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					Chapter 1: Executive Summary
A. Description of the Business Concept and the Business
        Farm Fuels, LLC. (FFL) is in the business of supporting and promoting the use of
sustainable sources of energy. The company will sell biodiesel production systems to farmers
who have or can grow enough oil feedstock plants to make biodiesel fuel primarily for their own
consumption. The biodiesel production system is composed of a preprocessing seed crushing
unit to extract the oil for introduction into the microreactor unit in which the actual biodiesel fuel
is produced.
B. USP – The Unique Selling Proposition
        FFL’s unique selling proposition involves the competitive and economical production of
biodiesel fuel using a novel and unique microreactor targeted to farmers on mid-large size farms
who have substantial fuel operational costs. By combining FFL’s biodiesel producing technology
with its efficient and economical advantages such as tax incentives, the business will thrive in the
biodiesel farming market. The “user friendly” system will allow customers to operate their own
small scale biodiesel plant.
C. The Opportunity and the Strategy
        The main opportunity is to provide customers with the ability to economically produce a
renewable fuel source at a competitive cost for their own use. Due to initiatives to reduce
dependence on imported fuels, the market for biofuels is greatly expanding. Currently, the
demand is so large that suppliers of this equipment cannot keep up with demand for production
of biodiesel fuel. According to early projections, demand for biodiesel will continue to increase
throughout the next several years. FFL will capitalize on this booming industry with cutting edge
technology.
        FFL’s strategy will include strong advertising and promotion and building personal
relationships with customers. Once FFL’s Oregon and Washington customer bases have been
established, the company will have the opportunity to grow and reach out to different
geographical markets in the U.S. and Western Canada. FFL will establish strong brand equity
through its commitment to sustainable resources and environmentally goals.
D. The Target Market and Sales Projections
       FFL will initially target existing or potential owners of mid-large size canola oil farms in
the Pacific Northwest. As the company sells more products, FFL plans to expand its target
market to the Midwest, a large producer of canola oil, by the end of five years. Local sales
representatives will be responsible for selling the product using various promotional techniques
such as web-based simulations and direct sales marketing.
       By 2008, FFL projects that the company will be ready to launch the microreactor system.
FFL anticipates first year sales of three units in year one. This is due to the fact that the
microreactor system is still new to the market and that this technology has no proven
performance. Also, the farmers would incur a switching cost from batch processing to the
microreactor technology. However, the efficiency and effectiveness of this technology will
eventually induce farmers to
                                          Table 1.1 Farm Fuels, LLC’s Projected Market Share
purchase and use this system. Table
                                                Year          2008     2009     2010     2011  2012
1.1 describes FFL’s projected
                                           Market Share      0.41%    2.78% 11.20% 16.63% 19.21%
market share.




Farm Fuels, LLC.                                                                                   -i-
E. Competitive Advantages
       The core component of the biodiesel system is the microreactor technology. When
comparing the current technology utilized in the biodiesel industry with the microreactor
technology, several advantages are obtained and are as follows:
         - The microreactor production will allow for a continuous flow process which produces
           a predictable quantity and quality of biodiesel.
         - The production capacity of the microreactor technology is flexible. It offers the
           potential to scale up and allow the consumer to increase productions needed.
         - Microreactor technology accelerates the entire process of making biodiesel.
         - It is cost efficient to self-produce biodiesel versus purchasing from a retail supplier.
F. The Economics, Profitability, and Harvest Potential
        FFL is expected to become profitable during the second year. Initial-equity breakeven
occurs during month 29, and gross margins of 70%. The operating margin in the first year starts
out negative due to high R&D costs but by the third year, it is expected to reach nearly 34%. The
business has potential to be highly profitable in the long-term since the demand for biodiesel is
projected to increase over the next several years. As long as there is a surplus of the demand,
FFL will have a viable market position.
        The harvesting options available for FFL include buying the ownership back from the
investors, outright sale of the company to a larger corporation, converting to a C-Corporation and
take the company public or merge/strategically align with an existing firm. FFL will consult with
an outside advisor to assist with crafting and selecting the most beneficial harvest strategy for the
members of the company.
G. The Team
       FFL’s management team is composed of five founding members who have diverse
backgrounds, knowledge, and experiences in key areas such as marketing, supply chain
management, computer engineering, and finance. The management team will work closely with
the developers of the microreactor unit.
H. The Offering
        FFL requires $3,000,000 in initial funding. The founders of this company will each
contribute $50,000 (totaling $250,000). FFL will offer investors membership into the LLC that
will represent a 15% equity interest. For this equity interest, the investors expect the venture to
have an IRR of 40.1% annually for the first 5 years of operation.




Farm Fuels, LLC.                                                                                 - ii -
Chapter 2: The Industry, the Company and its Product and Services
A. The Industry
         Industry Overview
         The industry of biodiesel production equipment is highly dependent on the need for
biodiesel fuel which is driven both by economics compared to regular diesel fuel prices and also
by mandates from government agencies. As diesel prices have continued to fluctuate
dramatically with an upward trend over the last several years, biodiesel production has become
an attractive and economically competitive fuel substitute. Nationwide production of biodiesel
tripled in 2005 to 75 million gallons. This high growth trend for biodiesel results in an emerging
market for production equipment that is cost competitive for FFL’s customer target segment,
farmers.
         The biofuels industry has received considerable interest focused on the development and
expansion of biodiesel. Reducing noxious emissions, contributions to rural economic
development, improving agricultural business and reducing reliance on foreign oil have all been
identified as potential reasons for the growing attention on biodiesel1.
         U.S. Biodiesel Industry
         According to the National Biodiesel Board, the amount of biodiesel produced in the
United States in 2006 (est. 250 million gallons) will nearly triple the amount produced in 20052.
Due to this exponential growth, the entire production capacity of the biodiesel industry is
experiencing significant changes with this demand. To accommodate this growing demand,
producers and suppliers are introducing new production plants at a rapid pace. Although the U.S.
currently lags behind countries in Europe, by the year 2010, it is projected that the U.S. will
become the largest single biodiesel market, accounting for roughly 18% of the world’s biodiesel
consumption3.
         There are several advantages with consuming U.S. produced biodiesel. Aside from the
obvious environmental factors, there are also significant economic benefits from using this
biofuel.
    1) Reducing U.S. dependence on foreign oil
                 In 2005, the U.S. produced roughly 35.3 billion pounds of potential biodiesel
         feedstock4. If the entire feedstock base was committed to the production biodiesel, 4.64
         billion gallons of biodiesel could have been produced solely by domestic resources. At
         the current time, it represents about 15% of total annual U.S. diesel demand.
    2) Promoting industrial uses of agricultural products
                 Biodiesel may also provide a source of increased demand not only for
         agriculturally produced products, but also some wastes from food processing and
         production. For example, it is typical for soybean crush margins to be driven by the
         demand for soybean meal. Current estimates are that demand for meal will grow
         significantly in coming years. If this happens, either alternate uses of the products need to
         be found or waste management costs in everything from the meat packing to the
         restaurant industry will increase.
1
  Fortenbery, R.T. “Biodiesel Feasibility Study: An Evaluation of Biodiesel Feasibility in Wisconsin.” University of
Wisconsin-Madison Department of Agricultural and Applied Economics. March 2005.
2
  National Biodiesel Board. Retrieved November 20, 2006. <www.biodisel.org>.
3
  “Biodiesel Report.” SRI Consulting. November 2006.
4
  Fortenbery, R.T. “Biodiesel Feasibility Study: An Evaluation of Biodiesel Feasibility in Wisconsin.” University of
Wisconsin-Madison Department of Agricultural and Applied Economics. March 2005.


