our Grays Harbor production facility is designed to have annual nameplate capacity of 100 million gallons of biodiesel and will also produce up to approximately 7.5 million gallons of crude glycerin annually. We intend to market the glycerin to nearby manufacturing facilities for use as fuel. The production facility is designed to operate on a continuous basis.

 

Feedstock delivery. We will purchase soybean, canola and palm oil from many different suppliers, which can be delivered over water via barge directly to the production facility. The production facility is also capable of receiving deliveries of feedstock via rail, including unit trains, which are freight trains carrying a single commodity, or truck delivery. The Port is served by the Puget Sound and Pacific Railroad, which connects to the Burlington Northern Santa Fe and Union Pacific railroad main lines 40 miles to the southeast near Centralia, Washington.

 

Transportation and logistics. Our Grays Harbor production facility will have the ability to dispatch biodiesel over water by barge as well as by rail and truck, as needed, and has significant capacity for each form of transportation. The Port has a terminal with 41 feet of draft that can accommodate up to a 600-foot ship in addition to a smaller barge terminal. Both terminals will be fed directly by pipelines for vegetable oil coming in and biodiesel going out from our production facility, and we can supply biodiesel directly to marine users from the terminals. This site will also include on-site rail loading, including unit trains, and truck loading systems. Depending on relative costs and need, transportation methods can be easily changed. We will pay industry-standard fees for use of the Port and its facilities.

 

Rail agreements. We have entered into an agreement to lease up to 100 railcars, each with a 25,500-gallon capacity. These railcars will enter the Port on a rail line with improvements we have constructed for our production facility and for other tenants of the Port. The Port has an option to purchase these rail improvements, which, if exercised, would transfer ownership of the rail improvements subject to an easement for our continued use throughout the term of the site lease. We will pay industry-standard fees for the use of rail access on Port property.

 

Utility agreements. We have entered into agreements for the purchase of water and natural gas. Our agreement with Cascade Natural Gas provides us with natural gas at posted rates. We have also entered into an agreement to purchase water from the City of Aberdeen, which is adjacent to the Port, at the Port’s stated rates.

 

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Foreign-Trade Zone designation. The Port is designated as a Foreign-Trade Zone by the U.S. Department of Commerce. In April 2007 we applied for manufacturing authority as an “operator” in the Foreign-Trade Zone, which will allow us to import feedstock from certain countries, including Argentina, without payment of, or at a substantially reduced rate of, tariffs. We must comply with certain Department of Commerce, Port and U.S. Coast Guard regulations to receive the designation. We expect to obtain a decision on our application from the Foreign-Trade Zone Board in the second quarter of 2008.

 

Hawaii production facility

 

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

 

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

 

Argentina production facility

 

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

 

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

 

East Coast production facility

 

Overview. We are negotiating and expect to enter a lease for an 8.5-acre site in Philadelphia, Pennsylvania in May 2007. We intend to begin construction of a 100 MGY nameplate capacity facility at the site by the first half of 2008. We expect to complete construction of this production facility in the fourth quarter of 2008.

 

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Market opportunity. Our U.S. East Coast production facility will be strategically located to give us access to the large and growing East Coast diesel markets as well as Europe. We estimate that the current diesel fuel market on the East Coast to be approximately 23.4 BGY. Our East Coast location will give us a cost advantage over our competitors who must transport biodiesel via rail or road to the East Coast. We have also targeted the East Coast for the power generation market. We have undertaken a pilot program and entered into an agreement with a strategic power generation customer to supply biodiesel for use in power generation facilities. Additionally, several East Coast states have enacted laws that mandate or encourage the use of renewable or low emissions fuels or that provide tax or other incentives for renewable fuels, which we believe will stimulate demand for biodiesel.

 

Distribution network

 

Our distribution network leverages our strategic locations, which are accessible by truck, barge, and rail, including unit trains. We currently lease one barge and are under contract to purchase another barge, with a total capacity of more than 6.1 million gallons, and we have entered into an agreement to lease up to 100 railcars, each with a 25,500-gallon capacity. We plan to grow our distribution network to capture critical portions of the biodiesel value chain by:

 

   

owning or leasing additional rail cars and barges, which will enhance our inventory and working capital efficiencies;

 

   

increasing our on-site raw materials and finished product storage, which will provide flexibility in distributing our biodiesel; and

 

   

expanding our off-site terminal sites into strategic locations that use proprietary blending and pumping processes, which will allow us to store, blend and provide biodiesel directly “off the rack” at the point of delivery in high volumes.

 

Potential future production facility sites

 

We believe there is a significant and growing global demand for biodiesel, and we are continually monitoring our options for further growth. We are currently evaluating several sites globally, including in Belgium, China and the Philippines. As demand grows, we also may decide to increase our production capacity by expanding existing facilities. We also intend to evaluate opportunities to acquire additional biodiesel storage or distribution facilities and related infrastructure. Construction of sites beyond those currently planned in Hawaii, in Argentina and on the U.S. East Coast would likely require additional funding. Subject to securing appropriate funding and other factors, such as the demand for biodiesel and the successful construction and operation of our planned production facilities, we currently expect to construct one or two new production facilities annually starting in 2010.

 

Our site location criteria encompass many factors, including:

 

   

proximity to target customer markets;

 

   

good road, rail and deep water port access;

 

   

proximity to feedstock supply;

 

   

cost;

 

   

favorable local regulatory environment;

 

   

availability of utilities;

 

   

local qualified labor force;

 

   

expansion potential; and

 

   

adequate space for equipment and truck movement.

 

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Construction and Development

 

To complement our in-house expertise, we employ construction and engineering firms with extensive experience in the petroleum refining and chemical manufacturing industries. JH Kelly, LLC, the construction company that is building our Grays Harbor production facility, has over 25 years of experience in the petroleum and chemical processing facility construction business. We intend to use JH Kelly and our in-house engineering staff to adapt the design of the Grays Harbor production facility for our Hawaii and other new production facilities, which may be constructed using a significant number of modular components that we can ship for assembly at the sites from JH Kelly’s facility in Longview, Washington. For one year after constructing our Grays Harbor production facility, JH Kelly will be prohibited from providing services to another biodiesel or glycerin facility, and we have given JH Kelly a limited notice to proceed with initial construction planning for our Hawaii production facility. We believe our in-house design and project management expertise allows us to complete projects more efficiently than many of our competitors, which we believe are not as involved in the design, engineering and construction process and typically contract for more costly “turn-key” refineries.

 

Overview of Feedstocks and Hedging

 

Feedstock procurement

 

We secure our supply of vegetable oil feedstocks and methanol through the following methods:

 

   

we purchase feedstock through spot cash, fixed-price forward and delayed pricing contracts;

 

   

we utilize hedging positions in the feedstock and petroleum product futures markets to manage the risk of excessive price fluctuations, both for feedstock procurement and for index-based sales contracts of our products; and

 

   

we have proposed a biodiesel futures contract to the Chicago Board of Trade, or CBOT, to help expand the market for biodiesel and assist us in our hedging strategies.

 

Feedstock supply arrangements

 

   

Palm Oil. We have entered into a three-year contract with Cargill International Trading Pte Ltd. for delivery of palm oil to our production facilities, which we believe will be sufficient to provide up to 100% of our palm oil feedstock requirements through 2010. The purchase price for the palm oil under this agreement varies according to applicable market rates.

 

   

Canola Oil. We have entered into a one-year purchase agreement, with successive one-year renewal options, with Natural Selection Farms, Inc. for the purchase of canola seed vegetable oil. The purchase price for the canola oil under this agreement varies according to applicable market rates. In addition, we have entered into spot and basis contracts for canola oil with Archer Daniels Midland Company, Bunge Canada, Cargill Ltd. and others.

 

   

Methanol. We have entered into a three-year methanol purchase agreement with Methanex Methanol Company to supply methanol to us. We believe this agreement will supply us with 95% of our methanol needs for our Grays Harbor production facility through 2010, after taking into account the methanol we recover through our proprietary process. The purchase price for the methanol varies under this agreement according to the market index price per gallon that Methanex determines each month, plus fixed costs for freight, shipping and a geographic price adjustment.

 

Hedging strategy

 

We seek to mitigate our exposure to commodity price fluctuations by purchasing forward contracts covering a portion of our feedstock requirements on a fixed-price basis and by purchasing feedstock futures contracts. To mitigate biodiesel price risk, we sell a portion of our biodiesel production using forward contracts under fixed-

 

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price and indexed contracts. The indexed contracts are typically referenced to a commodities exchange, such as the CBOT, and we may in the future hedge a portion of the price risk associated with index contracts by selling exchange-traded feedstock or petroleum product contracts. We believe our strategy of managing exposure to commodity price fluctuations will mitigate our exposure to the volatility of commodity price fluctuations and their effect on our results of operations.

 

We implement our purchasing strategy within a range of risk tolerance levels established by our board of directors and monitored by an internal credit committee. We may elect to purchase raw materials in excess of our short-term production needs when we believe we can achieve a reasonable rate of return on our investment by holding such inventory for future sale or use.

 

Our fixed-price forward contracts specify the amount of feedstock, the price and the time period over which the feedstock is to be delivered. These forward contracts are at fixed prices or prices based on CBOT prices. The parameters of these contracts are based on local supply and demand and the seasonality of the price.

 

We buy futures positions on the CBOT and other exchanges to hedge a portion of our exposure to feedstock and petroleum-based products price risk, against which some of our customers measure our product offerings. In addition, we are designing our production facilities to have significant feedstock storage capacity. To help protect against potential supply disruptions, we generally plan to maintain several weeks of feedstock inventory at each of our production facilities. This inventory range depends on the time of year, the current market price for feedstock and biodiesel, and other factors.

 

Our risk management and hedging transactions are executed by our Managing Director of Trading and Risk Management and his staff through registered broker-dealers. All commodity risk transactions are marked to market on a daily basis. We may also engage in foreign currency hedging to protect price risk on feedstock contracts, such as palm oil from Malaysia, which are not denominated in U.S. dollars.

 

Sales and Marketing

 

Biodiesel is distributed primarily through independent petroleum distributors, which purchase the biodiesel and transport it by truck or rail and then blend it with diesel for the end-user customer. We will continue to supply these independent petroleum distributors. We also plan to expand the market to underserved sectors of the diesel market. Our marketing strategy focuses on existing customers for biodiesel, including marine vessels and both public and private vehicle fleets, and new customers encouraged to use biodiesel because of perceived business advantages, government mandates and end-user demand. Through our sales and business development teams, we plan to continue our efforts to develop direct relationships with potential customers to secure long-term contracts. We also intend to keep a percentage of our fuel available for sale in the spot market at any given time to take advantage of higher margin opportunities. As the biodiesel market grows and penetrates the mainstream diesel market, we intend to target sales directly to major petroleum companies and to expand into non-traditional biodiesel applications, such as power generation and mining.

 

The following are key components of our sales and marketing efforts:

 

   

secure cost-effective truck, rail and barge assets to transport biodiesel from our production facilities to the point of sale;

 

   

establish sufficient biodiesel storage facilities and secure petroleum terminal storage facilities;

 

   

ensure that the biodiesel we produce is of consistently high quality, meets applicable ASTM standards and is delivered timely and efficiently;

 

   

cultivate relationships with direct customers and distribution channel resellers; and

 

   

establish and differentiate our brand from other biodiesel producers by appearing at trade shows, using public relations and media opportunities, and engaging in “test runs” of our products.

 

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All of our planned biodiesel production facilities expect to have deep water port access, which will enable us to transport by barge large volumes of biodiesel directly to independent petroleum distributors and other customers, and to other storage facilities. We currently lease one barge and are under contract to purchase another barge, with an aggregate capacity of more than 6.1 million gallons.

 

Customers

 

The majority of our customers who have purchased biodiesel from us at our Seattle production facility since 2005 are still with us today. We intend to significantly grow this customer base with our new Grays Harbor production facility and our other production facilities under development. In 2006, two of our customers, Associated Petroleum Products and SeaPort Petroleum, accounted for more than 63% and 18% of our sales, respectively.

 

The opening of our Grays Harbor production facility will allow us to expand our customer base significantly by taking advantage of high production volumes and economies of scale. In September 2006, we entered into a biodiesel supply agreement with a large industrial fuel user, pursuant to which we have agreed to supply approximately 18 million gallons of biodiesel to this user in 2007, which may increase by up to 10% per year through 2011. The contract is a cost-plus contract in that we receive a fixed margin over the price of the feedstock and our actual costs to refine the feedstock. This user can choose to purchase the feedstock directly, which we expect to be primarily palm oil, and cause it to be shipped to Grays Harbor where we process it into biodiesel according to ASTM and other specifications. We will satisfy the obligations under the first year of the contract by purchasing biodiesel from Indonesia and Malaysia that we will provide to the user until our Grays Harbor production facility is producing the required quantities of biodiesel. We have the opportunity to improve our margins under the contract, depending on how we manage our manufacturing process and whether we act as the blender of record, which entitles us to receive the federal blender’s credit of $0.01 for every 1% of biodiesel we blend with diesel.

