**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

 

x**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 f**or the quarterly period ended**June 30, 2008**

 

o**TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 f**or the transition period from ______ to _______

 

Commission File Number: 000-51564

 

**NORTHERN ETHANOL, INC** 

(Exact name of registrant as specified in its charter)

 

**Delaware**

(State or other jurisdiction

of incorporation or organization)

 

**34-2033194**

(IRS Employer Identification No.)

 

**193 King Street East**

**Suite 300**

**Toronto, Ontario, M5A 1J5, Canada**

(Address of principal executive offices)

**(416) 366-5511**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.YesxNoo

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filero                                            | Accelerated filero         |
|---------------------------------------------------------------------|----------------------------|
| Non-accelerated filero(Do not check if a smaller reporting company) | Smaller reporting companyx |

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YesoNox

 

          As of August 14, 2008, there were 104,096,500 shares of Northern Ethanol, Inc. common stock, $0.0001 par value per share, issued and outstanding.

 

1

 

 

----

|       | **PART I.**                                                                                                                                                               | **Page** |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|       | **FINANCIAL INFORMATION**                                                                                                                                                 |     |
|       |                                                                                                                                                                      |     |
| Item 1.    | Financial Statements                                                                                                                                                      |     |
|       |                                                                                                                                                                      |     |
|       | Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007                                                                                         | F-1      |
|       | Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008

and 2007 (unaudited)                                                              | F-2      |
|       | Consolidated Statements of Stockholders’ Equity (Deficiency) and Comprehensive Income

for the Three and Six-Month Periods Ended June 30, 2008 and 2007 (unaudited) | F-3      |
|       | Consolidated Statements of Cash Flows for the Three and Six-Month Periods Ended

June 30, 2008 and 2007 (unaudited)                                                       | F-4      |
|       | Notes to Consolidated Financial Statements (unaudited)                                                                                                                    | F-5      |
|       |                                                                                                                                                                      |     |
| Item 2.    | Management’s Discussion and Analysis of Financial Condition and Results of Operations.                                                                              | 25       |
|       |                                                                                                                                                                      |     |
| Item 3.    | Quantitative and Qualitative Disclosures About Market Risk.                                                                                                               | 42       |
|       |                                                                                                                                                                      |     |
| Item 4.    | Controls and Procedures.                                                                                                                                                  | 42       |
|       |                                                                                                                                                                      |     |
|       | **PART II**                                                                                                                                                               |     |
|       | **OTHER INFORMATION**                                                                                                                                                     |     |
|       |                                                                                                                                                                      |     |
| Item 1.    | Legal Proceedings.                                                                                                                                                        | 43       |
|       |                                                                                                                                                                      |     |
| Item 1A.   | Risk Factors.                                                                                                                                                             | 43       |
|       |                                                                                                                                                                      |     |
| Item 2.    | Unregistered Sales of Equity Securities and Use of Proceeds.                                                                                                              | 57       |
|       |                                                                                                                                                                      |     |
| Item 3.    | Defaults Upon Senior Securities.                                                                                                                                          | 57       |
|       |                                                                                                                                                                      |     |
| Item 4.    | Submission of Matters to a Vote of Security Holders.                                                                                                                      | 57       |
|       |                                                                                                                                                                      |     |
| Item 5.    | Other Information.                                                                                                                                                        | 57       |
|       |                                                                                                                                                                      |     |
| Item 6.    | Exhibits.                                                                                                                                                                 | 57       |
|       |                                                                                                                                                                      |     |
| Signatures | 58                                                                                                                                                                        |
|       |                                                                                                                                                                      |     |

 

 

 

 

2

 

 

----

**PART I - FINANCIAL INFORMATION**

 

| **ITEM 1.** | **FINANCIAL STATEMENTS.** |
|-------------|---------------------------|

 

**Northern Ethanol, Inc.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

**Consolidated Balance Sheets**

| As at:                                                                                                        | June 30, 2008 |       |   | December 31, 2007 |   |
|---------------------------------------------------------------------------------------------------------------|---------------|------------|--------|-------------------|--------|
|                                                                                                          | (Unaudited)   |       |   |              |   |
| ASSETS                                                                                                        |          |       |   |              |   |   |   |
| CURRENT ASSETS:                                                                                               |          |       |   |              |   |   |   |
| Cash and cash equivalents                                                                                     | $             | 16,877     |   |              | $      | 9,622 |   |
| Accounts receivable (note 3)                                                                                  |          | 51,817     |   |              |   | 30,136 |   |
| Deposits (note 4)                                                                                             | 11,964        | 12,307     |
| Prepaid expenses (note 5)                                                                                     | 298,674       | 327,444    |
| Total current assets                                                                                          |          | 379,332    |   |              |   | 379,509 |   |
|                                                                                                          |          |       |   |              |   |   |   |
| Property under development and equipment (note 6)                                                             |          | 1,685,427  |   |              |   | 1,426,882 |   |
| Assets under capital lease (notes 7 and 10)                                                                   |          | 23,718,712 |   |              |   | 22,749,105 |   |
| Deferred financing costs (note 8)                                                                             |          | 345,121    |   |              |   | 341,883 |   |
| Other assets                                                                                                  |          | 6,293      |   |              |   | 6,473 |   |
|                                                                                                          | $             | 26,134,885 |   |              | $      | 24,903,852 |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY                                                                |          |       |   |              |   |   |   |
| CURRENT LIABILITIES:                                                                                          |          |       |   |              |   |   |   |
| Bank indebtedness (note 9)                                                                                    | $             | 7,588      |   |              | $      | 519,834 |   |
| Accounts payable (note 10)                                                                                    |          | 1,152,359  |   |              |   | 4,477,441 |   |
| Accrued liabilities (note 10)                                                                                 |          | 355,166    |   |              |   | 161,350 |   |
| Due to related party (note 10)                                                                                |          | 7,791,900  |   |              |   | 1,055,871 |   |
| Current portion of obligation under capital lease (note 13)                                                   |          | 32,972     |   |              |   | 31,951 |   |
| Total current liabilities                                                                                     |          | 9,339,985  |   |              |   | 6,246,447 |   |
|                                                                                                          |          |       |   |              |   |   |   |
| Obligation under capital lease (note 13)                                                                      |          | 18,258,258 |   |              |   | 18,808,747 |   |
|                                                                                                          |          | 27,598,243 |   |              |   | 25,055,194 |   |
| STOCKHOLDERS’ DEFICIENCY:                                                                               |          |       |   |              |   |   |   |
| Preferred stock, $.0001 par value; 100,000,000 shares authorized; none issued and outstanding (note 12)       |          | —    |   |              |   | — |   |
| Common stock, $.0001 par value; 250,000,000 shares authorized;                                                |          |       |   |              |   |   |   |
| (104,096,500 shares issued and outstanding as of June 30, 2008 and December 31, 2007, respectively (note 12)) |          | 10,410     |   |              |   | 10,410 |   |
| Additional paid-in capital                                                                                    |          | 6,659,290  |   |              |   | 6,526,827 |   |
| Deficit accumulated during the development stage                                                              |          | (8,298,473 | )      |              |   | (6,856,914 | ) |
| Accumulated other comprehensive income                                                                        |          | 165,415    |   |              |   | 168,335 |   |
|                                                                                                          |          | (1,463,358 | )      |              |   | (151,342 | ) |
| Going concern (note 2 a))                                                                                     |          |       |   |              |   |   |   |
| Commitments (note 15)                                                                                         |          |       |   |              |   |   |   |
| Contingency (note 16)                                                                                         |          |       |   |              |   |   |   |
|                                                                                                          | $             | 26,134,885 |   |              | $      | 24,903,852 |   |

See accompanying notes to unaudited consolidated interim financial statements

**F-1**

 

3

 

 

----

**Northern Ethanol, Inc.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

**Consolidated Statements of Operations**

**(Unaudited)**

 

|                                       |   |  

**Three months ended**

**June 30**

  |   |   |   |  

**Six months ended**

**June 30**

  |   | **Nov 29, 2004****(Inception) to****June 30** |   |
|--------------------------------------------|--------|-----------------------------------------------------|--------|--------|--------|---------------------------------------------------|--------|-----------------------------------------------|--------|
|                                       |   | **2008**                                            |   |   |   | **2007**                                          |   |                                          |   | **2008** |   |   |   | **2007** |   |   |   | **2008** |   |
| REVENUE                                    | $      | —                                             |   |   | $      | —                                           |   |                                          | $      | — |   |   | $ | — |   |   | $ | — |   |
|                                       |   |                                                |   |   |   |                                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| OPERATING EXPENSES                         |   |                                                |   |   |   |                                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and benefits (note 11)            |   | 417,858                                             |   |   |   | 659,885                                           |   |                                          |   | 807,692 |   |   |   | 1,320,182 |   |   |   | 5,159,649 |   |
| General and administrative                 |   | 236,997                                             |   |   |   | 353,243                                           |   |                                          |   | 410,109 |   |   |   | 624,607 |   |   |   | 2,516,752 |   |
| Occupancy costs                            |   | 48,557                                              |   |   |   | 44,965                                            |   |                                          |   | 97,020 |   |   |   | 85,471 |   |   |   | 378,001 |   |
| Foreign exchange loss (gain)               |   | (4,925                                              | )      |   |   | (32,289                                           | )      |                                          |   | 16,615 |   |   |   | (28,872 | ) |   |   | 4,812 |   |
| Depreciation                               |   | 11,389                                              |   |   |   | 10,131                                            |   |                                          |   | 22,614 |   |   |   | 19,172 |   |   |   | 85,929 |   |
| Interest                                   |   | 46,866                                              |   |   |   | 12,727                                            |   |                                          |   | 87,509 |   |   |   | 12,727 |   |   |   | 153,330 |   |
|                                       |   | 756,742                                             |   |   |   | 1,048,662                                         |   |                                          |   | 1,441,559 |   |   |   | 2,033,287 |   |   |   | 8,298,473 |   |
|                                       |   |                                                |   |   |   |                                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| NET LOSS                                   | $      | (756,742                                            | )      |   | $      | (1,048,662                                        | )      |                                          | $      | (1,441,559 | ) |   | $ | (2,033,287 | ) |   | $ | (8,298,473 | ) |
|                                       |   |                                                |   |   |   |                                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| BASIC AND DILUTED LOSS PER SHARE           | $      | (0.01                                               | )      |   | $      | (0.01                                             | )      |                                          | $      | (0.01 | ) |   | $ | (0.02 | ) |   |   |   |   |
|                                       |   |                                                |   |   |   |                                              |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING |   |  

 

104,096,500                         |   |   |   |  

 

104,096,500                       |   |                                          |   |  

 

104,096,500 |   |   |   |  

 

104,096,500 |   |   |   |   |   |

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated interim financial statements

 

 

 

**F-2**

 

4

 

 

----

 

**Northern Ethanol, Inc.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

**Consolidated Statements of Stockholders’ Equity (Deficiency) and Comprehensive Income**

**(Unaudited)**

Six Months ended June 30, 2008 and June 30, 2007

 

|                                            |        |   |   |       |   |   |                                 |   |   |   |                       |   |   |   |                                                |   |   |   |       |   |
|-------------------------------------------------|-------------|--------|--------|------------|--------|--------|--------------------------------------|--------|--------|--------|----------------------------|--------|--------|--------|-----------------------------------------------------|--------|--------|--------|------------|--------|
|                                            | **Shares**  |   |   | **Amount** |   |   | **Additional****Paid-In****Capital** |   |   |   | **Accumulated****Deficit** |   |   |   | **Accumulated****Other****Comprehensive****Income** |   |   |   | **Total**  |   |
|                                            |        |   |   |       |   |   |                                 |   |   |   |                       |   |   |   |                                                |   |   |   |       |   |
| Balances, December 31, 2006                     | 104,096,500 |   | $      | 10,410     |   | $      | 5,554,459                            |   |   | $      | (3,279,416                 | )      |   | $      | (63,167                                             | )      |   | $      | 2,222,286  |   |
| Comprehensive Income:                           |        |   |   |       |   |   |                                 |   |   |   |                       |   |   |   |                                                |   |   |   |       |   |
| Net loss for the six months ended June 30, 2007 | —     |   |   | —    |   |   | —                              |   |   |   | (2,033,287                 | )      |   |   | —                                             |   |   |   | (2,033,287 | )      |
| Other comprehensive income                      | —     |   |   | —    |   |   | —                              |   |   |   | —                    |   |   |   | 143,951                                             |   |   |   | 143,951    |   |
| Total Comprehensive Income                      |        |   |   |       |   |   |                                 |   |   |   |                       |   |   |   |                                                |   |   |   | (1,889,336 | )      |
| Stock-based compensation                        | —     |   |   | —    |   |   | 703,891                              |   |   |   | —                    |   |   |   | —                                             |   |   |   | 703,891    |   |
| Balances, June 30, 2007                         | 104,096,500 |   | $      | 10,410     |   | $      | 6,258,350                            |   |   | $      | (5,312,703                 | )      |   | $      | 80,784                                              |   |   | $      | 1,036,841  |   |
|                                            |        |   |   |       |   |   |                                 |   |   |   |                       |   |   |   |                                                |   |   |   |       |   |
|                                            |        |   |   |       |   |   |                                 |   |   |   |                       |   |   |   |                                                |   |   |   |       |   |
| Balances, December 31, 2007                     | 104,096,500 |   | $      | 10,410     |   | $      | 6,526,827                            |   |   | $      | (6,856,914                 | )      |   | $      | 168,335                                             |   |   | $      | (151,342   | )      |
| Comprehensive Income:                           |        |   |   |       |   |   |                                 |   |   |   |                       |   |   |   |                                                |   |   |   |       |   |
| Net loss for the six months ended June 30, 2008 | —     |   |   | —    |   |   | —                              |   |   |   | (1,441,559                 | )      |   |   | —                                             |   |   |   | (1,441,559 | )      |
| Other comprehensive income                      | —     |   |   | —    |   |   | —                              |   |   |   | —                    |   |   |   | (2,920                                              | )      |   |   | (2,920     | )      |
| Total Comprehensive Income                      |        |   |   |       |   |   |                                 |   |   |   |                       |   |   |   |                                                |   |   |   | (1,444,479 | )      |
| Stock-based compensation                        | —     |   |   | —    |   |   | 132,463                              |   |   |   | —                    |   |   |   | —                                             |   |   |   | 132,463    |   |
| Balances, June 30, 2008                         | 104,096,500 |   | $      | 10,410     |   | $      | 6,659,290                            |   |   | $      | (8,298,473                 | )      |   | $      | 165,415                                             |   |   | $      | (1,463,358 | )      |

 

See accompanying notes to unaudited consolidated interim financial statements

 

 

 

 

 

 

 

 

 

 

 

**F-3**

 

5

 

 

----

**Northern Ethanol, Inc.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 

|                                                  |   | **Three months ended**

**June 30** |   |   |   | **Six months ended****June 30,** |   |   | **Nov 29, 2004****(Inception) to****June 30** |       |
|-------------------------------------------------------|--------|-------------------------------------|--------|--------|--------|----------------------------------|--------|--------|-----------------------------------------------|------------|
|                                                  |   | **2008**                            |   |   |   | **2007**                         |   |   |                                          | **2008**   |   |   |   | **2007** |   |   |   | **2008** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                 |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| Net loss                                              | $      | (756,742                            | )      |   | $      | (1,048,662                       | )      |   | $                                             | (1,441,559 | ) | $ | (2,033,287 | ) |   | $ | (8,298,473 | ) |
| Items not involving cash:                             |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| Depreciation                                          |   | 11,389                              |   |   |   | 10,131                           |   |   |                                          | 22,614     |   |   | 19,172 |   |   |   | 85,929 |   |
| Stock-based compensation                              |   | 86,962                              |   |   |   | 318,428                          |   |   |                                          | 132,463    |   |   | 703,891 |   |   |   | 2,773,185 |   |
| Unrealized foreign exchange loss (gain)               |   | (4,516                              | )      |   |   | 25,834                           |   |   |                                          | 12,252     |   |   | 25,834 |   |   |   | 12,252 |   |
| Changes in non-cash working capital balances:         |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| Accounts receivable                                   |   | (4,744                              | )      |   |   | (67,051                          | )      |   |                                          | (22,804    | ) |   | (47,905 | ) |   |   | (52,940 | ) |
| Deposits                                              |   | —                             |   |   |   | 5,845                            |   |   |                                          | —    |   |   | 205,823 |   |   |   | (12,307 | ) |
| Prepaid expenses                                      |   | 11,260                              |   |   |   | 15,893                           |   |   |                                          | 19,984     |   |   | 19,890 |   |   |   | (307,460 | ) |
| Accounts payable                                      |   | (256,262                            | )      |   |   | 192,530                          |   |   |                                          | (209,291   | ) |   | 339,713 |   |   |   | 680,011 |   |
| Accrued liabilities                                   |   | 59,351                              |   |   |   | 57,543                           |   |   |                                          | 183,590    |   |   | 24,437 |   |   |   | 344,940 |   |
| Net cash (used in) provided by operating activities   |   | (853,302                            | )      |   |   | (489,509                         | )      |   |                                          | (1,302,751 | ) |   | (742,432 | ) |   |   | (4,774,863 | ) |
|                                                  |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                 |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| Deferred financing costs                              |   | —                             |   |   |   | (43,576                          | )      |   |                                          | —    |   |   | (43,576 | ) |   |   | (263,764 | ) |
| Bank indebtedness                                     |   | (3,559                              | )      |   |   | 473,839                          |   |   |                                          | (512,021   | ) |   | 470,190 |   |   |   | 7,813 |   |
| Due to related party                                  |   | 5,806,413                           |   |   |   | 92,002                           |   |   |                                          | 6,765,436  |   |   | 92,002 |   |   |   | 7,821,307 |   |
| Proceeds from issuance of common stock                |   | —                             |   |   |   | —                          |   |   |                                          | —    |   |   | — |   |   |   | 3,896,515 |   |
| Principal payment of capital lease obligation         |   | (59,625                             | )      |   |   | —                          |   |   |                                          | (59,625    | ) |   | (2,090 | ) |   |   | (65,450 | ) |
| Net cash (used in) provided by financing activities   |   | 5,743,229                           |   |   |   | 522,265                          |   |   |                                          | 6,193,790  |   |   | 516,526 |   |   |   | 11,396,421 |   |
|                                                  |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                 |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| Purchases of property under development and equipment |   | (234,711                            | )      |   |   | (35,930                          | )      |   |                                          | (244,711   | ) |   | (98,312 | ) |   |   | (1,235,902 | ) |
| Assets under capital lease                            |   | (4,638,712                          | )      |   |   | —                          |   |   |                                          | (4,638,712 | ) |   | (237,530 | ) |   |   | (5,348,384 | ) |
| Other assets                                          |   | —                             |   |   |   | —                          |   |   |                                          | —    |   |   | — |   |   |   | (5,506 | ) |
| Net cash (used in) provided by investing activities   |   | (4,873,423                          | )      |   |   | (35,930                          | )      |   |                                          | (4,883,423 | ) |   | (335,842 | ) |   |   | (6,589,792 | ) |
|                                                  |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| Effect of exchange rate changes on cash               |   | (225                                | )      |   |   | (8,182                           | )      |   |                                          | (361       | ) |   |   | (2,743 | ) |   |   | (14,889 | ) |
|                                                  |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |   |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS  |   | 16,279                              |   |   |   | (11,356                          | )      |   |                                          | 7,255      |   |   | (564,491 | ) |   |   | 16,877 |   |
|                                                  |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS:                            |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| Beginning of period                                   |   | 598                                 |   |   |   | 14,114                           |   |   |                                          | 9,622      |   |   | 567,249 |   |   |   | — |   |
| End of period                                         | $      | 16,877                              |   |   | $      | 2,758                            |   |   | $                                             | 16,877     |   | $ | 2,758 |   |   | $ | 16,877 |   |
|                                                  |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| SUPPLEMENTAL CASH FLOW INFORMATION                    |   |                                |   |   |   |                             |   |   |                                          |       |   |   |   |   |   |   |   |   |
| Assets acquired under capital lease                   | $      | —-                            |   |   | $      | 737,671                          |   |   | $                                             | —-   |   | $ | 1,213,017 |   |   | $ | 16,761,565 |   |
| Additions to property under development and equipment |   | 55,328                              |   |   |   | 201,549                          |   |   |                                          | 74,727     |   |   | 726,883 |   |   |   | 462,963 |   |
| Income taxes paid                                     |   | —-                            |   |   |   | —-                         |   |   |                                          | —-   |   |   |   | — |   |   |   | 353 |   |
| Interest paid                                         |   | 15,930                              |   |   |   | —-                         |   |   |                                          | 15,930     |   |   |   | —- |   |   |   | 17,088 |   |

 

See accompanying notes to unaudited consolidated interim financial statements

**F-4**

 

6

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **1.** | **OVERVIEW:** |
|--------|---------------|

 

The Company was incorporated as “Beaconsfield I, Inc.” in the State of Delaware on November 29, 2004, as a “blank check” company for the purpose of engaging in the potential future merger or acquisition of an unidentified target business.

 

On December 15, 2004, the Company issued 150,000 shares (pre-forward split) of its Common Stock for a total of $15 in cash. Additionally on that date, the Company issued 10,000,000 shares (pre-forward split) of its Common Stock, for a total of $50,000 in cash.

 

In July 2006, the Company engaged in a forward split of its Common Stock whereby it issued ten (10) shares of its Common Stock for every one (1) share then issued and outstanding. All references in these consolidated financial statements and notes to our issued and outstanding Common Stock are provided on a post-forward split basis, unless otherwise indicated.