Farm Fuels, LLC.                                                                                                -1-
      3) Development of renewable energy
         sources                                 Figure 2.1 Average Emissions Impacts on Heavy-
                 Numerous research studies       duty Diesel Engines
         have verified that exhaust
         emissions from biodiesel are
         substantially less than those from
         petroleum based diesel. As the
         percent of biodiesel in a
         bio/petroleum diesel blend
         increases, the benefits of reduced
         emissions increases (Figure 2.15).
         According to the Environmental
         Protection Agency (EPA), a 20%
         soybean oil based biodiesel and
         80% petroleum diesel fuel blend
         known as B20 results in a reduction of 10.1% in total particulate emissions (PM), 21.1%
         in hydrocarbons (HC), and 11% in carbon monoxide emissions (CO). In addition, sulfate
         emissions are reduced by 20%, due to the elimination of a sulfur-based engine lubricant
         required for use with diesel fuels. These reductions are offset by a 2% increase of nitrous
         oxide (NOx) emissions and a reduction in fuel efficiency of 1 to 2%.
                 Due to concerns about the apparent increase of NOx emissions, a recent in-depth
         study performed by the National Renewable Energy Laboratory found that the NOx
         emissions from biodiesel fuel to be statistically insignificant from that of petroleum diesel
         fuel6. As a result, net environmental impacts are overwhelmingly positive.
B. The Company and the Concept
       FFL is in the business of selling biodiesel production equipment to farmers who can
economically grow high oil feedstock plants to make biodiesel fuel for primarily their own
consumption. FFL’s intent is to sell and service this production equipment from the seed
crushing to biodiesel collection processes. The company was incorporated on December 3, 2006.
C. The Product
        Biodiesel production equipment is composed of a preprocessing seed crushing unit to
produce the oil for introduction along with methanol into a microreactor unit in which the actual
biodiesel fuel is produced and subsequently retained in storage tanks. A reaction by-product,
glycerol, is also produced
as seen in Figure 2.2.         Figure 2.2 Biodiesel Fuel System
Each unit is modular in                                     Methanol
design for easy servicing
and/or replacement. The
                                   Input          Crusher            Microreactor       Biodiesel
pre and post processing                                       Oil
units are commercially
available, while the                             Feedcake                               Glycerol
microreactor is a unique


5
    Environmental Protection Agency (EPA). 2006.
6
    McCormick, R.L. “Effects of Biodiesel Blends on Vehicle Emissions.” Milestone Report. October 2006.


Farm Fuels, LLC.                                                                                          -2-
technological advancement which has been patented by Jovanovic, et. al. at Oregon State
University.
        FFL is in the process of acquiring an exclusive license for the production and sale of the
microreactor for producing biodiesel fuel. It utilizes microchannels of 100-200 microns in
diameter into which the alcohol and feedstock oil is pumped for reaction to produce the
biodiesel. This process dramatically improves the reaction time (~10 minutes) by over an order
of magnitude compared to a batch type process. By using a fixed solid phase catalyst in the
microreactor, much of the batch type post processing costs associated with soluble catalyst
cleanup are avoidable, as well as the continual cost of the catalyst itself. The footprint of a
250,000 gallon per year output microreactor, the projected output size for customers, is also very
small (.5 meter x .5 meter x 0.25 meter) when compared to a comparable batch sized reactor
requiring several hundred square feet area. All of these advantages of the microreactor allow its
installation and use at the target segment, farm locations, at an exceptional price. This will allow
the farmer to realize a cost savings in his fuel purchases by growing and processing his own fuel
on location at not only competitive prices, but also including a tax subsidy of up to $1.10 per
gallon as allowed by the Energy Policy Act of 20057.
        Further, the farmer can use the canola plant as a rotational crop, thus improving the
usability of his fields. Under FFL’s current selling price, the payback to the farmer is only four to
five years, depending on the size of his canola crop and the current price of diesel fuel.
        In summary, the main benefits from the microchannel reactor are:
            - Biodiesel production at an efficient rate
            - Reduced capital cost (biodiesel reactor and crusher device)
            - Reduced feedstock cost (reduced methanol use and elimination of solvated catalyst)
            - Improved value of biodiesel
D. Entry and Growth Strategies
        Entry Strategy
        In order to enter the market, a viable marketing strategy must be implemented that is
targeted to the customer base. Farmers are becoming a solid customer base for biodiesel. The
benefits of producing biodiesel fuels on their own farms must be demonstrated. For example,
farmers must be shown that using biodiesel to run their farm equipment has superior benefits.
Not only is using the biofuels friendly towards the environment, it also has been proven to
reduce the wear and tear on the engines due to its inherent high levels of lubricity.
        In addition, proper pricing and marketing plans will contribute to the entry into this
market. The owners of mid-large size farms who grow feedstock have not been previously
targeted as potential producers of biodiesel. Pricing will be a key issue as the farmers will need
to understand the cost benefit of producing their own biodiesel as opposed to purchasing fuel
from a supplier. The marketing plans must truly display the benefits of FFL’s product and
conveying the “turn-key” aspect will be vital. At its simplest form, the “user-friendly” advantage
of the microreactor will be exploited. With minimal training, the farmers should be able to
successfully manage their own small scale biodiesel plant in a small amount of time after
purchasing the product.
        Growth Strategy
        For future growth strategies, FFL will consider tapping into different types of input
feedstocks, such as algae, as a potential source for biodiesel production. Researchers are finding

7
    Energy Policy Act of 2005. Retrieved January 15, 2007. <www.eere.energy.gov/afdc/laws/epact_2005.html>.


Farm Fuels, LLC.                                                                                              -3-
high levels of oils present in the algae. Once the research is complete, algae may have the
potential to be extremely cost efficient considering the amount of oils present and the low costs
associated with extracting them.
        Another growth strategy would be moving beyond the market of farmers and entering the
commercial market of biodiesel production plants. Once FFL’s efficiency rates of producing
large amounts of biodiesel in shorter time periods with lower costs are proven effective, the
company can offer to sell a series of microreactors into the larger scale plant operations. Based
on the size of the plant output requirements, FFL would have the potential to sell multiple
microreactors into a single plant. The plant net income would benefit from lower real estate in
terms of space requirements and operational costs resulting in a higher profitability margin.

Chapter 3: Market Research and Analysis
A. Potential Customers
        There are numerous potential customers for the microreactor system. For the first year,
the primary potential customer is an owner of a mid-large size farm (over 1,000 acres) in the
Pacific Northwest that can produce canola oil as a rotational crop. In year two, growers in
Washington and Idaho will be targeted. By years three and four, growers in North Dakota,
Montana and Minnesota, three places that primarily produce canola seed oil as feedstock, will be
targeted as additional customers.
        The farms that have been targeted in all areas are based upon their average annual
consumption of 24,400 gallons of fuel which costs approximately $49,0008. The USDA stated
that diesel accounted for 60% of all fuel purchases among U.S. farms9. Of these farms, FFL is
assuming that only 50% of these farms will be potential sales based on competition from other
profitable production crops. Please refer to Appendix 3 for a detailed breakdown10. The
economics for production of canola seed and processing into biodiesel fuel is shown in Table
3.1. The table shows both the component
                                                 Table 3.1 Farm Economics for Biodiesel Production
inputs and outputs for the biodiesel
reaction as well as tax incentives for the             Component Factors         Market Value/Acre
production of biofuels. The estimated cost        Seed @ $0.11/lb                       ($220.00)
                                                  Methanol @ $2.25/Gal                     (44.27)
of growing canola seed can be obtained
                                                  Operation Costs                          (20.00)
from a Crop Enterprise Budget developed
                                                  Biodiesel @ $1.97/Gal                    155.04
for Eastern Oregon and Washington
                                                  Glycerine* @ $6.00/Gal                     59.03
states11. Farm costs of $175 per acre were        Feedcake @ $150/Ton                      105.00
used to grow canola at a yield of 2,000           Tax Credits/Gal Biodiesel                  86.57
lbs/acre. This results in the production of                   Total                       $121.37
78.7 gallons of feedstock oil per acre
                                                  *Pharmaceutical grade produced.
which includes a loss of one fourth the
amount of seed oil to the feedcake, due to oil extraction inefficiencies. The economic value of
the canola seed is currently set at $0.11/lb for this analysis. This value is expected to increase
with increasing demand for canola.