 

We expect the contract to be the largest contract during our first year of operation at the Grays Harbor production facility, representing approximately 20% of our output in 2008. We expect to market the remainder of the fuel produced at Grays Harbor directly and through our wholly-owned subsidiary, Imperium Services LLC, to existing and new customers in the public and private fleet, power generation, mining and marine sectors.

 

Competition

 

In the U.S., we compete with three primary groups of biodiesel producers: large-scale biodiesel refineries, which includes companies such as Archer Daniels Midland Company and Cargill, Inc. that have divisions devoted to biodiesel production, and other companies that have large-scale biodiesel refining operations; start-up biodiesel refineries that are entering the market; and the large petroleum refining companies, which are developing large-scale diesel alternative refineries that use natural gas, coal and other non-renewable feedstocks. As the biodiesel production industry continues to grow, we expect that competition for production facility sites in the U.S. and offshore will increase.

 

We also face increasing competition from international biodiesel suppliers. In addition, if we attempt to sell into international markets, such as Europe, we will face competition from international biodiesel suppliers. The European biodiesel market is more mature than the U.S. biodiesel market and has more competitors with greater aggregate production capacity.

 

We believe our ability to compete successfully in the biodiesel production industry depends on several factors, including the following principal competitive factors:

 

   

continued technological innovations;

 

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price;

 

   

ability to deliver large fuel volumes;

 

   

biodiesel quality and ability consistently to deliver ASTM-grade biodiesel;

 

   

volume of biodiesel produced and sold; and

 

   

reliability of our production processes and delivery schedule.

 

Corporate Social Responsibility

 

We are dedicated to encouraging social responsibility in our corporation and strive to make decisions based not only on financial considerations but also on the short- and long-term consequences of our actions. We conduct our business in a manner consistent with our goals of reducing dependence on foreign oil and making renewable energy use a standard practice throughout the world. We recognize that conservation is not enough, and we will continue our lobbying efforts to promote the adoption of laws and regulations aimed at maintaining and supporting new renewable fuel standards. Renewable resources form the basis of our product and we continue to develop our technologies in an effort to make our processes more efficient and effective. We place a high value on compliance with local, state and federal laws. We and our employees seek to conduct our activities in compliance with applicable law and general standards of ethical behavior. We have aligned our corporate strategy with our philosophy of social responsibility. We believe that by maximizing our financial results and shareholder value we are also maximizing the benefits we provide to the environment.

 

Environmental Matters

 

We are subject to various federal, state, local and foreign environmental laws, regulations and permits, including those relating to: the discharge of materials into the air, water and ground; the generation, storage, handling, use, transportation and disposal of hazardous materials; and the health and safety of our employees. These laws, regulations and permits also can require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damage, criminal sanctions, permit revocations and/or facility shutdowns. In an effort to ensure that we secure all necessary environmental permits in a timely fashion, and remain in compliance with environmental permits, regulations and laws, we have hired an environmental permitting and compliance manager and routinely employ the services of qualified outside environmental consulting firms. Currently, our production facilities are not subject to any administrative claims or enforcement orders alleging necessary permits are not secured, or that we are not in compliance with existing environmental permits, laws and regulations.

 

There is a risk of liability for the investigation and cleanup of environmental contamination at each of the properties that we own, lease or operate and at off-site locations where a release or disposal of hazardous substances occurs and we are deemed to be a responsible party. While biodiesel is biodegradable, we utilize certain hazardous substances in our production process, and it is also possible that prior uses of our sites or nearby operations may cause contamination of our sites. We may be responsible under CERCLA or other environmental laws for all or part of the costs of investigation and/or remediation and for damage to natural resources. We may also be subject to related claims by private parties alleging property damage and personal injury due to exposure to hazardous or other materials at or from these properties. Some of these matters may require us to expend significant amounts for investigation and/or cleanup or other costs. We address the risk of environmental contamination in part by commissioning qualified environmental consulting firms at appropriate times to perform Phase I Environmental Site Assessments for properties we will own, lease or operate. We then commission the consultants to conduct follow up or Phase II investigations as necessary. Our Seattle production facility is a leased space in an existing warehouse that has no known environmental issues. At the Grays Harbor production facility site our consultants performed Phase I and Phase II analyses and concluded that the site poses no significant financial exposure from environmental contamination. For the Hawaii production facility, Phase I

 

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and Phase II analyses of our potential site in escrow revealed substantial remediation requirements; we are presently exercising our right not to close on this basis and have entered into a letter of intent for a 35-year lease at a different site for the production facility. We do not currently have pending any administrative enforcement actions or claims for contribution to or recovery of environmental remediation costs or for injury or damages relating to environmental releases from or affecting sites we own, lease or operate.

 

Our air emissions are subject to the federal Clean Air Act, the federal Clean Air Act Amendments of 1990 and similar state and local laws and associated regulations. The EPA has promulgated National Emissions Standards for Hazardous Air Pollutants, or NESHAP, under the federal Clean Air Act that will apply to facilities that we own or operate if the emissions of hazardous air pollutants exceed certain thresholds. If a production facility we operate is authorized to emit hazardous air pollutants above the threshold level, then we are required to comply with the NESHAP related to our manufacturing process and would be required to come into compliance with another NESHAP applicable to boilers and process heaters by September 2007. New or expanded facilities would be required to comply with both standards if they exceed the hazardous air pollutant threshold. In addition to costs for achieving and maintaining compliance with these laws, more stringent standards may also limit our operating flexibility. Because other domestic biodiesel manufacturers will have similar restrictions, however, we believe that compliance with more stringent air emission control or other environmental laws and regulations is not likely to materially affect our competitive position.

 

In addition, new environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement of existing laws or other developments could require us to make additional significant expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at our ongoing operations. Present and future environmental laws and regulations, and related interpretations, applicable to our operations, more vigorous enforcement policies and discovery of currently unknown conditions may require substantial capital and other expenditures.

 

The hazards and risks associated with producing and transporting our products, such as fires, natural disasters, explosions, abnormal pressures, blowouts and pipeline ruptures and the failure of pollution control equipment also may result in personal injury claims or damage to property and third parties. As protection against operating hazards, we maintain insurance coverage against some, but not all, potential losses. Our coverage includes physical damage to assets, employer’s liability, commercial general liability, automobile liability and workers’ compensation. We believe that our insurance is adequate and customary for our industry, but losses could occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We do not currently have pending material claims for damages or liability to third parties relating to the hazards or risks of our business.

 

See “Risk Factors—Risks Relating to the Biodiesel Industry—We may be adversely affected by environmental, health and safety laws, regulations and liabilities.”

 

Employees

 

As of May 7, 2007, we had 69 full-time employees, 19 in operations, 13 in engineering, and 37 who are responsible for companywide management, marketing, project management, logistics and administration. All of our employees are located in the U.S., except for one employee located in Argentina. None of our employees are covered by collective bargaining agreements. We have had no labor-related work stoppages, and we believe we have positive relations with our employees.

 

Facilities

 

As of March 31, 2007, we lease approximately 8,200 square feet of office space in Seattle, Washington for our corporate headquarters. This includes our primary lease, which expires on March 30, 2008, and a lease for

 

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additional office space, the term for which becomes month-to-month after May 31, 2007. We are currently negotiating a lease for approximately 27,300 square feet of office space in Seattle, Washington, and we expect to move our corporate headquarters to this space in June 2007. We expect that the lease will expire in July 2011. For a description of our current and proposed biodiesel production facilities, see “—Production Facilities” above.

 

Legal Proceedings

 

As of the date of this prospectus, we are not party to any material pending or threatened legal proceedings.

 

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MANAGEMENT

 

Directors and Executive Officers

 

The following table sets forth the names and ages of each of our executive officers and directors as of March 31, 2007, followed by a description of their business experience. All positions shown are with Imperium Renewables, Inc.

 

Name

   Age   

Position

Executive Officers      

Martin G. Tobias

   43    Chief Executive Officer, Chairman of the Board and Director

John P. Plaza

   41    President and Director

Marc D. Stolzman

   40    Chief Financial Officer

Arthur D. Ayrault IV

   45    Vice President of International

Jerold J. Goade

   43    Vice President of Finance and Administration

James Graham Noyes

   42    Vice President of Sales and Business Development

Jane A. Orenstein

   51    Vice President, General Counsel and Secretary

Mark E. Warner

   44    Vice President of Engineering
Non-Employee Directors      

Ira M. Ehrenpreis(1)(2)(3)

   38    Director

Nancy C. Floyd(1)(2)(3)

   52    Director

  (1)   Member of the Audit Committee
  (2)   Member of the Compensation Committee
  (3)   Member of the Nominating and Corporate Governance Committee

 

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

 

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

 

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

 

Arthur D. Ayrault IV. Mr. Ayrault has been our Vice President of International since July 2006, prior to which he served as a consultant to us from March 2006. Mr. Ayrault is responsible for development of joint

 

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

 

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

 

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

 

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

 

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

 

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

 

Nancy C. Floyd. Ms. Floyd has been a director since July 2005. Ms. Floyd is Founder and Managing Director of Nth Power, a venture capital firm. Ms. Floyd has led Nth Power’s investments in various entities,

 

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including Silicon Energy Corp and Northern Power Systems. In addition to serving on various company boards, Ms. Floyd sits on the boards of the Cleantech Venture Network, Center for Resource Solutions and American Council on Renewable Energy. Prior to founding Nth Power in 1997, Ms. Floyd built, managed and negotiated the sale of two high-growth energy and telecommunications companies. Ms. Floyd received her bachelor’s degree in Political Science from Franklin and Marshall College, where she currently serves as a Trustee, and her Masters degree in Political Science from Rutgers University.

 

Composition of the Board of Directors

 

Our board of directors is currently composed of four members. The board of directors has determined that only Mr. Ehrenpreis and Ms. Floyd are “independent” directors under the rules of the NASDAQ Stock Market. We intend to appoint such additional independent directors as needed so that a majority of our directors are independent within one year following this offering, so as to comply with applicable independence requirements of the SEC and the NASDAQ Stock Market. Upon completion of this offering, our amended and restated articles of incorporation will provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms.

 

At each annual meeting of shareholders after the initial classes are established, the successors to directors whose terms expire at that meeting will be elected to serve from the time of election and qualification until the third annual meeting following election. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes, so that, as nearly as possible, each class will consist of one-third of the total number of directors.

 

Committees of the Board of Directors

 

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee, each of which has the composition and responsibilities described below. It is our intention that the composition of our board committees comply, when required, with the applicable rules of the SEC and the NASDAQ Stock Market. Under these rules, our board committees must initially have one member who meets the applicable SEC and the NASDAQ Stock Market independence requirements, a majority of the members of each committee must meet these independence requirements within 90 days following this offering, and all committee members must meet these independence requirements within one year after this offering. If we fail to comply, when required, with the applicable requirements of the SEC or the NASDAQ Stock Market with respect to the independence of the members of our board of directors and committees of the board of directors, our common stock may be de-listed by the NASDAQ Global Market and we may otherwise be subject to adverse publicity and sanctions, which could have a material adverse effect on our results of operations and the market price of our common stock.

 

Audit Committee. Ms. Floyd and Mr. Ehrenpreis, each of whom is a non-employee member of our board of directors, currently comprise our audit committee. Upon completion of this offering, our audit committee will be comprised of             ,              and             . Our board has determined that each such member of our audit committee meets the requirements for independence and financial literacy under the listing standards for the NASDAQ Stock Market and SEC rules and regulations. We are relying on applicable NASDAQ and SEC phase-in rules concerning the number of independent directors serving on our audit committee. The audit committee is responsible for, among other things:

 

   

selecting and hiring our independent auditors, and approving the audit and non-audit services to be performed by our independent auditors;

 

   

evaluating the qualifications, performance and independence of our independent auditors;

 

   

reviewing and discussing with management and our independent directors our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

 

   

reviewing with management its assessment of the effectiveness of our internal control policies and procedures;

 

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

 

   

reviewing and approving any related-party transactions; and

 

   

establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls or auditing matters.

 

Compensation Committee. Ms. Floyd and Mr. Ehrenpreis, each of whom is a non-employee member of our board of directors, currently comprise our compensation committee. Upon completion of this offering, our compensation committee will be comprised of             . Our board has determined that each such member of our compensation committee meets the requirements for independence under the listing standards for the NASDAQ Stock Market. The compensation committee is responsible for, among other things:

 

   

reviewing our chief executive officer and other executive officers’ annual base salaries and annual incentive bonuses, including the specific goals and amount, equity compensation, employment agreements, severance arrangements and change in control agreements/provisions, and any other benefits, compensation or arrangements;

 

   

evaluating, approving and administering incentive compensation plans; and

 

   

preparing or reviewing disclosures regarding compensation that the SEC requires in our annual proxy statement.

