This Annual Report on Form 10-K includes
“forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). We intend those forward looking-statements to be covered by the safe harbor provisions for forward-
looking statements. All statements regarding our expected financial position and operating results, our business strategy, our
financing plans and the outcome of any contingencies are forward-looking statements. Any such forward-looking statements are based
on current expectations, estimates, and projections about our industry and our business and are subject to a number of risks and
uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ
materially from those expressed, projected or implied in by the forward-looking statements. Words such as “anticipates,”
“expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
or variations of those words and similar expressions are intended to identify such forward-looking statements. Forward-looking
statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated in or
implied by any forward-looking statements.
Such risks and uncertainties include the
risks noted under Part 1. “Business,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” but are also contained elsewhere. As a result of these factors, we cannot assure you
that the forward-looking statements in this Annual Report will prove to be accurate. Furthermore, if our forward-looking statements
prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements,
you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives
and plans in any specified time frame, or at all. We do not undertake any obligation to update any forward-looking statements.
Unless the context requires otherwise,
references to “we,” “us,” “our,” and “Pledge,” refer to Pledge Petroleum Corp,
and its subsidiaries.
Item 1. Business
Overview
Our goal is to be a next-generation renewable
fuels company. We intend to conduct business in the sourcing and implementation of renewable energy technology.
Our mission is to produce renewable diesel
fuel and biochar in a profitable yet sustainable manner. We strive to achieve net environmental and social benefits and intend
to achieve a negative carbon footprint, by responsibly managing our land use and water resources, and preserving our forests and
food sources, while promoting energy independence, job creation and community investment. Our strategy is generally predicated
on biomass feedstock sources consisting of residues from timber harvest and forest thinnings (sometimes called “slash”)
comprised of branches, broken or defective tree parts, tops, and trees not meeting grade specifications that can be harvested on
a sustainable basis.
Our technology platform is designed to
enable us to convert low-cost, abundant and sustainable biomass feedstock (i.e., slash) into diesel. Our renewable diesel, is expected
to burn much cleaner than traditional petroleum diesel, and to be chemically indistinguishable from conventional ASTM D975 diesel.
In addition, the renewable diesel we intend to produce will be a “drop-in” diesel meaning it is a 100% petroleum diesel
replacement.
In addition to renewable diesel, we intend
to sell Natura
TM
, which is a high-quality biochar. Biochar is charcoal used as a soil amendment. Biochar is a stable
and solid, rich in carbon, and can endure in soil for thousands of years. Biochar is made by carbonizing renewable organics like
wood and grass. Natura
TM
is a safe and natural product made in the United States. It is a byproduct of our renewable
diesel process and provides long-term gains in soil fertility and plant performance, as well as livestock enhancement.
We are fundamentally different from traditional
oil and biofuels companies. Unlike traditional oil companies, we intend to generate diesel from completely renewable and sustainable
sources rather than depleting fossil fuel reserves. At the same time, we differ from most traditional biofuels companies because
our end products are diesel and biochar rather than alcohols or fatty acid methyl esters (“FAME”), such as ethanol
or biodiesel. As compared to ethanol, the energy density of one gallon of our renewable diesel equates to 1.7 gallons of ethanol
equivalent. While we are a development stage company that has not generated any revenue and has experienced net losses since inception,
through our technology platform, we expect to provide a new domestic source of liquid transportation fuel — sustainably —
using renewable natural resources to help further energy independence and reduce greenhouse gas emissions.
We believe that the solution to the world’s
growing transportation fuel demands must be:
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Real.
Our technology platform should enable us to produce high-quality renewable diesel that is “drop in” to the existing transportation fuels infrastructure for use in vehicles on the road today. Our fuels will not be ethanol or FAME diesel. Unlike ethanol, which is generally subject to a 10% to 15% blend wall, our diesel should be useable as components in formulating a variety of fuel products meeting specifications of ASTM International for finished diesel derived from petroleum-based blend stocks.
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Rural.
We plan to locate our commercial production facilities in rural areas near sources of low-cost, abundant and sustainable biomass feedstock. We also consider the proximity of a potential site to our prospective customers, the adequacy of infrastructure, the availability of labor to operate our facilities and the award of any state or local incentives. We believe that our rural focus not only will help us reduce our operating costs, but also will revitalize rural economies impacted by closed paper mills. We expect that our initial production facility will be located in Bay Minette, Alabama
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Renewable
. Our technology platform is designed to allow us to convert low-cost, abundant and sustainable non-food biomass feedstock, including woody biomass, such as whole tree chips, logging residues, branches and bark into renewable diesel. In this regard, we believe that the transportation fuel produced from our process will help to satisfy mandates under the Renewable Fuel Standard program (the “RFS2”). We have selected Cooper Marine & Timberlands Corp. (a Cooper company) as our primary provider of feedstock because of their abundant, sustainable supply and generally low-cost and stable pricing history compared to feedstocks used by traditional biofuels companies.
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Repeatable.
We intend to utilize a modular design for our standard commercial production facilities that can be replicated at any locations with abundant and sustainable non-food feedstock in the southeastern United States and beyond. We believe that this “copy exact” design will help us to reduce our capital costs, implement learned best practices and facilitate rapid deployment of new production facilities. We believe that our repeatable renewable diesel production process will effectively eliminate the exploration risk experienced by traditional E&P companies.
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We expect that our renewable diesel will
offer several environmental benefits compared to traditional petroleum-based fuels. We believe that the renewable diesel that we
will produce will reduce direct lifecycle greenhouse gas emissions by over 80% compared to the fuels they displace.