8
  2002 Census of Agriculture. Farm Production Expenses. Retrieved February 12, 2007. <www.usda.gov>.
9
  Covey, T. et al. “Agricultural Income and Finance Outlook.” USDA Economic Research Service.
<www.ers.usda.gov>.
10
   2002 Census of Agriculture. State Profile. Retrieved February 12, 2007. <www.usda.gov>.
11
   Painter, Kathleen et. al. “Economic of Spring Canola Production in Dryland Eastern Washington.” Washington
State University, School of Economic Sciences. Crop Enterprise Report EB2009E. April 2006.


Farm Fuels, LLC.                                                                                            -4-
        The annual farm consumption of 24,400 gallons fuel used as noted above results in an
approximate net benefit to the farm of $38,000. This amount can be used as justification to
purchase the microreactor based biodiesel production system.
        Large scale plants and refineries will be an additional target market by year five.
Currently, there are 105 biodiesel producing plants in the U.S. with an average annual capacity
of 8 million gallons12.
        Co-Operatives and Extension Agents
        Many co-operatives exist within the farming community where individual farmers share
their resources in order to reduce costs of operating their farms. Sales of the microreactor system
will be targeted to 2 to 3 farmers to use for the production of biodiesel. The farmers can split the
purchase and operational costs and place the system in a mutual location. Local extension agents
will be utilized as an added resource to gain credibility with the farmers.
        Canola Oil Production
        The purpose of the microreactor is to reduce costs and save money in the long-term for
the customers. Given the industry, owners with mid-large size farms will make purchasing
decisions based on price. Since the microreactor is designed for farmers to be self-sufficient in
biodiesel production, FFL has the potential to meet consumer needs. Services such as extensive
training and developing personal relationships are also factors that appeal to FFL’s potential
customers.
        In order to identify potential customers, identifying the source of the potential feedstock
will be necessary since these are the primary inputs to the biodiesel reactor. A variety of virgin
oil feedstock can be used to produce biodiesel.
        As shown in Table 3.2, canola and palm oil         Table 3.2 Production of Oil per Acre
have relatively high production per acre. Although         Among Virgin Oil Feedstocks
palm oil has high production per acre, producing it            Feedstock         U.S. Gallons/Acre
in the U.S. is costly. Canola has high expectations             Soybean                    40
as a biodiesel feedstock in the U.S. Currently in              Rapeseed                   110
2006, 90% of one million acre canola production in              Mustard                   140
the U.S. is in North Dakota and Minnesota.                      Jatropha                  170
                                                                 Canola                   200
Improvement in winter canola varieties in recent
                                                                  Palm                    650
years has spurred production in Oklahoma and
                                                                 Algae                 10,000
Kansas and interest is also moving east13.
According to Tom Chastain, an Oregon State University professor in Crop and Soil Science,
canola is currently grown in Eastern Oregon and has been previously grown in the Willamette
Valley in Oregon.
        Although each individual farmer can grow feedstock and produce biodiesel using the
microreactor, the farmer will need to be given convincing information in order to make an
informed decision. Farmers who use biodiesel will have two options: 1) Continue to purchase
biodiesel from a supplier, 2) Use FFL’s products and services to generate their own biodiesel and
be more economically efficient.




12
   National Biodiesel Board. “Commercial Biodiesel Production Plants.” Retrieved November 20, 2006.
<www.nbb.org>.
13
   U.S. Canola Production. U.S. Canola Association, Retrieved November 20, 2006. <www.uscanola.com>.


Farm Fuels, LLC.                                                                                       -5-
        North Dakota, Minnesota and Montana are top three producers of canola oil in the U.S.
and thus provide a large market as growers of canola oil14. “The state of North Dakota has
tremendous potential to produce an alternative fuel for diesel engines,” Vern Hofman, an
agricultural engineer said. “As the name implies, biodiesel is similar to diesel fuel, except it is
produced from crops commonly grown in North Dakota.” Canola, soybeans, sunflowers and
safflowers are some of the main crops. All of them are capable of producing about 50 to 100
gallons of fuel per acre that can be used in an unmodified diesel engine. An estimate of the fuel
production from the state’s three main oil-producing crops in 2003 - soybeans, canola and
sunflowers - is more than 300 million gallons. Fuel production from any other oil-producing
crops would be in addition to this amount. In comparison, North Dakota agriculture uses about
85 million gallons of diesel fuel per year15.
B. Market Size and Trends
        “The global market for biodiesel is poised for explosive growth in the next ten years,”
says William Thurmond, Author of Biodiesel 2020 and Director of Management Consulting at
Emerging Markets Online16. The following chart is the U.S. biodiesel consumption prediction.
        Based upon Figure 3.1, the trend has
been that biodiesel consumption has seen
continuous growth since 2004 and the
projections suggest that the growth will
continue for the next few years. The
potential for annual growth in the market is
considerable. Once it is shown that the
microreactor has the capabilities to produce
multiple benefits for the customer, FFL’s
target market will have the opportunity to go
beyond the farms in the Northwest and            Figure 3.1 U.S. Biodiesel Consumption 2004-2010
Midwest and enter into new geographical
markets such as Canada. Over the next few years, knowledge of FFL’s product and reputation
will increase with potential customers and the growth of the company will follow thereafter.
        Growth Drivers
        According to a study performed by Bantz and Deaton, the market for diesel fuels is
growing at a faster rate than other fuel segments (2006). Drivers for the increase in demand in
biofuels include economic, social and environmental factors, as well as governmental mandates
and incentives. Concerns about U.S. energy security, consumer awareness of economic issues
and other regulations that promote use all contribute to a potential user-switch from other fuels to
biodiesel. The U.S. Government has had a significant role due to its increasing efforts of offering
incentives to investors. In a market where the demand is outweighing the supply, the producers
of biodiesel have an opportunity to be rewarded by helping to level out the industry17.


14
   Farm & Ranch Guide. North Dakota’s Ag Newspaper. Retrieved January 15, 2007.
<www.farmandranchguide.com/articles/2005/06/23/ag_news/regional_news/news11.txt>.
15
   State Summary, North Dakota. Agriculture in Classroom. Retrieved November 20, 2006.
<www.agclassroom.org/stats/northdakota.pdf>.
16
   “Biodiesel 2020: Global Market Survey, Case Studies and Forecasts.” Emerging Markets Online. October 2006.
17
   Bantz, S.G., and Deaton, M.L. “Understanding U.S. Biodiesel Industry Growth using System Dynamics
Modeling.” James Madison University, 2006.


Farm Fuels, LLC.                                                                                           -6-
        Environmental issues also come to the forefront as a large contributor to the increase in
demand for biodiesel. With the increase in knowledge and awareness regarding sustainable
business practices, customers are looking towards using biodiesel to assist in achieving sources
of renewable energy.
        Growth Limitations
        According to a report released by SRI Consulting titled the “Biodiesel Report,” there are
no technical limitations for the potential growth of the biodiesel industry18. The report identifies
the major limitation as feedstock availability and cost. The available feedstock is generally
classified under: vegetable oils, animal fats, and marine oils. These will have a significant role in
determining the amount of biodiesel produced as the availability of the feedstock is directly
related to the farmland available for crops.
C. Competition and Competitive Edges
         The largest competitive edge will be the economic model of distributed processing
whereby the production system is actually located at the individual customer’s farm. As opposed
to a model in which the individual farmer would have to transport the product to a centralized
facility, the distributed processing model allows for a significant cost reduction in terms of
maintaining the tax subsidy and transportation costs.
         The most significant competitor to micro-scale reactors are small scale, batch based,
biodiesel plants. To prove the efficiency of the microchannel reactor, Table 3.3 shows a
comparison of production plants in terms of cost per gallon production of biodiesel. Frazier,
Barnes & Associates (FBA) of Memphis, TN, a consulting firm specializing in vegetable oil
processing, assessed the capital cost of various sized biodiesel production facilities. Each of the
plant cost estimates are for a facility capable of handling a wide variety of feedstock for biodiesel
production. The capital cost estimates include the cost of facilities needed to pre-process any
feedstock such that it could be converted to biodiesel. FBA evaluated four different sized
biodiesel production plants looking closely at estimated construction and operating costs19.
Table 3.3 Estimated Capital Cost Comparison of Various Plant Sizes
        Plant Size*
                                   0.5                3                             15                   30
  (Million Gallons/Year)
 Capital Cost                  $0.95 Million       $3.4 Million                  $9.6 Million        $15.0 Million
 Feedstock Needed
         Pounds                  3.75 Million      22.5 Million                112.5 Million         225.0 Million
         Gallons                 0.50 Million       3.0 Million                 15.0 Million          30.0 Million
Source: Frazier, Barnes & Associates
*Assume a green field site. Estimated accuracy +/- 25%. Total includes capital cost for pre-processing feedstock.
       Another area of competition will be competing for feedstock inputs. The areas of North
Dakota and Minnesota have multiple uses for the canola oil. Currently, there are enough supplies
available for biodiesel production using the microreactor, but in the future, the industry could
experience profit margin pressures and competition for canola could increase. To assist with the
competitive pressures, FFL will look to other forms of input feedstock for supplying the
production of biodiesel. The Wall Street Journal stated that the new crop being examined for