 

In July 2006, the holders of a majority of the then issued and outstanding Common Stock approved an amendment to the Certificate of Incorporation wherein the Company’s name was changed to “Northern Ethanol, Inc.” to better reflect its current business plan. Northern Ethanol, Inc. is currently considered a development stage company.

 

The Company has two wholly-owned subsidiaries, Northern Ethanol, LLC, a New York limited liability company and Northern Ethanol (Canada) Inc., a Canadian corporation, which has three wholly-owned subsidiaries, Northern Ethanol (Barrie) Inc., Northern Ethanol (Sarnia) Inc. and Northern Ethanol Investments Inc., each of which is also a Canadian corporation.

 

| **2.** | **SIGNIFICANT ACCOUNTING POLICIES:** |
|--------|--------------------------------------|

 

|   | a) | Basis of presentation: |
|--------|----|------------------------|

 

Interim Financial Statements:

The accompanying interim consolidated financial statements of the Company as of June 30, 2008, for the three and six month periods ended June 30, 2008 and 2007 and for the period from November 29, 2004 (Inception) to June 30, 2008 have been prepared in accordance with United States accounting principles generally accepted for interim financial statement presentation and in accordance        with the rules and regulations of the United States Securities and Exchange Commission for small business users. Accordingly, these interim consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statement presentation. In the opinion of management, all adjustments necessary for a fair statement of the results of operations and financial position for        the interim period presented have been included. All such adjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results to be expected for a full year. This financial information should be read in conjunction with the consolidated financial statements and notes included in the Company’s Form 10-KSB for the year ended December 31, 2007. Changes in accounting policies adopted by the Company effective        January 1, 2008 are set out in note 2 n).

 

 

**F-5**

 

7

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **2.** | **SIGNIFICANT ACCOUNTING POLICIES (continued):** |
|--------|--------------------------------------------------|

 

Going concern:

There is substantial doubt about the Company’s ability to continue as a going concern. These consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will commence ethanol producing operations in the foreseeable future and accordingly will be able to realize its assets and discharge its liabilities in the normal course of        operations. The Company has no revenue, no earnings, and negative operating cash flows, and has financed its activities through bank borrowings, loans from related parties, capital lease arrangements and the issuance of shares. The Company’s ability to continue as a going concern is dependent on obtaining investment capital and achieving profitable operations. There can be no assurance that the Company will be successful in raising sufficient investment capital to commence ethanol        producing operations and to generate sufficient cash flows to continue as a going concern. These consolidated financial statements do not reflect the adjustments that might be necessary to the carrying amount of reported assets, liabilities and revenue and expenses and the balance sheet classification used if the Company were unable to commence ethanol producing operations in accordance with this assumption.

 

Consolidation:

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions are eliminated on consolidation.

 

|   | b) | Use of estimates: |
|--------|----|-------------------|

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the reported amounts of revenues and expenses and the disclosure of contingent liabilities. Actual results may differ from these        estimates.

 

|   | c) | Cash and cash equivalents: |
|--------|----|----------------------------|

 

Cash and cash equivalents consist of all highly-liquid investments with an original maturity of three months or less. Such investments are stated at cost plus accrued interest, which approximates market value.

 

|   | d) | Property under development and equipment: |
|--------|----|-------------------------------------------|

 

Computer equipment and software are recorded at cost and depreciated on a straight-line basis over their estimated useful life of three years.

 

Furniture and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful life of ten years.

 

Leasehold improvements are recorded at cost and depreciated on a straight-line basis over the shorter of the term of the lease and their estimated useful life.

 

 

 

**F-6**

 

8

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **2.** | **SIGNIFICANT ACCOUNTING POLICIES (continued):** |
|--------|--------------------------------------------------|

 

Property under development consists of engineering, site design, permitting, and other development costs related to preparation for the construction of ethanol production facilities.

 

Depreciation and amortization commences at the time when the assets are available for use in operations.

 

|   | e) | Leases: |
|--------|----|---------|

 

The Company follows the guidance in Statement of Financial Accounting Standard (“SFAS”) No. 13 “*Accounting for Leases*”, as amended, which requires the Company to evaluate the lease agreements it enters into to determine whether they represent operating or capital leases at the inception of the lease. The        application of this policy is described in notes 7 and 13.

 

|   | f) | Impairment of long-lived assets: |
|--------|----|----------------------------------|

 

Long-lived assets are reviewed for impairment at least annually or whenever events or changes in circumstance indicate that the carrying amount of the asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the long-lived asset. If the carrying amount of an asset exceeds        the estimated future cash flows from operations and residual value of the asset, an impairment charge is recognized for the amount that the carrying amount exceeds the fair value of the particular assets.

 

|   | g) | Capitalized interest: |
|--------|----|-----------------------|

 

In accordance with SFAS No. 34, the interest costs associated with the Company’s capital lease obligation are being capitalized to assets under capital lease until the Barrie plant is substantially complete and ready for the production of ethanol.

 

|   | h) | Deferred financing costs: |
|--------|----|---------------------------|

 

Deferred financing costs are costs and all related fees incurred to obtain debt financing and will be amortized as interest expense over the term of the related financing using the effective interest rate method.

 

|   | i) | Stock-based compensation: |
|--------|----|---------------------------|

 

Effective January 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) SFAS No. 123R, “*Share Based Payment*”. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.        That cost is recognized on a straight-line basis over the vesting period. That cost is measured based on the fair value of the equity or liability instruments issued using the Black-Scholes option pricing model.

 

 

 

**F-7**

 

9

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **2.** | **SIGNIFICANT ACCOUNTING POLICIES (continued):** |
|--------|--------------------------------------------------|

 

|   | j) | Foreign currency translation: |
|--------|----|-------------------------------|

 

The functional currency of the Company is United States dollars and the functional currency of its Canadian subsidiaries is Canadian dollars. The operations of the Canadian subsidiaries are translated into U.S. dollars in accordance with SFAS No. 52 “*Foreign Currency Translation*” as follows:

 

|   | (i)  | Assets and liabilities at the rate of exchange in effect at the balance sheet date; and |   |
|--------|------|-----------------------------------------------------------------------------------------|--------|
|   | (ii) | Revenue and expense items at the average rate of exchange prevailing during the period. |   |

 

Translation adjustments are included as a separate component of stockholders’ equity (deficiency) as accumulated other comprehensive income.

 

The Company and its subsidiaries translate foreign currency transactions into the Company’s functional currency at the exchange rate effective on the transaction date. Monetary items denominated in foreign currencies are translated into the functional currency at exchange rates in effect at the balance sheet date. Foreign exchange gains and losses are included in        income.

 

|   | k) | Income taxes: |
|--------|----|---------------|

 

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be        recovered or settled. A valuation allowance is provided when it is more likely than not that the full benefit of the deferred tax assets will not be realized. In June2006, the FASB issued FASB Interpretation No.48, “*Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No.109”*(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition        threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. FIN 48 was adopted by the Company effective January 1, 2007. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements or results of        operations.

 

|   | l) | Earnings (loss) per common share: |
|--------|----|-----------------------------------|

 

The Company computes net loss per common share using SFAS No. 128, “*Earnings Per Share*.” Basic loss per common share is computed based on the weighted average number of shares outstanding for the period. Diluted loss per share is computed by dividing net loss by the weighted average common shares outstanding assuming all        dilutive potential common shares were issued.

 

 

 

**F-8**

 

10

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **2.** | **SIGNIFICANT ACCOUNTING POLICIES (continued):** |
|--------|--------------------------------------------------|

 

|   | m) | Fair value of financial instruments: |
|--------|----|--------------------------------------|

 

The carrying value of cash and cash equivalents, bank indebtedness, accrued liabilities and accounts payable approximates fair value due to the short period of time to maturity. The carrying value of the obligation under capital lease approximates fair value as the discount rate of 12% in the capital lease approximates current market rates of interest available to the Company for the        same or similar debt instruments.

 

In February2006, the Financial Standards Board (“FASB”) issued SFAS No.155, “*Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No.133 and 140.*” SFAS No. 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be        accounted for as a whole on a fair value basis, at the holders’ election. SFAS No.155 also clarifies and amends certain other provisions of SFAS No.133 and 140. This statement is effective for all financial instruments acquired or issued in by the Company on or after January 1, 2007. The adoption SFAS No.155 did not have a material impact on the Company’s consolidated financial statements or results of operations.

 

|   | n) | Change in Accounting Policies: |
|--------|----|--------------------------------|

 

In September2006, the FASB issued SFAS No.157,*“Fair Value Measurements.”*SFAS No.157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No.157 requires companies to disclose the fair value of their financial instruments according to a        fair value hierarchy as defined in the standard. Additionally, companies are required to provide enhanced disclosure regarding financial instruments in one of the categories (level 3), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. The Company adopted SFAS No.157 effective January 1, 2008. The adoption of SFAS No.157 did not have a material impact on the Company’s consolidated financial statements or        results of operations.

 

In September2006, the FASB issued SFAS No.158, “*Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”*SFAS No.158 requires the recognition of the funded status of a defined benefit plan in the balance sheet; the recognition in other comprehensive income of gains or losses and prior service        costs or credits arising during the period but which are not included as components of periodic benefit cost; the measurement of defined benefit plan assets and obligations as of the balance sheet date; and disclosure of additional information about the effects on periodic benefit cost for the following fiscal year arising from delayed recognition in the current period. In addition, SFAS No.158 amends SFAS No.87, “Employers’ Accounting for Pensions,” and SFAS No.106,        “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” to include guidance regarding selection of assumed discount rates for use in measuring the benefit obligation. The recognition and disclosure requirements of SFAS No.158 were effective for the Company’s year ended December31, 2006. The measurement requirements are effective for fiscal years ending December 31, 2008. The adoption of SFAS No.158 did not have a material impact on the        Company’s consolidated financial statements or results of operations.

 

 

**F-9**

 

11

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **2.** | **SIGNIFICANT ACCOUNTING POLICIES (continued):** |
|--------|--------------------------------------------------|

 

In February 2007, the FASB issued SFAS No. 159, “*The Fair Value Option for Financial Assets and Financial Liabilities*” (“SFAS No. 159”). Under the provisions of SFAS No. 159, companies may choose to account for eligible financial instruments, warranties and insurance contracts at fair value on a        contract-by-contract basis. Changes in fair value will be recognized in earnings each reporting period. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company adopted the provisions of SFAS No. 159 effective January 1, 2008. The adoption SFAS No.159 did not have a material impact on the Company’s consolidated financial statements or results of operations.

 

|   | o) | Recent Accounting Pronouncements: |
|--------|----|-----------------------------------|

 

In December 2007, the FASB issued a revised standard, SFAS No. 141R*,*“*Business Combinations*” (“SFAS No. 141R”) on accounting for business combinations. The major changes to accounting for business combinations are summarized as follows:

 

|   | • | SFAS No. 141R requires that most identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business combination be recorded at “full fair value” |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | • | Most acquisition-related costs would be recognized as expenses as incurred |
|--------|--------|----------------------------------------------------------------------------|

 

|   | • | Obligations for contingent consideration would be measured and recognized at fair value at the acquisition date |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|

 

|   | • | Liabilities associated with restructuring or exit activities are recognized only if they meet the recognition criteria in SFAS No. 146, “*Accounting for Costs Associated with Exit or Disposal Activities*”, as of the acquisition date |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | • | An acquisition date gain is reflected for a “bargain purchase” |
|--------|--------|----------------------------------------------------------------------------|

 

|   | • | For step acquisitions, the acquirer re-measures its non-controlling equity investment in the acquiree at fair value as of the date control is obtained and recognizes any gain or loss in income |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | • | A number of other significant changes from the previous standard related to taxes and contingencies |
|--------|--------|-----------------------------------------------------------------------------------------------------|

 

The statement is effective for business combinations occurring in the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No.141R is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.

 

 

 

 

**F-10**

 

12

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **2.** | **SIGNIFICANT ACCOUNTING POLICIES (continued):** |
|--------|--------------------------------------------------|

 

In December 2007, the FASB issued a revised standard SFAS No. 160, “*Non-controlling Interests in Consolidated Financial Statements*” (“SFAS No. 160”), on accounting for non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements. This statement specifies        that non-controlling interests are to be treated as a separate component of equity, not as a liability or other item outside of equity. Because non-controlling interests are an element of equity, increases and decreases in the parent’s ownership interest that leave control intact are accounted for as capital transactions rather than as a step acquisition or dilution gains or losses. The carrying amount of the non-controlling interests is adjusted to reflect the change in ownership        interests, and any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity attributable to the controlling interest. This standard requires net income and comprehensive income to be displayed for both the controlling and the non-controlling interests. Additional required disclosures and reconciliations include a separate schedule that shows the effects of any transactions        with the non-controlling interests on the equity attributable to the controlling interest. The statement is effective for periods beginning on or after December 15, 2008. SFAS No. 160 will be applied prospectively to all non-controlling interests, including any that arose before the effective date. The adoption of SFAS No.160 is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.

 

In March2008, the FASB issued Statement of Financial Accounting Standards No.161, “*Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No.133*”(“SFAS No. 161”). This statement requires entities to provide greater transparency in derivative disclosures by        requiring qualitative disclosure about objectives and strategies for using derivatives and quantitative disclosures about fair value amounts of derivative instruments and gains and losses thereon. The statement is effective for periods beginning on or after November15, 2008. The adoption of SFAS No.161 is not expected to have a material impact on the Company’s consolidated financial statements or results of operations.

 

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “*The Hierarchy of Generally Accepted Accounting Principles*” (“SFAS No. 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles that are presented in conformity with        generally accepted accounting principles in the United States. The statement is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “*The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles*”. The adoption of SFAS No.162 is not expected to have a material impact on the Company’s        consolidated financial statements or results of operations.

 

 

| **3.** | **ACCOUNTS RECEIVABLE:** |
|--------|--------------------------|

 

|                                                          | **June 30, 2008** |   | **December 31, 2007** |
|---------------------------------------------------------------|-------------------|--------|-----------------------|
|                                                          |              |   |                  |   |   |
| Canadian federal government Goods and Services tax receivable | $                 | 51,817 |                  | $ | 30,136 |

 

 

**F-11**

 

13

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **4.** | **DEPOSITS:** |
|--------|---------------|

 

|                                                                               |   | **June 30, 2008** |   | **December 31, 2007** |
|------------------------------------------------------------------------------------|--------|-------------------|--------|-----------------------|
|                                                                               |   |              |   |                  |   |   |
| Refundable deposit on non-binding letter of intent for Sarnia land purchase        |   | $                 | 9,807  |                  | $ | 10,088 |
| Refundable deposit on head office lease utilities                                  |   |              | 1,167  |                  |   | 1,200 |
| Refundable deposit on non-binding letter of intent for Sarnia lease                |   |              | 980    |                  |   | 1,009 |
| Refundable deposit on non-binding letter of intent for Niagara Falls land purchase |   |              | 10     |                  |   | 10 |
|                                                                               |   | $                 | 11,964 |                  | $ | 12,307 |

 

| **5.** | **PREPAID EXPENSES:** |
|--------|-----------------------|

 

|                                                     |   | **June 30, 2008** |    | **December 31, 2007** |
|----------------------------------------------------------|--------|-------------------|---------|-----------------------|
|                                                     |   |              |    |                  |   |   |
| Prepaid rent for Barrie and head office leases (note 13) |   | $                 | 289,668 |                  | $ | 297,966 |
| Prepaid insurance                                        |   |              | 2,711   |                  |   | 21,452 |
| Prepaid other                                            |   |              | 6,295   |                  |   | 8,026 |
|                                                     |   | $                 | 298,674 |                  | $ | 327,444 |

 

| **6.** | **PROPERTY UNDER DEVELOPMENT AND EQUIPMENT:** |
|--------|-----------------------------------------------|

 

| **June 30, 2008**               |   | **Cost** |      | **Accumulated****Depreciation** |   | **Net book****Value** |   |
|---------------------------------|--------|----------|-----------|---------------------------------|--------|-----------------------|--------|
|                            |   |     |      |                            |   |                  |   |   |   |   |
| Properties under development    |   | $        | 1,487,994 |                            | $      | —               |   | $ | 1,487,994 |   |
| Computer equipment and software |   |     | 52,091    |                            |   | 33,437                |   |   | 18,654 |   |
| Furniture and equipment         |   |     | 193,780   |                            |   | 40,508                |   |   | 153,272 |   |
| Leasehold improvements          |   |     | 41,890    |                            |   | 16,383                |   |   | 25,507 |   |
|                            |   | $        | 1,775,755 |                            | **$**  | 90,328                |   | $ | 1,685,427 |   |

 

 

| **December 31, 2007**           |   | **Cost** |      | **Accumulated****Depreciation** |   | **Net book****Value** |   |
|---------------------------------|--------|----------|-----------|---------------------------------|--------|-----------------------|--------|
|                            |   |     |      |                            |   |                  |   |   |   |   |
| Properties under development    |   | $        | 1,203,619 |                            | **$**  | —               |   | $ | 1,203,619 |   |
| Computer equipment and software |   |     | 50,784    |                            |   | 25,697                |   |   | 25,087 |   |
| Furniture and equipment         |   |     | 199,331   |                            |   | 31,702                |   |   | 167,629 |   |
| Leasehold improvements          |   |     | 43,090    |                            |   | 12,543                |   |   | 30,547 |   |
|                            |   | $        | 1,496,824 |                            | $      | 69,942                |   | $ | 1,426,882 |   |

 

 

**F-12**

 

14

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **6.** | **PROPERTY UNDER DEVELOPMENT AND EQUIPMENT (continued):** |
|--------|-----------------------------------------------------------|

 

During the six months ended June 30, 2008, the Company capitalized $249,707 of engineering and site design costs and $67,009 of legal advisory costs to the cost of property under development at the Barrie, Ontario, Sarnia, Ontario and Niagara Falls, New York locations that are being developed into ethanol production facilities. The Company will not capitalize costs to property under        development beyond what is recoverable from operations. Depreciation of property under development will commence once the property has been determined to be available for its intended use. The assets will be depreciated over their estimated useful life.

 

| **7.** | **ASSETS UNDER CAPITAL LEASE:** |
|--------|---------------------------------|

 

|  

**June 30, 2008**  |   | **Cost** |       | **Accumulated****Depreciation** |   | **Net book****Value** |   |
|----------------------------|--------|----------|------------|---------------------------------|--------|-----------------------|--------|
| Assets under capital lease |   | $        | 23,718,712 |                            | $      | —               |   | $ | 23,718,712 |   |
|                            |        |          |            |                                 |        |                       |        |  |  |  |

 

| **December 31, 2007**      |   | **Cost** |       | **Accumulated****Depreciation** |   | **Net book****Value** |   |
|----------------------------|--------|----------|------------|---------------------------------|--------|-----------------------|--------|
| Assets under capital lease |   | $        | 22,749,105 |                            | $      | —               |   | $ | 22,749,105 |   |
|                            |        |          |            |                                 |        |                       |        |  |  |  |

 

Assets under capital lease consist of land and buildings located in Barrie, Ontario to be developed for ethanol producing operations. Management determined that the fair value of the land at the Barrie site was less than 25% of the fair value of the leased property at the inception of the lease and therefore considered the land and building as a single unit for purposes of determining        whether the lease should be classified as a capital lease in accordance with SFAS No. 13. Management concluded that the present value of the minimum lease payments, excluding any executory costs to be paid by the lessor, equals or exceeded 90% of the fair value of the leased property. The Company used its incremental borrowing rate of 12% to measure the present value of the minimum lease payments.

 

The buildings under capital lease at the Barrie site cannot currently be used to carry out the business of the Company without extensive renovation and construction activities. As such, management considers that the assets are not available for their intended use. Specifically, management expects to make substantial renovations to portions of the existing building to provide the space        needed to construct an ethanol processing facility. The portion of the building that will eventually serve as the administrative offices requires extensive renovation in order to bring it up to standard for occupation. Management’s initial examination of the infrastructure items has indicated that substantial additional expenditures will be required to ensure that rail lines are serviceable, and in correct locations, and that the gas and water lines can be expanded to provide the        required capacity for the plant operations.

 

During the six months ended June 30, 2008, the Company capitalized interest costs of $1,103,631 lessor’s operating cost charges of $304,557 and property tax of $217,541 to the cost of the assets under capital lease at the Barrie property that is being developed into an ethanol production facility. The Company will not capitalize costs to assets under capital lease beyond what is        recoverable from operations. Depreciation of assets under capital lease will commence once they are determined to be available for their intended use. The assets will be depreciated over the lesser of their estimated useful life or the remaining lease term.

 

**F-13**

 

15

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **8.** | **DEFERRED FINANCING COSTS:** |
|--------|-------------------------------|

 

|                                                          |   | **June 30, 2008** |    | **December 31, 2007** |
|---------------------------------------------------------------|--------|-------------------|---------|-----------------------|
|                                                          |   |              |    |                  |   |   |
| Non-refundable retainer paid to WestLB AG (note 15 c)         |   | $                 | 200,000 |                  | $ | 200,000 |
| Deferred financing costs for WestLB AG commitment (note 15 c) |   |              | 145,121 |                  |   | 141,883 |
|                                                          |   | $                 | 345,121 |                  | $ | 341,883 |

 

| **9.** | **BANK INDEBTEDNESS:** |
|--------|------------------------|

 

|                                        |   | **June 30, 2008** |    | **December 31, 2007** |
|---------------------------------------------|--------|-------------------|---------|-----------------------|
|                                        |   |              |    |                  |   |   |
| Indebtedness under Line of Credit Agreement |   | $                 | — |                  | $ | 511,579 |
| Indebtedness under corporate credit card    |   |              | 7,588   |                  |   | 8,255 |
|                                        |   | $                 | 7,588   |                  | $ | 519,834 |

 

On March 30, 2007, the Company entered into a Line of Credit Agreement with Union Capital Trust, Nassau, Bahamas (“Union”) wherein Union agreed to provide a $6 million unsecured line of credit. Interest accrues at the rate of twelve percent (12% per annum) and is payable monthly. Principal of $469,192 and interest of $57,524 was repaid at the maturity of the Line of Credit        Agreement on March 31, 2008 with funds borrowed under the Company’s line of credit with LDR Properties Inc. (note 10).