The Share Exchange Agreement
On December 19, 2018, we entered into a
Share Exchange Agreement (the “Share Exchange Agreement”) with Renewable Technology Solutions, Inc. (“RTS”),
and Christopher Headrick, a member of the Company’s board of directors and at that time the sole stockholder of RTS. Pursuant
to the Share Exchange Agreement and subject to certain unwind provisions of the Share Exchange Agreement, on December 19, 2018,
RTS became our wholly owned subsidiary. Pursuant to the Share Exchange Agreement, (i) upon the execution of such agreement, Mr.
Headrick delivered to us share certificates evidencing 1,000 shares of RTS common stock, no par value, which represents 100% of
the issued and outstanding shares of RTS common stock (the “RTS Shares”) and we delivered to Mr. Headrick 250,000,000
shares of our common stock, par value $0.001 per share (the “Pledge Common Shares”), and (ii) after the expiration
of the Unwind Period defined below and the filing of an amendment to our Certificate of Incorporation with the Secretary of State
of the State of Delaware, we have agreed to issue to Mr. Headrick 150,000 shares of Series D Preferred Stock, par value $0.001
(the “Series D Preferred Shares”) that will have the right to an aggregate of 1,500,000,000 votes on all items presented
to our stockholders for a vote. Upon the issuance of the 250,000,000 shares of common stock to Mr. Headrick, Mr. Headrick became
the owner of 52% of our outstanding voting securities. After the issuance of the 150,000 shares of our Series D Preferred Stock
to Mr. Headrick, he will own securities providing him the right to vote approximately eighty eight percent (88%) of our voting
securities and our other stockholders will own securities providing them with the right to vote approximately twelve percent (12%)
of our voting securities. If prior to the twelve-month anniversary of the execution of the Share Exchange Agreement, RTS has not
delivered evidence, in form and substance reasonably satisfactory to us of a copy of a financial commitment from a reputable source
for $3,000,000 to fund in part the construction of a renewable fuel manufacturing facility to be located in Bay Minette, Alabama,
the purchase of the equipment to be contained therein and the applicable technology (the “Unwind Condition”), the Share
Exchange will be unwound and RTS Shares will be returned to Mr. Headrick and the Pledge Common Shares will be returned to the Pledge
and the Series D Preferred Stock will not be issued.
Pursuant to the terms of the Share Exchange
Agreement and Escrow Agreement, until the Unwind Condition is satisfied, (i) Mr. Headrick shall not assign, pledge or transfer
any of the Pledge Common Shares and the Company shall not assign, pledge or transfer any of the RTS Shares (ii) any distributions
with respect to the Pledge Common Shares shall be made to Mr. Headrick and with respect to the RTS Shares shall be made to us and
(iii) Mr. Headrick shall have the full power to vote and exercise all voting, consent and related rights (including, without limitation,
all rights to provide instructions or directions as to the exercise of voting or consent rights) with respect to the Pledge Common
Shares, subject to the following limitations and we shall have the full power to vote and exercise all voting, consent and related
rights (including, without limitation, all rights to provide instructions or directions as to the exercise of voting or consent
rights) with respect to the RTS Shares, subject to the following limitations: (a) no amendments may be made to any of the charter
documents of either entity without approval of all of the members of the Board of Directors of such entity; (b) and no changes
to the Board of Directors of either entity (including increases or removals other than for cause) may be made by an entity without
approval of all of the members of the Board of Directors of such entity (c) effect or approve a merger, consolidation or acquisition
of all or substantially all of the assets of such entity without approval of all of the members of the Board of Directors of such
entity.
Christopher Headrick, John Zotos
and John Huemoeller each have indicated that they will vote in favor of an amendment to our Certificate of Incorporation to increase
the number of authorized shares of preferred stock that will provide us with the ability to designate the Series D Preferred Stock.
History
RTS was incorporated on August 22, 2018
under the laws of the State of Tennessee under the name Renewable Technology Solutions, Inc. Christopher Headrick, the Chief Executive
Officer and founder of RTS, has spent the last nine years researching various biodiesel technologies as well as locations for facilities.
Not only has he identified equipment that utilizes a technology that he intends to acquire but RTS has also entered into an agreement
to acquire a property on which to build facilities. A company owned by Mr. Headrick has entered into a sales representative agreement
with the owner of the equipment that incorporates the technology that we intend to acquire authorizing it to serve as an authorized
sales representative of the third-party manufacturer with the right to market and to solicit sales of the equipment. Mr. Headrick
has also received indications of interest from customers for offtake agreements, all pending the acquisition of the site for the
facility. Mr. Headrick has spent years building relationships with key partners and formulating the business plan for RTS in order
to enable RTS to successfully begin operations once the initial production facility is constructed. For example, RTS (or an affiliated
entity) has entered into the following letters of intent; (i) Cooper Marine & Timberlands Corp. (a Cooper company) to be its
primary provider of feedstock; (ii) Forest2Market to provide project development and operational support services related to biomass
feedstock; (iii) Weaver and Tidwell, L.L.P. to provide technical support and regulatory consulting services to RTS in its role
as a renewable fuel producer; and (iv) Targray Industries Inc. to purchase not less than 13 million gallons per year of renewable
diesel.
Production Facilities
RTS has executed an agreement, contingent
on obtaining third-party financing, to acquire approximately 28 acres of property in Bay Minette, Alabama for $1,250,000, on which
it intends to build its initial renewable fuel manufacturing facility. In connection therewith, RTS paid the seller of the property
a $5,000 down payment, which it borrowed from John Huemoeller, on our board of directors, pursuant to a promissory note bearing
interest at 5% per year, due upon the earlier of the closing of the Company’s next financing or one-year after issuance.
We estimate that the cost to build the facility on the site will be approximately $133,000,000. The Bay Minette, Alabama site under
contract will be able to accommodate up to a total of four production facilities. Bay Minette is situated in the Southeastern part
of the United States near abundant feedstock and has a rail loading facility, inland and gulf waterways and other transportation
channels.