18
   LaFond, Anita. “Global Biodiesel Market Growing Faster than Demand.” Free Republic, 2006.
19
   Doherty, B., Ferland, C., McKissick, J., and Shumaker, G. A. “A Study on the Feasibility of Biodiesel Production
in Georgia.” University of Georgia, February 2003.


Farm Fuels, LLC.                                                                                                -7-
potential biodiesel production is jatropha, which is an inedible oil seed whose primary purpose
could become a substitute feedstock20.
       The price of the microreactor based, biodiesel system will be $165,000. This reactor is
capable of producing 250,000 gallons annually. The comparison of capital cost per gallon is
shown in Table 3.4.
Table 3.4 Capital Cost per Annual Gallon Production of Biodiesel at Various Facilities
 Plant or Reactor Microreactor 0.5 Million Gal 3 Million Gal 15 Million Gal 30 Million Gal
                                        Size Plant      Size Plant       Size Plant    Size Plant
 Cost per Gallon          $0.66           $1.90           $1.13             $0.64        $0.50
         The microreactor has strong competitive advantages compared to existing biodiesel
processors in the market. Most of these processors operate via batch systems which require
increased levels of labor. Since the microreactor is a continuous system, it requires less labor
operation and has a larger throughput per plant size. A process method based on tertiary source
of triglycerides and supercritical production conditions also allows cost efficient processing in
terms of input costs.
         The main source for FFL’s competitive advantage comes in the form of the patented
technology used for the microreactor. It is proven to be more economically efficient than
competitors and it provides current users of biodiesel with the opportunity to become self-
sufficient by becoming producers.
D. Estimated Market Share and Sales
        The fundamental value that is being created with FFL’s product is providing the target
customer with the opportunity to become self-sufficient in producing biodiesel competitively to
regular diesel. With the microreactor’s unique            Table 3.5 Predicted Annual Sales in Units
efficiencies, there are many long-term benefits            Year       1      2     3      4       5
including a reduction in capital costs and an              Units      3     38    164 196 201
additional market for canola oil. With the large number of farmers producing canola, the
probability of obtaining a significant share of the market is high. The predicted annual sales are
in Table 3.5.
        As described in Figure 3.1, annual U.S. biodiesel consumption will be 240, 280, and 325
millions of gallons in 2008, 2009, and 2010, respectively. To account for FFL’s contribution to
the biodiesel production market, annual projected sales were multiplied an anticipated production
capacity of the system. See Table 3.6 for five year estimates of market share.
Table 3.6 Projected U.S. Biodiesel Consumption and FFL Projected Market Share
Year         Projected U.S. Biodiesel              Projected U.S. Biodiesel     FFL’s Project
                  Consumption                           Consumption             Market Share
                                                (Including FFL’s Projections)
 2008     240 Million Gallons                         241 Million Gallons           0.41%
 2009     280 Million Gallons                         288 Million Gallons           2.78%
 2010     325 Million Gallons                         366 Million Gallons          11.20%
2011*     406 Million Gallons                         487 Million Gallons          16.63%
2012*     508 Million Gallons                         630 Million Gallons          19.21%
* 25% Annual growth rate assumed


20
     “Alternative Fuels.” Wall Street Journal. January 29, 2007.


Farm Fuels, LLC.                                                                                -8-
E. Ongoing Market Evaluation
        Assessment
        Given the new venture is based on a developing technology in a dynamic and growing
industry, continual assessment will be vital. Areas including governmental regulations and
fuel/oil prices have the potential to impact the company and its customers. To ensure FFL’s
prices are competitive, the marketing team will continue on-going marketing research to stay up
to date with industry standards.
        The following outlines the evaluation processes:
        Target Market/Customers:
             - Compare projected and actual sales
             - Survey customers and seek feedback on product and services
             - Survey potential customers and find out why they are or are not interested in FFL’s
             product

Chapter 4: The Economics of the Business
A. Gross and Operating Margins
        FFL will be outsourcing the manufacturing of the microreactor portion of the biodiesel
system. Upon completion of the microreactor unit, the remainder of the assembly will take place
either at the warehouse or at the customer’s location. FFL’s gross and operating margins for the
turnkey biodiesel production system are described in Table 4.1.
        Although FFL’s operating margin is       Table 4.1 Financial Data for Years 1-5
predicted to be negative during the first year,     Year      Gross Margin       Operating Margin
it becomes positive in year 2. This is usual          1            70%                  -540.5%
during the start-up phases of a new bio-              2            70%                     6.6%
reactor business venture. Years 2 through 3           3            70%                    32.3%
show a marked improvement of the operating            4            70%                    33.5%
margin, improving from 6.6% up to 32.3%.              5            70%                    33.4%
See Appendix 13. These margin improvements will be achieved through improved sales
experience and market acceptance, and an increased marketing effort.
B. Profit Potential and Durability
        The magnitude of FFL’s profit stream is analyzed from the perspective of before and
after taxes. For the first year, the company will have operating losses. After year 3, the company
is expected to become fairly consistent with its gross and operating margins. By the fifth year,
profits are expected to reach approximately $12.7 million before taxes. Since the company is
utilizing a new business model in a relatively young industry, there were no industry benchmarks
that FFL could reference.
        FFL expects the durability of the forecasted profits to be quite high for several reasons.
The first is FFL’s possession of intellectual property (the microreactor) which gives the company
a sustained competitive advantage and a significant barrier to entry. The microreactor creates a
barrier to entry through product differentiation via its distributed processing capability at low
cost compared to the competition. There are currently no products in the biodiesel industry that
enable producers to utilize a continuous production process in a small scale format, and still
maintain the level of productivity. Second, FFL will capture the first-mover advantage in that
FFL is changing the conventional dynamics of fuel production and distribution with respect to
owners of mid-large size farms.


Farm Fuels, LLC.                                                                               -9-
C. Fixed, Variable, and Semi-variable Costs
        The costs of FFL can be classified as either fixed,
variable, or semi-variable in nature. For the first year of        Table 4.2 Year 1 Major Costs
operation, the total costs for major expenses are estimated to           Category           Cost
be $3,117,825. The fixed costs consist of the building lease,       Building Lease          $36,000
marketing expenses and R&D. The variable costs consist of           COGS                    150,600
                                                                    Marketing               250,000
cost of goods sold and royalties. Finally, the semi-variable
                                                                    Royalties                14,850
costs consist of selling and administration costs. These costs
                                                                    SG&A                    666,375
are shown in Table 4.2 and in more detail in Appendix 13.           R&D                   2,000,000
D. Months to Equity Break-even                                             Total        $3,117,825
        For the forecasted results, the anticipated break-even
sales level will be reached during the 29th month of operations. The stepwise growth in the chart
occurs as FFL prepares in advance for the coming harvest season. See Appendix 13.
E. Months to Reach Positive Cash Flow
      FFL’s cash flow turns positive during the 13th month of operation. See Appendix 13.