 

Nominating and Corporate Governance Committee. Ms. Floyd and Mr. Ehrenpreis, each of whom is a non-employee member of our board of directors, currently comprise our nominating and corporate governance committee. Upon completion of this offering, our nominating and corporate governance committee will be comprised of             . Our board has determined that each such member of our nominating and corporate governance committee meets the requirements for independence under the listing standards for the NASDAQ Stock Market. The nominating and corporate governance committee is responsible for, among other things:

 

   

assisting the board in identifying prospective director nominees and recommending to the board director nominees for each annual meeting of shareholders or otherwise to fill vacancies;

 

   

developing and recommending to the board governance principles applicable to us, if so required by our board of directors;

 

   

overseeing the evaluation of the board of directors and its committees, if requested by the board of directors;

 

   

recommending members for each board committee; and

 

   

recommending compensation for service on our board of directors and its committees.

 

Compensation Committee Interlocks and Insider Participation

 

None of the members of our compensation committee is an officer or employee of our company. None of our executive officers serves, 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 of directors or compensation committee. Mr. Ehrenpreis and Ms. Floyd are the current members of our compensation committee. See “Certain Relationships and Related Party Transactions” for a summary of related party transactions involving Mr. Ehrenpreis and Ms. Floyd.

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

The primary goals of the compensation committee of our board of directors with respect to executive compensation are to attract and retain the most talented and dedicated executives possible, to tie annual and long-term cash and stock-based incentives to achievement of specified performance objectives, and to align executives’ incentives with shareholder value creation. To achieve these goals, the compensation committee intends to implement and maintain compensation plans that tie a substantial portion of executives’ overall compensation to key strategic goals such as the raising of capital, speed of development and construction of our production facilities, the achievement of production goals, and the recruiting of talented executives and staff. The compensation committee in 2006 evaluated individual executive performance with a goal of setting compensation at levels the committee believed were comparable to executives in other companies of similar size and stage of development operating in the alternative energy industry while taking into account our relative performance and our own strategic goals.

 

In May 2007 we retained a compensation consultant to review our policies and procedures with respect to executive compensation. Our compensation committee has extensive experience with early-stage companies as well as extensive experience in serving on compensation committees of companies specializing in “clean technology” and alternative energy.

 

Elements of Compensation

 

Our executive compensation consists of the following elements:

 

Base salary. Base salaries for our executives are established based on the scope of their responsibilities, taking into account competitive market compensation paid by other companies for similar positions. As we are a relatively new company, we believe that executive base salaries should be targeted near the median of the range of salaries for executives in similar positions with similar responsibilities at comparable companies, in line with our compensation philosophy. However, because our industry is relatively new, we must compete with other more established industries such as petroleum and chemical companies, which may cause us to offer salaries higher than the median to strategic hires. Following this offering, base salaries will be reviewed annually, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience.

 

Discretionary annual bonus. Prior to 2007, the compensation committee awarded discretionary annual bonuses to our executive officers and other employees in accordance with target percentages of annual salary set forth in these employees’ offer letters. For 2006, the target bonus level for our Chief Executive Officer was 50% of base salary; for our President, the target was 50% of base salary; for Mr. Ayrault, 50% of base salary; for Mr. Goade, 20% of base salary; and lower percentage ranges for directors, managers and others. The specific targeted bonus levels for each executive officer were determined by our compensation committee based on general consideration of the factors described above. Our discretionary annual bonuses provide a recruitment tool and motivation to achieve our corporate and individual goals. Prior to the consummation of this offering, our compensation committee will consider adopting a new management bonus plan to formalize our procedures and policies for granting annual cash bonus awards to our executive officers.

 

The compensation committee has not determined whether it would attempt to recover bonuses from our executive officers if the performance objectives that led to the bonus determination were to be restated, or found not to have been met to the extent originally believed by the compensation committee. However, as a public company, if we are required to restate our financial results due to our material noncompliance with any financial reporting requirements under the federal securities laws as a result of misconduct, the chief executive officer and chief financial officer may be legally required to reimburse us for any bonus or other incentive-based or equity-based compensation they receive in accordance with the provisions of Section 304 of the Sarbanes-Oxley Act.

 

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Other than for Mr. Goade, we have not paid any significant signing or promotion bonuses to our named executive officers, nor have we guaranteed any bonuses to our named executive officers. Mr. Goade received a $30,000 signing bonus in 2006.

 

Long-term incentive program. Our salary and bonus programs are intended to compensate our executive officers for short-term performance. We believe that long-term performance is achieved through an ownership culture that encourages such performance by many of our employees including our executive officers through the use of equity incentives. Our stock compensation plans have been established to provide our employees, including our executive officers, with incentives to help align those employees’ long-term interests with the interests of shareholders. In 2006 our long-term incentives consisted solely of stock option grants under our 2005 Stock Option Plan. However, our executive officers have also acquired equity in us through direct investment in our common stock and in our prior preferred stock offerings. Long-term incentive awards are meant to supplement cash compensation, and ensure that our executive officers have an equity stake in our company. Following this offering we plan to provide long-term incentives through equity-based awards under our new 2007 Performance Incentive Plan and participation in our 2007 Employee Stock Purchase Plan, see “—Benefit Plans” below.

 

Except as described above, we have not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash and non-cash compensation or among different forms of non-cash compensation. However, we believe that the use of stock and stock-based awards offers the best approach to achieving our compensation goals. We have not adopted stock ownership guidelines, and, other than with respect to Messrs. Plaza and Tobias, our stock compensation plans have provided the principal method for our executive officers to acquire equity or equity-linked interests in our company. We believe that the annual aggregate value of these awards should be set near competitive median levels for comparable companies. However, due to the early stage of our business, we expect to provide a greater portion of total compensation to our executives through our stock compensation plans than through cash-based compensation.

 

For more information regarding stock option grants to our named executive officers as of December 31, 2006 and grants made to our named executive officers after December 31, 2006, see “—Grants of Plan-Based Awards” below.

 

Tax Considerations

 

Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, generally does not permit a tax deduction for compensation in excess of $1.0 million paid to the chief executive officer and the four other most highly paid executive officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We generally intend to structure the performance-based portion of our executive compensation, when feasible, to comply with exemptions in Section 162(m) of the Code so that the compensation remains tax deductible to us. However, our board of directors may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) of the Code when it believes that such payments are appropriate to attract and retain executive talent.

 

Role of Executives in Executive Compensation Decisions

 

Historically, each element of compensation of executive officers has been recommended to the compensation committee by our Chief Executive Officer, except as to his own compensation. The amount of each element of compensation for our Chief Executive Officer is determined by the compensation committee. The compensation committee also works with our finance and human resources departments in evaluating the financial, accounting, tax and retention implications of our various compensation programs. Neither our Chief Executive Officer nor any of our other executives participates in deliberations relating to his or her own compensation.

 

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Stock Option Practices

 

We have awarded all options to purchase our common stock to executive officers at or above the fair market value of our common stock at the grant date. Following this offering, option grants will be made by our compensation committee at meetings or via written consents, and the grants will have an exercise price equal to the closing market price of our common stock on the date of grant.

 

As a privately-owned company, there has been no market for our common stock. Accordingly, in 2006 we had no program, plan or practice pertaining to the timing of option grants to executive officers coinciding with the release of material non public information.

 

Summary Compensation Table

 

The following table sets forth information regarding compensation earned by our Chief Executive Officer, President, the person acting as our Chief Financial Officer, and the two other most highly compensated executive officers during the fiscal year ended December 31, 2006. We refer to these executive officers as our “named executive officers” elsewhere in this prospectus.

 

Name and Principal Position

   Salary ($)    Bonus
($)(1)
   Option
Awards
($)(2)
   All Other
Compensation
($)
    Total ($)

Martin G. Tobias

   $ 152,308    $ 75,000               $ 227,308

Chief Executive Officer and

Chairman of the Board

             

John P. Plaza

   $ 177,693    $ 87,500         $ 1,909 (3)   $ 267,102

President

             

Jerold J. Goade(4)

   $ 106,346    $ 51,205    $ 7,688          $ 165,239

Vice President of Finance and Administration

             

David Kirkpatrick(5)

   $ 97,788    $ 32,000    $ 13,274    $ 24,443 (6)   $ 167,505

Vice President of Business Development

             

Arthur D. Ayrault IV(7)

   $ 75,000    $ 37,603    $ 24,026          $ 136,629

Vice President of International

             

  (1)   Excluding a $30,000 signing bonus paid to Mr. Goade in 2006, the amounts otherwise represent target bonuses earned during 2006.
  (2)   The amounts represent the compensation expense recognized pursuant to SFAS No. 123(R) for 2006. See Note 1 to our audited consolidated financial statements included in this prospectus for a discussion of all assumptions made by us in determining the SFAS 123(R) values of our equity awards. Our executive officers will not realize the estimated value of these awards in cash until these awards are vested and exercised or sold. The weighted-average fair value of our options granted during the year ended December 31, 2005, calculated pursuant to SFAS No. 123, was $0.11 per share. For information regarding our valuation of option awards, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Summary of Critical Accounting Policies and Estimates—Stock-Based Compensation.”
  (3)   Consists of annual health club membership dues.
  (4)   Mr. Goade commenced employment with us on April 17, 2006. Amount includes prorated target bonus and a signing bonus.
  (5)   Mr. Kirkpatrick’s employment terminated as of December 31, 2006.
  (6)   Represents relocation expenses paid to Mr. Kirkpatrick.
  (7)   Mr. Ayrault commenced employment with us on July 1, 2006. He served as a consultant from May 1, 2006 through June 30, 2006.

 

Employment Agreement

 

Martin G. Tobias

 

We entered into an “at will” employment agreement with Martin G. Tobias, our Chief Executive Officer, on May 23, 2005. Under his employment agreement, Mr. Tobias is entitled to receive an annual base salary of $150,000, subject to review by our compensation committee.

 

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Grants of Plan-Based Awards

 

Set forth below is information regarding awards granted to our named executive officers during 2006. All equity grants were made under our 2005 Stock Option Plan.

 

2006 Grants of Plan-Based Awards

 

Name

  

Grant

Date

   Estimated Future
Payouts Under
Non-Equity
Incentive Plan
Awards Target ($)
  

Estimated Future
Payouts Under
Equity Incentive
Plan Awards

Target (#)

   Exercise Base
Price of Option
Awards ($/share)(1)
   Grant Date Fair
Value of Option
Awards ($)(2)

Martin G. Tobias

      $ 75,000             

John P. Plaza

      $ 87,500             

Jerold J. Goade

   5/11/2006         124,628    $ 0.5797    $ 43,535
      $ 21,205             

David Kirkpatrick(3)

   5/11/2006         234,256    $ 0.5797    $ 81,829

Arthur D. Ayrault IV

   5/11/2006         249,256    $ 0.5797    $ 143,861
      $ 37,603             

  (1)   The exercise price for these options was determined by our board of directors based on an approximation of the fair market value of our common stock on the date of grant after taking into account, among other things, the last price at which our capital stock was sold to an outside investor in an arms-length transaction, recent business activities, the liquidation preference attributable to our redeemable convertible preferred stock, and our current and budgeted short-term cash positions.
  (2)   These amounts represent the grant date fair value of the awards pursuant to SFAS No. 123(R). See Note 1 to our audited consolidated financial statements for a discussion of all assumptions made by us in determining the SFAS 123(R) values of our equity awards. These options vest at the rate of 25% following the first anniversary of the grant date, and in monthly installments thereafter for the subsequent three years.
  (3)   Mr. Kirkpatrick’s employment terminated as of December 31, 2006 and his options were forfeited at such time.

 

The following table summarizes the outstanding equity awards held by each of our named executive officers as of December 31, 2006.

 

Outstanding Equity Awards at 2006 Fiscal Year-End

 

     Option Awards

Name

   Number of Securities
Underlying
Unexercised Options
Exercisable (#)
   Number of Securities
Underlying
Unexercised Options
Unexercisable (#)
    Option
Exercise Price
($)
   Option
Expiration Date

Martin G. Tobias

   540,000    540,000 (1)   $ 0.50    6/9/2015

John P. Plaza

              

Jerold J. Goade

      124,628 (2)   $ 0.5797    4/16/2016

David Kirkpatrick(3)

              

Arthur D. Ayrault IV

      249,256 (2)   $ 0.5797    4/30/2016

  (1)   These stock options vest in equal monthly installments of 30,000 shares per month over three years. Vesting is accelerated upon a change in control of us. Upon termination for cause, all options will be immediately forfeited. Upon termination due to death or disability, vested options will remain exercisable for the earlier of twelve months or their earlier expiration date, and unvested options will be forfeited. For all other terminations, vested options will remain exercisable for the earlier of three months or their earlier expiration date, and unvested options will be forfeited.
  (2)   These stock options vest 25% on the first anniversary of the date of grant, and monthly thereafter in equal installments for the next three years following the grant date. Vesting is accelerated upon a change in control of us. Upon termination for cause, all options will be immediately forfeited. Upon termination due to death or disability, vested options will remain exercisable for the earlier of twelve months or their earlier expiration date, and unvested options will be forfeited. For all other terminations, vested options will remain exercisable for the earlier of three months or their earlier expiration date, and unvested options will be forfeited.
  (3)   Mr. Kirkpatrick’s employment terminated as of December 31, 2006 and his options were forfeited at such time.