The Technology
The basic technology that we intend to
acquire rights to utilizes a patented and commercially deployed fast pyrolysis process to turn biomass into renewable diesel. The
technology is owned by a third party and is sold to customers incorporated within and as part of a modular piece of equipment.
We intend to secure a purchase order for this equipment through the auspices of Christopher Headrick, who through a company he
owns is an authorized sales representative for the third party manufacturer. Christopher Headrick has also agreed to forego receipt
to any sales commissions paid to him in respect of our purchases of the equipment through his efforts.
Government Programs Favoring Biomass-Based
Diesel Production and Use
The biomass-based diesel industry benefits
from numerous federal and state government programs, the most important of which is RFS2.
Renewable Fuel Standard
On July 1, 2010, RFS2’s biomass-based
diesel requirement became effective, requiring for the first time that a certain percentage of the diesel fuel consumed in the
United States be made from renewable sources. The biomass-based diesel requirement can be satisfied by two primary fuels, biodiesel
and renewable diesel. Required volumes under the RFS2 program, referred to as the renewable volume obligation (“RVO”),
are determined by the United States Environmental Protection Agency (the “EPA”), subject to the approval of the Office
of Management and Budget (“OMB”). For 2012 through 2016, the biomass-based diesel RVO was set (in gallons) at one billion,
1.28 billion, 1.63 billion, 1.73 billion, and 1.90 billion for 2012, 2013, 2014, 2015 and 2016, respectively. In November 2016,
the EPA issued the final biomass-based diesel RVO volume for 2017 at 2.00 billion gallons. In November 2017, the EPA issued the
final biomass-based diesel volume for 2018 at 2.1 billion gallons and set the 2019 RVO volume target at 2.1 billion gallons.
The biomass-based diesel requirement is
one of four separate renewable fuel requirements under RFS2. The RFS2 requirements are based on two primary categories and two
subcategories. The two primary categories are conventional renewable fuel, which is primarily satisfied by corn ethanol, and advanced
biofuel, which is defined as a biofuel that reduces lifecycle greenhouse gas emissions by at least 50% compared to the petroleum-based
fuel the biofuel is replacing. The advanced biofuel category has two subcategories, cellulosic biofuel, to be satisfied by newly
developed cellulosic biofuels, such as ethanol made from woody biomass, and biomass-based diesel, which is satisfied by biodiesel
and renewable diesel. RFS2’s total advanced biofuel requirement is larger than the combined cellulosic fuel and biomass-based
diesel requirements, thus requiring the use of additional volumes of advanced biofuels.
The RFS2 requirement for advanced biofuels
can be satisfied by any advanced biofuel, including biodiesel, renewable diesel, biogas used in transportation, biobutanol, cellulosic
ethanol or sugarcane-based ethanol, so long as it meets the 50% greenhouse gas reduction requirement. The advanced biofuel requirement
was 2.88 billion gallons in 2015, 3.61 billion gallons in 2016, 4.28 billion gallons in 2017 and 4.29 billion gallons in 2018.
The advanced biofuel RVO is expressed in
terms of ethanol equivalent volumes (“EEV”), which is based on the fuel’s renewable energy content compared to
ethanol. Biodiesel has an EEV of 1.5 and renewable diesel has an EEV of 1.5-1.7, compared to 1.0 for sugarcane-based ethanol. Accordingly,
it requires less biomass-based diesel than sugarcane-based ethanol to meet the required volumes as each gallon of biomass-based
diesel counts as more gallons for purposes of fulfilling the advanced biofuel RVO, providing an incentive for refiners and importers
to purchase biomass-based diesel to meet their advanced biofuel RVO.
The RFS2 volume requirements apply to petroleum
refiners and petroleum fuel importers in the 48 contiguous states and Hawaii, who are defined as “Obligated Parties”
in the RFS2 regulations, and require these Obligated Parties to incorporate into their petroleum-based fuel a certain percentage
of renewable fuel or purchase credits in the form of renewable identification numbers (“RINs”) from those who do. An
Obligated Party’s RVO is based on the volume of petroleum-based fuel they produce or import. The largest United States petroleum
refining companies, such as Valero, Phillips 66, ExxonMobil, British Petroleum, Chevron, Shell, Marathon and Citgo, represent the
majority of the total RVO, with the remainder made up of smaller refiners and importers.
Renewable Identification Numbers
The EPA created the RIN system to track
renewable fuel production and compliance with the renewable fuel standard. EPA registered producers of renewable fuel may generate
RINs for each gallon of renewable fuel they produce. In the case of biomass-based diesel, generally 1.5 to 1.7 biomass-based diesel
RINs may be generated for each gallon of biomass-based diesel produced, based upon the fuel’s renewable energy content. Renewable
fuel, including biomass-based diesel, can then be sold with associated RINs attached. RINs may also be separated from the gallons
of renewable fuel they represent and once separated they may be sold as a separate commodity. RINs are ultimately used by obligated
parties to demonstrate compliance with RFS2. Obligated parties must obtain and retire the required number of RINs to satisfy their
RVO during a particular compliance period. An Obligated Party can obtain RINs by buying renewable fuels with RINs attached, buying
RINs that have been separated, or producing renewable fuels themselves. All RIN activity under RFS2 must be entered into the EPA’s
moderated transaction system, which tracks RIN generation, transfer and retirement. RINs are retired when used for compliance with
the RFS2 requirements.
The value of RINs is significant to the
price of biomass-based diesel. In 2017, RIN prices as a percentage contribution to the daily average B100 spot price, as reported
by the Oil Pricing Information System, or OPIS, fluctuated significantly throughout the year and range from a low of $1.19 per
gallon, or 38%, in December to a high of $1.76 per gallon, or 56%, in August.