Chapter 5: Marketing Plan
A. Overall Marketing Strategy
         FFL’s specific marketing philosophy and strategy is to market the many benefits of using
the biofuels production system. The system is designed to be user friendly, efficient, flexible in
its input and output requirements, its cost savings, and environmental benefits. FFL plans on
initially targeting farmers who can grow canola oil feedstock as the company’s primary
customers.
         FFL’s strategy in terms of reaching this target market is to focus on direct marketing
methods. This includes: farm bureaus, setting up displays at various trade shows, obtaining
membership lists in farmer associations and cooperatives, placing advertisements in farm-related
journals, maintaining demonstration sites and word of mouth. Since FFL’s target market will be
comparatively small to begin with, the company’s sales force can visit the farms of the potential
customers and educate them about the product and services. Through the use of biodiesel
websites and newsletters, FFL will be able to spread the word about the company’s product.
         As previously stated, the introduction of FFL’s product will be limited to the Northwest
region for the first two years and will expand into the Midwest by year 4. Seasonal trends will
definitely have an impact on the company’s sales, especially in the Pacific Northwest where
canola oil can be grown in the off-season. To promote out of season sales, FFL will educate the
end-user about other feedstock capabilities in conjunction with select discounts.
B. Pricing
        The manufacturing cost of the total system is $50,000. Given all of the costs related to
manufacturing and selling this equipment, the selling price will be $165,000. Since exact
comparisons in the market cannot be found, FFL will compare the price of the microreactor to
other processing systems (see Table 5.1).




Farm Fuels, LLC.                                                                              - 10 -
Table 5.1 Price Comparison
                                                                                Batch/
               Product                    Price         Throughput*                               Description
                                                                             Continuous
             Gaiam                 $4,999      0.6 Gallon / Hour             Batch System       No Preprocessor
      Microreactor system       $165,000       30 Gallon / Hour               Continuous        No Preprocessor
            Refinery
                                $950,000       57 Gallon / Hour              Batch System       No Preprocessor
 (0.5 Million Gallon Capacity)
* Batch system equivalence based on gallons per cycle time.
        Given the competition, it is clear that FFL will be serving a different market that will
require a completely different pricing strategy. In establishing FFL’s pricing strategy, the
benefits and payback period to FFL’s customers are extremely relevant. The expected payback
period will vary based on many independent factors, but in general, is expected to be between
four to five years.
C. Sales Tactics
         The methods for selling the microreactor will stem mostly from direct sales. The
company’s sales representatives will present the product at various farm-related functions, such
as trade shows and exhibitions, and will also take part in “door-to-door” selling by visiting the
targeted farms. This tactic will be essential so that potential customers can fully understand the
product and its benefits.
         The individuals selected for FFL’s sales force will be local representatives who are
familiar with potential customers. Since the emphasis on sales will be on personal interactions
with customers, the sales representatives will utilize their local knowledge of the industry to
provide optimal customer service to the farmers.
         A main goal of the sales force will be to conduct research to identify which farmers have
the most influence over other farmers. In the farming industry, it is typical to find 1-2 “early
adopters” who are highly influential when it comes to purchasing trends. By establishing
relationships with these “early adopters” when entering a geographic market, it will be easier to
subsequently make sales to other customers in the area.
         The sales force will focus much of their sales pitch on the added value the system will
bring to their farms. According to results from a focus group conducted by Dan Whitaker, most
farmers valued the familiarity of the salespeople and were more likely persuaded to purchase
farm equipment when the value of their land can be increased21. It will be necessary for the sales
team to display strong communication skills so that the product’s functions, features and benefits
can be explained in a simple way that can be understood by the potential customer.
         The initial sales force will start out with only two individuals fulfilling those roles. As the
company grows and the word spreads about the product, FFL will increase the company’s sales
force into the Washington (2), Idaho (2), Montana (2), North Dakota (2) and Minnesota (2). The
total sales calls to farms in the geographic markets over five years will be approximately 6,500.
         The sales representatives will be paid a base salary and commission for the amount of
microreactor systems they sell. The sales representatives are already selling farming equipment
so they will already be embedded in the farming community.
D. Service and Warranty Policies
       Any customer who purchases a microreactor will receive on-site training on how to

21
     Whitaker, Dan. Statement concerning focus group results. Personal meeting on February 6, 2007.


Farm Fuels, LLC.                                                                                            - 11 -
operate it. Currently, the lifespan of the product is unknown. Once the product lifespan can be
estimated with relative accuracy, customers will receive a warranty policy corresponding with
the lifespan.
E. Advertising and Promotion
         The advertising campaign will be directed at the target market through demonstration
sites, trade shows, announcements in newsletters and trade journals, promotion packages and
other various forms of promotion. The cost of advertising and promotion for the first year is
estimated at $250,000 and is described in Table 5.2.
         In the subsequent four years, the promotional budget will increase to accommodate the
growth into new geographical markets and expansion in existing markets. The demonstration
sites will only exist during the first two years of the venture and will be taken off of the
marketing expenses. In years two through five, the marketing budget will be $300,000,
$600,000, $800,000 and $1,000,000 respectively.
Table 5.2 Year 1 Promotional Budget
        Promotion             Price      Quantity    Total Cost              Description
 Marketing Packages               $20       700         $14,000           Brochures, letters
 Demonstration Sites           50,000          2        100,000        Operating, and other fees
                                                                    Transportation costs, employee
Trade Shows                    10,000          10        100,000
                                                                                 wages
                                                                      Online features, streaming
Web-Based Services              3,000           1          3,000
                                                                     videos, online demonstration
Miscellaneous                  33,000        N/A          33,000       Miscellaneous expenses
                      Total                             $250,000
        Demonstration Sites
        A key factor in FFL’s marketing strategy will be the development of demonstration sites
placed strategically around the Northwest. In order for the product to sell, customers must be
shown how the system works. To prove the product’s worth, FFL will select one farming site to
act as an “open house” to show other farmers how the system works. The site most likely chosen
will be that of the “early adopter.” The individuals running the farm will be given in-depth
training on how to operate the system. The farms that are chosen to display and run the system
will only be charged the cost of the system and its distribution in exchange for their services in
operating and showing the system to potential customers. As sales increase and the market
expands, demonstration sites will be set up in new areas.
        Web-based Services
        Web services will promote the product, visit to demonstration sites and provide contact
numbers of sales representatives for additional information. With effective uses of streaming
videos and other features, the virtual demonstration site will show how the product functions.
Personal testimony of satisfied customers will encourage interest from potential customers.
Current news and events about biodiesel will also be included on the website for customer use.
For promoting demonstration sites, up to date activities and event locations will be listed.
        Support from “Green” Organizations
        This venture will appeal to green organizations due to its focus on environmental issues.
FFL plans on making connections with various organizations, such as the National Biodiesel
Board, to seek support in terms of advertising and promotion on their various media outlets
(websites, newsletters). FFL will also focus marketing efforts towards “green communities” that


Farm Fuels, LLC.                                                                              - 12 -
regularly support environmentally-friendly technology.
F. Distribution
        The distribution of the product is direct to the customers including installation via service
personnel. Inventory of the product will be centralized initially, since it is cost efficient and hard
to predict from which region the company is making sales. Based on geographic distant and
number of orders to customer regions, FFL will set up warehouse facilities for assembly and
distribution of the product to these customers. By grouping the orders for distant regions,
delivery cost per unit can be minimized. In addition, for regional trends showing increased sales
of products and parts, a regional inventory would be established to minimize delivery cost per
unit.