 

| **10.** | **RELATED PARTY BALANCES AND TRANSACTIONS:** |
|---------|----------------------------------------------|

 

|                                            |   | **June 30, 2008** |      | **December 31, 2007** |
|-------------------------------------------------|--------|-------------------|-----------|-----------------------|
|                                            |   |              |      |                  |   |   |
| Indebtedness under LDR Line of Credit Agreement |   | $                 | 7,791,900 |                  | $ | 1,055,871 |

 

On July 9, 2007, the Company entered into a Line of Credit Agreement with Aurora Beverage Corporation (“Aurora”), wherein Aurora agreed to provide a $1 million unsecured line of credit. Interest accrues at the rate of eight percent (8% per annum) and is payable monthly. Principal and unpaid interest was due on or before July 8, 2008. Effective December 14, 2007, the Line        of Credit Agreement with Aurora was amended (the “First Amendment”) to increase the maximum principal amount of the loan to $2 million. On March 7, 2008, the Company entered into an amendment (the “Second Amendment”) wherein as a result of a reorganization, the lender was changed to LDR Properties Inc. (“LDR”), the line of credit was increased from $2,000,000 to $8,000,000 and the due date for this line of credit was amended from July 8, 2008, to July        8, 2009. Effective June 30, 2008, the Line of Credit Agreement with LDR was amended (the “Third Amendment”) to increase the maximum principal amount of the loan to $12 million. The principal and interest outstanding on this line of credit is now due on July 8, 2009. The balance of the terms of the initial Line of Credit Agreement remains as originally stated. As of June 30, 2008, a principal amount of $7,791,900 was outstanding under this LDR line of credit and interest of        $96,412 was accrued as an accrued liability. All draws on the LDR line of credit are subject to review and approval of the lender, who has not denied any of the Company’s requests to date.

 

**F-14**

 

16

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **10.** | **RELATED PARTY TRANSACTIONS (continued):** |
|---------|---------------------------------------------|

 

Aurora Beverage Corporation and LDR Properties Inc, both Ontario corporations, are companies owned by the same individual that owns Fercan Developments Inc. (“Fercan”). Fercan owns 10,000,000 shares of the Company’s outstanding Common Stock or 9.6% interest.

 

During the six months ended June 30, 2008, the Company received advances of $482,005 from the Company’s Chairman, President and Chief Executive Officer that were repaid on June 30, 2008 from advances under the LDR line of credit. The Company has not reimbursed the Company’s Chairman, President and Chief Executive Officer for expenses in the amount of $123,309 incurred on        behalf of the Company. This amount is included in accounts payable at June 30, 2008.

 

The trustee of the Union Capital Trust Line of Credit (note 9) is Ronald Wyles. Ronald Wyles owns 10,000,000 shares of the Company’s outstanding Common Stock or 9.6% interest.

 

In April 2006, the Company, through a Canadian subsidiary, entered into a lease for its head office space, as further discussed in note 13. Also in April 2006, the Company, through another Canadian subsidiary, entered into the Barrie lease for property to be used as an ethanol processing facility, as further discussed in note 13. These leases were entered into with Fercan. Lease        payments due to Fercan of $3,366,522 that were included in accounts payable at December 31, 2007 and lease payments of $1,824,654 for the six months ended June 30, 2008 were paid on June 30, 2008 from advances under the LDR line of credit.

 

In September 2006, the Company deposited $200,000 in trust with Aurora, to hold storage tanks for possible use in ethanol production. This refundable deposit gave the Company a right of first refusal to purchase the tanks for a period of 180 days at a price to be negotiated. Following a decision not to utilize these storage tanks, the Company was refunded this deposit in February        2007.

 

During the six months ended June 30, 2008, the Company incurred legal fees and expenses of $21,058 (2007 - $34,471) with Andrew I. Telsey, P.C. for corporate and securities counsel. The amount due to Andrew I. Telsey, P.C of $67,670 was included in accounts payable at June 30, 2008. Andrew I. Telsey, the Company’s Corporate Secretary and one of its directors, is the sole        shareholder of Andrew I. Telsey, P.C.

 

During the six months ended June 30, 2008, the Company incurred consulting fees of $44,131 (2007 - $39,652) with Frank Klees. That amount was included in accrued liabilities at June 30, 2008 and an additional amount of $46,778 due to Frank Klees was included in accounts payable at June 30, 2008. Frank Klees is one of the Company’s directors.

 

During the six months ended June 30, 2008, the Company purchased $nil (2007 - $1,857) in furniture and design services from Dragonfly Design Group, a company owned by the adult daughter of the Company’s Chairman, President and Chief Executive Officer.

 

All transactions with related parties are at arm’s length.

 

 

 

**F-15**

 

17

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **11.** | **STOCK OPTIONS:** |
|---------|--------------------|

 

On April 4, 2006, the Company approved the 2006 Stock Plan (the “Plan”) and reserved 8,000,000 shares of Common Stock for issuance under the Plan.

 

A summary of the status of Company’s stock option plan as of June 30, 2008 and of changes in options outstanding under the Company’s plan during the six month period ended June 30, 2008 is as follows:

 

|                                               |   | **Number of Shares** |   |   |   | **Weighted Average Exercise Price** |   |
|----------------------------------------------------|--------|----------------------|--------|--------|--------|-------------------------------------|--------|
| Outstanding at June 30, 2008 and December 31, 2007 |   | 5,090,000            |   |   |   | $                                   | 1.00   |   |
|                                               |   |                 |   |   |   |                                |   |   |
| Options exercisable at June 30, 2008               |   | 3,894,909            |   |   |   | $                                   | 1.00   |   |
| Non-vested options at June 30, 2008                |   | 1,195,091            |   |   |   | $                                   | 1.00   |   |
|                                                    |        |                      |        |        |        |                                     |        |  |  |

 

Stock options outstanding as of June30, 2008, were as follows:

 

|                               |   | **Options Outstanding** |      | **Options Exercisable**                            |   |
|------------------------------------|--------|-------------------------|-----------|----------------------------------------------------|--------|
|  

 

**Exercise Price** |   | **Number Outstanding**  |      | **Weighted Average Remaining****Contractual Life** |   | **Weighted-Average****Exercise****Price** |   | **Number****Exercisable** |   | **Weighted****Average****Exercise****Price** |   |
| $                                  | 1.00   |                    | 5,090,000 |                                               | 3.21   |   | $ | 1.00 |   | 3,894,909 |   | $ | 1.00 |   |
|                                    |        |                         |           |                                                    |        |  |  |  |  |  |  |  |  |  |

 

The fair value of each option granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

 

| Risk-free interest rate                                                                     |   | 4.2% to 5.1 | %      |
|---------------------------------------------------------------------------------------------|--------|-------------|--------|
| Volatility factor of the future expected market price of the Company’s

common shares |   | 86.6        | %      |
| Weighted average expected life in years                                                     |   | 5.0         |   |
| Weighted average forfeiture rate                                                            |   | 3.2         | %      |
| Expected dividends                                                                          |   | None        |   |

 

The fair value of the options granted as determined above was $3,387,382, of which $132,463 was expensed during the six month period ended June 30, 2008 (June 30, 2007 – $703,891). The weighted average fair value per share for the options granted above was $0.66.

 

 

 

 

**F-16**

 

18

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **12.** | **CAPITAL STOCK:** |
|---------|--------------------|

 

Holders of shares of Common Stock are entitled to cast one vote for each share held at all stockholders’ meetings for all purposes, including the election of directors. The Common Stock does not have cumulative voting rights.

 

The preferred stock of the Company shall be issued by the Board of Directors of the Company in one or more classes or one or more series within any class, and such classes or series shall have such voting powers, full or limited or no voting powers, and such designations, preferences, limitations or restrictions as the Board of Directors of the Company may determine, from        time-to-time.

 

Holders of stock of any class shall not be entitled as a matter of right to subscribe for or purchase or receive any part of any new or additional issue of shares of stock of any class, or of securities convertible into shares of stock of any class, whether now hereafter authorized or whether issued for money, for consideration other than money, or by way of dividend.

 

| **13.** | **LEASE AGREEMENTS:** |
|---------|-----------------------|

 

On April 20, 2006, the Company entered into a lease agreement through its wholly-owned subsidiary, Northern Ethanol (Barrie) Inc, for a 25 year lease, with two ten-year optional renewal periods on the same terms and conditions and at market rates for similar properties in the area at renewal, on an industrial property located in Barrie, Ontario, Canada, (the “Barrie        Lease”), on which it intends to construct an ethanol processing facility.

 

The Company also entered into a five year lease on April 20, 2006 through its wholly-owned subsidiary, Northern Ethanol (Canada) Inc., for office premises located in Toronto, Ontario, Canada to be used for its head office (the “Head Office Lease”). The terms of the office lease at the Toronto location require it to be accounted for as an operating lease.

 

The terms of the leases require the following minimum payments:

 

|  

**Fiscal Year**                  |   |   | **Barrie Lease** |       |   | **Head Office****Lease** |   |    | **Total** |   |
|------------------------------------------|--------|--------|------------------|------------|--------|--------------------------|--------|---------|-----------|--------|
| Balance of 2008                          |   |   | $                | 1,113,074  |   |                     | $      | 88,261  |      |   | $ | 1,201,335 |   |
| 2009                                     |   |   |             | 2,226,149  |   |                     |   | 176,523 |      |   |   | 2,402,672 |   |
| 2010                                     |   |   |             | 2,226,149  |   |                     |   | 176,523 |      |   |   | 2,402,672 |   |
| 2011                                     |   |   |             | 2,226,149  |   |                     |   | 73,551  |      |   |   | 2,299,700 |   |
| 2012                                     |   |   |             | 2,226,149  |   |                     |   | — |      |   |   | 2,226,149 |   |
| Thereafter                               |   |   |             | 47,007,373 |   |                     |   | — |      |   |   | 47,007,373 |   |
| Total minimum lease payments             |   |   | $                | 57,025,043 |   |                     | $      | 514,858 |      |   | $ | 57,539,901 |   |
| Less amount representing interest of 12% |   |   |             | 38,733,813 |   |                     |   |    |      |   |   |   |   |
|                                     |   |   |             | 18,291,230 |   |                     |   |    |      |   |   |   |   |
| Less current portion                     |   |   |             | 32,972     |   |                     |   |    |      |   |   |   |   |
|                                     |   |   | $                | 18,258,258 |   |                     |   |    |      |   |   |   |   |
|                                          |        |        |                  |            |        |                          |        |         |           |        |  |  |  |  |  |

 

**F-17**

 

19

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **13.** | **LEASE AGREEMENTS (continued):** |
|---------|-----------------------------------|

 

The Barrie lease payments are due on a monthly basis starting in November 2006. Upon commissioning of the ethanol facility at the Barrie location, the carrying value of the assets under capital lease will be amortized on a straight line basis over the period remaining in the 25 year term. The interest cost implicit in the capital lease obligation will be recognized at the 12% rate        implicit in the lease, and will be calculated on a monthly basis on the balance outstanding at each month end. Since the lease payments are in Canadian dollars, the actual amortization and interest cost reflected in the account will vary as the exchange rate changes.

 

The lease requires total payments of C$58,148,437 ($57,025,043) over the remaining term of the lease, of which C$39,496,870 ($38,733,813) is interest and C$18,651,567 ($18,291,230) is the repayment of the capital lease principal amount. The capital lease principal will be paid down by C$33,621 ($32,972) as a result of monthly lease payments that will be made over the next        year.

 

During the three-month period ended June 30, 2008, the outstanding monthly lease payments under the Barrie lease totaling C$4,703,334 ($4,638,712) and under the Head Office lease totaling C$195,000 ($192,246) that had been previously deferred under agreement with the lessor from February 2007 and June 2007 respectively, were paid.

 

| **14.** | **INCOME TAXES:** |
|---------|-------------------|

 

The Company has incurred losses resulting from start-up costs. A valuation allowance has been recorded to fully offset any deferred tax asset because the future realization of the related income tax benefits is uncertain.

 

| **15.** | **COMMITMENTS:** |
|---------|------------------|

 

|   | a) | Effective July 24, 2006, the Company entered into a five-year Project Development Agreement with Delta-T Corporation, Williamsburg, Virginia (“Delta”), wherein Delta agreed to provide professional advice, business and technical information, design and engineering and related services to assist in assembling all of the information, permits,                        agreements and resources necessary for the construction of an ethanol plant having a production capacity of 108 million gallons per year in Barrie, Ontario, Canada. Delta was paid $100,000 in advance for their future services and the non-refundable amount was capitalized to property under development. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In September 2006, the Company entered into a similar agreement with Delta relating to the construction of an ethanol plant having a production capacity of 108 million gallons per year in Sarnia, Ontario, Canada. Delta was paid an initial amount of $70,000 and that non-refundable amount was recorded as a prepaid expense at December 31, 2006 and then reclassified and capitalized to        property under development on July 30, 2007 with the execution of the Agreement of Purchase and Sale with LANXESS Inc. described in note 15 d). The remaining balance of $30,000 due to Delta will be paid upon issuance of an air permit by the Province of Ontario. No further amounts are payable under the terms of the Delta agreements. The relationship between Delta and the Company is exclusive during the five-year term of the Agreement whereby the Company agreed to use its best efforts to        enter into an engineering procurement and construction contract or a technology agreement with Delta at these locations and if it fails to do so, to give Delta a first right of refusal for 60 days to assume any agreements made with other ethanol plant technology vendors.

 

**F-18**

 

20

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **15.** | **COMMITMENTS (continued):** |
|---------|------------------------------|

 

|   | b) | On August 18, 2006, the Company entered an Agreement for Procurement and Merchandizing Services with Parrish & Heimbecker, Ltd (“P&H”), wherein P&H shall provide the Company with a commodity and currency hedging system in order to protect the Company from the risk of currency and raw material price fluctuations. In addition,                        P&H will source all the corn required for the operation of the Company’s planned plants in Barrie and Sarnia, Ontario at the best possible prices and in a pattern that meets the plants’ processing requirements. P&H will also manage the sale of the Company’s dried distiller grain by-product. The Company will pay P&H C$1.00 per metric tonne of corn procured and C$1.00 per metric tonne of dried distiller grain sold for its Barrie and Sarnia                        operations. There are no minimum purchase quantities to P&H. The term of the Agreement is five years. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | c) | Effective December 13, 2006, the Company executed an engagement letter and indicative term sheets with WestLB AG (“WestLB”), whereby WestLB has conditionally agreed to provide arrangement, placement and underwriting services on senior debt and subordinate debt financing for up to 75% of the construction costs (to a maximum of approximately                        $365 million) of the Company’s Barrie and Sarnia facilities on a “best efforts” basis. The term “best efforts” means that WestLB believes that they can syndicate the debt financing the Company requires but that there is no guarantee that they will be successful or that the terms will be as indicated in their term sheets until they market the transaction and receive firm commitments from a syndicate of lenders for the funds required on                        acceptable terms to the Company. Among other things, the provision of the 75% financing in accordance with the engagement letter and the indicative term sheets is conditional on the Company obtaining subordinate debt or equity investment for the remaining 25% of construction costs. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The WestLB indicative term sheets offer first priority senior secured construction and term financing for up to 60% of the total capital requirements of plant construction and for working capital for a total term of up to 7.5 years and subordinated secured construction and term financing for up to 15% of the total capital requirements of plant construction for a total term of up to        eight years. Following conversion of the senior construction loan to a senior term loan, the loan amount is to be repaid in equal quarterly installments over six years. Surplus cash as defined by debt service covenant is to be swept to accelerate the repayment of the senior term loan and to repay the subordinated term loan.

 

The Company paid a non-refundable retainer deposit of $200,000 to WestLB on execution of the engagement letter and indicative term sheets to be used towards West LB’s costs and expenses in connection with financing. The Company will also pay WestLB’s costs and expenses in connection with the financing. During the six months ended June 30, 2008, the Company incurred $4,229        towards WestLB’s costs and expenses. This payment has been recorded as a deferred financing cost at June 30, 2008. In the event that the WestLB engagement is terminated by the Company and it enters into a similar debt financing with another lender within 12 months of terminating WestLB, the Company will pay WestLB a termination fee of $10,000,000. If the financing contemplated in the engagement letter and indicative term sheets is finalized with WestLB, the Company will pay to        WestLB a structuring and arrangement fee of the greater of $5,000,000 or 2% of the principal amount of the senior financing and $5,000,000 or 5% of the principal amount of the subordinated financing. In addition, the Company will pay a fee to market the senior and subordinate loans of 1% of the principal amount of each. The interest rate on the senior financing will be at LIBOR plus an anticipated spread of 325 to 350 basis points.

 

**F-19**

 

21

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **15.** | **COMMITMENTS (continued):** |
|---------|------------------------------|

 

Until the senior loan has been fully drawn, the Company shall pay a commitment fee of 0.50% on the unutilized portion. The interest rate on the subordinate financing will be at LIBOR plus an anticipated spread of 1000 basis points. As the subordinate financing will be fully drawn on closing there will be no commitment fees applicable on that facility. Other covenants, representations        and warranties will form part of the final documentation on closing of the loan agreement.

 

|   | d) | On July 30, 2007 and as amended on June 26, 2008, the Company entered into an Agreement of Purchase and Sale with LANXESS Inc. (“LANXESS”) wherein LANXESS agreed to sell approximately 30 acres of land located in Sarnia, Ontario to the Company for C$450,000 ($441,306) by March 31, 2009, at the latest. The Agreement is conditional upon the                        Company’s satisfaction with its physical inspection of the land, zoning and permitting, the Company entering into an Engineering, Procurement and Construction contract for the construction of an ethanol plant, the Company obtaining financing for the land purchase and plant construction and the Company and LANXESS entering into an agreement with TransAlta Energy Corporation (“TransAlta”) in respect of relief for LANXESS’s obligations under its                        steam supply contract with TransAlta. If the Company’s closing conditions are waived, in addition to the payment of the land purchase price of C$450,000 ($441,306), it will pay LANXESS a non-refundable amount of C$100,000 ($98,068) immediately, C$325,000 ($318,721) when the construction of the ethanol plant begins and C$325,000 ($318,721) when the ethanol plant commences operation for a total of C$750,000 ($735,510) as compensation for LANXESS’s costs to                        re-engineer existing infrastructure presently located on the land. If after closing of the purchase, the Company has not commenced construction of the ethanol plant under an Engineering, Procurement and Construction contract by June 30, 2009, LANXESS has the option to reacquire the land for C$450,000 ($441,306). The Company paid a refundable interest bearing deposit amount of C$10,000 ($9,807) on execution of the Agreement. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | e) | On December 18, 2007 and as first amended on March 14, 2008 and as second amended on May 16, 2008, the Company entered into a Purchase and Sale Agreement with Praxair Inc. (“Praxair”), to acquire approximately 70 acres of land located in Niagara Falls, NY. The cost of this property is $5,000,010, payable as follows: (i) a refundable payment                        of $10 on execution of the Agreement; (ii) $100,000 to be paid within ten (10) days after receipt of a fully executed Brownfield Site Cleanup Agreement by and between the Company and the Commission of the New York State Department of Environmental Conservation, (iii) the sum of Four Million Nine Hundred Thousand ($4,900,000) on the date that funding is available to the Company under all agreements related to the financing of the construction of an ethanol production                        facility at this location. The Agreement is conditional upon the Company’s satisfaction with its physical inspection of the land, the environmental test data necessary to qualify for the New York State Brownfield Cleanup Program Governmental Incentive Program, the zoning and permitting for use as an ethanol production facility and the Company obtaining financing for the land purchase and plant construction. If the Company terminates the Agreement due to failure to                        have these conditions satisfied then it will receive a refund of its deposits together with any interest thereon. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

 

**F-20**

 

22

 

 

----

**NORTHERNETHANOL,INC.**

*(A DEVELOPMENT STAGE COMPANY)*

**(Formerly BEACONSFIELD I, INC.)**

 

**NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS**

 

| **15.** | **COMMITMENTS (continued):** |
|---------|------------------------------|

 

|   | f) | On March 12, 2008, the Company entered into a term sheet with SK Engineering & Construction Co. Ltd. (“SK E&C”) for the development of an engineering, procurement and construction (“EPC”) contract for its proposed ethanol plant to be located in Sarnia, Ontario, Canada. The term sheet provides that SK E&C will deliver                        an EPC contract price within 51⁄2 months (October 2008) of the execution of a Phase 2 Project Development Agreement with Delta (note 15 g)) whereby Delta will provide a basic process engineering package to allow SK E&C to develop an EPC contact price. If that price is acceptable, the Company expects to execute the EPC contract within 30 days and proceed to close financing and begin construction at the Sarnia site within 30 days thereafter. In the event that the                        Company does not execute an EPC contract with SK E&C, it will be required to pay a cancellation fee of $300,000. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | g) | Effective May 5, 2008, the Company executed a Phase 2 Project Development Agreement (“Phase 2 Agreement”) with Delta for the Company’s proposed ethanol plant to be located in Sarnia, Ontario, Canada on the payment of a $200,000 non-refundable fee. Under this Phase 2 Agreement, Delta will provide a preliminary site layout, a preliminary                        mass and energy balance and a preliminary process flow diagram for the proposed plant, as well as process emissions data to assist with environmental permitting, system design specifications and a basic process engineering package suitable for estimating construction cost. A further non-refundable fee of $200,000 shall be paid to Delta on delivery of the basic process engineering package. The Company will also reimburse Delta for all travel and related expenses incurred                        in connection with this Phase 2 Agreement. Delta’s sole remedy in the event the Phase 2 Agreement is breached by the Company is limited to the non-refundable fees of $400,000. The relationship between Delta and the Company is exclusive during the five-year term of the Phase 2 Agreement whereby the Company has agreed to use its best efforts to enter into an engineering procurement and construction contract or a technology agreement with Delta at the Sarnia location                        and if it fails to do so, to give Delta a first right of refusal for 60 days to assume any agreement made with another ethanol plant technology vendor. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **16.** | **CONTINGENCY:** |
|---------|------------------|

 

On December 21, 2007, the Company received a Notice of Application (“Application”) between North American (Park Place) Corporation (“Applicant”) and Fercan Developments Inc., Northern Ethanol (Barrie) Inc., Northern Ethanol (Canada) Inc. and the City of Barrie (“Respondents”), applying for a declaration that the zoning of the property at 1 Big Bay        Point Road, Barrie, Ontario does not permit the property to be used as an ethanol production plant, for a permanent injunction prohibiting the property from being used as an ethanol production plant and for the costs of the Application to be paid by the Respondents. The Application is scheduled to be heard before a judge of the Ontario Superior Court of Justice on October 10, 2008.