The renewable fuel that we expect to produce
will qualify as a D7 renewable fuel. D7 RINs are awarded for Cellulosic Biomass-based Diesel, Cellulosic Biofuel, Advanced Biofuel
and Renewable Fuel with GHG emission reductions of at least 60%. D7 RINs are traded at the value of D3 RINs multiplied by 1.7.
D3 RINs traded at an average above $2.50 per gallon in 2017 and based upon the 1.7 multiplier, D7 RINs were worth approximately
$4.25 per gallon on average in 2017. Additionally, D7 RINs hold more intrinsic value, as D& RINs have the most flexibility
for compliance because they can be retired to meet several mandate categories.
Biodiesel Tax Credit
The federal biodiesel mixture excise tax
credit (“BTC”), when in effect, provides a $1.00 per gallon excise tax credit to the first blender of biomass-based
diesel with at least 0.1% petroleum-based diesel fuel. The BTC can then be credited against such biodiesel federal excise tax liability
or the blender can obtain a cash refund from the United States Treasury for the value of the credit. The BTC was first implemented
on January 1, 2005, although on several occasions it has been allowed to lapse and then subsequently reinstated, in some cases
on a retroactive basis, as detailed in the following table:
The BTC is best thought of as an incentive
shared across the entire value chain through routine, daily trading and negotiation. In February 2018, the BTC was retroactively
reinstated for 2017, but was not reinstated for 2018. It is uncertain whether the BTC will be reinstated for 2018 or any later
years.
California Low Carbon Fuel Standard
Credits
The California Low Carbon Fuel Standard
(“LCFS”) regulation is a rule designed to reduce greenhouse gas emissions associated with transportation fuels used
in California. The regulation quantifies lifecycle greenhouse gas emissions by assigning a “carbon intensity” (“CI”)
score to each transportation fuel based on that fuel’s lifecycle assessment. Each fuel provider (generally the fuel’s
producer or importer, or “regulated party”) is required to ensure that the overall CI score for its fuel pool meets
the annual carbon intensity target for a given year. A regulated party’s fuel pool can include gasoline, diesel, and their
blend stocks and substitutes. In other words, excess CI reductions from one type of fuel (e.g., diesel) can be used to offset insufficient
reductions in another fuel (e.g., gasoline).
We would obtain CI credits when we sell
qualified biomass-based diesel into California, which is our intended market. During 2017, CI credits ranged from $69.5 per metric
ton to $113.0 per metric ton, as reported by OPIS.
Anticipated Future Revenues from
Fuel Sales and Credits
In addition to selling the diesel fuel
itself, RTS anticipates qualifying for three distinct credits. As a factor of our Low Carbon Intensity, RTS renewable diesel should
receive $2.00 plus per gallon produced from Low Carbon Fuel Credits (LCFS) awarded by the California Air Resources Board. In addition,
the unique feedstock we expect to utilize should allow us to qualify for EPA issued D7 Renewable Identification Numbers (RINs).
D7 RINs receive 1.7 times the value of D3 RINs, which translates into $3.50 to $3.85 per gallon produced based upon the most recent
pricing. Finally, RTS expects to qualify for the Federal Biodiesel Excise Tax Credit (BTC), which is valued today at $1.00 per
gallon produced. At today’s pricing, RTS anticipates receiving over $8.50 per gallon in revenue due to these credits.
Other Government Programs
According to the U.S. Department of Energy,
more than 40 states have implemented various programs that encourage the use of biomass-based diesel through blending requirements
as well as various tax incentives.
Our Market
The global transportation fuels market
represents one of the world’s largest markets at over $2 trillion. According to the U.S. Energy Information Administration
(“EIA”) for 2009, there was a 138 billion gallon market for gasoline and a 49 billion gallon market for diesel in the
United States alone. We expect our renewable diesel to have “drop in” compatibility with traditional hydrocarbons,
unlike conventional biofuels such as FAME diesel, corn ethanol and sugarcane ethanol.
Although we expect our renewable diesel
will be marketable not only into the global transportation fuels market, its renewable nature also should allow us to benefit from
government programs and incentives. In 2007, the Energy Independence and Security Act (“EISA”) was adopted to move
the United States toward greater energy independence and security and to increase the production of clean renewable fuels domestically.
EISA updated RFS2 to require the use of cellulosic biofuel, a renewable fuel derived from renewable cellulosic biomass that produces
at least 60% lower lifecycle greenhouse gas emissions compared to a 2005 baseline. We believe that the renewable diesel that we
produce will reduce direct lifecycle greenhouse gas emissions by over 80% compared to the fuels they displace.
We believe that our renewable diesel will
qualify as cellulosic biofuel under RFS2. We expect that our diesel will have an equivalence value of between 1.5 to 1.7. Equivalence
value equates to the number of RIN credits per gallon. We expect that this designation, together with the higher energy content
of our renewable fuels than ethanol, will make our diesel attractive to fuel producers because diesel can be used to satisfy specific
volume requirements for cellulosic biofuel, as well as the volume requirements for both advanced biofuel and renewable fuel under
RFS2. This provides cellulosic biofuel producers like our company an opportunity to compete with producers of advanced biofuel
and other renewable fuel, but not vice versa. Accordingly, the potential size of the mandated market for cellulosic biofuel in
2022 under RFS2 encompasses the 36.0 billion gallon mandate for all renewable fuels, which includes the 21.0 billion gallon mandate
for advanced biofuel, which also includes the 16.0 billion gallon mandate for cellulosic biofuel. Under the EISA mandates, by 2022
renewable fuels are expected not only to make up an increasing percentage of liquid transportation fuels in the United States,
but also are expected to contribute to a 15% reduction in net imports of crude oil from 2009 levels. Additional renewable fuels
mandates exist in Europe and other countries with varying mandates and volume requirements for premium renewable fuels.