 

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In March 2007, Mr. Stolzman, our Chief Financial Officer, and Mr. Goade, our Vice President of Finance and Administration, were granted options to purchase up to 250,000 and 25,000 shares of common stock, respectively, under the 2005 Stock Option Plan at an exercise price of $13.00 per share. These options vest 25% on the first anniversary of the date of hire, in the case of Mr. Stolzman, and the date of grant, in the case of Mr. Goade, and monthly thereafter in equal installments for the next three years following such date. The exercise price for these options was determined by our board of directors based on an approximation of the fair market value of our common stock on the date of grant after taking into account, among other things, the last price at which our capital stock was sold to an outside investor in an arms-length transaction, recent business activities, the liquidation preference attributable to our redeemable convertible preferred stock, and our current and budgeted short-term cash positions.

 

Option Exercises and Stock Vested

 

There have been no exercises of stock options, SARs or similar instruments, or vesting of stock, restricted stock, restricted stock units or similar instruments, by our named executive officers during the last fiscal year.

 

Pension Benefits

 

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

 

Nonqualified Deferred Compensation

 

None of our named executive officers participates in or has account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us. The compensation committee, which will be comprised solely of “outside directors” as defined for purposes of Section 162(m) of the Code, may elect to provide our officers and other employees with non-qualified defined contribution or deferred compensation benefits if the compensation committee determines that doing so is in our best interests.

 

Potential Payments Upon Termination or Change in Control

 

We are not obligated to make any cash payment to any of our named executive officers on the termination of employment for any reason. We do not provide any medical continuation or death or disability benefits for any of our executive officers that are not also available to our employees. Messrs. Tobias, Stolzman, Goade and Ayrault hold options that would vest in full upon any change in control. We are not obligated to make any other payments on a change in control. Assuming a change in control had taken place on December 31, 2006, the following individuals would have been entitled to change in control payments in the amounts set forth opposite their name:

 

     Value of Accelerated Equity
and Performance Awards(1)

Martin G. Tobias

   $             

Marc D. Stolzman

  

Jerold J. Goade

  

Arthur D. Ayrault IV

  

  (1)   Based on an assumed initial public offering price of $            per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus.

 

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Director Compensation

 

We paid no compensation to our non-employee directors during 2006 other than the reimbursement of their actual out-of-pocket expenses for attending meetings.

 

Upon consummation of this offering, each of our current non-employee directors will receive an option to purchase             shares of our common stock at an exercise price equal to the closing price of our common stock on the first day of trading. Each of these options will vest in         equal monthly installments following the offering. Following this offering, each non-employee director will receive an annual retainer of $            . In addition, each non-employee director will receive $            per meeting of the board of directors attended in person or $            per meeting attended telephonically, and each committee member will receive $            per meeting attended of their respective committees.

 

Each non-employee director who serves on the audit committee, other than the chairperson of the audit committee, will receive an additional annual retainer of $            . The chairpersons of the audit committee, the compensation committee and the nominating and corporate governance committee will also receive additional annual retainers of $            , $            and $            , respectively.

 

Each non-employee director who first becomes a member of our board of directors after the consummation of this offering will be granted an option to purchase             shares of our common stock, vesting in         equal monthly installments. After the consummation of this offering, each non-employee director that continues as a non-employee director will be entitled to receive an annual option grant to purchase             shares of our common stock, vesting in         equal monthly installments. Each such option will have an exercise price equal to the fair value of our common stock on the date of grant and will have a ten-year term. In the event of our “change in control,” each outstanding non-employee director option will become immediately vested and exercisable in full.

 

Benefit Plans

 

2005 Stock Option Plan

 

Our 2005 Stock Option Plan was adopted by our board of directors and approved by our shareholders in December 2005, and provides for the grant of awards to our employees and consultants. As of March 31, 2007, options to purchase 2,805,337 shares of our common stock at a weighted-average exercise price of $4.39 per share were outstanding under our 2005 Stock Option Plan. Our 2005 Stock Option Plan will terminate upon the effective date of our 2007 Performance Incentive Plan. However, any outstanding options granted under our 2005 Stock Option Plan will remain outstanding and subject to the terms of such plan and related stock option agreements until they are exercised or until they terminate or expire by their terms.

 

Our 2005 Stock Option Plan provides for the grant of both incentive stock options that qualify for favorable tax treatment under Section 422 of the Code and nonqualified stock options, both of which have maximum permitted terms of ten years. Incentive stock options may be granted only to employees of Imperium Renewables, Inc., while nonqualified stock options may be granted to our employees, employees of affiliates and consultants. The exercise price of incentive stock options may not be less than the fair market value of our common stock on the date of grant. Prior to the completion of this offering, the exercise price of nonstatutory stock options could not be less than 85% of the fair market value of our common stock on the date of grant. In the case of 10% shareholders, the exercise price of incentive and nonstatutory stock options may not be less than 110% of the fair market value of our common stock on the date of grant.

 

In the event of a change in control of us, the 2005 Stock Option Plan also provides that all outstanding options will, to the extent not assumed or substituted by the successor entity, immediately vest in full and become exercisable prior to such change in control and those options that remain unexercised shall terminate on the consummation of the change in control.

 

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Historically, stock option grants under the 2005 Stock Option Plan were made at the discretion of our board of directors and, in appropriate circumstances, with recommendations from our executive officers, including Martin G. Tobias, our Chief Executive Officer, and John P. Plaza, our President. Stock options granted by us have an exercise price equal to the fair market value of our common stock on the day of grant, typically vest 25% after one year and monthly thereafter over an additional three years from the date of hire for initial grants based upon continued employment, and generally expire ten years after the date of grant.

 

2007 Performance Incentive Plan

 

In May 2007, our board of directors adopted the form of our 2007 Performance Incentive Plan, or the Incentive Plan. Prior to effectiveness of this offering, our board of directors will establish the number of shares of our common stock that will initially be authorized and reserved for issuance under the Incentive Plan. Prior to effectiveness of this offering, we will seek shareholder approval for the Incentive Plan. The Incentive Plan will become effective upon the effectiveness of this offering.

 

The Incentive Plan is intended to make available incentives that will assist us to attract, retain and motivate employees, consultants and members of the board of directors, whose contributions are essential to our success. We may provide these incentives through the grant of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and units, deferred compensation awards, other cash-based or stock-based awards and non-employee director awards.

 

The administrator of our Incentive Plan will be the compensation committee of our board of directors. The administrator has the sole authority to construe and interpret the terms of the Incentive Plan and awards granted under it. Subject to the provisions of the Incentive Plan, the administrator has the discretion to determine the persons to whom and the times at which awards are granted, the types and sizes of such awards, and all of their terms and conditions. The compensation committee may increase the discretionary annual bonus paid to our executive officers. The actual amount of discretionary bonus is determined following a review of each executive’s individual performance and contribution to our strategic goals conducted during the first quarter of each fiscal year. The compensation committee has not fixed a maximum payout for any officers’ annual discretionary bonus.

 

Our employees and consultants are eligible to receive grants of nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units and performance shares or units under the Incentive Plan, while only employees are eligible to receive incentive stock option awards. For all options granted under the Incentive Plan, the exercise price may not be less than the fair market value of a share of our common stock on the date of grant. Deferred compensation awards may be granted only to officers, directors or members of a select group of highly compensated employees. Non-employee director awards may be granted only to members of the board of directors who are not our employees or any affiliate of ours. These awards may be granted in the form of nonstatutory stock options, stock appreciation rights, restricted stock or restricted stock units. Non-employee director awards are limited to no more than              shares in any fiscal year, except that this limit may be increased on the basis of the attainment of certain milestones, including the individual’s initial appointment or election to the board of directors, service as the chairman or lead director of the board of directors, service on a committee of the board of directors, and service as chairman on a committee of the board of directors.

 

In the event of certain changes in control of us, stock options and stock appreciation rights outstanding under the Incentive Plan may be assumed or substituted by the successor entity. Any stock options or stock appreciation rights that are not assumed in connection with a change in control or exercised prior to a change in control will terminate without further action by the administrator. However, the administrator may choose to:

 

   

accelerate the vesting and exercisability of any or all outstanding options and stock appreciation rights upon such terms as it determines; or

 

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cancel each or any outstanding option or stock appreciation right in exchange for a payment to the holder with respect to each share.

 

In the event of a change in control, the administrator may also, in certain cases, choose to accelerate the vesting and/or settlement of any restricted stock award, restricted stock unit award, performance share or performance unit award, deferred compensation award, or cash-based or other stock-based award upon such conditions as it determines. In addition, the vesting of all non-employee director awards will, to the extent not assumed or substituted, automatically be accelerated in full upon a change in control.

 

The Incentive Plan will continue in effect until it is terminated by the administrator; provided, however, that all awards will be granted, if at all, within ten years of the effective date of the Incentive Plan. The administrator may amend, suspend or terminate the Incentive Plan at any time; provided that without shareholder approval, the plan cannot be amended to increase the number of shares authorized, change the class of persons eligible to receive incentive stock options or effect any other change that would require shareholder approval under any applicable law or listing rule. Amendment, suspension or termination of the Incentive Plan may not adversely affect any outstanding award without the consent of the participant, unless such amendment, suspension or termination is necessary to comply with any applicable law, regulation or rule.

 

2007 Employee Stock Purchase Plan

 

In May 2007, our board of directors adopted, and prior to effectiveness of this offering we will seek shareholder approval for, our Employee Stock Purchase Plan, or ESPP. The ESPP will become effective upon the effectiveness of this offering.

 

A total of 500,000 shares of our common stock will be made available for sale under the ESPP. This initial authorization will increase automatically on January 1, 2008 and each subsequent anniversary through January 1, 2017 by an amount equal to the smaller of 1% of the number of shares of common stock issued and outstanding on December 31 of the prior year, or 100,000 shares. Alternatively, our board of directors can act prior to January 1 each year to increase the share reserve by a lesser amount determined by the compensation committee of the board of directors. Appropriate adjustments will be made to the number of authorized shares and other numerical limits in the ESPP and in outstanding purchase rights to prevent dilution or enlargement of participants’ rights in the event of certain changes to our capital structure. Our board of directors or a committee of our board of directors will administer the ESPP. Our board of directors or our administering committee will have full and exclusive authority to interpret the terms of the ESPP and determine eligibility.

 

All of our employees are eligible to participate in the ESPP if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, an employee may not participate in the ESPP if, as a result of participating, the employee would own stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock. In addition, no employee may participate in the ESPP at a rate that would enable the employee to purchase more than $25,000 worth of stock for each calendar year.

 

Our ESPP is intended to qualify under Section 423 of the Code and provides for six-month offering periods. The offering periods generally start on the first trading day on or after July 1st and January 1st of each year, except for the first offering period, which will commence on the first trading day on or after the effective date of this offering and will end on the first trading day on or after December 31, 2007.

 

Our ESPP permits participants to purchase common stock through payroll deductions of up to 15% of their eligible compensation, which includes a participant’s base salary, wages, overtime and shift premium pay and commissions, but excludes payments of incentive compensation, bonuses and other compensation.

 

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Accumulated payroll deductions are used to purchase shares of our common stock at the end of each offering period. For each offering period, the purchase price is 95% of the fair market value of our common stock on the purchase date. Participants may end their participation at any time during an offering period, and will be refunded in their accumulated payroll deductions for such offering period. Participation ends automatically upon termination of employment with us.

 

A participant may not transfer rights granted under the ESPP other than by will, the laws of descent and distribution or as otherwise provided under the ESPP.

 

In the event of our “change in control,” a successor entity may assume or substitute for rights to participate in the ESPP. If the successor entity refuses to assume or substitute for the outstanding participation rights, the offering period then in progress will be shortened and a new end of offering period date will be set prior to the effective date of the change in control transaction.

 

Our ESPP may be terminated by our board of directors or an administering committee at any time. The board of directors or such a committee has the authority to amend or terminate our ESPP, except that, subject to certain exceptions described in the ESPP, no such action may adversely affect any outstanding rights to purchase stock under our ESPP.

 

Other Benefit Plans

 

Our employees, including our executive officers, are entitled to various employee benefits. These benefits include the following: medical and dental care plans; flexible spending accounts for healthcare; a 401(k) plan; and paid time off.

 

401(k) Plan

 

Beginning January 1, 2007, our eligible employees have been offered the right to participate in a 401(k) Plan administered by our compensation committee through a third party financial services firm. We currently do not offer any matching contributions to the employee contributions made under this plan.

 

Limitation of Liability and Indemnification

 

Our articles of incorporation provide that we will indemnify our directors and officers to the fullest extent permitted by the Washington Business Corporation Act, including instances in which indemnification is otherwise discretionary under the law. Our articles of incorporation provide that we will indemnify our officers and directors against liability incurred as a result of their performance of services requested by the company, and will advance to them reasonable expenses towards the defense of any such proceeding brought against them, except in any case in which liability results from:

 

   

acts or omissions adjudged to have involved intentional misconduct, a knowing violation of law or an unlawful distribution; or

 

   

any transaction in which the director or officer is adjudged to have personally received a benefit in money, property or services to which he or she is not legally entitled.