Chapter 6: Design and Development Plans
A. Development Status and Tasks
         FFL is in early development stages of scaling up the original prototype microreactor
developed by Jovanovic et. al. For guidance in the production of microreactor, FFL plans on
utilizing the consulting services of Brian Paul who is a co-inventor of the microreactor and an
Associate Professor in Industrial and Manufacturing Engineering at Oregon State University.
One of the principals in the company, Frank Shala, is a chemist and will provide support with the
biodiesel production aspects of development. FFL also needs to identify the appropriate
equipment set (pumps, controllers, seed crusher, tanks, etc.) as well as the automation and
interface system for the biodiesel production system. To help with the automation
implementation, FFL plans on hiring the consulting services of Tyler Backman, a current OSU
student who recently              Table 6.1 List of Key Tasks in Design and Development
developed an automation
                                                           Activity                       Schedule
system for a batch scale
                                   Locate assembly facility                                  1 month
biodiesel system at                Identify source of system components                      1 month
Madison Farms in Echo,             Scale up and production of microreactor                2-3 months
Oregon. Remaining tasks            Hire consultants for assemble and test of total system 4-5 months
are testing the microreactor
system in terms of output quality and sustained operation, and obtaining facilities for production.
Product reliability studies will be an on-going activity to determine potential product issues and
improvement opportunities. The key tasks are listed in Table 6.1.
B. Difficulties and Risks
        There are no anticipated design and development problems in the production of the
microreactor. However, this is dependent on not only the successful scalability of the
microreactor from the laboratory stage, but also on a manufacturing process that can reliably
produce the integrated biofuel system. If this does not proceed in a timely fashion, then the
scheduled production of the microreactor system can be significantly delayed, thereby causing
additional costs in time to market. Other risks also involve schedule delays with suppliers and
machining operations. Ordering component parts in advance will help ameliorate some of these
delays, but will increase inventory carrying costs. As sales increase, it is planned to operate in a
JIT mode, due to the high cost of the component parts.
        While the microreactor is of a fairly simple design, it has some critical dimensions (e.g.,
alignment of channels) which need strict quality controls in place during production to ensure its
reliable operation. Testing of each microchannel in the product will further verify that the


Farm Fuels, LLC.                                                                                 - 13 -
microreactor meets its specifications. FFL anticipates some initial component integration issues,
but is confident that these can be readily solved. It is also highly desirable to either incorporate a
solid phase catalyst into the microreactor or to operate the microreactor under supercritical
conditions to eliminate the added catalyst cost and the subsequent operational costs in byproduct
cleanup as a result. Javanovic’s group is pursuing the latter approach which FFL hopes to
implement in the product.
C. New Products and Services
        FFL will be continually assessing alternate product material composition and
manufacturing processes both for the microreactor and input feedstocks to reduce operating
costs. These investigations will not impact the release of the current product which is made out
of stainless steel and utilizes canola seed as the feedstock. Further improvements of the
microreactor design by Jovanovich et. al., such as operation under supercritical conditions to
allow a wider range of feedstocks without a catalyst, may be incorporated in future production
models.
D. Costs Structure
        It is anticipated that the above costs   Table 6.2 Estimated Design and Development Costs
will be used to produce the first unit for sale.              Resource                   Cost
The materials costs are quite high, due to        Labor (2 Technicians)                  $50,000
anticipated pre-production optimization of        Materials                              150,000
the microreactor design and quality control       Consulting Fees                         60,000
costs. FFL needs to have a contingency of         Production and Testing Services         50,000
approximately $53,400 for any                                   Total                   $310,000
underestimation of the above costs. This
represents about a 20% increase of $267,000 ($310,000 less $50,000 first unit cost). The above
costs are included in the R&D expenses during the first two years of operation (see Appendix
13).
E. Proprietary Issues
        FFL is currently seeking a license agreement with Oregon State University for the use of
their patent on a microreactor used to make biodiesel, invented by Jovanovic et. al. This
agreement will give the company exclusive rights to produce and market for sale their
microreactor for biodiesel production.

Chapter 7: Legal, Intellectual Property and Ethical Issues
A. Selection of a Business Entity
         Initially, FFL intends to market and sell its product to the Pacific Northwest States
(Oregon, Washington, Idaho), however it is the intention to expand to North Dakota, Montana,
and Minnesota after year two. This expansion delay is due to the market acceptability of the
product in farming communities (i.e., product success will be demonstrated after one or two
growing seasons). As the current five year plan only considers sales in the United States, a
Limited Liability Corporation (LLC) is the best business entity selection to address product
liability and entity recognition concerns within the U.S. It is now a recognized business structure
in all 50 states plus the District of Columbia22. An LLC allows owners to avoid the double

22
 “Spotlight on the Limited Liability Company (LLC).” The Company Corporation. Retrieved January 31, 2007,
<www.corporate.com/llc-definition.jsp>.


Farm Fuels, LLC.                                                                                       - 14 -
taxation of paying first corporate tax on profit and then personal income tax on dividend
distributions. Although the administrative costs and some tax situations are somewhat higher
than other entity types, there are benefits that allow the deductibility of expenses for various
insurance and retirement plans for both owners and employees23. Due to the expected limited
cash flow in the early years of operation, cash dividends are not planned so growth may be
maximized.
        The company will retain the services of an attorney to aid in the formation of the Articles
of Incorporation in Oregon, as well as with other necessary legal paperwork and provide general
counsel. Where appropriate, FFL will offer equity positions in the company to knowledgeable
investors for the advancement of this venture.
B. Regulatory Issues
         FFL will conform to all local, state, and country regulations for the sale of its products.
The company will also do so likewise with respect to the locations of biodiesel equipment
manufacture (e.g., Oregon). This includes following financial reporting and employment
standards pursuant to the level of employment.
         While FFL will not be the producer of the biodiesel fuel, it will inform customers and
producers of any applicable governmental regulations to which they may be required to adhere to
(e.g., EPA and OSHA regulations for handling, storage, and disposal of the feedstocks, fuel and
its byproducts). It will be important to note that FFL will not be responsible for the ultimate
quality of the biodiesel produced, as this is highly dependent on the quality of the input feedstock
and purity of the chemical reactants or customer’s compliance with governmental regulations.
         Currently in 2007, business regulations specific to biodiesel are not yet fully established,
however, the government’s main objective appears to focus on tax credits and other incentives to
encourage the use of biodiesel fuel. The National Biodiesel Board (NBB), which is funded by
United Soybean Board, has great influence in the implementation of governmental regulations
with respect to biodiesel production and use. NBB cooperates with the BQ-9000 Quality
Management Program which offers certificate programs both to biodiesel producers and
marketers and recommends fuel quality testing standards through conformance with American
Society of Testing and Materials (ASTM) specifications24.
         The tax incentives which may directly or indirectly affect the business model (sales to the
customers) are Volumetric Blender Tax Credit, Small Agri-Biodiesel Producer Tax Credit and
Alternative Fuel Refueling Infrastructure Tax Credit. The Volumetric Blender Tax Credit
(Section 1344 of the Energy Policy Act of 2005) applies towards blends of biofuel composed of
at least 0.1% by volume of petroleum based diesel with biodiesel derived solely from virgin oils.
The blender, who must register and be approved by the Internal Revenue Service, must add a
required amount of dye to the blended fuel to receive this credit. The Small Agri-Biodiesel
Producer Tax Credit (Section 1345 of the Energy Policy Act of 2005) is a volumetric based
income tax credit for the production of agri-biodiesel (biodiesel made from first-use vegetable
oils and first-use animal fats).
         The two aforementioned credits are usually limited to the first 15 million gallons of
biofuel produced. The Alternative Fuel Refueling Infrastructure Tax Credit (Section 1342 of the
Energy Policy Act of 2005) provides tax credit for the installation of certain qualifying fueling
infrastructures that dispense alternative fuel, including biodiesel blends B20 and higher25.
23
   Wade, Theresa M. et. al. “Choosing the Right Entity.” Salem, Oregon. 2007.
24
   “National Biodiesel Board Fuel Policy.” National Biodiesel Board. June 21, 2006.
25
   National Biodiesel Board. Retrieved February 1, 2007. <www.biodiesel.org/news/taxincentive>.