 

The Company believes that the current zoning for the property does permit the production of ethanol and the possibility of the Applicant’s claim being successful is remote. The Company intends to vigorously pursue its defense.

 

 

**F-21**

23

 

 

----

| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF** |
|-------------|---------------------------------------------------|

|   | **FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|--------|---------------------------------------------------|

 

          *The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we        caution readers regarding certain forward looking statements in the following discussion and elsewhere in this Report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and        assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on, our behalf. We disclaim any obligation to update        forward-looking statements. You should carefully consider all of the risks and all other information contained in or incorporated by reference in this report and in our filings with the SEC. These risks are not the only ones we face. Additional risks and uncertainties not presently known to us, or which we currently consider immaterial, also may adversely affect us. If any of these risks actually occur, our business, financial condition and results of operations could be materially and        adversely affected.*

 

**OVERVIEW**

We were incorporated as “Beaconsfield I, Inc.” in the State of Delaware on November 29, 2004, as a “blank check” companyfor the purpose of engaging in the potential future merger or acquisition of an unidentified target business.

 

On December 15, 2004, we issued 150,000 shares (pre-forward split) of our Common Stock for a total of $15 in cash. Additionally on that date, we issued 10,000,000 shares (pre-forward split) of our Common Stock, for a total of $50,000 in cash.

 

In July 2006, we engaged in a forward split of our Common Stock whereby we issued ten (10) shares of our Common Stock for every one (1) share then issued and outstanding. Also in July 2006, the holders of a majority of our then issued and outstanding Common Stock approved an amendment to our Certificate of Incorporation wherein we did change our name to “Northern Ethanol,        Inc.” to better reflect our current business plan that is described under “PLANOFOPERATION” below. We are currently considered a “development stage” company.

 

We have two wholly-owned subsidiaries, Northern Ethanol, LLC, a New York limited liability company and Northern Ethanol (Canada) Inc., a Canadian corporation, which has three wholly-owned subsidiaries, Northern Ethanol (Barrie) Inc., Northern Ethanol (Sarnia) Inc. and Northern Ethanol Investments Inc., each of which is also a Canadian corporation.

 

**RESULTSOFOPERATIONS**

 

*Comparison of Results of Operations for the three months ended June 30, 2008 and 2007*

 

|   | During the three-month periods ended June 30, 2008 and 2007, we did not generate any revenues. |
|--------|------------------------------------------------------------------------------------------------|

 

 

24

 

 

----

During the three-month period ended June 30, 2008, we incurred costs and expenses totaling $756,742, including $417,858 in salaries and benefits, $236,997 in general and administrative expense, $48,557 in occupancy costs, a foreign exchange gain of $4,925, $11,389 in depreciation expense and $46,866 in interest expense.

 

The general and administrative expense of $236,997 included legal and accounting fees of $81,863, consulting fees of $52,277, travel related costs of $42,418 and other miscellaneous costs totaling $60,439. Occupancy costs of $48,557 are the costs of rent, utilities, insurance and maintenance for our head office location that we began leasing on April 20, 2006. The foreign exchange gain        of $4,925 occurred due to the impact of the weakening of the US$ dollar against the C$ dollar during the period on the C$ dollar expenses of our Canadian subsidiaries. Net interest costs of $46,866 arose on the LDR Properties Inc. (“LDR”) line of credit and on advances from our Chairman, President and Chief Executive Officer that were repaid on June 30, 2008. The interest rate on the LDR line of credit and the advances from our Chairman, President and Chief Executive Officer        the rate is 8% per annum. Interest amounts of $39,128 and $7,466 were accrued on funds borrowed from these financing sources respectively in the current quarter.

 

During the three-month period ended June 30, 2007, our total expenses were $1,048,662, including $659,885 in salaries and benefits, $353,243 in general and administrative expense, $44,965 in occupancy costs, a foreign exchange gain of $32,289, $10,131 in depreciation expense and $12,727 in interest expense. Salaries and benefits declined $242,027 in the three-month period ended June        30, 2008 from the same period in 2007 primarily due to a $231,466 decline in stock based compensation expense in the current period. General and administrative expenses fell $116,246 from the same period last year when we incurred legal and accounting costs of $79,043 associated with due diligence on the aborted Quad County Corn Processors acquisition and consulting costs of $33,486 for assistance with establishing our corporate governance and human resource policies. The foreign        exchange gain was greater in the three-month period ended June 30, 2007 than in the three-month period ended June 30, 2008 as the Canadian dollar appreciated by 7.7% against the US dollar in the second quarter of 2007 compared to by 0.7% in second quarter of 2008. Interest costs in three-month period ended June 30, 2008 increased $34,139 over the same period in the prior year due to borrowings growth needed to fund continued development.

 

          As a result, we incurred a net loss of $756,742 for the three-month period ended June 30, 2008 ($0.01 per share),compared to a net loss of $1,048,662 for three-month period ended June 30, 2007 ($.01 per share).

 

*Comparison of Results of Operations for the six months ended June 30, 2008 and 2007*

 

During the six-month periods ended June 30, 2008 and 2007, we did not generate any revenues.

 

During the six-month period ended June 30, 2008, we incurred costs and expenses totaling $1,441,559, including $807,692 in salaries and benefits, $410,109 in general and administrative expense, $97,020 in occupancy costs, a foreign exchange loss of $16,615, $22,614 in depreciation expense and $87,509 in interest expense.

 

The general and administrative expense of $410,109 included legal and accounting fees of $111,534, consulting fees of $104,686, travel related costs of $82,158 and other miscellaneous costs totaling $111,731. Occupancy costs of $97,020 are the costs of rent, utilities, insurance and maintenance for our head office location that we began leasing on April 20, 2006. The foreign exchange        loss of $16,615 occurred due to the impact of the strengthening of the US$ dollar against the C$ dollar during the period on the C$ dollar expenses of our Canadian subsidiaries. Net interest costs of $87,509 arose on the

 

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Union Capital Trust (“Union”), LDR Properties Inc. (“LDR”) lines of credit and on advances from our Chairman, President and Chief Executive Officer. The Union line of credit was repaid at the maturity of the Line of Credit Agreement on March 31, 2008 with funds borrowed under the Company’s line of credit with LDR and the advances from our Chairman, President and Chief        Executive Officer were repaid on June 30, 2008 also by funds borrowed from LDR. The interest rate on the Union line of credit is 12% per annum and on the LDR line of credit and the advances from our Chairman, President and Chief Executive Officer the rate is 8% per annum. Interest amounts of $15,137, $63,295 and $8,604 were accrued on funds borrowed from these financing sources respectively during the six-month period ended June 30, 2008.

 

During the six-month period ended June 30, 2007, our total expenses were $2,033,287, including $1,320,182 in salaries and benefits, $624,607 in general and administrative expense, $85,471 in occupancy costs, a foreign exchange gain of $28,871, $19,172 in depreciation expense and $12,727 in interest expense. Salaries and benefits declined $512,490 in the six-month period ended June 30,        2008 from the same period in 2007 primarily due to a $571,428 decline in stock based compensation expense in the current period, that was partially offset by the impact of the 11% appreciation of the Canadian dollar against the US dollar on salaries and benefits paid in Canadian dollars. There was no change in the number of employees or the Canadian dollar salary amounts paid from the same six-month period in 2007. General and administrative expenses fell $214,392 from the same period        last year when we incurred legal and accounting costs of $79,043 associated with due diligence on the aborted Quad County Corn Processors acquisition, legal and accounting costs of $26,632 in regard to a pending registration statement with the SEC, legal costs of $16,430 prior to securing a land purchase agreement in Sarnia and consulting costs of $57,709 for assistance with establishing our corporate governance and human resource policies. A foreign exchange gain was recorded in the        six-month period ended June 30, 2007 as the Canadian dollar appreciated against the US dollar in the period whereas in the same six-month period in 2008 it weakened resulting in a foreign exchange loss. Interest costs in six-month period ended June 30, 2008 increased $74,782 over the same period in the prior year due to borrowings growth needed to fund continued development.

 

As a result, we incurred a net loss of $1,441,559 for the six-month period ended June 30, 2008 ($0.01 per share),compared to a net loss of $2,033,287 for six-month period ended June 30, 2007 ($0.02 per share).

 

We do not expect to begin generating revenues until such time as our ethanol plants described herein under “Plan of Operation” become operational, which is not expected to occur until late 2010, or we successfully acquire an operating ethanol plant. Accordingly the following is our Plan of Operation.

 

**PLANOFOPERATION**

 

As of the date of this Report we have adopted a business plan to initially construct and operate threeethanol plants. Our goal is to produce ethanol in Ontario and New York State and to market and sell ethanol in Central Canada and the Eastern United States. In this regard we have secured or are in advanced stages of securing sites to build ethanol processing facilities at two        locations in Ontario, Canada (Barrie and Sarnia) and one in Niagara Falls, New York for total planned production capacity of approximately 324 million gallons per annum. Each of these locations will be the site for a corn-based ethanol processing facility. The plants that we intend to build will be dry mill plants. The reason for selecting this method of milling over a wet mill process is that a majority of ethanol plants in North America use the dry mill process and have found that        this method of milling is reliable and runs well with fewer problems than the wet mill process. The ethanol technology provider process that we will select will utilize dry milling and will also provide us with performance guarantees in the engineering, procurement and construction (“EPC”) contracts. The facilities currently envisaged are expected to be completed and operational over the next two years.

 

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We have secured, or are in the advanced stages of securing, sites to build ethanol processing facilities at the following locations, in the capacities indicated:

 

|   | • | *Barrie, Ontario, Canada; 108 million gallons*– This 35 acre site has been obtained under a 25 year lease with two ten year renewal options at the then current market for comparable properties. The lease allows us to utilize all existing site infrastructure and demolish or modify existing structures to optimize                        plant operations. We are leasing our Barrie site and our Head Office space from Fercan Developments Inc., a company that owns 10,000,000 shares of our outstanding Common Stock, or 9.6% interest. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | • | *Sarnia, Ontario, Canada; 108 million gallons*– Effective July 30, 2007and as amended on June 26, 2008, we entered into an Agreement of Purchase and Sale (the “Lanxess Agreement”) with Lanxess, Inc., a Canadian corporation (“Lanxess”), to acquire approximately 30                        acres of land located in Sarnia, Ontario, Canada where we intend to build an ethanol plant. The Lanxess Agreement replaced a July 2006 non-binding letter of intent with Lanxess for this location that provided for a 99-year lease on the property. The cost of this acquisition is C$450,000 (C$15,000 per acre), subject to adjustment upon the issuance of a surveyor’s certificate confirming the actual acreage of the property. Closing of this acquisition is to take place                        no later than March 31, 2009. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The Lanxess Agreement is also conditional, among other things, upon our satisfaction with our physical inspection of the land, zoning and permitting, our entering into an Engineering, Procurement and Construction contract (the “EPC Contract”) for the construction of our ethanol plant, our obtaining financing for the land purchase our ethanol plant construction, execution of        an acceptable Remediation and Indemnity Agreement once Lanxess completes certain remediation actions to bring the land into compliance with existing environmental laws and our reaching an agreement with Lanxess and TransAlta Energy Corporation (“TransAlta”) in respect of relief for Lanxess’s obligations under its existing steam supply contract with TransAlta requiring the purchase of a minimum of 900,000 MMBTU of steam per year. The Lanxess Agreement also requires for        us to enter into a Services Agreement with Lanxess, whereby Lanxess will provide us with water intake and output facilities as reasonably required to allow for the construction, operation and maintenance of our proposed ethanol plant.

 

The Agreement also provides for additional payments to Lanxess of C$750,000 in consideration for Lanxess’ efforts to undertake significant efforts to re-engineer existing infrastructure presently located on the property as required to allow for the construction of our ethanol plant, as well as support necessary for technical interfaces with our development of the land. The        Lanxess Agreement provides for us to partially compensate Lanxess for these efforts by payment of the aggregate sum of C$750,000, with a non-refundable amount of C$100,000 to be paid upon our satisfaction and waiver of the conditions discussed above. The remaining C$650,000 shall be paid in two equal installments of C$325,000. The first such installment shall be paid on or before the date which is the date the contractor under the EPC Contract begins construction of our ethanol plant        and the second such installment shall be paid on or before commencement of the operation of our proposed ethanol plant. If after closing of the Lanxess Agreement we have not commenced construction of our ethanol plant under the EPC Contract by June 30, 2009, Lanxess has the option to reacquire the land for C$450,000. We paid the refundable interest bearing deposit amount of C$10,000 on execution of the Lanxess Agreement.On Closing, this deposit amount shall be        credited to the purchase price.

 

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The Agreement also provides us with an option to acquire certain additional adjacent property owned by Lanxess if it elects to sell or otherwise transfer this property in the future on terms to be agreed in the future.

 

This site is adjacent to a major rail line, has good highway access, access to the Great Lakes for shipping purposes and is fully zoned and serviced. As of the date of this Report we are proceeding with the finalization of the business terms incorporating the aforementioned provisions along with other provisions for site services, including steam energy.

 

|   | • | *Niagara Falls, New York; 108 million gallons*– On December 18, 2007 and as first amended on March 14, 2008and as second amended on May 16, 2008, we entered into a Purchase and Sale Agreement with Praxair, Inc. (“Praxair”), to acquire approximately 70 acres of land located in                        Niagara Falls, NY, where we intend to build an ethanol plant. The cost of this property is $5,000,010, payable as follows: (i) an earnest money payment of Ten Dollars ($10) made simultaneously with the execution of the Agreement; (ii) a further sum of One Hundred Thousand Dollars ($100,000) to be paid within ten (10) days after our receipt of a fully executed Brownfield Site Cleanup Agreement by and between us and the Commission of the New York State Department of                        Environmental Conservation; (iii) the sum of Four Million Nine Hundred Thousand Dollars ($4,900,000) on the date that funding is available to the Company under all agreements related to the financing of the construction of an ethanol production facility at this location. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The Agreement is also conditional upon our satisfaction with various conditions, including (i) our physical inspection of the land; (ii) environmental testing of the soil and groundwater and other related environmental testing, in order to allow us to obtain inspection data necessary to qualify for various governmental incentive programs; (iii) our satisfaction that the property is        suitable for the development of an ethanol plant, including environmental issues, zoning issues, the availability and capacity of services to the property and the cost of obtaining the same; (iv) the successful culmination of the environmental review process in accordance with the New York State Environmental Quality Review Act and the availability of a building permit for a structure satisfactory to meet our requirements and any and all other licenses, approvals, permits, consents and        grants as may be necessary to allow us to build an ethanol plant and ancillary buildings on the property; (v) there being legally and physically unobstructed pedestrian, vehicular and other transportation ingress to and egress from the property; and (vi) the property being zoned and permission being granted by local government and by the State of New York to allow our proposed use of the property as an ethanol production facility. In the event these conditions are not satisfied or we        determine that any condition is not reasonably expected to be satisfied prior to Closing, we are obligated to so advise Praxair in writing and thereafter, either party to the Agreement has the right to cancel and terminate the Agreement. If we terminate the Agreement due to failure to have these conditions satisfied then we will receive a refund of our deposit together with any interest thereon.

 

The Agreement also provides for the parties to enter into negotiations to complete a Service Agreement whereby Praxair will provide water from its exiting pump house in an amount sufficient to allow us to operate our proposed ethanol plant and ancillary operations, provide easements, right-of-ways and other rights as we may require to utilize Praxair’s river discharge facilities        that are adjacent to the property, as well as to access the property, utilize the necessary utility services that will be required to operate the proposed ethanol facility and ancillary operations, if permitted, assign to us the rights to utilize the existing CSX Transportation (“CSX”) rail lines, or otherwise assist us in obtaining a new agreement with CSX in order to allow us access to the existing rail lines. The acquisition of the Property is not conditional upon        our

 

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reaching mutually acceptable terms with Praxair for such Service Agreement. The failure to reach such an agreement could have a materially negative impact on our ability to develop an ethanol plant on the Property. In the event terms of a mutually acceptable Service Agreement are not reached and a relevant agreement executed within ten (10) days prior to closing, either party to the        Agreement has the right to cancel and terminate the Agreement.

 

We have also agreed to enter into good faith negotiations with Praxair whereby we will attempt to reach mutually acceptable terms to sell to Praxair CO2 produced by us from the ethanol fermentation process. However, the failure to enter into such an agreement in the future will not give rise to any right to invalidate the Agreement.

 

This site is adjacent to a major rail line, has good highway access, access to the Great Lakes for shipping purposes and is fully zoned and serviced. As of the date of this Report we are proceeding with the finalization of the business terms incorporating the aforementioned provisions along with other provisions for site services, including steam energy.

 

Each of these locations will be the site for an ethanol processing facility, using corn as the feedstock. Our proposed plants will be designed to incorporate many of the newest technological innovations, including molecular sieves for dehydrating ethanol and continuous fermentation processing. The Barrie location represents a conversion of an existing site’s servicing        infrastructure from a former brewery.As of the date of this Report, a portion of the existing structures at the Barrie site have been demolished by the lessor for safety reasons. Of the remaining structures, we plan on either renovating them or demolishing those that are not germane to our proposed operations at the Barrie site and to utilize the rail spur and the utility connections. The Sarnia location offers an        existing rail spur, steam connection from a neighboring power plant, utility connections and dock facilities. The Niagara Falls location offers an existing rail spur, the possibility of a steam connection from a neighboring power plant and utility connections.

 

We have selected these sites because of our belief that in order to be competitive with both existing and proposed new ethanol plants the following criteria needs to be considered:

 

|   | • | Local access to feedstock |
|--------|--------|---------------------------|

|   | • | Access to end users |
|--------|--------|---------------------|

|   | • | Access to skilled labor market |
|--------|--------|--------------------------------|

|   | • | Status of infrastructure |
|--------|--------|--------------------------|

|   | • | Zoning |
|--------|--------|--------|

 

Our proposed facilities are to be located on industrial zoned sites. There are three primary means of transporting ethanol in North America, including rail, truck or barge and not all of these transportation modes are available to all our competitors. All of our proposed locations have ease of access to all three modes, which are expected to reduce our transportation costs. We believe        the sites we have chosen provide access to a number of available local gasoline blending facilities owned by major refiners including Getty Oil, Imperial Oil (Exxon), PetroCanada, Shell and Suncor.

 

The potential drawbacks of these locations include higher transportation costs for feedstock and higher property costs. While no assurances can be provided, we believe that this will be offset by the reduced cost of transporting ethanol because of proximity to the end use market.