Other Support Agreements
Mr. Headrick has spent years building relationships
with key partners and formulating the business plan for our company in order to enable us to successfully begin operations once
the initial production facility is brought online. A company owned by Mr. Headrick has entered into a sales representative agreement
with the owner of the equipment that incorporates the technology that we intend to acquire authorizing it to serve as an authorized
sales representative of the third-party manufacturer with the right to market and to solicit sales of the equipment. In addition,
RTS (or an affiliated entity) has entered into the following letters of intent; (i) Cooper Marine & Timberlands Corp. (a Cooper
company) to be our primary provider of feedstock, (ii) Forest2Market to provide project development and operational support services
related to biomass feedstock, (iii) Weaver and Tidwell, L.L.P. to provide technical support and regulatory consulting services
to RTS in its role as a renewable fuel producer and (iv) Targray Industries Inc. to purchase not less than 13 million gallons per
year of renewable diesel.
Our Competitive Strengths
We believe that our business benefits from
a number of competitive strengths, including the following:
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Our renewable fuel product will be hydrocarbons compatible with the existing transportation fuels infrastructure.
Unlike other renewable fuels such as ethanol, which is alcohol-based, or biodiesel, which is composed of fatty acids, our diesel will be hydrocarbon compatible that can “drop in” to the existing petroleum-based transportation fuels infrastructure, including pipelines, interchangeably with their petroleum-based counterparts to produce various fuel products, including finished gasoline and diesel. In addition, due to the higher energy content of our diesel, we believe that our transportation fuels will sell at a premium to ethanol. Currently, we expect to compete in the mandated renewable fuels market against corn ethanol, sugarcane ethanol and biodiesel and in the general market for gasoline and diesel fuels.
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Existing renewable diesel producers are unable to meet overall demands.
The overall demand in the United States for renewable diesel cannot be met by the limited number of renewable diesel producers operating today. As a result, competition is not a primary part of the renewable diesel marketplace dynamics. For example, the renewable diesel consumed in California alone (approximately 278 million gallons in 2016) was provided from just several producers of diesel producers. As a result, we believe that we will be able to sell as much renewable diesel as we can produce.
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The technology.
We intend to utilize the modular technology platform offered by a third-party supplier to convert biomass into high-quality renewable diesel. By leveraging the technological innovations and modular design and demonstrated scale-up cost, we believe we have significantly reduced our operating risk.
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The feedstock we use in our process is completely renewable, low-cost, abundant and sustainable.
Our technology platform uses tree slash to produce our renewable diesel. We have selected Cooper Marine & Timberlands Corp. (a Cooper company) as our primary provider of feedstock because of their completely renewable, abundant, sustainable supply and generally low-cost and stable pricing history compared to feedstocks used by traditional biofuels companies. Cooper Marine & Timberlands Corp. provides tree slash as our sole feedstock because of their abundant supply and generally stable pricing history. This completely renewable and sustainable
non-food
feedstock has a low-cost relative to other traditional renewable biomass and a long lifecycle that we believe significantly decreases price volatility compared to seasonal feedstocks that depend more on weather and other short-term supply and demand dynamics. We believe that our ability to use tree splash, such as logging residues, branches and bark, will enable us to keep our feedstock expenses at a low price.
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We have identified strategic locations for our commercial production facilities.
The proposed site for our initial-scale commercial production facility is Bay Minette, Alabama, situated in the Southeast near abundant Cooper Marine & Timberlands Corp. feedstock and with access to rail, inland and gulf waterways and other transportation channels. We believe that the Southeast of the United States can provide us with an available skilled labor force for our facilities.
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We believe that we have a better use for woodchip feedstock.
Based on current prices, and if we meet our target production cost metrics, and if competition for feedstock develops in a region, we believe that we may be able to afford higher prices for feedstock than paper mills.
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We have an experienced management team.
Our executive officers and senior operational managers have extensive experience in research and development, new product development, capital project execution, feedstock procurement, plant operations and technology commercialization across the catalyst, refining, chemicals and forest products industries. We believe that the experience of our management team provides us with valuable relevant experience, which we believe will enhance our ability to commercialize our products, grow our business and improve our technology.
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Our Strategy
Our principal strategy is to leverage the
technology and equipment we intend to acquire with our operational expertise to produce clean, economical, renewable and sustainable
“green” diesel that we can sell at prices that are competitive with petroleum-based transportation fuels. Key elements
of our strategy include the following:
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We have adopted a build, own and operate strategy.
We plan to build, own and operate our commercial production facilities in the United States. We have identified a 28-acre site located in Bay Minette, Alabama where we intend to acquire the real property and construct our initial facility.
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We expect to have a diversified revenue stream.
We intend to derive our revenue from five major sources: (1) the sale of renewable diesel, (2) the sale of biochar, (3) RIN, (4) BTC and (5) California LCFS. We believe that these diversified revenue streams will enable us to achieve long-term recurring revenues and mitigate risk.
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We are pursuing federal, state and other financing to construct our initial commercial production facilities.
The acquisition of our initial-scale commercial production facility is dependent on obtaining financing in all or part through a $133 million loan or convertible debenture or equity raise. We are strategically exploring other financing alternatives, including financing commercial production facilities.
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We plan to build our production facilities using “copy exact” principles.