 

Our articles of incorporation also limit our directors’ liability to us and our shareholders for monetary damages incurred in their capacity as a director to liability resulting from the same acts or omissions or transactions described above.

 

Our articles of incorporation also provide that we may purchase and maintain liability insurance on behalf our directors, officer, employees, and agents. We currently maintain a liability insurance policy pursuant to which our directors and officers may be indemnified against liability incurred as a result of serving in their capacities as directors and officers.

 

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Prior to completion of the offering, we intend to enter into shareholder-approved indemnification agreements with each of our directors and officers to provide additional contractual assurances regarding the scope of the indemnification provided for in our articles of incorporation and to provide additional procedural protections. We believe that these provisions and agreements are necessary to attract and retain qualified directors and executive officers.

 

At present we are not aware of any pending litigation or proceeding involving any of our directors, officers, employees or agents in their capacity as such, for which indemnification will be required or permitted. In addition, we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification by any director or officer.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Since March 5, 2004, our date of inception, we have engaged in the following transactions with our executive officers, directors and holders of 5% or more of our capital stock, and their affiliates.

 

Sale of Preferred Stock

 

In December 2005, we sold an aggregate of 2,282,584 shares of our Series A redeemable convertible preferred stock at $1.3143 per share for an aggregate purchase price of approximately $3.0 million to Nth Power Clean Energy Fund, L.P. and Nth Power Technologies Fund II-A, L.P., which entities are affiliated with Nancy C. Floyd, one of our directors. These two affiliated entities together hold 5% or more of our capital stock.

 

In October 2006, we sold an aggregate of 573,162 shares of our Series B redeemable convertible preferred stock at $13.0853 per share for an aggregate purchase price of approximately $7.5 million to Technology Partners Fund VII, L.P. and Technology Partners Affiliates VII, L.P., which entities are affiliated with Ira M. Ehrenpreis, one of our directors. These two affiliated entities together hold 5% or more of our capital stock. In October 2006 and February 2007, we sold an aggregate of 165,243 shares of our Series B redeemable convertible preferred stock at $13.0853 per share for an aggregate purchase price of approximately $2.2 million to Nth Power Clean Energy Fund, L.P. and Nth Power Technologies Fund II-A, L.P.

 

Investor Rights Agreement

 

In connection with the sale of our Series B redeemable convertible preferred stock, we entered into an investor rights agreement with certain of our shareholders, which agreement provides such shareholders certain rights to request us to register their securities under the Securities Act. Parties to this agreement include: Technology Partners Fund VII, L.P., Technology Partners Affiliates VII, L.P., Nth Power Clean Energy Fund, L.P. and Nth Power Technologies Fund II-A, L.P.; Odyssey Biofuels, LLC, which entity is affiliated with John P. Plaza, one of our directors and executive officers, and which holds 5% or more of our capital stock; Martin G. Tobias, one of our directors, an executive officer, and holder of 5% or more of our capital stock; and IOA LLC, a holder of 5% or more of our capital stock. As of March 31, 2007, the holders of 16,978,703 shares of our common stock were entitled to rights with respect to the registration of their shares under the Securities Act. For a more detailed description of these registration rights, see “Description of Capital Stock—Registration Rights.” The agreement also provides the holders of our redeemable convertible preferred stock with the right to receive certain financial information as well as other rights, all of which rights, other than registration rights, terminate immediately prior to the consummation of this offering.

 

Other Agreements

 

Pursuant to a voting agreement originally entered into in December 2005 and most recently amended and restated in February 2007 by and among us and certain of our shareholders, Nancy C. Floyd, Ira M. Ehrenpreis, Martin G. Tobias and John P. Plaza have each been elected to serve as members on our board of directors, and, as of the date of this prospectus, continue to so serve. Pursuant to the voting agreement, the holders of our common stock are entitled to nominate two members to our board of directors, and the holders of our Series A and Series B redeemable convertible preferred stock are entitled to nominate two members to our board of directors, as designated by Nth Power Clean Energy Fund, L.P. and Nth Power Technologies Fund II-A, L.P. and by Technology Partners Fund VII, L.P. and Technology Partners Affiliates VII, L.P., respectively. Additionally, the holders of our common stock and Series A and Series B redeemable convertible preferred stock are entitled to nominate one independent member to our board of directors by mutual agreement. We also entered into a right of first refusal and co-sale agreement with holders of our common and redeemable convertible preferred stock pursuant to which such holders have the right to purchase and/or sell shares of our capital stock in the event of proposed sales by another party to this agreement. These agreements and the rights provided therein terminate upon consummation of this offering.

 

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Notes and Warrants

 

In connection with the sale of our Series A redeemable convertible preferred stock, in August 2005 we issued and sold convertible promissory notes to Nth Power Clean Energy Fund, L.P. and Nth Power Technologies Fund II-A, L.P. for an aggregate principal amount of $250,000, which converted into 446,853 shares of common stock at $0.5797 per share in December 2005. In connection with the sale of our Series B redeemable convertible preferred stock, in October 2006 we issued warrants to purchase up to 54,762 shares of our common stock at an exercise price of $0.01 per share to Nth Power Clean Energy Fund, L.P. and Nth Power Technologies Fund II-A, L.P. In addition, in connection with the sale of our Series B redeemable convertible preferred stock in October 2006, we issued warrants to purchase up to 280,183 shares of our common stock at an exercise price of $0.01 per share to Technology Partners Fund VII, L.P. and Technology Partners Affiliates VII, L.P.

 

Stock Option

 

In January 2007, we granted an option to TP Management VII, LLC, an entity affiliated with Mr. Ehrenpreis, Technology Partners Fund VII, L.P. and Technology Partners Affiliates VII, L.P., to purchase 100,000 shares of common stock at an exercise price of $6.50 per share.

 

IOA Agreement

 

We hired a third party contactor, IOA LLC, to provide certain construction and engineering services related to our production facility in Seattle, Washington, between March 2004 and December 2004. In settlement of $250,000 due for such services, IOA LLC accepted an interest in our subsidiary, Seattle Biodiesel LLC, which was then converted into 3,000,000 shares of our common stock, which made IOA LLC a holder of 5% or more of our capital stock. In 2005 and 2006, we engaged IOA LLC to provide additional construction services for our Seattle production facility, for which we paid approximately $210,000 and $199,000 during the years ended December 31, 2005 and 2006, respectively. The four members of IOA LLC are also owners of Sabyr Contractors, Inc., which we have engaged to act as the “owner’s representative” for construction of our Grays Harbor production facility. The payment amount under the contract for their services as owner’s representative is on a time and materials basis and we expect, upon completion of our Grays Harbor production facility, the payment amount to be approximately $300,000.

 

We believe that all of these transactions were on terms as favorable as could have been obtained from unrelated third parties.

 

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PRINCIPAL AND SELLING SHAREHOLDERS

 

The following table sets forth, as of March 31, 2007, information regarding beneficial ownership of our capital stock by the following:

 

   

each person, or group of affiliated persons, who is known by us to beneficially own 5% or more of any class of our voting securities;

 

   

each of our current directors and proposed directors;

 

   

each of our named executive officers;

 

   

all current directors and executive officers as a group; and

 

   

each of the selling shareholders.

 

Beneficial ownership is determined according to the rules of the SEC. Beneficial ownership means that a person has or shares voting or investment power of a security, and includes shares underlying options and warrants that are currently exercisable or exercisable within 60 days after the measurement date. This table is based on information supplied by officers, directors and principal and selling shareholders. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below, based on the information each of them has given to us, have sole investment and voting power with respect to their shares, except where community property laws may apply.

 

Unless otherwise indicated, we deem shares of common stock subject to options and warrants that are exercisable within 60 days of March 31, 2007 to be outstanding and beneficially owned by the person holding the options and warrants for the purpose of computing percentage ownership of that person, but we do not treat them as outstanding for the purpose of computing the ownership percentage of any other person.

 

The percentage of shares beneficially owned before the offering is based on 31,439,806 shares of our common stock outstanding as of March 31, 2007, assuming conversion of all outstanding shares of our redeemable convertible preferred stock into an equal number of shares of common stock, but in accordance with the rules of the SEC, assuming no exercise of outstanding warrant or options. The percentage of shares beneficially owned after the offering is based on             shares of common stock outstanding after the closing of the offering, assuming no exercise of the underwriters’ over-allotment option. The percentage of shares beneficially owned after the offering assuming full exercise of the over-allotment option is based on             shares of common stock outstanding after the closing of the offering.

 

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Unless otherwise indicated, the address for each person or entity named below is c/o Imperium Renewables, Inc., 1418 Third Avenue, Suite 300, Seattle, Washington 98101.

 

Name and Address of Beneficial

Owner

 

Shares Beneficially
Owned Prior to the

Offering

    Shares
Beneficially
Owned After
Offering
    Shares Offered
in Over-
Allotment
Option
  Shares Beneficially
Owned After Offering
Assuming Full Exercise of
Over-Allotment Option
 
  Number   Percent     Number   Percent     Number   Number   Percent  

Odyssey Biofuels LLC(1)

  7,556,996   24.0 %              %                %

4130 S.W. Monroe Street

             

Seattle, Washington 98136

             

Entities affiliated with Technology Partners(2)

  3,996,790   12.6 %              %                %

550 University Avenue

             

Palo Alto, California 94301

             

IOA LLC(3)

  2,827,497   9.0 %              %                %

3852 S. 66th Street

             

Tacoma, Washington 98409

             

Entities affiliated with Nth Power(4)

  2,949,442   9.4 %              %                %

50 California Street, Suite 840

             

Palo Alto, California 94111

             

Entities affiliated with BlackRock(5)

  2,674,756   8.5 %              %                %

33 King William Street

London EC4R9A5, England

             

John P. Plaza(6)

  7,556,996   24.0 %              %                %

Ira M. Ehrenpreis(7)

  3,996,790   12.6 %              %                %

550 University Avenue

             

Palo Alto, California 94301

             

Nancy C. Floyd(8)

  2,949,442   9.4 %              %                %

50 California Street, Suite 840

             

Palo Alto, California 94111

             

Martin G. Tobias(9)

  2,484,000   7.7 %              %                %

Arthur D. Aryault IV(10)

  62,314   *                %                %

Jerold J. Goade(11)

  33,753   *                %                %

David Kirkpatrick(12)

  0   *       *         *  

Marc D. Stolzman

  0   *       *         *  

All directors and executive officers as a group (11 persons)(13)

  17,088,295   54.0 %              %                %

  *   Less than one percent (1%).
  (1)   Mr. Plaza, as managing member, has sole voting and investment power with respect to such shares.
  (2)   Consists of 3,399,611 shares and 263,373 shares issuable upon the exercise of warrants held by Technology Partners Fund VII, L.P., 216,996 shares and 16,810 shares issuable upon the exercise of warrants held by Technology Partners Affiliates VII, L.P., and 100,000 shares issuable upon the exercise of a stock option issued outside of our 2005 Stock Option Plan to TP Management VII, LLC (collectively, “Technology Partners”). TP Management VII, LLC is the general partner of both Technology Partners Fund VII, L.P. and Technology Partners Affiliates VII, L.P. The managing members of TP Management VII, LLC are Mr. Ehrenpreis, John E. Ardell, Jim Glasheen, Sheila Mutter and Roger Quy, who possess shared voting and investment power. Each of the managing members of TP Management VII, LLC disclaims beneficial ownership of the shares held by Technology Partners except to the extent of his or her pecuniary interest therein.
  (3)   Karen Say, as managing member shares voting and investment power over the shares with members, Michael McAloon, Michael Muller and Winfield Brown.