 

Based on the target price range of $180 million to $200 million stated in the EPC term sheet we executed March 9, 2007 with Aker Kvaerner Songer Canada Ltd. (“AKSC”) for our Barrie plant, a maximum price of $204 million stated in the EPC term sheet we executed March 12, 2008 with SK

 

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Engineering & Construction Co. Ltd. (“SK E&C”) for our Sarnia plant, discussions with Delta-T, and our indicative term sheet executed December 13, 2006 with WestLB AG, (“WestLB”), each discussed below, as of the date of this Report, we estimate that the Barrie, Sarnia and Niagara Falls plants will cost $688 million combined as per the following table:

 

| **Items**                               |   |   | **Barrie** |        |   | **Sarnia** |   |        |   | **Niagara** |   | **Total**   |   |   |        |
|-----------------------------------------|--------|--------|------------|-------------|--------|------------|--------|-------------|--------|-------------|--------|-------------|--------|--------|-------------|
| Fixed Price EPC Contract Costs:         |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
|                                    |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
| EPC Price Materials                     |   |   | $          | 128,000,000 |   |       | $      | 120,000,000 |   |        | $      | 120,000,000 |   | $      | 368,000,000 |   |   |   |
| EPC Price Labor                         |   |   |       | 67,000,000  |   |       |   | 65,000,000  |   |        |   | 65,000,000  |   |   | 197,000,000 |   |   |   |
| Total EPC Costs                         |   |   |       | 195,000,000 |   |       |   | 185,000,000 |   |        |   | 185,000,000 |   |   | 565,000,000 |   |   |   |
|                                    |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
| Owners Costs:                           |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
| Land                                    |   |   |       | -           |   |       |   | 1,200,000   |   |        |   | 5,000,000   |   |   | 6,200,000   |   |   |   |
| Project Management                      |   |   |       | 745,000     |   |       |   | 710,000     |   |        |   | 710,000     |   |   | 2,165,000   |   |   |   |
| Infrastructure Upgrades                 |   |   |       | 1,627,000   |   |       |   | 805,000     |   |        |   | 10,805,000  |   |   | 13,237,000  |   |   |   |
| Permitting (Environmental and Building) |   |   |       | 460,000     |   |       |   | 134,000     |   |        |   | 134,000     |   |   | 728,000     |   |   |   |
| Insurance During Construction           |   |   |       | 662,000     |   |       |   | 659,000     |   |        |   | 659,000     |   |   | 1,980,000   |   |   |   |
| Owners Engineer                         |   |   |       | 219,000     |   |       |   | 202,000     |   |        |   | 202,000     |   |   | 623,000     |   |   |   |
| Startup Materials& Labor            |   |   |       | 658,000     |   |       |   | 640,000     |   |        |   | 640,000     |   |   | 1,938,000   |   |   |   |
| Spare Parts                             |   |   |       | 570,000     |   |       |   | 552,000     |   |        |   | 552,000     |   |   | 1,674,000   |   |   |   |
| Lenders Engineer                        |   |   |       | 319,000     |   |       |   | 319,000     |   |        |   | 319,000     |   |   | 957,000     |   |   |   |
| Other Miscellaneous Costs               |   |   |       | 368,000     |   |       |   | 368,000     |   |        |   | 368,000     |   |   | 1,104,000   |   |   |   |
| Total Owners Costs                      |   |   |       | 5,628,000   |   |       |   | 5,589,000   |   |        |   | 19,389,000  |   |   | 30,606,000  |   |   |   |
|                                    |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
| SubTotal Costs                          |   |   |       | 200,628,000 |   |       |   | 190,589,000 |   |        |   | 204,389,000 |   |   | 595,606,000 |   |   |   |
|                                    |   |   |       |        |   |       |   |        |   |        |   |        |   |   |        |   |   |   |
| Contingency                             |   |   |       | 16,050,000  |   |       |   | 15,247,000  |   |        |   | 16,351,000  |   |   | 47,648,000  |   |   |   |
| Interest During Construction            |   |   |       | 14,536,000  |   |       |   | 13,822,000  |   |        |   | 16,546,000  |   |   | 44,904,000  |   |   |   |
| Total Costs                             |   |   | $          | 231,214,000 |   |       | $      | 219,658,000 |   |        | $      | 237,286,000 |   | $      | 688,158,000 |   |   |   |

 

The actual costs of construction may vary from these cost estimates as we will not be able to confirm the EPC price until we negotiate and enter into a contract with an EPC contractor and the owner’s costs estimates are subject to change depending on the actual construction start date, length of construction and receipt of final supplier invoices. The final cost of construction        could be 10% to 15% higher or lower than these estimates.

 

We will need to raise this $688 million amount in equity and/or debt financing to complete construction of the Barrie, Sarnia and Niagara Falls ethanol production facilities. Effective December 13, 2006, we executed an engagement letter and indicative term sheets with WestLB whereby WestLB has conditionally agreed to provide arrangement, placement and underwriting services onsenior debt and subordinate debt financing for up to 75% of the construction costs (to a maximum of approximately $365 million) of our Barrie and Sarnia facilities on a “best efforts” basis. The term “best efforts” means that WestLB believes that they can syndicate the debt financing we require but that there is no guarantee that they will be successful or that the terms will be as indicated in their term sheets until they market the transaction        and receive firm commitments from a syndicate of lenders for the funds required on acceptable terms to us. Among other things, the engagement letter and indicative term sheets are conditional on our obtaining subordinate debt or equity investment for the remaining 25% of construction costs. There is no agreement with WestLB pertaining to our proposed Niagara Falls location.

 

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The WestLB indicative term sheets offer first priority senior secured construction and term financing for up to 60% of the total capital requirements of plant construction and for working capital for a total term of up to 7.5 years and subordinated secured construction and term financing for up to 15% of the total capital requirements of plant construction for a total term of up to        eight years. Following conversion of the senior construction loan to a senior term loan, the loan amount is to be repaid in equal quarterly installments over 6 years. Surplus cash as defined by debt service covenant is to be swept to accelerate the repayment of the senior term loan and to repay the subordinated term loan.

 

We paid a non-refundable retainer of $200,000 to WestLB on execution of the engagement letter and indicative term sheets using funds from the net proceeds of $3,846,500 received from our September 2006 private placement. In the event that we chose to terminate the WestLB engagement and we enter into a similar debt financing with another lender within twelve months of terminating        WestLB, we will pay WestLB a termination fee of $10,000,000. If the financing contemplated in the engagement letter and indicative term sheets is finalized with WestLB, we will pay to WestLB a structuring and arrangement fee of the greater of $5,000,000 or 2% of the principal amount of the senior financing and $5,000,000 or 5% of the principal amount of the subordinated financing. In addition, we will pay a fee to market the senior and subordinate loans of 1% of the principal amount of        each. The interest rate on the senior financing will be at LIBOR plus an anticipated spread of 325 to 350 basis points. Until the senior loan has been fully drawn, we shall pay a commitment fee of 0.50% on the undrawn portion. The interest rate on the subordinate financing will be at LIBOR plus an anticipated spread of 1000 basis points. As the subordinate financing will be fully drawn on closing there will be no commitment fees applicable on that facility. We expect other covenants,        representations and warranties will form part of the final documentation on closing of the loan agreement. We also agreed to pay WestLB’s costs and expenses in connection with the financing. As of the date of this Report, we have paid $110,526 for costs incurred by WestLB’s legal and engineering advisors from funds borrowed under our Line of Credit Agreements with LDR Properties Inc. (formerly Aurora Beverage Corporation) and Union Capital Trust. There is no termination date        to the WestLB engagement letter. WestLB has indicated that they are interested in including our proposed Niagara Falls, New York location in their debt syndication but we have not received a revised engagement letter and indicative term sheet from them as of the date of this Report.

 

With the execution of the SK E&C EPC term sheet for our Sarnia location on March 12, 2008, a convertible bond term sheet (“Bond Term Sheet”) dated November 14, 2007 between us and SinoUp & Rise Ltd. of Beijing, China that contained a provision giving SinoUp & Rise Ltd. the right to nominate the EPC Contractor became effective. Under the terms of the Bond Term        Sheet, on condition of WestLB successfully completing the arrangement of our senior debt and subordinate debt financing, SinoUp & Rise Ltd. agreed to provide the 25% balance of the financing (approximately $45 million per facility to a maximum total amount of $90 million) required for our Barrie and Sarnia ethanol facilities in the form of a 7 year convertible bond, subordinated to the WestLB senior and subordinated debt financing. During the first two years from advance, the        convertible bond will not pay interest but will instead accrue that interest as principal at an unpaid coupon rate of LIBOR plus 10%. Thereafter, the convertible bond will pay interest at LIBOR plus 15%, and the principal shall be repaid on a straight line basis until maturity. The convertible bond holder shall be able to convert the unamortized amount of the bond into shares of our Common Stock at a debt to share conversion price of $3.00 per share after the first two years from        advance. For conversion purposes, the unamortized amount shall not exceed the original principal amount of $90 million. Any conversion resulting in the convertible bond holder holding more than 10% of our equity ownership will result in the convertible bond holder receiving a seat on our Board of Directors.

 

We have had discussions with SinoUp & Rise Ltd. regarding participating in the financing of our proposed Niagara Falls, New York location but we have not received a term sheet from them as of the date of this Report. We have also discussed the financing required for our proposed Niagara Falls, New

 

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York location with investment bankers, financial institutions and private investors, but as of the date of this Report we have received no binding commitments. We may not be able to obtain sufficient funding from one or more investors or other financial institutions for our proposed Niagara Falls, New York location, or if such funding is obtained, that it will be on terms that we have anticipated or that        are otherwise acceptable to us. If we are unable to secure adequate financing, or financing on acceptable terms is unavailable for any reason, we may be forced to abandon our construction of that planned ethanol production facility. See “Risk Factors.”

 

Effective July 24, 2006, we entered into a five-year Project Development Agreement (the “Delta-Barrie Agreement”) with Delta-T Corporation, Williamsburg, Virginia (“Delta”), wherein Delta agreed to provide us professional advice, business and technical information, design and engineering and related services in order to assist us in assembling all of the        information, permits, agreements and resources necessary for construction of an ethanol plant having the capacity to produce 108 million gallons per year in Barrie, Ontario, Canada. We paid Delta the non-refundable sum of $100,000 for their services.

 

In September 2006, we entered into a similar five-year agreement with Delta relating to our proposed Sarnia ethanol plant (the “Delta-Sarnia Agreement”) and paid Delta an initial non-refundable amount of $70,000 for such services, with the balance of $30,000 due upon issuance of an air permit by the Province of Ontario. We have not paid the $30,000 balance as of the date of        this Report as we did not wish to incur the cost of applying to the Ministry of Environment of Ontario for an air permit until we had secured the Sarnia property. As of the date of this Report, we have not applied for our air permit for our Sarnia property. References to the Delta-Barrie Agreement and Delta-Sarnia Agreement are hereinafter jointly referred to as the “Delta Agreements,” unless otherwise indicated.

 

The Delta Agreements provide for Delta to assist us in the development and analysis of the operating costs, plant specifications, compliance with environmental issues, product marketing, industry economics, technical and other assistance. Delta’s sole remedy in the event that we breach theDelta Agreements is limited to the non-refundable fees of $170,000        paid under the Delta Agreements. The relationship between Delta and us is deemed exclusive during the five-year term of the Delta Agreements. We have agreed to use our best efforts to enter into an EPC contract or a technology agreement with Delta at these locations and if we fail to do so, to give them a first right of refusal for 60 days to assume any agreements made with other ethanol plant technology vendors.

 

Although Delta has been involved in 120 alcohol production projects for fuel, beverage, and industrial customers on five continents, it has no previous experience developing or constructing ethanol plants in Canada. The construction of ethanol plants using Delta technology is carried out by construction contractors. On March 9, 2007, we executed a term sheet for the development of an        engineering, procurement and construction (“EPC”) contract for the Barrie site with Aker Kvaerner Songer Canada Ltd. (“AKSC”), because of their extensive experience in the construction of power plants in the United States and Canada, However as we did not pay the non-refundable fee of $500,000 to AKSC for executing the term sheet and as AKSC is no longer working with Delta, the AKSC agreement was effectively terminated during the fourth quarter of 2007. Since        that time, we have been negotiating with other large, experienced EPC contractors that are acceptable to Delta for construction of ethanol plants at each of our three proposed locations. Effective March 12, 2008, we executed a term sheet with SK Engineering & Construction Co. Ltd. (“SK E&C’) of Seoul, South Korea for the development of an engineering, procurement and construction (“EPC”) contract for our proposed ethanol plant to be located in Sarnia,        Ontario, Canada. We expect to receive the EPC contract price from SK E&C within 51⁄2 months (October 2008) of the Phase 2 Project Development Agreement that we executed with Delta effective May 5, 2008 on our payment of a $200,000 non-refundable fee. Under this Phase 2 Project Development Agreement, Delta will provide a preliminary site layout, a preliminary mass and energy balance and a preliminary process flow diagram for the proposed plant, as well as process emissions data        to assist with

 

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environmental permitting, system design specifications and a basic process engineering package suitable to allow SK E&C to develop an EPC contact price. A further non-refundable fee of $200,000 shall be paid to Delta on delivery of the basic process engineering package. We are also responsible to reimburse Delta for all travel and related expenses incurred in connection with this Phase 2 Agreement.        Delta’s sole remedy in the event that we breach the Phase 2 Agreement is limited to the non-refundable fees of $400,000. The relationship between Delta and us is deemed exclusive during the five-year term of the Phase 2 Agreement. We have agreed to use our best efforts to enter into an EPC contract or a technology agreement with Delta at our Sarnia location and if we fail to do so, to give them a first right of refusal for 60 days to assume any agreement made with another ethanol        plant technology vendor.

 

          If the EPC contract price then provided by SK E&C is acceptable, we expect to execute the EPC contract within 30 days and proceed to close financing and begin construction at the Sarnia site within 30 days thereafter. Construction would take place over an 18 to 22 month period so ethanol production at our Sarnia location        is not expected to begin until the fourth quarter of 2010 at the earliest as of the date of this Report. In the event that we do not execute an EPC contract with SK E&C, we will be required to pay a cancellation fee of $300,000.

 

We also expect to enter into similar arrangements with SK E&C for our proposed ethanol plants to be located in Barrie, Ontario, and Niagara Falls, New York. We have not yet received term sheets from SK E&C regarding these facilities as of the date of this Report.

 

Delta’s primary role in the projects is to provide the process technology and engineering. This will include all of the prime processes in the receiving and milling of the corn, the cook process, fermentation process, distillation process, molecular sieve and centrifuge process, chemical storage area, fuel and ethanol storage and load-out as well as DDGS drying, storage and        load-out. As the EPC Contractor, SK E&C will erect the Delta process components as well as engineer, procure and construct the balance of plant equipment for such items as the boiler house, cooling towers, all utility tie-ins, plant fire water system, and any water treatment systems. SK E&C will be responsible for all labor supply and project completion risk(i.e. project completed on schedule, at the contract price, meeting design specifications). The Delta plant design that we        have selected is based on plant designs and components currently being utilized by other Delta customers. Any differences in our plant designs from the standard Delta design will be to provide for higher reliability and performance. Not all current projects undertaken by Delta appear on their website due to client preferences with regards to confidentiality.

 

In August 2006, we contracted with Parrish & Heimbecker Ltd. (“P&H”) to provide corn procurement and co-product merchandizing services on a fee per shipment basis for a five-year period for our proposed Barrie and Sarnia ethanol plants upon the opening of such plants. P&H is a privately held grain merchant corporation that owns and operates grain elevators and        has extensive domestic and international experience in international grain origination and co-product merchandizing. We engaged them to source all of the corn required for the operation of the Barrie and Sarnia ethanol facilities at competitive market prices. We expect they will assist us in negotiations with major corn suppliers to guarantee supply and price by committing to long-term purchase agreements or opportunistic purchases on the spot market when this can be done at favorable        rates. We will pay P&H C$1.00 per metric ton of corn procured for our Barrie and Sarnia operations. P&H will manage the sale of our dried distiller grain by-product. We will pay P&H C$1.00 per metric ton of DDGS sold for marketing the sale of our product at market prices. Our agreement with P&H does not include any minimum purchase requirements. As of the date of this Report, we have not discussed corn procurement and co-product merchandizing services for our proposed        Niagara Falls facility with P&H or any other company.

 

We are currently in the process of finalizing marketing contracts covering the Barrie and Sarnia facilities with ECO Energy Inc. (“ECO”), a privately held Tennessee corporation that provides ethanol

 

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marketing capability across North America. ECO is a fully integrated marketing company supported by an experienced sales force, a knowledgeable logistics and scheduling department, customer service, and an online computer system that we will be able to access to streamline all necessary correspondence for daily shipments and transportation transactions. We expect to engage this marketing company to handle        the sales and transportation logistics of our ethanol production at market prices in exchange for a commission of $0.01 per gallon of ethanol sold. As of the date of this Report, we have not discussed ethanol marketing for our proposed Niagara Falls facility with ECO or any other company.

 

We filed the Site Plan application for our proposed Barrie plant in June 2007 but did not receive a decision from the City of Barrie within the timeframe of The Ontario Municipal Act and in September 2007 made a request for an adjudication hearing with the Ontario Municipal Board. On December 3, 2007, the City of Barrie passed an Interim Control By-Law prohibiting the establishment of        ethanol production facilities on lands designated or zoned for industrial uses for a period of one year during which the City of Barrie would conduct a study on the impact of ethanol production. We expect that the Ontario Municipal Board hearing will be held on our Site Plan application and the Interim Control By-Law and a decision will be reached during the fourth quarter of 2008. For the Sarnia site, we have recently commenced this process and expect to receive our Site Plan Approval        permit from the City of Sarnia during the third quarter of 2008. As of the date of this Report, we have not filed a site plan permit for our proposed Niagara Falls, New York site.

 

For our two proposed Ontario locations, Environmental Permits are issued by the Ministry of the Environment of Ontario. In March 2007, we applied for this permit for the Barrie plant and we expect to receive the final permit once we resolve our Site Plan issue with the City of Barrie. We expect that our environmental permit for Sarnia, once submitted, will be processed within a shorter        time frame than the Barrie permit, given that the Sarnia plant will be similar to the Barrie plant and we have our experience with the Barrie application to draw upon. As of the date of this Report, we had not begun the environmental permitting process for our proposed Niagara Falls, New York location.

 

None of our current management has any experience in developing or operating ethanol plants. Our Chief Operating Officer and Vice President Development, Steven Reader, and our Director of Project Management and Operations, Gordon Langille, have extensive experience in the construction and operation of North American power plants and pipelines.

 

We are implementing a growth strategy by:

 

| • | Building state of the art processing plants;                                        |
|--------|-------------------------------------------------------------------------------------|
|   |                                                                                |
| • | Negotiating stable long term contracts with key suppliers;                          |
|   |                                                                                |
| • | Securing long term sales agreements;                                                |
|   |                                                                                |
| • | Pursuing acquisitions of existing ethanol producers; and                            |
|   |                                                                                |
| • | Pursuing acquisitions and/or strategic alliances with ethanol technology companies. |

 

We are committed to investing in the latest technology to ensure that the processing costs are as low as possible, and the outputs are of the highest quality. The initial locations have been chosen due to proximity to supply of corn, natural gas, and water and are well located for the transportation of inputs and products.

 

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The manner in which we intend to develop future sites beyond the initial aforementioned locations will depend on the nature of the opportunity, the respective needs of the parties involved, and ourselves. We have set up a separate subsidiary to own each ethanol plant. We may purchase ethanol producing facilities outright, acquire an ownership interest in companies controlling ethanol        producing facilities, or issue shares in the subsidiary company that controls the site to outside parties who control ethanol producing facilities. We were in negotiations to acquire an existing ethanol plant site in the Province of Quebec, Canada. We made a fully refundable deposit to the prospective sellers’ solicitor, in trust, in the amount of $750,000. But we elected to terminate this potential acquisition and the deposit has been returned to us.

 

We plan to identify and exploit new technologies for reduced costs and greater manufacturing yields. For example, we are examining new technologies enabling the conversion of cellulose, which is generated predominantly from wood waste, paper waste and agricultural waste, into ethanol which would reduce or eliminate our dependency on corn as a primary feedstock while also helping local        municipalities deal with ever increasing demands on their garbage disposal sites.

 

**LIQUIDITYANDCAPITALRESOURCES**

 

At June 30, 2008, we had $16,877 in cash and cash equivalents.

 

          In July 2006, we engaged in a forward split of our Common Stock whereby we issued ten (10) shares of our Common Stock for every one (1) share then issued and outstanding. Following the aforesaid forward stock split, we commenced a private offering of our Common Stock. We closed this offering in September 2006 after selling an        aggregate of 4,096,500 shares of our Common Stock at a price of $1.00 per share and received aggregate net proceeds of $3,846,500 therefrom. The proceeds from our private placement that closed September 2006 financed our working capital requirements, including salaries and benefits, lease commitments, and capital expenditures on property, plant and equipment through March 31, 2007.

 

In order to allow us to continue to implement our business plan, on March 30, 2007, we entered into a Line of Credit Agreement with Union Capital Trust, Nassau, Bahamas (“Union”) wherein Union has agreed to provide us with a $6 million unsecured line of credit. Interest accrues at the rate of twelve percent (12% per annum) and is payable monthly. The trustee of the Union        Capital Trust Line of Credit is Ronald Wyles. Ronald Wyles owns 10,000,000 shares of our outstanding Common Stock or 9.6% interest. Principal and accrued interest of $526,716 outstanding under the Union line of credit was repaid at maturity on March 31, 2008 with funds borrowed under our line of credit with LDR Properties Inc. as described herein.

 

On July 9, 2007, we entered into a Line of Credit Agreement with Aurora Beverage Corporation, (“Aurora”) wherein Aurora has agreed to provide us with a $1 million unsecured line of credit. Interest accrues at the rate of eight percent (8% per annum) and is payable monthly. Principal and unpaid interest was due on or before July 8, 2008. Effective December 14, 2007, the Line        of Credit Agreement with Aurora was amended to increase the maximum principal amount of the loan to $2,000,000. On March 7, 2008, the Aurora Line of Credit Agreement was further amended, as a result of a reorganization, to change the lender to LDR Properties Inc. (“LDR”), to increase the loan principal amount to $8,000,000 and to extend the due date to July 8, 2009. Effective June 30, 2008, the Line of Credit Agreement with LDR was amended to increase the maximum principal        amount of the loan to $12,000,000. The balance of the terms of the initial Line of Credit Agreement remains as originally stated. All draws on the LDR (formerly Aurora) line of credit are subject to review and approval of the lender, who has not denied any of our requests to date. LDR, an Ontario corporation, is a company owned by the same individual that

 

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owns Fercan Developments Inc. (“Fercan”). Fercan owns 10,000,000 shares of our outstanding Common Stock, or 9.6%

 

We believe that the amended LDR line of credit will provide sufficient monies to fund our expected working capital requirements for project development (approximately $1,500,000 per quarter) until we are in a position to begin construction at one or more of our proposed sites and draw on the proposed WestLB line of credit described above herein.