We plan to employ a modular design that can be replicated for our subsequent standard commercial production facilities. The initial facility that we plan to develop is expected to be designed to produce approximately 13 million gallons of renewable diesel per year and approximately 23,000 tons of biochar per year. Utilizing learning from our initial commercial production facilities, we plan to deploy a “copy exact” strategy of standardized modular designs to reduce our capital costs, implement best practices, reduce operating costs, increase personnel flexibility and facilitate fast deployment of new production facilities. We believe that commercially available feedstock sources exist to support significant expansion opportunities in biomass-rich regions in the United States and globally. At a later date, we may consider larger or smaller standardized facility sizes to optimize the scale for local feedstock availability and transportation costs.
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We plan to expand our base of prospective customers.
We believe that we will be able to sell our renewable diesel to a variety of potential customers, including integrated oil companies, distributors of finished products, such as terminal or rack owners, and end users of petroleum products, such as transportation companies, fleets or petrochemical operators. We believe that this broad potential customer base will allow us to maximize the value we receive for our products, as well as make us less dependent on any one customer or market.
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We believe that we will be able to compete with petroleum-based transportation fuels.
Over time, our goal is to achieve commercial viability without reliance on government incentives, mandates or tariffs. Although we will benefit from mandated policies such as RFS2, we expect that our standard commercial production facilities will be able to produce our diesel on a cost-competitive basis with existing petroleum-based counterparts without government subsidies at current pricing. We also expect to be able to compete in non-mandated international transportation fuels markets, as well as mandated international transportation fuels markets, such as the European biodiesel market, that have historically commanded higher prices per gallon.
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We plan to drive brand loyalty for RTS.”
We believe our products will provide strategically important new domestic sources of liquid transportation fuels, sustainably utilizing local renewable resources to help further energy independence and reduce greenhouse gas emissions. We plan to capitalize on the increasing global trend in green awareness to differentiate our renewable transportation fuels from petroleum-based alternatives. In the long term, we believe that we will have a substantial marketing opportunity with a variety of large, fuel-intensive prospective customers seeking sustainable, renewable transportation fuel options. These potential customers may include distributors of finished products, such as terminal or rack owners, and end users of petroleum products such as transportation companies, fleets or municipalities that would place a premium on environmentally friendly products.
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Marketing
We intend to use a variety of marketing
channels to promote our products and platform, such as digital, print and social media advertising, email campaigns, industry events
and public relations. If the costs of the marketing channels we use increase dramatically, then we may choose to use alternative
and less expensive channels, which may not be as effective as the more expensive channels. As we add to or change the mix of our
marketing strategies, we may need to expand into more expensive channels than those we are currently in, which could adversely
affect our business, results of operations and financial condition.
Intellectual Property
With respect to proprietary know-how that
may not be patentable, or that we believe is best protected by means that do not require public disclosure, and processes for which
patents are difficult to enforce, we rely on, among other things, trade secret protection and confidentiality and non-circumvent
agreements to protect our interests. All of our employees and consultants have entered into non-disclosure and proprietary information
and inventions assignment agreements with us. These agreements address intellectual property protection issues and require our
employees and consultants to assign to us all of the inventions, designs and technologies they develop during the course of their
employment or consulting engagement with us. We also control access to sensitive information by limiting access to only those employees
and consultants who need to know the information and who have agreed contractually to maintain the confidentiality of that information.
There can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach, that
others will not independently develop equivalent proprietary information or that other third parties will not otherwise gain access
to our trade secrets and other intellectual property.
Our precautions may not prevent misappropriation
or infringement of our intellectual property. Third parties could infringe or misappropriate our patents, copyrights, trademarks,
trade secrets and other proprietary rights. Litigation may be necessary to enforce our intellectual property rights, to protect
our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement,
invalidity, misappropriation or other claims. Any such litigation could result in substantial costs and diversion of our resources.
Moreover, any settlement of or adverse judgment resulting from such litigation could restrict or prohibit our use of the technology.
Our failure or inability to adequately protect our intellectual property or to defend against third-party infringement claims could
materially harm our business.
If any of our processes, products or technology
is covered by third party patents or other intellectual property rights, we could be subject to various legal actions. We cannot
assure you that our technology and products do not infringe patents held by others or that they will not in the future. Litigation
is costly and time-consuming, and there can be no assurance that our litigation expenses will not be significant in the future
or that we will prevail in any such litigation.
Environmental and Regulatory Matters
Our operations are subject to a variety
of federal, state and local environmental laws and regulations that govern the discharge of materials into the environment or otherwise
relate to environmental protection. Examples of these laws include:
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the Clean Air Act, also known as CAA, and analogous state laws that impose obligations related to air emissions and regulate fuels and fuel additives;
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the federal Comprehensive Environmental Response, Compensation, and Liability Act, also known as CERCLA or the Superfund law, and analogous state laws that regulate the cleanup of hazardous substances that may be or have been released at properties currently or previously owned or operated by us or at locations to which our wastes are or have been transported for disposal;
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the federal Water Pollution Control Act, also known as the Clean Water Act, and analogous state laws that regulate discharges from our facilities into state and federal waters, including wetlands;
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the federal Resource Conservation and Recovery Act, also known as RCRA, and analogous state laws that impose requirements for the storage, treatment and disposal of solid and hazardous waste from our facilities;
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the Endangered Species Act; and
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the Toxic Substances Control Act and analogous state laws that impose requirements on the use, storage and disposal of various chemicals and chemical substances at our facilities.
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These laws and regulations may impose numerous
obligations that are applicable to our operations, including the acquisition of permits to conduct regulated activities, the incurrence
of capital or operating expenditures to limit or prevent releases of materials from our facilities, and the imposition of substantial
liabilities and remedial obligations for pollution resulting from our operations. Numerous governmental authorities, such as the
EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under
them, often requiring difficult and costly corrective actions. Most of these statutes include citizen suit provisions, which enable
private parties, in lieu of the government, to sue for alleged violations of environmental law. Failure to comply with these laws,
regulations or permits may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial
obligations and the issuance of injunctions limiting or preventing some or all of our operations. In addition, we may experience
a delay in obtaining or be unable to obtain required permits, which may cause us to lose potential and current customers, interrupt
our operations and limit our growth and revenue.