Farm Fuels, LLC.                                                                                  - 15 -
According to IRS tax form 8911, FFL’s product is qualified as a refueling property for personal
use. These credits are shown in Table 7.1 and provide tax deductions for the customers of FFL’s
products.
Table 7.1 Biodiesel Tax Incentives
                        Credit                                    Amount                Expiration
 Volumetric Blender Tax Credit26,6                             $1.00/Gallon          December 31, 2008
 Small Agri-Biodiesel Producer Tax Credit27                    $0.10/Gallon          December 31, 2008
 Alternative Fuel Refueling Infrastructure Tax Credit6    30% of Infrastructure Cost December 31, 2009
       The above expiration dates contained in Energy Policy Act of 2005 are likely to be
extended due to the government’s interest in promoting biofuel usage.
C. Developing and Protecting Intellectual Property of the Business
         The main intellectual property utilized in the product is that pertaining to the process of
making biodiesel fuel as revealed in a patent application by Jovanovic et. al. at Oregon State
University (OSU)28. FFL will exclusively license this IP, based on a microreactor technology, to
manufacture biodiesel production equipment for use with vegetable oils and/or animal fats. The
founders of FFL will negotiate a contract with OSU’s Office of Technology Transfer for
appropriate royalty payments to use this license. While OSU will retain ownership of this IP, any
new patentable designs or processes developed by FFL to improve this technology will be
assignable to FFL and may be used for cross-licensing purposes or royalty payment reductions
with OSU.
         This intellectual property uses a microchannel technology that requires precision
machining and testing for production of the microreactor. It is the intent of the company to
outsource this production to a local expert manufacturing company. It will be necessary to have
non-disclosure agreements in place with this company to restrict any IP or other trade secrets
utilized for the production of the microreactor. While it would be difficult, though not impossible
to replicate this design, FFL will use trademarks for the company’s name, logos, and products as
well as close relationships with the customers to advertise FFL’s unique technology and help
prevent any IP infringement concerns.
         As the license with OSU is based on contract law, any violation of the terms of the
contract by FFL can result in lose of the patent use and/or punitive damages. This may occur by
marketing the microreactor for use with other non-licensed feedstocks (e.g., wood products
based) or even implying the same by the sales staff to influence or make a sale. FFL would be a
party to this license violation and, if found guilty, would be liable for damages. From Section
284 of the Patent Act and using the “but for” test, these would include possible additional
royalties to OSU, profits to the other licensee whose application was violated (upon actual proof
of lost sales), prejudgement interest, if violation is over several years time, and price erosion of
the other licensee’s product from loss of profits29. Loss of patent use will be devastating for the
company, as it is the only competitive advantage that differentiates FFL from its competitors
based on an advanced technology.
26
   IRS Notice 2005-62. Internal Revenue Service. Retrieved February 7, 2007 <www.irs.gov/irb/2005-
35_IRB/ar18.html>.
27
   Energy Policy Act of 2005. Alternative Fuel Data Center. Retrieved January 15, 2007.
<www.eere.energy.gov/afdc/laws/epact_2005.html>.
28
   Jovanovic et. al. “Process for Making Biodiesel.” Ref. No.:245-74072-01.
29
   Melvin, Sean P. CyberLaw and E-Commerce Regulation: An Entrepreneurial Approach. Ohio: South-Western,
2005. p.82.


Farm Fuels, LLC.                                                                                      - 16 -
         Due to the high dependency of FFL business success pertaining to patent coverage, the
management will need to retain the services of a patent attorney to verify that the patent is valid
with no potential prior art claims, is properly registered with the PTO, and is not questionable or
at least knows the limitations with respect to an estoppel (or laches, if applicable) defense. The
management team also needs to inform its employees, especially sales and marketing, of the
limitations of the application of the patent license to avoid infringement issues.
D. Managing Legal and Ethical Issues
        FFL is committed to conduct business affairs that comply with ethical and legal
regulations and expectations that meet not only FFL’s members’ expectation, but all FFL’s
stakeholders as well. This is very important for the company’s reputation and brand
development.
        The company will develop guidelines to meet these expectations in the form of training
documents and certifications for management and employee responsibilities and duties, and
further supported by regular reviews and the use external auditors and advisors for business and
employee relations to ensure trust and openness in its activities. The Human Resources
Department will ensure compliance with all governmental regulations especially those from
OSHA, pertaining to the safety of FFL’s employees, suppliers and customers, due to the
potential exposure and use of hazardous chemicals and materials. Compliance to safety standards
and regulations in other states in which the company conducts business will also be required. The
company may further take out umbrella liability insurance for its upper management and owners
to further minimize their liability.

Chapter 8: Manufacturing and Operations Plan
A. Operating Cycle
        FFL’s general operating cycle is shown in       Figure 8.1 Overview of Farm Fuels, LLC.
Figure 8.1. The company plans on outsourcing the Operating Cycle
manufacturing of the microreactor unit to Korvis
Automation, Inc. They specialize in
                                                               Korvis              Farm Fuels,
manufacturing products (precision systems) in a            Automation, Inc.           LLC.
supporting OEM role. By leveraging their
extensive knowledge and skill, FFL will be able
                                                             Oregon State           Customer
to focus on the sales and service of the biodiesel             University
system to the customers. FFL’s plan is to follow
the principles of just-in-time (JIT) production for
the whole system, and to maintain an inventory of parts that will be needed for routine and
expected maintenance.
        FFL is in discussions with Korvis Automation, Inc. to produce the microreactor unit on a
variable, just-in-time schedule. This is due to the seasonality of the business of FFL’s primary
customers (the farmer) business. FFL expects 70% of sales to occur during the first four months
of the year. The Oregon farmer’s spring season harvest takes place during the months of May
and June, so the majority of sales will occur in the four months leading up to this harvest. The
remaining 30% of annual sales are expected to be distributed at 25% occurring during the
months of May, June, and July, and the other 5% occurring during the months of August through
December. FFL’s long-term strategy will be to distribute the annual sales more evenly
throughout the year. This will be achieved by finding other feedstocks that are harvested at
different times of the year, compared to canola, and to diversify and broaden the company’s


Farm Fuels, LLC.                                                                               - 17 -
customer base to include larger refineries that operate year round. FFL will be discussing other
issues such as required lead times, product service support, and warranty issues with Korvis
Automation, Inc.
B. Geographical Location and Rationale
        FFL is planning on being located just east of Corvallis along the Highway 34 Industrial
corridor. There are two primary reasons behind the selection of this location. First, it will allow
FFL to remain in close proximity to the designers/creators of the microreactor (Dr. Jovanovic
and Dr. Paul) as well as the company (Korvis Automation, Inc.) whom FFL will be outsourcing
the manufacturing portion of the product. This triad should enable FFL to efficiently solve any
problems incurred during the development/start-up phases. It will also allow FFL to work closely
towards the continuous improvement and evolution of the microreactor and its associated
technologies. Other substantial advantages include a steady supply of highly skilled workers and
easy interstate access to FFL’s initial customers in eastern Oregon. A disadvantage might come
in the form of higher wage rates.
C. Facilities and Improvements
        FFL intends to lease a facility along the Highway 34 industrial corridor that will satisfy
the needs to warehouse finished microreactor units, assemble the product (the biodiesel system),
and adequately support FFL’s sales and service staff. Given these uses, FFL estimates that it will
require approximately 7,000 to 10,000 square feet of warehouse and office space preferably with
a loading dock, to meet its needs. After talking with numerous local realtors about these
requirements, property can be leased for approximately $3,000 per month30. After year three,
when FFL expands the target market to farmers in Montana, North Dakota, and Minnesota, FFL
will lease a second warehouse in the Midwest to better serve these new customers.
        The actual assembly of the biodiesel system should be relatively straightforward, only
requiring standard or basic tools. However, to effectively transport and distribute the
microreactor and biodiesel system from the outsourced manufacture to the customers, FFL will
require a truck and forklift. During the first two years of operation, FFL will rent trucks and
forklifts on an as-needed basis. As sales are expected to increase substantially in year three, FFL
will shift to leasing the trucks and forklifts on a long-term basis. Another option would be to
purchase used trucks and forklifts on the secondary market. Preliminary research has shown that
there are ample used trucks available for $25,000 or less. As far as forklifts are concerned,
refurbished ones can be purchased for approximately $10,000. A new forklift would cost around
$25,000.
        The majority of the proposed financing will go towards the development of FFL’s
prototype/demonstration biodiesel systems. The remainder will go towards the procurement of
FFL’s facility and equipment, and sales, service and administrative staff salaries.
D. Strategy and Plans – Manufacturing and Operations
        As seen in Figure 8.1, FFL plans on outsourcing the manufacturing of the microreactor
unit to Korvis Automation, Inc. FFL selected Korvis Automation, Inc. for several reasons.
        1) They possess the necessary expertise to produce a quality product.
        2) In May of 2005, Korvis implemented a Manufacturing Resource Planning (MRP)
          system to help meet the dynamic needs of their customers and which will be
          particularly well suited to meet FFL’s growth plans.