 

          We estimate that we will require $688 million in additional debt and or equity capital to complete the construction and commissioning of the Barrie, Sarnia and Niagara Falls facilities, and there are no assurances that we will be able to raise this capital when needed.

 

Effective December 13, 2006, we executed an engagement letter and indicative term sheets with WestLB whereby WestLB has conditionally agreed to provide arrangement, placement and underwriting services on senior debt and subordinate debt financing for up to 75% of the construction costs (to a maximum of approximately $365 million) of our Barrie and Sarnia facilities on a “best        efforts” basis. The term “best efforts” means that WestLB believes that they can syndicate the debt financing we require but that there is no guarantee that they will be successful or that the terms will be as indicated in their term sheets until they market the transaction and receive firm commitments from a syndicate of lenders for the funds required on acceptable terms to us. Among other things, the provision of the 75% financing in accordance with engagement letter        and the indicative term sheets is conditional on our obtaining subordinate debt or equity investment for the remaining 25% of construction costs.

 

The WestLB indicative term sheets offer first priority senior secured construction and term financing for up to 60% of the total capital requirements of plant construction and for working capital for a total term of up to 7.5 years and subordinated secured construction and term financing for up to 15% of the total capital requirements of plant construction for a total term of up to        eight years. Following conversion of the senior construction loan to a senior term loan, the loan amount is to be repaid in equal quarterly installments over six years. Surplus cash as defined by debt service covenant is to be swept to accelerate the repayment of the senior term loan and to repay the subordinated term loan.

 

We paid a non-refundable retainer deposit of $200,000 to WestLB on execution of the engagement letter and indicative term sheets. In the event that we chose to terminate the WestLB engagement and we enter into a similar debt financing with another lender within 12 months of terminating WestLB, we will pay WestLB a termination fee of $10,000,000. If the financing contemplated in the        engagement letter and indicative term sheets is finalized with WestLB, we will pay to WestLB a structuring and arrangement fee of the greater of $5,000,000 or 2% of the principal amount of the senior financing and $5,000,000 or 5% of the principal amount of the subordinated financing. In addition, we will pay a fee to market the senior and subordinate loans of 1% of the principal amount of each. The interest rate on the senior financing will be at LIBOR plus an anticipated spread of 325        to 350 basis points. Until the senior loan has been fully drawn, we shall pay a commitment fee of 0.50% on the undrawn portion. The interest rate on the subordinate financing will be at LIBOR plus an anticipated spread of 1000 basis points. As the subordinate financing will be fully drawn on closing there will be no commitment fees applicable on that facility. Other covenants, representations and warranties will form part of the final documentation on closing of the loan agreement.        WestLB has indicated that they are interested in including our proposed Niagara Falls, New York location in their debt syndication but we have not received a revised engagement letter and indicative term sheet from them as of the date of this Report.

 

With the execution of the SK E&C EPC term sheet for our Sarnia location on March 12, 2008, a convertible bond term sheet (“Bond Term Sheet”) dated November 14, 2007 between the Company and

 

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SinoUp & Rise Ltd. of Beijing, China that contained a provision giving SinoUp & Rise Ltd. the right to nominate the EPC Contractor became effective. Under terms of the Bond Term Sheet, on condition of West LB successfully completing the arrangement of the Company’s senior debt and subordinate debt financing, SinoUp & Rise Ltd. agreed to provide the 25% balance of the financing        (approximately $45 million per facility to a maximum total amount of $90 million) required for our Barrie and Sarnia ethanol facilities in the form of a 7 year convertible bond, subordinated to the West LB senior and subordinated debt financing. During the first two years from advance, the convertible bond will not pay interest but will instead accrue that interest as principal at an unpaid coupon rate of LIBOR plus 10%. Thereafter, the convertible bond will pay interest at LIBOR plus        15%, and the principal shall be repaid on a straight line basis until maturity. The convertible bond holder shall be able to convert the unamortized amount of the bond into the Company’s common shares at a debt to share conversion price of $3.00 per share after the first two years from advance. For conversion purposes, the unamortized amount shall not exceed the original principal amount of $90 million. Any conversion resulting in more than 10% equity ownership in the Company will        result in the convertible bond holder receiving a board seat.

 

We have had discussions with SinoUp & Rise Ltd. regarding participating in the financing of our proposed Niagara Falls, New York location but we have not received a term sheet from them as of the date of this Report. We have also discussed the financing required for our proposed Niagara Falls, New York location with investment bankers, financial institutions and private investors,        but as of the date of this Report we have received no binding commitments. We may not be able to obtain sufficient funding from one or more investors or other financial institutions for our proposed Niagara Falls, New York location, or if such funding is obtained, that it will be on terms that we have anticipated or that are otherwise acceptable to us. If we are unable to secure adequate financing, or financing on acceptable terms is unavailable for any reason, we may be forced to        abandon our construction of that planned ethanol production facility.

 

Our lease commitments for our head office space and for our Barrie plant are as follows:

 

| **Fiscal Year**              |   |   |   | **Barrie Lease** |   |       |   | **Head Office****Lease** |   |   |   | **Total** |   |
|------------------------------|--------|--------|--------|------------------|--------|------------|--------|--------------------------|--------|--------|--------|-----------|--------|
| Balance of 2008              |   |   |   | $                |   | 1,113,074  |   |                     |   | $      |   | 88,261    |   |   |   | $ |   | 1,201,335 |   |
| 2009                         |   |   |   |             |   | 2,226,149  |   |                     |   |   |   | 176,523   |   |   |   |   |   | 2,402,672 |   |
| 2010                         |   |   |   |             |   | 2,226,149  |   |                     |   |   |   | 176,523   |   |   |   |   |   | 2,402,672 |   |
| 2011                         |   |   |   |             |   | 2,226,149  |   |                     |   |   |   | 73,551    |   |   |   |   |   | 2,299,700 |   |
| 2012                         |   |   |   |             |   | 2,226,149  |   |                     |   |   |   | —   |   |   |   |   |   | 2,226,149 |   |
| Thereafter                   |   |   |   |             |   | 47,007,373 |   |                     |   |   |   | —   |   |   |   |   |   | 47,007,373 |   |
| Total minimum lease payments |   |   |   | $                |   | 57,025,043 |   |                     |   | $      |   | 514,858   |   |   |   | $ |   | 57,539,901 |   |

 

We anticipate that we will be able to satisfy our current lease commitments given our related party relationship with the lessor and the availability of the LDR line of credit also provided by the same related party. Thereafter we expect to satisfy these commitments with the proceeds from the senior construction and term financing provided by WestLB pursuant to an engagement letter and        indicative term sheets effective December 13, 2006, and from additional subordinate debt or equity to be raised. There are no assurances that we will be able to raise additional subordinate debt or equity on terms acceptable to us, or at all. In the event we are unable to raise additional funds on acceptable terms, we will need to reconsider our objectives and undertake efforts to reduce costs. Once construction of our Barrie, Sarnia and Niagara Falls plants is complete, we expect to        satisfy the lease commitments with cash flow generated from the operations of these plants.

 

**INFLATION**

 

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          Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the six-month period ended June 30, 2008.

 

**CRITICALACCOUNTINGESTIMATES**

 

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the amounts of assets,        liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different        assumptions or conditions. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

 

***Leases***– We follow the guidance in SFAS No. 13 “*Accounting for Leases*,” as amended, which requires us to evaluate the lease agreements we enter into to determine whether they represent operating or capital leases at the inception of the lease.

 

***Assets under capital lease***- Assets under capital lease consist of land and buildings located in Barrie, Ontario to be developed for ethanol producing operations. We determined that the fair value of the land at the Barrie site was less than 25% of the fair value of the leased property at the inception of the lease and therefore considered the land        and building as a single unit for purposes of determining whether the lease should be classified as a capital lease in accordance with SFAS No. 13. We concluded that the present value of the minimum lease payments, excluding any executory costs to be paid by the lessor, equals or exceeded 90% of the fair value of the leased property. We used our incremental borrowing rate of 12% to measure the present value of the minimum lease payments.

 

The buildings under capital lease at the Barrie site cannot currently be used to carry out the business of the Company without extensive renovation and construction activities. As such, we consider that the assets are not available for their intended use. Specifically, we expect to make substantial renovations to portions of the existing building to provide the space needed to        construct an ethanol processing facility. The portion of the building that will eventually serve as the administrative offices requires extensive renovation in order to bring it up to standard for occupation. Our examination of the infrastructure items has indicated that substantial additional expenditures will be required to ensure that rail lines are serviceable, and in correct locations, and that the gas and water lines can be expanded to provide the required capacity for the plant        operations. Before commencing demolition of the remaining structures and construction activities, we will use the findings of an engineering study that will be performed, with detailed recommendations on the usefulness of individual assets.

 

***Capitalized Interest***– In accordance with SFAS No. 34, the interest costs associated with our capital lease obligation will be capitalized to assets under capital lease until the Barrie plant is substantially complete and ready for the production of ethanol.

 

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***Deferred financing costs***- Costs incurred to obtain debt financing, including all related fees are amortized as interest expense over the term of the related financing using the straight-line method which approximates the interest rate method. To the extent these fees relate to facility construction, a portion is capitalized with the related interest        expense into construction in progress until such time as the facility is placed into operation.

 

***Foreign currency translation***– Our functional currency is United States dollars and the functional currency of our Canadian subsidiaries is Canadian dollars. The operations of our Canadian subsidiaries are translated into U.S. dollars in accordance with SFAS No. 52, “*Foreign Currency        Translation*,” as follows:

 

|   | (i) | Assets and liabilities at the rate of exchange in effect at the balance sheet date; and |
|--------|-----|-----------------------------------------------------------------------------------------|

 

|   | (ii) | Revenue and expense items at the average rate of exchange prevailing during the period. |
|--------|------|-----------------------------------------------------------------------------------------|

 

Translation adjustments are included as a separate component of stockholders’ equity (deficiency) as a component of comprehensive income or loss. We expect the functional currency of our Canadian subsidiaries to change to the United States dollar once our planned ethanol production facilities in Canada commence ethanol producing operations, as debt, operating revenues and costs        of our Canadian subsidiaries will primarily be denominated in United States dollars.

 

We and our subsidiaries translate foreign currency transactions into the Company’s functional currency at the exchange rate effective on the transaction date. Monetary items denominated in foreign currencies are translated into the functional currency at exchange rates in effect at the balance sheet date. Foreign exchange gains and losses are included in income.

 

***Stock-based compensation*****–**Effective January 1, 2006, we adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 123R, “*Share Based Payment*.” SFAS 123R requires a public entity to measure the cost of        employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized on a straight-line basis over the employee service period (usually the vesting period). That cost is measured based on the fair value of the equity or liability instruments issued using the Black-Scholes option pricing model.

 

***Income taxes***- Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates expected to apply in the years in which        those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that the full benefit of the deferred tax assets will not be realized.

 

In June2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No.109”(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax        position taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. We adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have a material impact on our consolidated financial statements or results of operations.

 

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***Recent accounting pronouncements*****–**In December 2007, the FASB issued a revised standard, SFAS No. 141R*,*“*Business Combinations*” (“SFAS No. 141R”) on accounting for business combinations. The        major changes to accounting for business combinations are summarized as follows:

 

|   | • | SFAS No. 141R requires that most identifiable assets, liabilities, non-controlling interests and goodwill acquired in a business combination be recorded at “full fair value” |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Most acquisition-related costs would be recognized as expenses as incurred |
|--------|--------|----------------------------------------------------------------------------|

|   | • | Obligations for contingent consideration would be measured and recognized at fair value at the acquisition date |
|--------|--------|-----------------------------------------------------------------------------------------------------------------|

|   | • | Liabilities associated with restructuring or exit activities are recognized only if they meet the recognition criteria in SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, as of the acquisition date |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | An acquisition date gain is reflected for a “bargain purchase” |
|--------|--------|----------------------------------------------------------------------------|

|   | • | For step acquisitions, the acquirer re-measures its non-controlling equity investment in the acquiree at fair value as of the date control is obtained and recognizes any gain or loss in income |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | A number of other significant changes from the previous standard related to taxes and contingencies |
|--------|--------|-----------------------------------------------------------------------------------------------------|

 

The statement is effective for business combinations occurring in the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No.141R is not expected to have a material impact on our consolidated financial statements or results of operations.

 

In December 2007, the FASB issued a revised standard SFAS 160, “*Non-controlling Interests in Consolidated Financial Statements*”, on accounting for non-controlling interests and transactions with non-controlling interest holders in consolidated financial statements. This statement specifies that non-controlling interests are        to be treated as a separate component of equity, not as a liability or other item outside of equity. Because non-controlling interests are an element of equity, increases and decreases in the parent’s ownership interest that leave control intact are accounted for as capital transactions rather than as a step acquisition or dilution gains or losses. The carrying amount of the non-controlling interests is adjusted to reflect the change in ownership interests, and any difference        between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity attributable to the controlling interest. This standard requires net income and comprehensive income to be displayed for both the controlling and the non-controlling interests. Additional required disclosures and reconciliations include a separate schedule that shows the effects of any transactions with the non-controlling        interests on the equity attributable to the controlling interest. The statement is effective for periods beginning on or after December 15, 2008. SFAS 160 will be applied prospectively to all non-controlling interests, including any that arose before the effective date. The adoption of SFAS No.160 is not expected to have a material impact on our consolidated financial statements or results of operations.

 

In March2008, the FASB issued Statement of Financial Accounting Standards No.161, “*Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No.133*”(“SFAS No. 161”). This statement requires entities to provide greater transparency in derivative disclosures by        requiring qualitative disclosure about objectives and strategies for using derivatives and quantitative disclosures about fair value amounts of derivative instruments and gains and losses thereon. The statement is effective for periods beginning on or after November15, 2008. The adoption of SFAS No.161 is not expected to have a material impact on our consolidated financial statements or results of operations.

 

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In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “*The Hierarchy of Generally Accepted Accounting Principles”*(“SFAS No. 162”). This statement identifies the sources of accounting principles and the framework for selecting the principles that are presented in conformity with        generally accepted accounting principles in the United States. The statement is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “*The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles*”. The adoption of SFAS No.162 is not expected to have a material impact on our consolidated        financial statements or results of operations.

 

| **ITEM 3.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.** |
|-------------|-----------------------------------------------------------------|

 

We are exposed to various market risks, including changes in commodity prices, foreign exchange and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices. At our current stage of development, we do not have the credit capacity or sufficient certainty of future ethanol production to enter transactions involving financial instruments to        manage and reduce the impact of changes in commodity prices, foreign exchange and interest rates. However, we expect to enter into interest rate hedge contracts to fix the interest rate on at least 50% of our outstanding debt under our loan agreement with WestLB once we close financing on our first ethanol production facility. We also expect to begin hedging our exposure to adverse fluctuations in commodity spot prices for ethanol, DDGS corn, and natural gas approximately six months        before our first ethanol production facility begins production. We may also hedge our foreign exchange exposure by entering into foreign exchange contracts. We do not plan on entering into derivatives or other financial instruments for trading or speculative purposes.

 

| **ITEM 4.** | **CONTROLS AND PROCEDURES.** |
|-------------|------------------------------|

 

**EVALUATIONOFDISCLOSURECONTROLSANDPROCEDURES**

 

As of the end of the period covered by this quarterly report, our Chief Executive Officer and Chief Financial Officer conducted an evaluation of our disclosure controls and procedures. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be        disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (i)recorded, processed, summarized and reported within the time periods specified in the applicable Securities and Exchange Commission rules and forms and (ii)accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

**CHANGESININTERNALCONTROLS**

 

          There have been no changes in our internal controls or in other factors that could significantly affect these controls and procedures during the six-month period ended June 30, 2008.

 

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**PART II. OTHER INFORMATION**

 

| **ITEM 1.** | **LEGAL PROCEEDINGS** |
|-------------|-----------------------|

 

On December 21, 2007, we received a Notice of Application (the “Application”) between North American (Park Place) Corporation (the “Applicant”) and Fercan Developments Inc., Northern Ethanol (Barrie) Inc., Northern Ethanol (Canada) Inc. and the City of Barrie (“Respondents”), applying for a declaration that the zoning of the property at 1 Big Bay        Point Road, Barrie, Ontario does not permit the property to be used as an ethanol production plant, for a permanent injunction prohibiting the property from being used as an ethanol production plant and for the costs of the Application to be paid by the Respondents. The Application is scheduled to be heard before a judge of the Ontario Superior Court of Justice on October 10, 2008.

 

We believe that the current zoning for the property does permit the production of ethanol and the possibility of the Applicant’s claim being successful is remote. We have been and intend to continue to vigorously pursue our defense.

 

| **ITEM 1A.** | **RISK FACTORS** |
|--------------|------------------|

 

          *An investment in our Common Stock is a risky investment*.*Prospective investors should carefully consider the following risk factors before purchasing shares of our Common Stock*.*We believe that we        have included all material risks.*

 

***RISKSRELATEDTOOURPROPOSEDOPERATIONS***

 

**We have incurred losses in the past and expect to incur greater losses until our ethanol production begins****.**We are a development stage company and we have not yet commenced operations. As of June 30, 2008, we had an accumulated deficit of $8,298,473. For the six-month period ended June 30, 2008, we incurred a net loss of        $1,441,559, and for the year ended December 31, 2007, we incurred a net loss of $3,577,498. We expect to incur significantly greater losses at least until the completion of our initial ethanol production. We estimate that the earliest completion date of one of our proposed locations and, as a result, our earliest date of ethanol production will not occur until the fourth quarter of 2010. Until then, we expect to rely on cash from debt and equity financing to fund all of the cash        requirements of our business. Until we successfully build and begin operating our proposed ethanol plants we will experience negative cash flow. Once our ethanol plants are built and become operational, there are no assurances that we will be able to attain, sustain or increase profitability on a quarterly or annual basis. A downturn in the demand for ethanol would significantly and adversely affect our sales and profitability.

 

**Ethanol competes with other existing products and other alternative products could also be developed for use as fuel additives**. Our revenue will be derived primarily from sales of ethanol. Ethanol competes with MTBE (methyl tertiary butyl ether) as an oxygenate in gasoline to meet both oxy-fuel and reformulated gasoline requirements. Until recently,        MTBE has been the most widely used oxygenate to meet the requirements of the Clean Air Act Amendments of 1990. Because of its favorable handling qualities and the fact that it is a petroleum product, MTBE has been the preferred oxygenate for the petroleum industry. However, MTBE has shown significant adverse environmental and health safety characteristics that have led to the decision by several key States to ban its use. Specifically, MTBE is highly persistent and has been identified        as a potential carcinogen. MTBE has been detected in drinking water supplies in almost all areas where it is used. Reflecting these issues, California, New York, Connecticut, New Jersey and more than twenty other States have banned the use of MTBE.

 

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We expect to be completely focused on the production and marketing of ethanol and its co-products for the foreseeable future. We may be unable to shift our business focus away from the production and marketing of ethanol to other renewable fuels or competing products. Accordingly, an industry shift away from ethanol or the emergence of new competing products may reduce the demand for        ethanol. A downturn in the demand for ethanol would significantly and adversely affect our sales and profitability*.*

 

**In addition to selling ethanol, we also intend to sell the co-products of ethanol production – dried distillers grains (DDGS) and carbon dioxide (“CO2”) and the markets for these products may decrease in the future.**The primary use of DDGS is for livestock feed as a replacement for traditional animal feeds such as        soy-meal. In the United States, cattle (both dairy and beef) have so far been the primary users of DDGS as livestock feed, but larger quantities of DDGS are making their way into the feed rations of hogs and poultry. In 2007, ethanol dry mills in the United States produced approximately 14.6 million metric tons of distillers grains. Of this, approximately 84% was fed to dairy and cattle, 11% to swine, and 5% to poultry. Due to the fact that DDGS have a long shelf life, they are suitable        for transportation to markets all over the world. In 2007, the United States exported more than 2 million tons of distillers grains. In recent years, large markets for DDGS have developed in Europe, led by Ireland and the United Kingdom, as well as in Canada, Mexico, China, Japan, and Taiwan. Asia has a long history of importing U.S. grain because of its large population and limited space in which to grow crops. Worldwide, there is a large market for animal feed but DDGS generally need        to displace other feeds as buyers will base their selection primarily on cost competitiveness. As increasing volumes of ethanol production come on-line, the amount of DDGS in the marketplace should increase proportionately. This may put downward pressure on prices and presents a risk to our business. At today’s prices, it is estimated that DDGS sales will represent approximately 20% of our total sales.

 

Carbon dioxide is produced during the fermentation stage of the ethanol production process. This excess gas is captured and sold to carbon dioxide resellers. The carbon dioxide market is well established and consists of three major segments: the beverage market (27%), the food market (43%), and the industrial market (30%). The market is cyclical in that demand increases during the        summer as beverage and food demands create shortages and higher spot prices. Transportation is a limiting factor when sourcing carbon dioxide. On average, transportation costs account for 50% of the delivered cost of carbon dioxide. For that reason, customers generally must be within 200 miles of the plant. As increasing volumes of ethanol production come on-line, it is possible that the market prices for CO2 will soften due to a finite amount of demand and an increasing        supply. At today’s prices, it is estimated that CO2 sales will represent approximately 0.4% of our total sales.