We believe that our current operations
are in substantial compliance with existing environmental laws, regulations and permits. New laws, new interpretations of existing
laws, increased governmental enforcement of environmental laws or other developments could require us to make significant additional
expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased future investments
for environmental controls at our ongoing and future 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.
Clean Air Act Regulation.
Our operations
and the products we intend to manufacture will be subject to certain specific requirements of the CAA and similar state and local
regulations and permitting requirements. These laws, regulations and permitting requirements may restrict our emissions, affect
our ability to make changes to our operations, and otherwise impose limitations on or require controls on our operations. We expect
that the facility we intend to acquire will be deemed a “minor source” under the CAA. It is possible that additional
facilities that we construct in the future may be considered “major sources” or that modifications to planned facilities
may cause such facilities to be “major sources,” which would subject these facilities to more stringent permitting
requirements, including requirements of Title V of the CAA. In addition to costs that we expect to incur to achieve and maintain
compliance with these laws, new or more stringent CAA standards in the future also may limit our operating flexibility or require
the installation of new controls at our facilities and future facilities. Because other domestic alternative fuel manufacturers
will be subject to similar restrictions and requirements, 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.
Hazardous Substances and Wastes.
There is a risk of liability for the investigation and cleanup of environmental contamination at each of the properties that we
own or operate and at off-site locations where we may arrange for the disposal of hazardous substances. If these substances have
been or are disposed of or released at sites that undergo investigation and/or remediation by regulatory agencies, we may be responsible
under CERCLA or other environmental laws for all or part of the costs of investigation and/or remediation and for damage to natural
resources. We may also be subject to related claims by private parties alleging property damage and personal injury due to the
presence of or 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 are unaware of any material environmental liabilities relating
to contamination at or from our facilities.
We will also generate solid wastes, including
hazardous wastes, that are subject to the requirements of RCRA and comparable state statutes. Although RCRA regulates both solid
and hazardous wastes, it imposes strict requirements on the generation, storage, treatment, transportation and disposal of hazardous
wastes. The EPA and various state agencies have limited the approved methods of disposal for certain hazardous and non-hazardous
wastes.
Water Discharges.
The Clean Water
Act and analogous state laws impose restrictions and strict controls regarding the discharge of pollutants into state waters as
well as waters of the United States and to conduct construction activities in waters and wetlands. Certain state regulations and
the general permits issued under the Federal National Pollutant Discharge Elimination System, or NPDES, program prohibit any discharge
into surface waters, ground waters, injection wells and publicly owned treatment works except in strict conformance with permits,
such as pre-treatment permits and NPDES permits, issued by federal, state and local governmental agencies. We anticipate that our
process waste water will not be directly discharged into state or U.S. waters, but rather will be sent to a publicly owned treatment
works. In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for
discharges of storm water runoff from certain types of facilities. These regulations and permits may require us to monitor and
sample the storm water runoff from certain of our facilities or our discharges to publicly owned treatment works. Some states also
maintain groundwater protection programs that require permits for discharges or operations that may impact groundwater conditions.
Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge
permits or other requirements of the Clean Water Act and analogous state laws and regulations. We believe that compliance with
existing permits and compliance with foreseeable new permit requirements will not have a material adverse effect on our financial
condition, results of operations or cash flow.
Construction Permits.
Our business
is also subject to sewer, electrical and construction permitting requirements. As a condition to granting necessary permits, regulators
could make demands that increase our costs of construction and operations, in which case we could be forced to obtain additional
debt or equity capital. Permit conditions could also restrict or limit the extent of our operations. We cannot assure you that
we will be able to obtain and comply with all necessary permits to construct our commercial production facilities. Failure to obtain
and comply with all applicable permits and licenses could halt our construction and could subject us to future claims.
Safety.
The hazards and risks associated
with producing and transporting our cellulosic gasoline and diesel, such as fires, natural disasters, explosions and pipeline ruptures,
also may result in personal injury claims or damage to property and third parties. As protection against operating hazards, we
maintain insurance coverage against some, but not all, potential losses. Our coverage includes physical damage to assets, employer’s
liability, comprehensive general liability, automobile liability and workers’ compensation. We maintain insurance coverage
against pollution resulting from environmental accidents that occur on a sudden and accidental basis, some of which may result
in toxic tort claims. 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 are not currently aware of pending material claims
for damages or liability to third parties relating to the hazards or risks of our business.
OSHA.
We are subject to the requirements
of the federal Occupational Safety and Health Act and comparable state statutes, laws and regulations. These laws and the implementing
regulations strictly govern the protection of the health and safety of employees. The Occupational Safety and Health Administration’s,
or OSHA, hazard communication standard, the EPA’s community right-to-know regulations under Title III of CERCLA and similar
state laws require that we organize and/or disclose information about hazardous materials used or produced in our operations.
Our operations are also subject to standards
designed to ensure the safety of our processes, including OSHA’s Process Safety Management standard. The Process Safety Management
standard imposes requirements on regulated entities relating to the management of hazards associated with highly hazardous chemicals.
Such requirements include conducting process hazard analyses for processes involving highly hazardous chemicals, developing detailed
written operating procedures, including procedures for managing change, and evaluating the mechanical integrity of critical equipment.
TSCA.