 

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  (4)   Consists of 2,605,212 shares and 49,286 shares issuable upon the exercise of warrants held by Nth Power Technologies Fund II-A, L.P. (“Nth Power Technologies”) and 289,468 shares and 5,476 shares issuable upon the exercise of warrants held by Nth Power Clean Energy Fund, L.P. (“Nth Power Clean Energy,” and together with Nth Power Technologies, “Nth Power”). The general partner of Nth Power Technologies is Nth Power Management II-A, LLC, whose managing member is Nth Power LLC. The general partner of Nth Power Clean Energy is Nth Power Management CEF, LLC, whose managing member is also Nth Power LLC. The managing directors of Nth Power LLC are Ms. Floyd, Bryant J. Tong and Tim Woodward, who possess shared voting and investment power. Each of the managing directors of Nth Power LLC disclaims beneficial ownership of the shares held by Nth Power except to the extent of his or her pecuniary interest therein.
  (5)   Consists of 2,521,913 shares held by Merrill Lynch International Investment Funds New Energy Fund (“MLIIF New Energy Fund”) and 152,843 shares held by BlackRock Natural Resources Fund (together, the “BlackRock” entities). BlackRock Investment Management (UK) Limited acts as the Investment Advisor to the MLIIF New Energy Fund and possesses sole voting and investment power with respect to the shares held by MLIIF New Energy Funds. BlackRock Investment Management International Limited acts as the Investment Manager for the BlackRock Natural Resources Fund and possesses sole voting and investment power with respect to the shares held by BlackRock Natural Resources Fund.
  (6)   Includes 7,556,996 shares held by Odyssey Biofuels, LLC (“Odyssey”), of which Mr. Plaza, as managing member, has sole voting and investment power. Mr. Plaza disclaims beneficial ownership of the shares held by Odyssey except to the extent of his pecuniary interest therein.
  (7)   Includes 3,996,790 shares, 380,183 of which are issuable upon exercise of warrants and an option issued outside of our 2005 Stock Option Plan, held by Technology Partners, of which Mr. Ehrenpreis, as a managing member of the general partner of the Technology Partners entities, has shared voting and investment power. Mr. Ehrenpreis disclaims beneficial ownership of the shares held by Technology Partners except to the extent of his pecuniary interest therein.
  (8)   Includes 2,949,442 shares, 54,762 shares of which are issuable pursuant to warrants, held by Nth Power, of which Ms. Floyd, as a managing director of the managing member of the general partners of the Nth Power entities, has shared voting and investment power. Ms. Floyd disclaims beneficial ownership of the shares held by Nth Power except to the extent of her pecuniary interests therein.
  (9)   Includes 690,000 shares issuable pursuant to stock options exercisable within 60 days after March 31, 2007. Includes 46,154 shares owned by Finn Tobias GST Exempt Trust, of which Mr. Tobias, as a co-trustee, along with Alex Landes, possess voting and investment power. Mr. Tobias disclaims beneficial ownership of the shares held by the Finn Tobias GST Exempt Trust, except to the extent of his pecuniary interest therein.
  (10)   Includes 62,314 shares issuable pursuant to stock options exercisable within 60 days after March 31, 2007.
  (11)   Includes 33,753 shares issuable pursuant to stock options exercisable within 60 days after March 31, 2007.
  (12)   Mr. Kirkpatrick’s employment terminated as of December 31, 2006.
  (13)   Consists of shares beneficially owned by all executive officers and directors as a group, and 5,000 shares issuable to Mark E. Warner upon the exercise of options exercisable within 60 days after March 31, 2007.

 

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DESCRIPTION OF CERTAIN INDEBTEDNESS

 

Credit Facility

 

In June 2007, through our subsidiary Imperium Grays Harbor, LLC, we expect to enter into a $101.2 million senior secured credit facility with Société Générale and its U.S. subsidiary SG Americas Securities, LLC. Initially, we expect that the credit facility will consist of a $41.2 million construction term loan that we may use to finance the completion of construction of our Grays Harbor production facility and a $60.0 million senior secured revolving credit facility available for working capital purposes, including letters of credit for the bulk purchase of vegetable oil and biodiesel. We expect that the term loan will be available until the earlier of June 2008 or when our Grays Harbor production facility is commissioned at 100 MGY nameplate capacity, and that it will mature in June 2015. Borrowings under either the term loan or revolving credit facility will bear interest at LIBOR plus the applicable margin of 3.5% during the construction of the Grays Harbor production facility or 3.25% thereafter. We expect that the interest rate may be reduced if we are able to meet output milestones from our Grays Harbor production facility under fixed price contracts to counterparties rated at least BBB-. In addition to paying interest on the outstanding principal under the credit facility, we expect that we will be required to pay a commitment fee in respect of unused loan commitments at a rate of 0.5% per annum. We expect that loan advances under the revolving credit facility will have a borrowing base limitation based on a percentage of eligible receivables, outstanding inventory and accounts.

 

We expect that our obligations under the construction term loan will be secured by first priority security interests in all present and future assets, accounts receivable and inventory of our Grays Harbor production facility, assignments of all material agreements and regulatory permits related to our Grays Harbor production facility, and a pledge of all of our equity interests in the Grays Harbor production facility. We expect that the terms of the credit facility will require us to comply with various customary covenants, including that we maintain certain debt service reserves, debt-service and debt-to-tangible-net-worth ratios, and minimum working capital and tangible net worth amounts. We also expect the credit facility agreement to have a cash flow sweep feature that will require us to use at least 50% of our excess cash flow to repay the term loan, and to use up to 100% in the first two years such that we have reduced the outstanding balance on the term loan to 70% of its original amount. In addition, we expect that we will be required to maintain a segregated account with a designated bank in the amount of $35.0 million to secure the proposed credit facility until the satisfaction of specific engineering tests at our Grays Harbor production facility.

 

As of the date of this prospectus, we have no other debt outstanding, other than our agreement to repurchase the equity interest of the other investor in our Grays Harbor production facility, which we have classified as a put note payable on our consolidated balance sheet. See Note 7 to our audited consolidated financial statements included in this prospectus.

 

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DESCRIPTION OF CAPITAL STOCK

 

Upon the consummation of this offering and the filing of our amended and restated articles of incorporation with the Washington Secretary of State, our authorized capital stock will consist of 300,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share.

 

Common Stock

 

As of March 31, 2007, 33,824,875 shares of our common stock were outstanding and held of record by 78 shareholders, assuming the conversion of all outstanding shares of our redeemable convertible preferred stock into common stock, which will occur immediately upon consummation of this offering, and exercise of all of our outstanding warrants and an option issued outside of our 2005 Stock Option Plan. In addition, as of March 31, 2007, 2,805,337 shares of our common stock were subject to outstanding options.

 

Each share of our common stock entitles its holder to one vote on all matters to be voted on by our shareholders and there are no cumulative voting rights, which means that the holders of a majority of the outstanding shares of our common stock will be entitled to election of directors standing for election. Subject to preferences to which holders of any of our preferred stock may be entitled, holders of our common stock will receive ratably any dividends our board of directors declares out of funds legally available for that purpose. If we liquidate, dissolve or wind up our business, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and the satisfaction of any liquidation preference of any of our outstanding shares of preferred stock. Holders of our common stock have no preemptive rights, conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to our common stock. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued in this offering will be fully paid and nonassessable.

 

The rights, preferences and privileges of holders of our common stock are subject to and may be adversely affected by the rights of holders of shares of any series of preferred stock that we may designate in the future.

 

Preferred Stock

 

Upon consummation of this offering, our outstanding shares of redeemable convertible preferred stock will convert into 14,879,886 shares of common stock. Thereafter, pursuant to our articles of incorporation, our board of directors will have the authority, without further action by our shareholders, to issue up to 5,000,000 shares of our preferred stock in one or more series. Our board of directors may designate the number of shares constituting any series and the rights, preferences, privileges and restrictions of any series of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference and sinking fund terms. The issuance of our preferred stock could adversely affect the voting power of holders of our common stock and the likelihood that holders of our common stock will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. Additionally, the issuance of preferred stock may decrease the market price of the common stock and may adversely affect the voting, economic and other rights of the holders of common stock. Immediately after consummation of this offering, no shares of our preferred stock will be outstanding, and we have no present plans to issue any shares of preferred stock.

 

Registration Rights

 

Upon completion of this offering, the holders of                          shares of our common stock will be entitled to rights with respect to the registration of these shares under the Securities Act. We refer to these shares as registrable securities. Under the terms of the investor rights agreement between us and the holders of the registrable securities, if we propose to register any of our securities under the Securities Act, holders of

 

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registrable securities are entitled to notice of such registration and may be entitled to include their registrable securities in the proposed registration statement. At any time within the five year period following the completion of this offering, holders of all of these registrable securities will be entitled to demand registration, pursuant to which they may require us to use our best efforts to register their registrable securities under the Securities Act, up to a maximum of two registrations. Holders of a majority of these registrable securities, acting together, may initiate this type of registration and request that we register all or a portion of their registrable securities. If and when we become eligible under applicable securities laws to file a registration statement on Form S-3, holders of registrable securities may also require us to file an unlimited number of additional registration statements on Form S-3 so long as the holders propose to sell at least $500,000 of registrable securities and we have not already filed two registration statements on Form S-3 in the previous twelve months. The foregoing registration rights of the holders of registrable securities are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration and our right not to effect a demand registration 180 days after this offering or 90 days after any subsequent offering of our securities. In addition, no shareholder will have any rights under the agreement to include registrable securities in a registration statement (1) five years following the consummation of this offering, or (2) if all registrable securities held by such holder may be sold in any 90-day period pursuant to Rule 144 or another similar exemption under the Securities Act without registration.

 

Under the agreement, we are required to pay for all costs and expenses (other than underwriting discounts and commissions, stock transfer taxes and expenses of one special counsel to such holders) incurred in connection with the registration of registrable securities. All shares registered may be resold in the public markets. Under the agreement, we have agreed to indemnify the holders of the common stock entitled to registration rights against certain liabilities, including liabilities under the Securities Act.

 

Anti-Takeover Provisions

 

Washington Anti-Takeover Law

 

Washington law imposes restrictions on some transactions between a corporation and significant shareholders. Chapter 23B.19 of the Washington Business Corporation Act generally prohibits a “target corporation” from engaging in specified “significant business transactions” with an “acquiring person.” This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us. An acquiring person is defined as a person or group of persons that beneficially owns 10% or more of the voting securities of the target corporation. The target corporation may not engage in “significant business transactions,” as defined in Chapter 23B.19, for a period of five years after the date of the transaction in which the person became an acquiring person, unless the transaction or acquisition of shares is approved by a majority of the disinterested members of the target corporation’s board of directors prior to the time of acquisition. “Significant business transactions” include, among other things:

 

   

a merger or share exchange with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person;

 

   

a termination of 5% or more of the employees of the target corporation as a result of the acquiring person’s acquisition of 10% or more of the shares; or

 

   

a transaction in which the acquiring person is allowed to receive a disproportionate benefit as a shareholder.

 

After the five-year period, a “significant business transaction” may occur, as long as it complies with “fair price” provisions specified in the statute or is approved at a meeting of shareholders by a majority of the votes entitled to be counted within each voting group entitled to vote separately on the transaction, not counting the votes of shares as to which the acquiring person has beneficial ownership or voting control. A corporation may not “opt out” of this statute.

 

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Articles of Incorporation and Bylaw Provisions

 

Upon the consummation of this offering, our articles of incorporation and bylaws will include a number of provisions that may have the effect of deterring takeovers or delaying or preventing changes in control or changes in our management that a shareholder might deem to be in his or her best interest. These provisions include the following:

 

   

our board of directors may issue up to 5,000,000 shares of preferred stock, with any rights or preferences, including the right to approve or not approve an acquisition or other change in control;

 

   

our articles of incorporation provide for a classified board of directors;

 

   

our articles of incorporation and bylaws provide that our board of directors may only be removed for cause by the affirmative vote of our shareholders;

 

   

our bylaws limit who may call a special meeting of shareholders to our board of directors, chairman of the board or president;

 

   

our bylaws provide that shareholders seeking to present proposals before a meeting of shareholders or to nominate candidates for election as directors at a meeting of shareholders must provide timely advance written notice to us in writing;

 

   

our bylaws specify requirements as to the form and content of a shareholder’s notice;

 

   

our bylaws provides that, subject to the rights of the holders of any outstanding series of our preferred stock, all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of our directors then in office, even if less than a quorum;

 

   

our bylaws provides that our board of directors may fix the number of directors by resolution; and

 

   

our articles of incorporation do not provide for cumulative voting for our directors. The absence of cumulative voting may make it more difficult for shareholders owning less than a majority of our capital stock to elect any members to our board of directors.

 

Transfer Agent and Registrar

 

                                       has been appointed as the transfer agent and registrar for our common stock.

 

Listing

 

We have applied to list our common stock on the NASDAQ Global Market under the trading symbol “IMPR.”

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Prior to this offering, no public market existed for our common stock. Future sales of substantial amounts of our common stock, or the perception that these sales could occur, could adversely affect prevailing market prices for our common stock and could impair our future ability to obtain capital, especially through an offering of equity securities.

 

Based on shares outstanding as of March 31, 2007, upon the consummation of this offering,              shares of common stock will be outstanding. Of these outstanding shares, the              shares sold in this offering, or              shares if the underwriters’ over-allotment option is exercised in full, will be freely transferable without restriction or further registration under the Securities Act, unless the shares are purchased by our “affiliates” as that term is defined under Rule 144 under the Securities Act, or Rule 144.

 

The remaining                  shares of common stock that will be outstanding upon the consummation of this offering will be “restricted securities” as defined under Rule 144. Restricted securities may be sold in the U.S. public markets only if registered or if they qualify for an exemption from registration, including by reason of Rule 144 or 701 under the Securities Act, which rules are summarized below. For shares of common stock received upon a “cashless exercise” of a warrant or option, the Rule 144 holding period commences on the date the holder acquired the warrant or option. For shares of common stock received upon payment of the exercise price, the Rule 144 holding period commences on the date the holder acquired the shares of common stock received upon exercise. For purposes of the foregoing calculations, we have assumed that the 2,385,069 shares of common stock issuable upon exercise of all of our outstanding warrants and an option issued outside of our 2005 Stock Option Plan were exercised by payment in cash of the exercise price. These remaining shares will be eligible for sale in the public market as follows:

 

   

Upon the expiration of the lock-up agreements described below, approximately              additional shares will be eligible for sale pursuant to Rules 144 and 701;

 

   

Beginning in              , of the              shares referred to in the previous bullet,              shares will be eligible for resale pursuant to Rule 144(k), and the remaining shares of our common stock referred to in the previous bullet (assuming these shares are not held by our affiliates) may become eligible for resale under Rule 144(k) at various dates thereafter.