 

**Carbon dioxide is believed to contribute to global warming**.**Future government regulations to reduce carbon dioxide emissions may impact our ability to produce ethanol**. Carbon dioxide is the most common of the compounds collectively referred to as greenhouse gases. In the recently released        Summary for Policymakers, the Intergovernmental Panel on Climate Change (IPCC) indicated that “*most of the observed increase in globally averaged temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations*” (IPCC, 2007). The IPCC assigns a rating of “very likely” when the expected outcome of a result is greater than 90%.

 

A number of proposals are being considered around the world to combat increased greenhouse gas emissions. The specifics of these proposals vary. Typically, one of their overarching objectives is to reduce anthropogenic greenhouse gas emissions. Proposals include methods as varied as improving energy efficiency, adopting energy sources that create minimal greenhouse gas emissions (e.g.,        generating electricity from wind or solar energy), or shifting from fossil fuels to alternatives fuels derived from renewable sources (e.g., deriving ethanol from corn). Therefore, current proposals to combat global

 

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warming do not appear to be contrary to, or pose a risk of a material adverse impact on, the proposed project to derive ethanol from corn.

 

**In order to complete the construction of our planned ethanol production facilities, we will require the infusion of significant additional debt and equity funding**. We anticipate that we will need to raise approximately $688 million in equity and/or debt financing to complete construction of our three proposed ethanol production facilities in Barrie        and Sarnia, Ontario and Niagara Falls, New York.*See*“Part I, Item 2, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –PLANOFOPERATION.” There are no assurances that we will be able to obtain this financing and/or investment.

 

Effective December 13, 2006, we executed an engagement letter and indicative term sheets with West LB AG (“WestLB”) whereby WestLB has conditionally agreed to solicit and arrange debt financing for 75% of the cost of constructing our Barrie and Sarnia facilities up to a maximum of $1.35 per gallon of annual plant capacity in senior debt and $0.34 per gallon of annual plant        capacity in subordinated debt. Combined the Barrie and Sarnia plants are expected to have annual plant capacity of 216 million gallons on an undenatured basis. As such, WestLB would conditionally provide up to $365 million of financing. 75% of the combined construction cost estimate of $451 million for the Barrie and Sarnia facilities would equate to $338 million. Interest during construction of the two plants of $28 million was estimated at the interest rate on the senior financing        conditionally offered at London Interbank Offering Rate (“LIBOR”) plus an anticipated spread of 325 to 350 basis points and at LIBOR plus an anticipated spread of 1000 basis points on the subordinate financing. Currently LIBOR is at 2.7%, so that the interest rate on the senior financing would be 5.95% to 6.2% and the interest rate on the subordinate financing would be 12.7%. On a construction cost of $451 million, the senior financing would total $270,600,000 and would be        repaid in quarterly installments over 6 years following completion of construction. The subordinate financing would amount to $67,650,000 and would be repaid over 8 years from advance, with repayment terms to be negotiated. WestLB has indicated that they are interested in including our proposed Niagara Falls, New York location in their debt syndication but we have not received a revised engagement letter and indicative term sheet from them as of the date of this Report.

 

With the execution of the SK E&C EPC term sheet for our Sarnia location on March 12, 2008, a convertible bond term sheet (“Bond Term Sheet”) dated November 14, 2007 between us and SinoUp & Rise Ltd. of Beijing, China that contained a provision giving SinoUp & Rise Ltd. the right to nominate the EPC Contractor became effective. Under terms of the Bond Term Sheet,        on condition of West LB successfully completing the arrangement of our senior debt and subordinate debt financing, SinoUp & Rise Ltd. agreed to provide the 25% balance of the financing (approximately $45 million per facility to a maximum total amount of $90 million) required for our Barrie and Sarnia ethanol facilities in the form of a 7 year convertible bond, subordinated to the West LB senior and subordinated debt financing. During the first two years from advance, the convertible        bond will not pay interest but will instead accrue that interest as principal at an unpaid coupon rate of LIBOR plus 10%. Thereafter, the convertible bond will pay interest at LIBOR plus 15%, and the principal shall be repaid on a straight line basis until maturity. At current LIBOR rates, the interest on the convertible bond financing would be 17.7%. The convertible bond holder shall be able to convert the unamortized amount of the bond into shares of our Common Stock at a debt to        share conversion price of $3.00 per share after the first two years from advance. For conversion purposes, the unamortized amount shall not exceed the original principal amount of $90 million. Any conversion resulting in the convertible bond holder holding more than 10% of our equity ownership will result in the convertible bond holder receiving a seat on our Board of Directors.

 

We have had discussions with SinoUp & Rise Ltd. regarding participating in the financing of our proposed Niagara Falls, New York location but we have not received a term sheet from them as of the date of this Report. We have also discussed the financing required for our proposed Niagara Falls, New

 

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York location with investment bankers, financial institutions and private investors, but as of the date of this Report we have received no binding commitments. We may not be able to obtain sufficient funding from one or more investors or other financial institutions for our proposed Niagara Falls, New York location, or if such funding is obtained, that it will be on terms that we have anticipated or that        are otherwise acceptable to us. If we are unable to secure adequate financing, or financing on acceptable terms is unavailable for any reason, we may be forced to abandon our construction of that planned ethanol production facility. (See a complete description of the terms under “Part I, Item 2, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –PLANOFOPERATION” in this Report.)

 

**Holders of our Common Stock may suffer significant dilution in the future**. As of the date of this Report we do not have sufficient capital available to allow us to build the three ethanol plants discussed herein. As a result, it is possible that we may elect to raise additional equity capital by selling shares of our Common Stock or other securities        in the future to raise the funds necessary to allow us to implement our business plan. If we do so, investors will suffer significant dilution.

 

**Our capital structure will be highly leveraged because we plan to fund a substantial majority of the construction costs of our planned ethanol production facilities through the issuance of a significant amount of debt**. Our debt levels and debt service requirements could have important consequences which could reduce the value of your investment,        including:

 

| • | limiting our ability to borrow additional amounts for operating capital or other purposes and causing us to be able to borrow additional funds only on unfavorable terms; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                      |
| • | reducing funds available for operations and distributions because a substantial portion of our cash flow will be used to pay interest and principal on our debt;          |
|   |                                                                                                                                                                      |
| • | making us vulnerable to increases in prevailing interest rates;                                                                                                           |
|   |                                                                                                                                                                      |
| • | placing us at a competitive disadvantage because we may be substantially more leveraged than some of our competitors;                                                     |
|   |                                                                                                                                                                      |
| • | subjecting all or substantially all of our assets to liens, which means that there may be no assets left for our stockholders in the event of a liquidation; and          |
|   |                                                                                                                                                                      |
| • | limiting our ability to adjust to changing market conditions, which could increase our vulnerability to a downturn in our business or general economic conditions.        |

 

If cash flow from operations is insufficient to pay our debt service obligations it is possible that we could be forced to sell assets, seek to obtain additional equity capital or refinance or restructure all or a portion of our debt on substantially less favorable terms. In the event that we are unable to refinance all or a portion of our debt or raise funds through asset sales, sales        of equity or otherwise, we may be forced to liquidate and you could lose your entire investment. However, while no assurances can be provided, based upon our discussions and negotiations with financing entities as of the date of this Report, we do believe that our proposed business plan is viable and that we will obtain the additional financing necessary to develop our ethanol plants.

 

**If we are unable to raise the required senior debt and subordinate debt financing with WestLB, we will lose our non-refundable retainer deposit and we may be liable to pay significant** 

 

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**termination fees.**In December 2006, we paid a non-refundable retainer deposit of $200,000 to WestLB on execution of the engagement letter and indicative term sheets. We also agreed to pay all of WestLB’s expenses in connection with arrangement, placement and underwriting of the financing. As of the date of this Report, we have paid $110,526 for costs incurred by        WestLB’s legal and engineering advisors. If WestLB is unable to secure adequate financing, or financing on acceptable terms is unavailable for any reason, we will lose the $200,000 non-refundable retainer deposit and we will not be able to recover expenses paid. In the event that we chose to terminate the WestLB engagement and we enter into a similar debt financing with another lender within 12 months of terminating WestLB, we will be required to pay WestLB a termination fee of        $10,000,000.

 

**Our success depends, to a significant extent, upon the continued services of Gordon Laschinger, our President and Chief Executive Officer, who has no prior experience in the ethanol industry****.**While Mr. Laschinger has developed key personal relationships with our expected suppliers and customers, most of these        individuals have significantly more experience than Mr. Laschinger in the ethanol industry. This may place us at a competitive disadvantage because we will greatly rely on these relationships in the conduct of our proposed operations and the execution of our business strategies. The loss of Mr. Laschinger could also result in the loss of our favorable relationships with one or more of our suppliers and customers. Although we have entered into an employment agreement with        Mr. Laschinger, that agreement terminates April 30, 2009. We expect to renew this agreement upon termination, but there are no assurances that the parties will reach an agreement. In addition, we do not maintain “key person” life insurance covering Mr. Laschinger or any other executive officer. The loss of Mr. Laschinger could also significantly delay or prevent the achievement of our business objectives.

 

**We will be competing with other established ethanol production and marketing companies who have greater experience and resources than we currently have**. We will have several significant competitors in the ethanol production industry including GreenField Ethanol Inc. (formerly Commercial Alcohols Inc.), currently the largest producer of ethanol in        Canada, Archer-Daniels-Midland Company, (“ADM”), the largest producer of ethanol in the United States, VeraSun Energy, Corp. and Aventine Renewable Energy Holdings, Inc, both large U.S. ethanol producers, and Suncor Energy Inc., whichhas an ethanol plant in Sarnia, and others. These companies are presently producing ethanol in substantial volume, have greater financial resources and have more experienced personnel than we presently do. We are not currently producing any        ethanol. Those competitors who are presently producing ethanol have greater capital resources than we currently do. As a result, this will be a significant obstacle that we will need to overcome in order to become successful. In addition, our lack of experience in our chosen industry relative to many of our significant competitors may cause us to fail to anticipate or respond adequately to new developments and other competitive pressures. This failure could reduce our competitiveness        and cause a decline in our market share, sales and profitability.

 

**We will be competing with other ethanol production companies, animal farmers and other corn users for our feedstock****.**The principal raw material we expect to use to produce ethanol and its co-products is corn. We expect that corn feedstock costs will represent approximately 79% of operating costs. The profitability of our        business fluctuates greatly with changes in the price of corn. For each $0.10 per bushel increase in the cost of corn, our total corn cost increases by $8,059,701 per year. Significant increases in the price of corn will have substantial negative impacts on the profitability of our plants.

 

Feedstock costs may rise in the future as a result of the increased competition from additional ethanol plants beginning production and continued growth and demand from other users such as animal farmers and corn oil manufacturers. The supply of corn may be insufficient to meet this competing demand and as a result corn prices may rise, resulting in lower profit margins or making the        production of ethanol uneconomical. Corn prices as measured by the United States Department of Agriculture, or USDA, increased from under $2 per bushel in 2005 to $3.40 per bushel in 2007. According to the USDA

 

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during the 2006/07 crop year, over 2 billion bushels of corn (19 percent of the harvested crop) were used to produce ethanol, a 30-percent increase from the previous year. Increasing ethanol capacity could further boost demand for corn and result in sustained prices at current levels or a further increase in corn prices.**The development of our three proposed        ethanol plants will result in a period of rapid growth that will impose a significant burden on our current administrative and operational resources**. If we are able to obtain the financing necessary to implement our business plan, of which there can be no assurance, our ability to effectively manage our growth will require us to substantially expand the capabilities of our administrative and operational resources by attracting, training, managing and        retaining additional qualified personnel, including additional members of management, technicians and others. To successfully develop our two proposed ethanol plants, we will need to manage the construction of these facilities, as well as operating, producing, marketing and selling the end products generated by these facilities. There can be no assurances that we will be able to do so. Our failure to successfully manage our growth will have a negative impact on our anticipated results        of operations.

 

**Our proposed business of producing and selling ethanol is subject to significant supply and demand fluctuations**.**An increase in production of ethanol could have a negative impact on our anticipated revenues**. We may increase inventory levels in anticipation of rising ethanol prices and decrease        inventory levels in anticipation of declining ethanol prices. As a result, we are subject to the risk of ethanol prices moving in unanticipated directions, which could result in declining or even negative gross profit margins for this segment of our business. Accordingly, this segment of our business would be subject to fluctuations in the price of ethanol and these fluctuations may result in lower or even negative gross margins and which could materially and adversely affect our        profitability.

 

We believe that the production of ethanol is expanding rapidly. According to the Renewable Fuels Association, current ethanol production capacity in the United States stands at 7,888mm gallons per year. According to the Canadian Renewable Fuels Association, in Canada, current production capacity is roughly 194mm gallons per year. There is capacity under construction of 5,536mm gallons        in the United States and 192mm gallons in Canada. In our immediate market, consisting of Ontario, Quebec, Indiana, Ohio, Pennsylvania, New York and New Jersey, there is current production capacity of 828mm gallons per year, with capacity under construction of 845mm gallons per year.

 

*US Ethanol Production 2001-2008*

 

|                        |   | **January 2001** |   | **January 2002** |   | **January 2003** |   | **January 2004** |   | **January 2005** |   | **January 2006** |   | **January 2007** |   | **January 2008** |   |
|-----------------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|------------------|--------|
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Total Ethanol Plants        |   | 56               |   | 61               |   | 68               |   | 72               |   | 81               |   | 95               |   | 110              |   | 139              |   |
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Ethanol Production Capacity |   | 1921.9 mgy       |   | 2347.3 mgy       |   | 2706.8 mgy       |   | 3100.8 mgy       |   | 3643.7 mgy       |   | 4336.4 mgy       |   | 5493.4 mgy       |   | 7888.4mgy        |   |
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Plants Under Construction   |   | 5                |   | 13               |   | 11               |   | 15               |   | 16               |   | 31               |   | 73               |   | 61               |   |
|                        |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |             |   |
| Capacity Under Construction |   | 64.7 mgy         |   | 390.7 mgy        |   | 483 mgy          |   | 598 mgy          |   | 754 mgy          |   | 1778 mgy         |   | 6129 mgy         |   | 5536 mgy         |   |

 

_______________________

 

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Source: Renewable Fuels Association - http://www.ethanolrfa.org/industry/statistics/

 

Increases in the demand for ethanol may not be commensurate with increasing supplies of ethanol. Thus, increased production of ethanol may lead to lower ethanol prices. The increased production of ethanol could also have other adverse effects. For example, increased ethanol production will lead to increased supplies of co-products from the production of ethanol, such as DDGS and        CO2. Those increased supplies could lead to lower prices for those co-products. We cannot predict the future price of ethanol or DDGS. Any material decline in the price of ethanol or DDGS will adversely affect our sales and profitability. Also, the increased production of ethanol could result in increased demand for corn. This could result in higher prices for corn and cause higher ethanol production costs. Additionally, due to the fact that the price of ethanol usually moves        with the price of wholesale unleaded gasoline, we will not be able to pass any increases in corn costs on to the customer. This presents a risk to us as our margin will suffer greatly if corn prices increase while gasoline prices decrease.

 

**We cannot rely on long-term ethanol orders or commitments by our customers for protection from the negative financial effects of a decline in the price for ethanol**. The ethanol industry does not use fixed price long-term contracts. According to the Renewable Fuels Association (www.ethanolRFA.org/industry/statistics/), between 90% and 95% of the        ethanol in the U.S. and Canada is sold pursuant to six to twelve month contracts, negotiated between the ethanol producer and the oil refiner or gasoline blender. As such, we believe that we will not be able to rely on long-term (over one year) contracts for the sale of our product. Entering in to a long-term contract would require us to give the buyer a significant discount to current market prices. We believe that if and when wecommence operations, it will be more profitable for us to        sell into the spot market and through a mixture of short-term (less than one year) contracts. The Chicago Board of Trade launched an ethanol futures contract in March 2005. As of the date of this Report, there has been limited trading activity in ethanol futures. There is no certainty that this market will develop sufficient liquidity to provide an effective means of hedging against a decline in ethanol prices. As a result, the limited certainty of ethanol orders can make it difficult        for us to forecast our sales and allocate our resources in a manner consistent with our actual sales. Our expense estimates are based in part on our expectations of future sales and, if our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls.

 

The market for fuel ethanol in Canada is extremely similar to the market in the United States. With free trade the border is essentially invisible to ethanol producers and cross-border selling is common. We intend to sell our product in the market that nets us the highest price at the time.

 

**We will be dependent on a small number of customers because there are a finite number of petroleum refiners and mixers in North America**. We intend to sell our ethanol to petroleum refiners and gasoline blenders in the Northeastern United States and Central Canada. According to Eco Energy Inc., there are upwards of fifty potential customers in our        target market with whom they currently work. Our proposed Barrie location is close to Imperial Oil’s facility in Toronto, Ontario and Petro-Canada’s facility in Oakville, Ontario, Canada. The Sarnia site is in close proximity to large refineries owned by Shell Canada and Suncor Energy. The Niagara Falls, New York site is close Getty Oil’s refinery in Pennsylvania. This comparatively small group of potential customers represents a risk compared to if our sales were less        concentrated within a larger number of customers because a smaller group of customers can exert greater influence on our selling prices and if we lose a customer or a customer becomes insolvent, we could experience a significant decrease in revenue. As many of our costs and expenses will be relatively fixed, a reduction in revenue could decrease our profit margins and adversely affect our business, financial condition and results of operations. We expect that the costs of transportation        will allow us to ship our ethanol production competitively within a 300 mile radius of our Barrie, Sarnia and

 

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Niagara Falls facilities, although if there are shortages in markets outside of this area, market conditions at times may allow us to ship beyond this radius.

 

**We have not conducted any significant business operations as yet and have been unprofitable to date**. Accordingly, there is no prior operating history by which to evaluate the likelihood of our success or our contribution to our overall profitability. We may never complete construction of an ethanol production facility and commence significant        operations or, if we do complete the construction of an ethanol production facility, it may not be successful in contributing positively to our profitability.

 

**The market price of ethanol is dependent on many factors, including the price of gasoline, which is in turn dependent on the price of petroleum. These fluctuations may cause our results of operations to fluctuate significantly.**Petroleum prices are highly volatile and difficult to forecast due to frequent changes in global politics and the world        economy. The distribution of petroleum throughout the world is affected by incidents in unstable political environments, such as Iraq, Iran, Kuwait, Saudi Arabia, the former U.S.S.R. and other countries and regions. The industrialized world depends critically on oil from these areas and any disruption or other reduction in oil supply can cause significant fluctuations in the prices of oil and gasoline. As we cannot predict the future price of oil or wholesale gasoline, this may lead to        unprofitable prices for the sale of ethanol due to significant fluctuations in market prices. For example, the New York spot price of wholesale unleaded gasoline and ethanol rose from approximately $1.70 per gallon and $2.00 per gallon, respectively, in December 2005 to approximately $2.30 and over $4.00 per gallon, respectively, in June 2006. As of June 30,2008, wholesale gasoline prices were approximately $3.44 per gallon while spot ethanol prices have fallen to approximately $3.05        per gallon. If the price of gasoline and petroleum declines, we believe that the price of ethanol may be adversely affected. Fluctuations in the market price of ethanol may cause our profitability to fluctuate significantly.

 

**We will be subject to extensive air, water and other environmental regulations in connection with the construction and operation of our planned ethanol production facilities. We cannot predict in what manner or to what extent governmental regulations will harm our business or the ethanol production and marketing industry in general****.**Our proposed business is subject to extensive regulation by federal and provincial governmental agencies in Canada and the US. The production and sale of ethanol is subject to regulation by agencies of the US Federal Government, including, but not limited to, the Environmental Protection Agency (the “EPA”) in the US as well as other agencies in each jurisdiction in which ethanol is produced, sold, stored or transported. In Canada, the production and sale of        ethanol is subject to regulation by Environment Canada, through the Canadian Environmental Protection Act 1999, and in Ontario as well by the Ontario Ministry of the Environment.

 

Environmental laws and regulations that are expected to affect our planned operations are extensive and have become progressively more stringent. Applicable laws and regulations are subject to change, which could be made retroactively. Violations of environmental laws and regulations or permit conditions can result in substantial penalties, injunctive orders compelling installation of        additional controls, civil and criminal sanctions, permit revocations and/or facility shutdowns. If significant unforeseen liabilities arise for corrective action or other compliance, our sales and profitability could be materially and adversely affected.

 

In addition, the production of ethanol involves the emission of various airborne pollutants, including particulates, carbon monoxide, oxides of nitrogen and volatile organic compounds. We also may be required to obtain various other water-related permits, such as a water discharge permit and a storm-water discharge permit, a water withdrawal permit and a public water supply permit. If        for any reason we are unable to obtain any of the required permits, construction costs for our planned ethanol production facilities are likely to increase. In addition, the facilities may not be fully constructed at all.

 

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Compliance with regulations may be time-consuming and expensive and may delay or even prevent sales of ethanol.

 

**We will need to obtain various construction permits relating to our proposed ethanol plants and there can be no assurances that we will be able to obtain these permits, or that we will not incur significant delay in obtaining the same****.**As of the date of this Report we have begun obtaining those permits required relating        to the construction of our proposed ethanol plants. Each of our proposed locations is located on an existing industrial site. Existing industrial sites typically require fewer permits because they already have road and rail access permits, water intake and discharge permits. For our proposed Ontario locations, we will be required to obtain a Site Plan Approval. The Site Plan Approval process entails submitting a detailed layout of the proposed plant including a landscape plan and items        such as building finishes and an artist’s rendering showing what the plant will look like from various street level views. While we do not believe that we will encounter any problem obtaining this permit from the local municipalities because the sites have existing fire suppression and storm water management systems in place, there can be no assurances that we will not experience a problem or delay in obtaining these permits. The general time period required for this permit is 90        days.