We are subject to the requirements
of the Toxic Substances Control Act, or TSCA, which regulates the commercial manufacture and use of chemicals. Before an entity
can manufacture a chemical, it needs to determine whether that chemical is listed in the TSCA inventory. If a substance is listed,
then manufacture can commence immediately after a notice of commencement. If not, then a “Chemical Abstracts Service”
number is obtained, and a registration and pre-manufacture notice must be filed with the EPA. We have obtained the Chemical Abstracts
Service numbers, filed a pre-manufacturing notice, entered into a consent order with the EPA, and sent notices of commencement
to the EPA. The failure to comply with TSCA could have a material adverse effect on our results of operations and financial condition.
In addition, the TSCA new chemical submission policies may change and additional government legislation or regulations may be enacted
that could prevent or delay regulatory approval of our products.
Climate Change.
In the United States,
legislative and regulatory initiatives are underway at the federal and state levels to regulate greenhouse gas, or GHG, emissions,
including emissions by facilities such as our initial-scale and planned commercial production facilities. Pursuant to the EPA’s
2009 finding that GHGs present an endangerment to human health and the environment, and other rulemakings and interpretations,
the EPA concluded that GHG-emitting stationary sources would become subject to federal permitting requirements under the Clean
Air Act starting in 2011. In 2010, the EPA issued a final rule, known as the “Tailoring Rule,” that defined regulatory
emissions thresholds at which certain new and modified stationary sources would become subject to permitting requirements for GHG
emissions under the CAA. Projected GHG emissions from our facility would fall below the currently applicable thresholds for GHG
reporting or permitting requirements. However, our future commercial production facilities are expected to exceed such thresholds
and, therefore, will be required to comply with such GHG reporting or permitting requirements if they meet or exceed reporting
or permitting thresholds. These thresholds may be reduced from their current levels; for example, the EPA has indicated in rulemakings
that it may revise the current Tailoring Rule thresholds downward, making additional sources subject to permitting requirements.
Additional direct federal regulation of
GHG emissions may be implemented under other CAA programs, including the New Source Performance Standards, or NSPS, program. The
EPA has already proposed to regulate GHG emissions from one source category—electric generating units—and may propose
GHG NSPS for additional source categories in the future. Many states, either individually or through multi-regional initiatives,
already have begun implementing measures to reduce GHGs, primarily through the planned development of emission inventories or regional
GHG “cap and trade” programs.
Complying with federal and state greenhouse
gas reporting and permitting requirements may result in materially increased compliance costs, increased capital expenditures,
decreased earnings, increased operating costs and additional operating restrictions for our business, which could harm our competitive
position.
Because regulation of GHG emissions is
relatively new, further regulatory, legislative and judicial developments are likely to occur. Such developments may affect how
these GHG initiatives will impact the demand for our products and our operating results. Due to the uncertainties surrounding the
regulation of and other risks associated with GHG emissions, we cannot predict the financial impact of related developments on
us. Because other domestic alternative fuel manufacturers will be subject to similar restrictions and requirements, however, we
believe that compliance with GHG reporting or emission requirements is not likely to materially affect our competitive position.
RTS has executed a contract to acquire
a 28 acre of property for $1,250,000 on which we intend to construct a renewable diesel facility in Bay Minette, Alabama. We expect
to finance the acquisition the of real property and construction of the facility utilizing a mixture of debt and equity, however,
we have received no funding commitments to date and no assurance can be given that any such commitments will be secured.
Competition
We will face competition from producers
and suppliers of petroleum-based diesel fuel, other biomass-based diesel producers, marketers, traders and distributors. The size
of the biomass-based diesel industry is small compared to the size of the petroleum-based diesel fuel industry and large petroleum
companies have greater resources than we do. Our principal competitive differentiators are biomass-based diesel quality and RIN
quality, supply reliability and price. We also face competition in the biomass-based diesel RIN compliance market from producers
of renewable diesel and in the advanced biofuel RIN compliance market from producers of other advanced biofuels. We believe that
we will compete with large, multi-product companies that have greater resources than we do. Archer Daniels Midland Company, Cargill
Incorporated, Louis Dreyfus Commodities Group and Ag Processing Inc. are major international agribusiness corporations and biodiesel
producers with the financial sourcing and marketing resources to be formidable competitors in the biodiesel industry. These agribusiness
competitors tend to make biodiesel from higher cost virgin vegetable oils such as soybean or canola oil, which they produce as
part of their integrated agribusinesses. We will also be in competition with other producers of renewable diesel. For example,
Renewable Energy Group and Neste Oil have greater resources than we do along with approximately 882 million gallons of renewable
diesel production capacity in Asia and Europe. Another renewable diesel competitor is Diamond Green Diesel, LLC, the joint venture
between Valero Energy Corp. and Darling International, which has approximately 160 million gallons of production capacity and announced
plans to grow its capacity to 275 million gallons and beyond. Renewable diesel can also satisfy the RFS2 biomass-based diesel requirement
if the renewable diesel meets the greenhouse gas reduction requirements.
Risk Management
The prices for feedstocks and biomass-based
diesel can be volatile and are not always closely correlated. Lower-cost feedstocks are particularly difficult to risk manage given
that such feedstocks are not traded in any public futures market. To manage feedstock and biomass-based diesel price risks, we
intend to utilize forward contracting, hedging and other risk management strategies, including the use of futures, swaps, options
and over-the-counter products.
In establishing our risk management strategies,
we draw from our own in-house risk management expertise and consult with industry experts. We utilize research conducted by outside
firms to provide additional market information and risk management strategies. We believe combining these sources of knowledge,
experience and expertise expands our view of the fluctuating commodity markets for raw materials and energy to improve our risk
management strategies.
Employees
As of April 10, 2019, we had one individual
that performs services for us in Tennessee that qualifies as a full-time employee. We currently also employ two contractors. We
believe that our success will depend, in part, on our ability to attract and retain qualified personnel. We have never experienced
a work stoppage due to labor difficulties and believe that our relations with our employees are good. None of our employees are
represented by labor unions.