 

Additionally, of the 2,805,337 shares of common stock issuable upon exercise of options outstanding as of March 31, 2007, approximately              shares will be vested and eligible for sale 180 days after the date of this prospectus.

 

Rule 144

 

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted securities for at least one year, including the holding period of any prior owner other than one of our affiliates, is entitled to sell a number of restricted shares within any three-month period that does not exceed the greater of:

 

   

one percent of the number of shares of our common stock then outstanding, which will equal approximately              shares immediately after this offering; or

 

   

the average weekly trading volume of our common stock on the NASDAQ Global Market during the four calendar weeks preceding the filing with the SEC of a notice on Form 144 with respect to the sale.

 

Sales of restricted shares under Rule 144 are also subject to requirements regarding the manner of sale, notice, and the availability of current public information about us. Rule 144 also provides that affiliates relying on Rule 144 to sell shares of our common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares, other than the holding period requirement.

 

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Rule 144(k)

 

Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale and who has beneficially owned the restricted securities proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate of us, may sell those shares without complying with the manner-of-sale, public information, volume limitation or notice provisions of Rule 144.

 

Rule 701

 

Under Rule 701, shares of our common stock acquired from us in connection with a qualified compensatory plan or other written agreement may be resold, to the extent not subject to lock-up agreements, by:

 

   

persons other than affiliates, beginning 90 days after the date of this prospectus, subject only to the manner-of-sale provisions of Rule 144; and

 

   

our affiliates, beginning 90 days after the date of this prospectus, subject to the manner-of-sale, current public information, and filing requirements of Rule 144, in each case, without compliance with the one-year holding period requirement of Rule 144.

 

As of March 31, 2007, options to purchase a total of 2,805,337 shares of common stock were outstanding, of which 680,165 were vested. All shares of our common stock issuable under these options are subject to lock-up agreements with the underwriters.

 

Form S-8 Registration Statements

 

We intend to file one or more registration statements on Form S-8 under the Securities Act after the closing of this offering to register the shares of our common stock that are issuable pursuant to our 2007 Performance Incentive Plan, 2005 Stock Option Plan and 2007 Employee Stock Purchase Plan. These registration statements will be effective upon filing. Shares covered by these registration statements will then be eligible for sale in the public markets, subject to any applicable lock-up agreements and to Rule 144 limitations applicable to affiliates.

 

Registration Rights

 

After completion of this offering and based on shares outstanding as of March 31, 2007, the holders of             shares of our capital stock will be entitled to various rights with respect to the registration of their shares of common stock for offer or sale to the public pursuant to an investors rights agreement. Such registration will permit the resale of those shares in the public market.

 

Lock-up Agreements

 

We expect that prior to the pricing of this offering, we, all of our directors and executive officers, each of the selling shareholders and, we expect, holders of all outstanding shares of our common stock and securities exercisable for or convertible into our common stock will have agreed that, subject to certain exceptions, without the prior written consent of Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. on behalf of the underwriters, we and they will not, during the period beginning on the date of this prospectus and ending 180 days thereafter or, if the underwriters’ over-allotment option is exercised, 270 days from the date of this prospectus in the case of a selling shareholder:

 

   

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock;

 

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enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our common stock;

 

   

in our case only, file or cause to be filed a registration statement, including any amendments, with respect to the registration of any shares of our common stock or securities convertible, exercisable or exchangeable into our common stock or any other securities of the company; or

 

   

publicly announce the intent to do any of the foregoing,

 

whether any such transaction described in the first two bullet points immediately above is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise.

 

Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. may, in their sole discretion, at any time and without notice, release for sale in the public market all or any portion of the shares subject to the lock-up agreements. See “Underwriters.”

 

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U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

 

The following is a general discussion of material U.S. federal income and estate tax consequences of the acquisition, ownership and disposition of our common stock purchased pursuant to this offering by a beneficial owner that, for U.S. federal income tax purposes, is treated as a non-U.S. holder. As used in this prospectus, the term “non-U.S. holder” is a person that is not, for U.S. federal income tax purposes:

 

   

an individual who is a citizen or resident of the U.S.;

 

   

a corporation or partnership (including any entity treated as such for U.S. federal tax purposes) created or organized in the U.S. or under the laws of the U.S. or of any political subdivision of the U.S.;

 

   

an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

 

   

a trust (i) the administration of which is subject to the primary supervision of a U.S. court and one or more U.S. persons have the authority to control all of its substantial decisions, or (ii) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

 

An individual may be treated, for U.S. federal income tax purposes, as a resident of the U.S. in any calendar year by being present in the U.S. on at least 31 days in that calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. The 183-day test is determined by counting all of the days the individual is treated as being present in the current year, one-third of such days in the immediately preceding year and one-sixth of such days in the second preceding year. Residents are subject to U.S. federal income tax as if they were U.S. citizens.

 

If a partnership or other entity treated as a partnership for U.S. federal income tax purposes is a beneficial owner of our common stock, the treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. We urge beneficial owners of our common stock that are a partnership and partners in these partnerships to consult their tax advisors regarding the U.S. federal income tax consequences of acquiring, owning and disposing of our common stock.

 

This discussion assumes that non-U.S. holders will acquire and hold our common stock sold pursuant to this offering as a capital asset (generally, property held for investment) within the meaning of the Internal Revenue Code of 1986, as amended, or the Code, which will generally be the case if you hold the stock for investment.

 

This discussion does not address all aspects of U.S. federal taxation that may be relevant to a particular non-U.S. holder in light of the holder’s individual investment or tax circumstances, or to non-U.S. holders that are subject to special tax rules. In addition, this description of U.S. tax consequences does not address:

 

   

U.S. state and local or non-U.S. tax consequences;

 

   

the tax consequences for the shareholders, partners, beneficiaries or other owners of a non-U.S. holder; and

 

   

special tax rules that may apply to non-U.S. holders subject to special tax treatment under U.S. federal tax laws, including:

 

   

former citizens or residents of the Untied States subject to tax as expatriates;

 

   

partnerships or other pass-through entities;

 

   

hybrid entities;

 

   

tax-exempt entities;

 

   

controlled foreign corporations;

 

   

passive foreign investment companies;

 

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banks and insurance companies;

 

   

certain trusts;

 

   

dealers in securities;

 

   

brokers;

 

   

holders of securities held as part of a “straddle,” “hedge,” “conversion transaction” or other risk-reduction or integrated transaction; and

 

   

persons who hold or receive our common stock as compensation.

 

This discussion is based on current provisions of the Code, final, temporary and proposed U.S. Treasury regulations, judicial opinions, published positions of the U.S. Internal Revenue Service, or IRS, and other applicable authorities, all as in effect on the date hereof and all of which are subject to differing interpretations or change, possibly with retroactive effect. We have not requested a ruling from the IRS or an opinion of counsel with respect to the tax consequences discussed herein, and there can be no assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained.

 

In view of the foregoing and because the following is intended as a general summary only, we urge you to consult your tax advisor regarding the U.S. federal tax consequences of acquiring, owning or disposing of our common stock, as well as any tax consequences that may arise under the laws of any foreign, state, local or other taxing jurisdiction or under any applicable tax treaty.

 

Distributions

 

As described under “Dividend Policy” above, we do not anticipate making distributions with respect to our common stock in the foreseeable future. If, however, distributions are made with respect to shares of our common stock, such distributions generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. (References in the remainder of this discussion to “dividends” will be to distributions that are treated as dividends for U.S. federal tax purposes.) Distributions in excess of our current or accumulated earnings and profits generally will constitute a return of capital to the extent of the recipient’s adjusted tax basis in our common stock and will be applied against and reduce such adjusted tax basis. To the extent that a non-dividend distribution exceeds the recipient’s adjusted tax basis in our common stock, the excess will be treated as gain realized on the sale or other disposition of the common stock and will be treated, for non-U.S. holders, as described under “—Disposition of Common Stock” below.

 

Dividends we pay to a non-U.S. holder, that are not treated as effectively connected with the non-U.S. holder’s conduct of a trade or business in the U.S., generally will be subject to U.S. federal income withholding tax at a rate of 30% of the gross amount of the dividend unless the holder is entitled to an exemption from or reduced rate of withholding under an applicable income tax treaty. To receive a reduced treaty rate, prior to the payment of a dividend a non-U.S. holder must provide us with an IRS Form W-8BEN (or successor form) certifying qualification for the reduced rate.

 

Dividends we pay to a non-U.S. holder that are treated as effectively connected with a non-U.S. holder’s conduct of a trade or business in the U.S., or (if an applicable income tax treaty applies) that are attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the U.S., generally are not subject to the U.S. withholding tax. To obtain this exemption, prior to the payment of a dividend, a non-U.S. holder must provide us with an IRS Form W-8ECI (or successor form) properly certifying this exemption. Such effectively connected dividends or dividends attributable to a permanent establishment, together with other U.S. trade or business income, net of specified deductions and credits, generally are subject to U.S. federal income tax at rates applicable to U.S. persons. In addition, such dividends received by a corporate non-U.S. holder that are

 

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effectively connected with a U.S. trade or business (or dividends attributable to a corporate non-U.S. holder’s permanent establishment in the U.S. if an income tax treaty applies) may be subject to an additional “branch profits tax” at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty.

 

Regardless of whether the distribution is treated as effectively connection with the non-U.S. holder’s conduct of a trade or business in the U.S., if we are, or have been at any time during the five-year period preceding such distribution (or the non-U.S. holder’s holding period, if shorter), a “United States real property holding corporation,” we may be required to withhold 10% of the gross amount of a non-dividend distribution. Consequently, we may withhold at a 10% rate in circumstances in which withholding at a 30% rate (or lower rate as specified in an applicable income tax treaty) does not apply or may not apply.

 

A non-U.S. holder who provides us with an IRS Form W-8BEN or an IRS Form W-8ECI will be required to periodically update such form.

 

A non-U.S. holder that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS.

 

Disposition of Common Stock

 

A non-U.S. holder generally will not be subject to U.S. federal income tax, including by way of withholding, on gain recognized on a sale, exchange or other taxable disposition of our common stock unless any one of the following applies:

 

   

the non-U.S. holder is an individual who is present in the U.S. for 183 days or more in the taxable year of the sale, exchange or other taxable disposition and certain other conditions are met;

 

   

the gain is effectively connected with the non-U.S. holder’s conduct of a trade or business in the U.S. or (if an applicable tax treaty requires) attributable to a U.S. permanent establishment or fixed base of such non-U.S. holder, which gain, in the case of a corporate non-U.S. holder, must also be taken into account for branch profits purposes; or

 

   

we are, or have been at any time during the five-year period preceding such disposition (or the non-U.S. holder’s holding period, if shorter), a “United States real property holding corporation,” unless (i) our common stock is regularly traded on an “established securities market,” as defined in applicable U.S Treasury regulations, and (ii) the non-U.S. holder holds no more than 5% of our outstanding common stock, directly or indirectly, during the relevant five-year period (or the non-US holder’s holding period, if shorter). Generally, we will be a United States real property holding corporation if the fair market value of our U.S. real property interests equals or exceeds 50% of the sum of the fair market values of our worldwide real property interests and our other assets used or held for use in a trade or business, all as determined under applicable U.S Treasury regulations. Although we believe we are not currently a U.S. real property holding corporation and do not expect to become a U.S. real property holding corporation, it is possible that, because of our acquisition, construction and development of real property in the United States through our facilities, we could become a U.S. real property holding corporation. Accordingly, no assurances can be made in this regard. If we are deemed to be a U.S. real property holding corporation and you are a non-U.S. holder owning more than 5% of our outstanding common stock, directly or indirectly, during the relevant period prescribed above, you may be subject to U.S. federal tax on its disposition of our common stock and should consult your tax advisor.

 

U.S. Federal Estate Taxes

 

An individual non-U.S. holder who is treated as the owner, or has made certain lifetime transfers, of an interest in our common stock will be required to include the value thereof in his or her gross estate for U.S.

 

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federal estate tax purposes, and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise.

 

Information Reporting and Backup Withholding

 

Generally, we must report annually to the IRS the amount of distributions paid, the name and address of the recipient and the amount of the tax withheld, if any. A similar report is sent to the holder. The information reporting requirement applies regardless of whether withholding was required. Copies of the information returns reporting those distributions and withholding, if any, may also be made available to the tax authorities in the country in which the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement. The gross amount of dividends paid to a non-U.S. holder subject to information reporting that fails to certify its non-U.S. holder status in accordance with applicable U.S. Treasury regulations may be subject to backup withholding at the applicable rate.