 

We filed the Site Plan application for our proposed Barrie plant in June 2007 but did not receive a decision from the City of Barrie within the timeframe of The Ontario Municipal Act and in September 2007 made a request for an adjudication hearing with the Ontario Municipal Board. On December 3, 2007, the City of Barrie passed an Interim Control By-Law prohibiting the establishment of        ethanol production facilities on lands designated or zoned for industrial uses for a period of one year during which the City of Barrie would conduct a study on the impact of ethanol production. We expect that the Ontario Municipal Board hearing will be held on our Site Plan application and the Interim Control By-Law and a decision will be reached during early 2009. For the Sarnia site, we have recently commenced this process and expect to receive our Site Plan Approval permit from the        City of Sarnia during the fourth quarter of 2008.

 

For our two proposed Ontario locations, Environmental Permits are issued by the Ministry of the Environment of Ontario. In March 2007, we applied for this permit for the Barrie plant and we expect to receive the final permit once we resolve our Site Plan issue with the City of Barrie. We expect that our environmental permit for Sarnia, once submitted, will be processed within a shorter        time frame than the Barrie permit, given that the Sarnia plant will be similar to the Barrie plant and we have our experience with the Barrie application to draw upon.

 

As of the date of this Report, we had not begun the permitting process for our proposed Niagara Falls, New York location.

 

The receipt of environmental permits on existing industrial sites tends to be less onerous than on greenfield sites. Other permits that will be required are standard building permits that our EPC contractor will obtain as part of the obligations included in the EPC contract. There can be no assurances that we will obtain all permits in a timely manner, or at all. Failure to obtain all        necessary permits will have a significant negative impact on our proposed plan of operation.

 

**We face a risk that the Government of Canada may institute a corn countervailing duty that could increase feedstock costs for our proposed Canadian plants****.**The Ontario corn market relies on imports from the United States to increase liquidity. The most recent corn countervailing duty was brought about in September 2005,        by the Ontario Corn Producers. Originally, the Corn Producer’s successfully lobbied for a provisional countervailing duty that was effective from December 15, 2005 until April 18, 2006. On April 17, 2006, the Canadian International Trade Tribunal (CITT) found that the importation of grain corn from the U.S. had not caused and is not threatening to cause material injury to

 

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domestic Canadian corn producers despite a determined legal and public relations effort by Canadian corn producers to persuade the CITT that U.S. subsidies, together with alleged dumping by U.S. producers of corn in Canadian markets were indeed causing such injury. In the event that a corn countervailing duty is enacted again, it is not expected to apply to product shipped back to the United States.        Therefore, if we import U.S. corn into Canada and then export ethanol and DDGS to the U.S. we expect that we will be able to draw the duty back. However, we would not be able to recover the corn countervailing duty on any US produced corn used to make ethanol for sale in the Canadian market and we could be faced with higher corn prices in Ontario given the Ontario market’s reliance on imported US corn.

 

**Delays in our ability to obtain the financing necessary to commence construction of our proposed ethanol plants, delays in the construction of our planned ethanol production facilities or defects in materials and/or workmanship may occur**. As of the date of this Report we have not begun construction of our proposed ethanol plants, nor do we have any        commitment for all of the financing that is required to begin construction. No assurances can be provided that we will obtain the same.

 

Further, construction projects often involve delays in obtaining permits and encounter delays due to weather conditions, fire, the provision of materials or labor or other events. In addition, changes in interest rates or the credit environment or changes in political administrations at the federal, provincial, state or local levels that result in policy change towards ethanol or our        project in particular, could cause construction and operation delays. Any of these events may adversely affect our ability to commence our proposed operations, which may expose us to additional unknown risks that arise due to such a delay.

 

          As of the date of this Report, we expect the timeframe to the commencement of ethanol production at our planned Sarnia facility to be as follows:

 

|   | 1. | Based on discussions with City of Sarnia officials, receive site plan approval in October 2008. |
|--------|----|-------------------------------------------------------------------------------------------------|

|   | 2. | Based on EPC term sheet signed March 12, 2008 with SK E&C, develop and negotiate EPC contract and receive EPC pricing by October 2008. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Based on discussions with Ontario Ministry of Environment officials, receive Ontario Ministry of Environment permit in December 2008. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | Finalize EPC contract by December 2008. |
|--------|----|-----------------------------------------|

|   | 5. | Based on requirements of WestLB indicative term sheets dated December 13, 2006, close debt and or equity financing in February 2009. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | With financing closed, give SK E&C full notice to proceed with detailed engineering work in February 2009. |
|--------|----|----------------------------------------------------------------------------------------------------------------|

|   | 7. | Based on discussions with SK E&C, completion of site preparation work in March 2009. |
|--------|----|------------------------------------------------------------------------------------------|

|   | 8. | Based on discussions with SK E&C, SK E&C mobilizes to site in March 2009. |
|--------|----|-----------------------------------------------------------------------------------|

|   | 9. | Based on discussions with SK E&C, first pour of concrete in April 2009. |
|--------|----|-----------------------------------------------------------------------------|

|   | 10. | Based on discussions with SK E&C and Delta-T, start of plant commissioning in October 2010. |
|--------|-----|-------------------------------------------------------------------------------------------------|

|   | 11. | Based on EPC term sheet signed March 9, 2007 with SK E&C and Delta-T full operations of plant in January 2011. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------|

 

We expect the permitting process for the Barrie plant will be completed following an Ontario Municipal Board hearing by early 2009 and that plant completion will be within three months of the Sarnia plant. We have not begun the permitting process for our proposed Niagara Falls, New York location as of the date of this Report but based on our preliminary discussions with local        representatives, we believe that we could commence construction at that location in the second quarter of 2009.

 

**We are subject to a legal claim that seeks to prohibit the production of ethanol in Barrie, Ontario****.**On December 21, 2007, we received a Notice of Application (“Application”) between North

 

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American (Park Place) Corporation (“Applicant”) and Fercan Developments Inc., Northern Ethanol (Barrie) Inc., Northern Ethanol (Canada) Inc. and the City of Barrie (“Respondents”), applying for a declaration that the zoning of the property we have leased at 1 Big Bay Point Road, Barrie, Ontario does not permit the property to be used as an ethanol production plant, for a permanent        injunction prohibiting the property from being used as an ethanol production plant and for the costs of the Application to be paid by the Respondents. The Application is scheduled to be heard before a judge of the Ontario Superior Court of Justice on October 10, 2008. While we believe that the current zoning for the property does permit the production of ethanol and the possibility of the Applicant’s claim being successful is remote, if the Applicant’s claim is successful we        may be delayed in developing or unable to develop our Barrie location for the production of ethanol and may incur significant costs in defending the Applicant’s claim..

 

**Any significant increase in the final construction costs of our proposed facilities will adversely affect our capital resources****.**We have estimated that the construction cost of our proposed three facilities to be approximately $688 million. The estimated cost of these facilities is based on the target EPC price range        included in the aborted AKSC term sheet executed on March 9, 2007 for our Barrie plant, the maximum price range estimated by SK E&C in the term sheet executed on March 12, 2008 for our Sarnia plant, on discussions with Delta-T, engineering estimates, and on WestLB’s experience with other ethanol construction projects that they have financed, but the final construction cost of the facility may be significantly higher when firm EPC prices are received. We expect to receive a        fixed EPC contract price from SK E&C for our Sarnia Plant in October 2008 and approximately three months thereafter for our Barrie and Niagara Falls Plants. Once executed, the EPC contracts will guarantee a fixed price for the plants and that they will achieve 95% of their design capacity. Final construction costs however may vary from EPC contract prices due to possible price escalation factors that may be agreed to in the EPC contract on certain material inputs, force majeure        events that the EPC contractor can not control and that may be exempted in the EPC contract from the fixed price guarantee, and change orders that we may request over the course of construction. While we intend to seek additional funding to deal with any adverse contingencies that may arise before construction is completed, or at the very least have such potential sources of funding in place if this situation occurs, there can be no assurances that we will be able to raise this        additional capital to fund the cost of these variances if they occur.

 

**There is a risk that, because of the proposed location of our ethanol plants, we may incur additional costs for corn, water, electricity and natural gas, the raw materials required for the production of ethanol****.**The September 2006 Muse Stancil report, commissioned by us to assess the feasibility of its Barrie and Sarnia        locations for ethanol production, estimated that these facilities will process approximately 78 million bushels of corn each year at expected annual production of 216 million gallons of ethanol and will require significant and uninterrupted supplies of water, electricity and natural gas. The prices for corn, electricity and natural gas have fluctuated significantly in the past and may fluctuate significantly in the future. In addition, droughts, severe winter weather and other problems        may cause delays or interruptions of various durations in the delivery of corn to our facilities, reduce corn supplies and increase corn prices.

 

In 2006, approximately 218 million bushels of corn were grown in Ontario and an additional 96 million bushels were grown in Quebec. We anticipate sourcing approximately one-third (26,865,670 bushels) of our corn needs locally, with the balance (53,731,340 bushels) being purchased from the United States. The study performed by Muse Stancil & Co. suggests that we should expect to        incur freight costs of $0.18 per bushel or $4,835,820 annually from Ohio to Sarnia, Ontario, and $0.70 per bushel or $18,805,969 annually from Ohio to Barrie, Ontario. To date we have not had a study performed on the corn sourcing or freight costs to our Niagara Falls location, but we expect that it would be similar to that

 

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of the Sarnia location. The transportation of a large proportion of our corn presents a risk to Northern Ethanol as we would be negatively affected by increases in transportation costs.1

 

These freight costs may be higher than expected in the event of severe winter weather conditions. The locations chosen for our plants present a weather risk to Northern Ethanol because significant snowfalls may result in transportation delays. Sarnia, Ontario receives annual snowfall of 51 inches on average, Barrie, Ontario receives average annual snowfall of 128 inches and Niagara        Falls, New York receives average annual snowfall of 93 inches. We believe that having three ways to transport corn (via truck, rail, and freighter on the Great Lakes) will help reduce the risk of weather-related delays.2

 

Local water, electricity and gas utilities may not be able to reliably supply the water, electricity and natural gas that our facilities will need or may not be able to supply such resources on acceptable terms. Although a stable supply exists for gas, water and electricity in the Barrie, Sarnia and Niagara Falls areas, localized conditions such as drought or severe weather conditions        may affect the supply of raw materials to these areas from time to time over the life of the plant. Each proposed plant will require approximately 10,500 cubic ft. of gas per day, 1,000,000 US gallons of water per day and an average of 16 MW/hr of electricity. The loss of any of these utilities would cause us to shut down the plant until normal utilities are restored. We may not be able to successfully anticipate or mitigate fluctuations in the prices of raw materials and energy through        the implementation of hedging and contracting techniques. Our hedging and contracting activities may not lower our prices of raw materials and energy, and in a period of declining raw materials or energy prices, these hedging and contracting strategies may result in our paying higher prices than our competitors. In addition, we may be unable to pass increases in the prices of raw materials and energy to our customers. Higher raw materials and energy prices will generally cause lower        profit margins and may even result in losses. Accordingly, our potential sales and profitability may be significantly and adversely affected by the prices and supplies of raw materials and energy.

 

          **We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have those controls attested to by our independent auditors****.**As directed by Section 404 of the Sarbanes-Oxley Act of 2002        (“SOX 404”), the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 10-KSB. We have evaluated our internal control systems in order to allow our management to report on our internal controls, as a required part of our annual report on Form 10-KSB beginning with our reports for the fiscal year ended December 31,        2007. In addition, the independent registered public accounting firm auditing our company’s financial statements must also attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting as well as the operating effectiveness of the company’s internal controls for the fiscal year ended December 31, 2009.

 

While we have expended resources in identifying financial reporting risks, and controls that address themasrequired by SOX 404, there can be no positive assurance that we will receive a positive attestation from our independent auditors.

 

In the event we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial

_________________________

1 SOURCES: http://www.statcan.ca/Daily/English/061207/d061207a.htm

Muse Stancil & Co., Corn and Distillers Grains Report – pg 3

2  SOURCES: http://www.theweathernetwork.com/weather/stats/pages/C02022.htm?CAON0040

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statements and our ability to obtain equity or debt financing could suffer.

 

***RISKSRELATEDTOOURCOMMONSTOCK***

 

**There is a limited trading market for our securities and there can be no assurance that such a market will develop in the future.**On February 19, 2008 our Common Stock was approved for trading on the Over-the-Counter Electronic Bulletin Board (“OTCBB”) operated by the Financial Industry Regulatory Authority (“FINRA”), f/k/a the        National Association of Securities Dealers, Inc. As of the date of this report, trading in our Common Stock is limited. There is no assurance that a market will develop in the future or, if developed, that it will continue.

 

          **We do not have significant financial reporting experience, which may lead to delays in filing required reports with the Securities and Exchange Commission and suspension of quotation of our securities on the OTCBB, which will make it more difficult for you to sell your        securities****.**TheOTCBB limits quotations to securities of issuers that are current in their reports filed with the Securities and Exchange Commission (the “SEC”). Because we do not have significant financial reporting experience, we may experience delays in filing required reports with the SEC. Because issuers whose securities are qualified for quotation on the OTCBB are required to file these        reports with the SEC in a timely manner, the failure to do so may result in a suspension of trading or delisting from the OTCBB. We have been late in filing some of the reports we have been required to file with the SEC but are reviewing our internal procedures to insure that future reports are filed in a timely manner.

 

          **There are no automated systems for negotiating trades on the OTCBB and it is possible for the price of a stock to go up or down significantly during a lapse of time between placing a market order and its execution, which may affect your trades in our        securities****.**Because there are no automated systems for negotiating trades on the OTCBB, they are conducted via telephone. In times of heavy market volume, the limitations of this process may result in a significant increase in the time it takes to execute investor orders. Therefore, when investors place market orders, an order to buy or sell a specific number of shares at the current market price, it is possible for the price of        a stock to go up or down significantly during the lapse of time between placing a market order and its execution.

 

          **Our stock will be considered a “penny stock” so long as it trades below $5.00 per share, This can adversely affect its liquidity**. Our Common Stock will be considered a “penny stock,” so long as it trades below $5.00 per share and as such,        trading in our Common Stock will be subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the        transaction.

 

SEC regulations also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative        and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely affect the market price for our securities. In addition, few broker-dealers are likely to undertake these compliance activities. Other risks associated with trading in penny stocks could also be        price fluctuations and the lack of a liquid market.

 

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          **We do not anticipate payment of dividends, and investors will be wholly dependent upon the market for the Common Stock to realize economic benefit from their investment**. As holders of our Common Stock, you will only be entitled to receive those dividends that are        declared by our Board of Directors out of retained earnings. We do not expect to have retained earnings available for declaration of dividends in the foreseeable future. There is no assurance that such retained earnings will ever materialize to permit payment of dividends to you. Our Board of Directors will determine future dividend policy based upon our results of operations, financial condition, capital requirements, reserve needs and other circumstances.

 

**Any adverse effect on the market price of our Common Stock could make it difficult for us to raise additional capital through sales of equity securities at a time and at a price that we deem appropriate****.**Holders of our shares of Common Stock registered pursuant to our Form SB-2 registration statement which became        effective on September 26, 2007, are permitted, subject to few limitations, to freely sell these shares of Common Stock. Sales of substantial amounts of Common Stock, including shares issued upon the exercise of stock options issued pursuant to the Stock Plan we have adopted, or in anticipation that such sales could occur, may materially and adversely affect prevailing market prices for our Common Stock. In addition to the shares of Common Stock registered on our Form SB-2 registration        statement, there is an aggregate of 4,446,830 shares of our Common Stock underlying options that have been issued and which may be exercised over the next 12 month period. Also, an aggregate of 100,000,000 shares of our Common Stock have been held by certain non-affiliates of our Company (as that term is defined under the Securities Act of 1933, as amended) for a period sufficient to allow them to sell their shares. If they do so, such sales could have a material and adverse affect on        the prevailing market prices for our Common Stock, if and when such a market develops.

 

**The market price of our Common Stock may fluctuate significantly in the future****. T**he market price of our Common Stock may fluctuate in response to one or more of the following factors, many of which are beyond our control:

 

| • | the volume and timing of the receipt of orders for ethanol from major customers;                       |
|--------|--------------------------------------------------------------------------------------------------------|
|   |                                                                                                   |
| • | competitive pricing pressures;                                                                         |
|   |                                                                                                   |
| • | our ability to produce, sell and deliver ethanol on a cost-effective and timely basis;                 |
|   |                                                                                                   |
| • | our inability to obtain construction, acquisition, capital equipment and/or working capital financing; |
|   |                                                                                                   |
| • | the introduction and announcement of one or more new alternatives to ethanol by our competitors;       |
|   |                                                                                                   |
| • | changing conditions in the ethanol and fuel markets;                                                   |
|   |                                                                                                   |
| • | changes in market valuations of similar companies;                                                     |
|   |                                                                                                   |
| • | stock market price and volume fluctuations generally;                                                  |
|   |                                                                                                   |
| • | regulatory developments;                                                                               |
|   |                                                                                                   |
| • | future sales of our Common Stock or other securities.                                                  |

 

 

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Furthermore, adverse economic conditions in our market area could have a negative impact on our results of operations. Demand for ethanol could also be adversely affected by a slow-down in overall demand for oxygenate and gasoline additive products. The levels of our ethanol production and purchases for resale will be based upon forecasted demand. Accordingly, any inaccuracy in        forecasting anticipated revenues and expenses could adversely affect our business. Furthermore, we recognize revenues from ethanol sales at the time of delivery. The failure to receive anticipated orders or to complete delivery in any quarterly period could adversely affect our results of operations for that period. Quarterly results are not necessarily indicative of future performance for any particular period, and we may not experience revenue growth or profitability on a quarterly or        an annual basis.

 

The price at which you purchase shares of our Common Stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your shares of Common Stock at or above your purchase price, which may result in substantial losses to you and which may include the complete loss of your investment. In the past, securities class action litigation has often        been brought against a company following periods of stock price volatility. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and our resources away from our business. Any of the risks described above could adversely affect our sales and profitability and also the price of our Common Stock.

**RISKSRELATEDTOOURCOMPANY**

 

          **Provisions of our Certificate of Incorporation and Bylaws may delay or prevent a take-over that may not be in the best interests of our stockholders****.**Provisions of our Certificate of Incorporation and Bylaws may be deemed to have        anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the General Corporation Law of Delaware also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation’s        disinterested stockholders.

 

          In addition, our Certificate of Incorporation authorizes the issuance of up to 25,000,000 shares of Preferred Stock with such rights and preferences determined from time to time by our Board of Directors. No shares of our Preferred Stock are currently outstanding. Our Board of Directors may, without stockholder approval,        issue Preferred Stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our Common Stock.

 

          **Our management and principal shareholders have the ability to significantly influence or control matters requiring a shareholder vote and other shareholders may not have the ability to influence corporate transactions****.**Currently, our        principal shareholders, in the aggregate, own approximately 95% of our outstanding Common Stock. As a result, these shareholders, acting together, have the ability to determine the outcome on all matters requiring approval of our shareholders, including the election of directors and approval of significant corporate transactions.

 

          **We cannot predict whether we will successfully effectuate our current business plan. Each prospective purchaser is encouraged to carefully analyze the risks and merits of an investment in our Common Stock and should take into consideration when making such analysis, among others, the Risk Factors        discussed above****.**

 

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| **ITEM 2.** | **UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**- None |
|-------------|-----------------------------------------------------------------------|

 

| **ITEM 3.** | **DEFAULTS UPON SENIOR SECURITIES**- None |
|-------------|-------------------------------------------|

 

| **ITEM 4.** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS** |
|-------------|---------------------------------------------------------|

 

On June 17, 2008, we held our annual meeting of shareholders at our principal place of business in Toronto, Ontario, Canada. At that meeting our current members of our Board of Directors were re-elected for a one year term. In addition, our shareholders ratified the appointment of KPMG LLP as our independent auditors, to audit our financial statements for our fiscal year ended December        31, 2008.

 

| **ITEM 5.** | **OTHER INFORMATION-**None |
|-------------|----------------------------|

 

| **ITEM 6.** | **EXHIBITS** |
|-------------|--------------|

 

| **Exhibit No.** | **Description**                                                                                     |
|-----------------|-----------------------------------------------------------------------------------------------------|
|            |                                                                                                |
| 31.1            | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  |
|            |                                                                                                |
| 31.2            | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  |
|            |                                                                                                |
| 32.1            | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|            |                                                                                                |
| 32.2            | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  |

 

 

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**SIGNATURES**

 

          Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

|   | **NORTHERN ETHANOL, INC.** |
|--------|----------------------------|

 

 

| Dated: August 14, 2008 | By:s/ Gordon Laschinger______________ |
|------------------------|---------------------------------------|

|   | Gordon Laschinger, |
|--------|--------------------|

|   | Chief Executive Officer & President |
|--------|-----------------------------------------|

 

| Dated: August 14, 2008 | By:s/ Richard Smith__________________ |
|------------------------|---------------------------------------|

|   | Richard Smith |
|--------|---------------|

|   | Chief Financial Officer |
|--------|-------------------------|

 

 

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