 

Payments of dividends or of proceeds on the disposition of stock made to a non-U.S. holder may be subject to additional informational reporting and backup withholding. Backup withholding will not apply if the non-U.S. holder established an exemption, for example, by properly certifying its non-U.S. status on an IRS Form W-8BEN (or successor form). Notwithstanding the foregoing, backup withholding may apply if either we or our paying agent has actual knowledge, or reason to know, that the holder is a U.S. person.

 

Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability, if any, provided that certain required information is furnished to the IRS in a timely manner.

 

The foregoing discussion is only a summary of certain U.S. federal income and estate tax consequences of the acquisition, ownership and disposition of our common stock by non-U.S. holders. You are urged to consult your own tax advisor with respect to the particular tax consequences to you of ownership and disposition of our common stock, including the effect of any U.S., state, local, non-U.S. or other tax laws and any applicable income or estate tax treaty.

 

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UNDERWRITERS

 

Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. are acting as representatives and book-running managers, have severally agreed to purchase, and we have agreed to sell to them, the number of shares indicated below:

 

Name

   Number of Shares

Morgan Stanley & Co. Incorporated

  

Lehman Brothers Inc.

  

UBS Securities LLC

  

Jefferies & Company, Inc.

  

Piper Jaffray & Co.

  

Calyon Securities (USA) Inc.

  
    

Total

  
    

 

The underwriters and the representatives are collectively referred to as the “underwriters” and the “representatives,” respectively. The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.

 

The underwriters initially propose to offer part of the shares of common stock directly to the public at the offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $              per share under the public offering price. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.

 

We and the selling shareholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to              and              additional shares of common stock, respectively, at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.

 

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The following table shows the per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to us and the selling shareholders. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional              shares of common stock.

 

          Total
     Per Share    No Exercise    Full Exercise

Public offering price

   $                $                $            

Underwriting discounts and commissions to be paid by:

        

Imperium Renewables, Inc.

   $                $                $            

The selling shareholders

   $                $                $            

Proceeds, before expenses, to Imperium Renewables, Inc.

   $                $                $            

Proceeds, before expenses, to selling shareholders

   $                $                $            

 

The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $            .

 

The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of common stock offered by them.

 

We have applied to list of our common stock on the NASDAQ Global Market under the trading symbol “IMPR.”

 

We and all directors and officers and the holders of all of our outstanding stock and stock options have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated and Lehman Brothers Inc. on behalf of the underwriters, we and they will not, during the period beginning on the date of this prospectus and ending 180 days thereafter or, in the case of the selling shareholders, if the underwriters’ over-allotment option is exercised, 270 days from the date of this prospectus:

 

   

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock;

 

   

file any registration statement with the Securities and Exchange Commission relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or

 

   

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock.

 

The restrictions described in the immediately preceding paragraph to do not apply to:

 

   

the sale of shares to the underwriters;

 

   

transactions by any person other than us relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares;

 

   

transfers by any person other than us of shares of common stock or any security convertible into common stock as a bona fide gift;

 

   

transfers by any person other than us of shares of common stock to any trust, partnership or limited liability company solely for the direct or indirect benefit of such person or the immediate family of such person provided that any such transfer shall not involve a disposition for value;

 

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transfers by any person other than us of shares of common stock to any beneficiary of such person pursuant to a will or other testamentary document or applicable laws of descent;

 

   

transfers by any person other than us of shares of common stock or any securities convertible into or exercisable or exchangeable for common stock to us;

 

   

distributions by any person other than us of shares of common stock or any security convertible into common stock to limited partners or shareholders of such person provided that any such transfer shall not involve a disposition for value; or

 

   

transfers by any person other than us of shares of common stock to any wholly-owned subsidiary of such person or to the parent corporation of such person or any wholly-owned subsidiary of such parent corporation provided that any such transfer shall not involve a disposition for value.

 

The 180-day or 270-day restricted period, as applicable, described in the preceding paragraph will be extended if:

 

   

during the last 17 days of the applicable restricted period we issue an earnings release or material news event relating to us occurs; or

 

   

prior to the expiration of the applicable restricted period, we announce that we will release earnings results during the 16 day period beginning on the last day of the applicable restricted period,

 

in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18 day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

 

To facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time.

 

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

 

We, the selling shareholders and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

 

A prospectus in electronic format may be made available on websites maintained by one or more underwriters, or selling group members, if any, participating in this offering. The representatives may agree to allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet distributions on the same basis as other allocations.

 

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Other than the prospectus in electronic format, the information on any underwriter’s or selling group member’s web site and any information contained in any other web site maintained by an underwriter or selling group member is not part of the prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter or selling group member in its capacity as an underwriter or selling group member and should not be relied upon by you.

 

Pricing of the Offering

 

Prior to this offering, there has been no public market for our common stock. The initial public offering price was determined by negotiations between us and the representatives. Among the factors considered in determining the initial public offering price were our future prospects and those of our industry in general, our sales, earnings and certain other financial and operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities, and certain financial and operating information of companies engaged in activities similar to ours.

 

European Economic Area

 

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive, each of the underwriters has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Member State it has not made and will not make an offer of shares to the public in that Member State, except that it may, with effect from and including such date, make an offer of shares to the public in that Member State:

 

(a) at any time to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;

 

(b) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year, (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

 

(c) at any time in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.

 

For the purposes of the above, the expression an “offer of shares to the public” in relation to any shares in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in that Member State.

 

United Kingdom

 

Each of the underwriters has represented and agreed that it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of the shares in circumstances in which Section 21(1) of such Act does not apply to us and it has complied and will comply with all applicable provisions of such Act with respect to anything done by it in relation to any shares in, from or otherwise involving the United Kingdom.

 

If you purchase shares of common stock offered by this prospectus, you may be required to pay stamp taxes and other charges under the laws and practices of the country of purchase, in addition to the offering price listed on the cover page of this prospectus.

 

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LEGAL MATTERS

 

The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by our counsel, DLA Piper US LLP. Sidley Austin LLP is acting as counsel for the underwriters in connection with this offering.

 

EXPERTS

 

The consolidated financial statements of Imperium Renewables, Inc. at December 31, 2005 and 2006, and for each of the two years in the period ended December 31, 2006 and the period from March 5, 2004 (inception) through December 31, 2004, appearing in the Registration Statement of which this prospectus is a part have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our common stock to be sold in this offering. The registration statement, including the attached exhibits and schedules, contains additional relevant information about us and our capital stock. The rules and regulations of the SEC allow us to omit from this prospectus certain information included in the registration statement. For further information about us and our common stock, you should refer to the registration statement and the exhibits and schedules filed with the registration statement. In addition, upon the consummation of this offering, we will file reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended. You may obtain copies of this information from the Public Reference Room of the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website that contains reports, proxy statements and other information about issuers. The address of that website is www.sec.gov.

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENT S

 

Report of Independent Registered Public Accounting Firm

   F-2

Audited Consolidated Financial Statements

  

Consolidated Balance Sheets:
As of December 31, 2005 and 2006

   F-3

Consolidated Statements of Operations:
For the period from March 5, 2004 (inception) to December 31, 2004, and the years ended December 31, 2005 and 2006

   F-4

Consolidated Statements of Redeemable Convertible Preferred Stock and of Shareholders’ Equity and Members’ Deficit:
For the period from March 5, 2004 (inception) to December 31, 2004 and the years ended December 31, 2005 and 2006

   F-5

Consolidated Statements of Cash Flows:
For the period from March 5, 2004 (inception) to December 31, 2004, and the years ended December 31, 2005 and 2006

   F-6

Notes to Consolidated Financial Statements

   F-7

Unaudited Condensed Consolidated Financial Statements

  

Condensed Consolidated Balance Sheets:
As of December 31, 2006 and March 31, 2007

   F-27

Condensed Consolidated Statements of Operations:
For the three months ended March 31, 2006 and 2007

   F-28

Condensed Consolidated Statements of Cash Flows:
For the three months ended March 31, 2006 and 2007

   F-29

Notes to Condensed Consolidated Financial Statements

   F-30

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders

Imperium Renewables, Inc.

 

We have audited the accompanying consolidated balance sheets of Imperium Renewables, Inc. (the Company) as of December 31, 2005 and 2006, and the related consolidated statements of operations, redeemable convertible preferred stock and shareholders’ equity and members’ deficit, and cash flows for the period from March 5, 2004 (inception) to December 31, 2004 and for the years ended December 31, 2005 and 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Imperium Renewables, Inc. at December 31, 2005 and 2006, and the consolidated results of its operations and its cash flows for the period from March 5, 2004 (inception) to December 31, 2004 and for the years ended December 31, 2005 and 2006 in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment, effective January 1, 2006.

 

  

/s/ Ernst & Young LLP

 

Seattle, Washington

May 1, 2007

 

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IMPERIUM RENEWABLES, INC.

 

CONSOLIDATED BALANCE SHEETS

 

     December 31,  
     2005     2006  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 8,696,810     $ 18,446,662  

Short-term investments

     —         27,563,850  

Trade accounts receivable

     104,722       279,582  

Other accounts receivable

     38,113       9,732  

Inventory

     290,715       156,081  

Prepaid expenses and other current assets

     15,019       406,452  
                

Total current assets

     9,145,379       46,862,359  

Property, plant and equipment, net

     692,211       989,213  

Construction in progress

     —         21,261,578  

Other assets

     4,000       453,190  
                

Total assets

   $ 9,841,590     $ 69,566,340  
                

Liabilities and shareholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 533,256     $ 10,062,655  

Notes payable to related parties, net of discount

     —         7,500,000  

Accrued expenses and other current liabilities

     107,423       803,623  
                

Total current liabilities

     640,679       18,366,278  

Deferred rent

     8,741       89,402  

Asset retirement obligation

     21,456       24,138  

Long term put note payable

     —         10,000,000  

Commitments and contingencies (Note 15)

    

Redeemable convertible preferred stock, no par value, authorized and designated 12,000,000 shares; 5,679,906 and 8,635,308 shares issued and outstanding at December 31, 2005 and 2006, respectively

     7,362,930       37,400,548  

Shareholders’ equity

    

Common stock, no par value, warrants and additional paid in capital, authorized 39,000,000 shares; 16,559,920 shares issued and outstanding at December 31, 2005 and 2006

     2,876,076       10,112,801  

Receivable from sale of common stock

     (25,000 )     —    

Accumulated other comprehensive income

     —         67,434  

Accumulated deficit

     (1,043,292 )     (6,494,261 )
                

Total shareholders’ equity

     1,807,784       3,685,974  
                

Total liabilities and shareholders’ equity

   $ 9,841,590     $ 69,566,340  
                

 

See accompanying notes to consolidated financial statements.

 

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IMPERIUM RENEWABLES, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Period From
March 5, 2004
(inception) to
December 31,
2004
       
       Years Ended December 31,  
     2005     2006  
                    

Product sales

   $ —       $ 1,311,883     $ 4,982,371  

Cost of sales

     —         1,599,411       5,845,570  
                        

Gross loss

     —         (287,528 )     (863,199 )

Operating expenses:

      

Research and development expenses

     29,542       100,785       268,002  

Selling, general and administrative expenses

     66,841       501,494       4,243,010  
                        

Total operating expenses

     96,383       602,279       4,511,012  
                        

Operating loss

     (96,383 )     (889,807 )     (5,374,211 )

Other income (expense):

      

Interest income

     4       27,858       658,937  

Interest expense

     (2,360 )     (82,604 )     (735,695 )
                        

Total other expense, net

     (2,356 )     (54,746 )     (76,758 )
                        

Net loss

   $ (98,739 )   $ (944,553 )   $ (5,450,969 )
                        

Net loss per basic and diluted common share

   $ (0.01 )   $ (0.07 )   $ (0.33 )
                        

Shares used in computing net loss per basic and diluted common share

     8,124,590       13,439,567       16,559,920  
                        

 

See accompanying notes to consolidated financial statements.

 

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IMPERIUM RENEWABLES, INC.

 

CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND OF SHAREHOLDERS’ EQUITY AND MEMBERS’ DEFICIT

 

    Redeemable Convertible Preferred Stock     Common Stock  

Receivable
from Sale of
Common

Stock

   

Members’

Contribution

    Accumulated
Other
Comprehensive
Income
 

Accumulated

Deficit

    Total
Shareholders’
Equity or
Members’
Deficit
 
    Series A   Series B              
    Shares   Amount   Shares   Amount     Shares   Amount          

Contributions from members

  —     $ —     —     $ —       —     $ —     $ —       $ 71,855     $ —     $ —       $ 71,855  

Net loss

  —       —     —       —       —       —       —         —         —       (98,739 )     (98,739 )
                                                                     

Balance at December 31, 2004

  —       —     —       —       —       —       —         71,855       —       (98,739 )     (26,884 )
 

Contributions from members

  —       —     —       —       —       —       —