30
     Century 21. Renee Rahn. <rrahnc21@gmail.com> (from MLS).


Farm Fuels, LLC.                                                                               - 18 -
       3) Kovis has never missed a single delivery date proving their staff’s dedication to the
          customer and their ability to produce the microreactor according to JIT principles.
       4) As mentioned earlier, it will allow for close collaboration between FFL, the
          microreactor designers, and the manufacturer.
       As far as the sustainability of operations, FFL plans on running all trucks and vehicles on
biodiesel when applicable. FFL also plans on working with the suppliers to switch to biodiesel
when possible. All of FFL’s vehicles will be serviced regularly to maximize efficiency.
Recycling of all pertinent materials will be performed.

Chapter 9: IT Strategy and Plan
A. IT Strategy
        FFL’s strategic focus is on the production, sales and service of the biodiesel system. In
order to align with this business strategy, the IT strategy will focus on an internal information
system (Intranet) for supporting its sales and services with linkages to suppliers for timely
production order needs. These IT infrastructure activities include the support of customer
relationship management, just-in-time (JIT) operation, bookkeeping of transactions and product
delivery status. Web-based promotion of the product will utilize web based video, including
animated biodiesel equipment operation demonstrations, and customer cost modeling
(affordability) information. Due to the intensive educational effort to train customers in this new
product concept and the low initial sales volume, the company is not planning to enter the e-
commerce business in the near future.
B. Internet Strategy
        FFL expects to increase contacts with potential customers by promoting its product on its
Web site. Information such as product specifications, location of demonstration sites, safety and
maintenance instructions, and up-to-date biodiesel information will be posted. Potential
customers will be encouraged to contact a FFL’s regional sales representative for pricing and
other detailed information. Another aspect of the Internet strategy is for customer support after
installation of a biodiesel production system. Information for running the system, frequently
asked questions, contact information for service representatives and information regarding
suppliers of methanol and wholesalers collecting byproduct and excess oil will be available.
C. IT Architecture
        An inexpensive Enterprise Resource Planning (ERP) system is necessary to support
FFL’s operation. The selection criteria for an ERP system will be based on the business needs as
well as cost. Figure 9.1 shows how information flows between customers and the company;
Figure 9.2 shows the corresponding IT architecture. Linkages to the supplier network will be
included when sales volume increases to enable JIT production. The number of servers in the
Web server cluster and ERP server cluster will be increased as the number of customers increase.
Figure 9.1 Information Flow                       Figure 9.2 IT Architecture
       Customer
                                                                       Outside Externet




                    Sales                                              Router Firewall
                Representative

                                                                           Switches


   Web Server           ERP Server

        Farm Fuels, LLC.
                                                                         Database Server
                                                  Web Server Cluster                       ERP Server Cluster




Farm Fuels, LLC.                                                                                                - 19 -
        For software, the service prices for a professional web designer are expected to be
$6,000. Several ERP companies offer software for small-mid size businesses with costs
dependant on the number of modules and functionalities. Pricing ranges from $99 per user, per
month (NetSuite, Inc.) to a one-time fee of $25,000
(Oracle). FFL estimates the ERP purchase to be               Table 9.1 Cost Estimate of IT Facilities
$5,000 and the total software costs to be $8,000.                       Item                 Cost
        For hardware, the price of a server is $1,049          Software:
(Dell PowerEdge 1900 Server), the price of a router by          ERP Package                    $5,000
Cisco Systems starts from $309 (Cisco 857 Router)               Web Page Design                  6,000
and the price of a switch is $19.90 (Repotec 8 port            Hardware:
Nway Metal Switch). The costs of other hardware                 3 Servers                      $3,147
                                                                Router & 2 Switches                 349
such as backup, UPS and employee workstations are
                                                                Miscellaneous                  $5,000
included in the miscellaneous expenses. Starting with
                                                               Consulting Service              $5,000
three servers, the initial cost of the IT architecture is               Total                 $24,496
estimated in Table 9.1. A further update is expected
when adding linkages to the supplier network. Assuming four server updates each year, FFL
estimates upgrade and maintenance cost to be $3,000 and $4,000 each year, respectively.
D. IT Delivery
         In order to reduce the cost of building the IT infrastructure, outsourcing of development
and maintenance to an IT consulting firm or a system integrator with a mix of consultants is
planned. The selection criteria for choosing the outsourcing firm are adequate business
knowledge to understand system requirements from FFL’s business infrastructure, technological
capability and cost. The negotiation and selection will most likely involve trade-offs among these
three criteria.
         Once the IT outsourcing firm is selected, the IT manager will be responsible for periodic
communication with the IT consulting firm to coordinate changing requirements, ensuring the
priorities of system features, monitoring progress and dealing with other unexpected problems.
E. IT Management
        The delivered IT infrastructure is expected to be used in the long term with continuous
maintenance. It is also expected to expand as the company grows. Building a long term
relationship with IT infrastructure suppliers for sharing industry information, obtaining flexible
contract terms and quick responses for supporting security and other deleterious events is the role
of the IT manager. An appropriate consulting service partnership will also provide oversight and
accountability of the outsourcing company to meet the implementation and maintenance needs of
the ERP for FFL.
F. IT Investment
        The criteria for IT investment are: clarity of expected cost and development time, and
expected return. For the initial IT investment, the expected cost is $24,496 and the development
time is 2 months. The cost of the initial investment is considered as a minimum requirement to
support FFL’s IT strategy.
        The benefits can be calculated both tangible and intangible earnings. The tangible
earnings would be in terms of labor cost savings. Intangible benefits are the streamlined
information flows between FFL and suppliers, FFL and customers, and within FFL.




Farm Fuels, LLC.                                                                                  - 20 -
     Figure 10.1 Organization Chart
Chapter 10: Management Team
A. Key Management Personnel
        FFL’s management team is composed of five founding members who have diverse
backgrounds, knowledge, and experiences in key areas such as marketing, supply chain
management, computer engineering, and finance. Individual skills and backgrounds are outlined
in Appendix 10. The management team will initially carry multiple roles with the venture. At the
end of five years, FFL plans on using the organizational structure, as shown in Figure 10.1.
B. Organization Structure – Roles and Responsibilities
        The functional organization structure is used to manage the company which is shown in
Figure 10.1. The CEO and the management team of FFL will be responsible for providing and
implementing the company’s strategic
                                            Figure 10.1 Organization Chart
plans and maintaining operational
duties of the company in order to                                       Chief Executive Officer

achieve its objectives in a competitive                                                                Administrative
                                                                                                         Assistant
business environment. Each
department will report directly to the
CEO.                                             Chief            Vice-                      Manager                 Chief
        The CFO is responsible for             Financial
                                                Officer
                                                                President
                                                                Sales and
                                                                                              Human
                                                                                             Resources
                                                                                                                   Operating
                                                                                                                    Officer
                                                                Marketing
analyzing and reviewing financial
data, reporting financial performance,          Office            Sales                                             Service
preparing budgets, and monitoring              Assistants     Representatives                                    Technicians

expenditures and costs.
        The Vice-President of Sales
and Marketing is responsible for introducing and promoting microreactor biodiesel production to
consumers.
        The manager of Human Resources is responsible for managing personnel issues as well
as recruiting and training new employees. Note: As a start-up company, the CEO will be initially
responsible for these duties. This position will not be filled until FFL approaches 100 employees.
        The COO is responsible for managing and monitoring the daily operations of the
company. The COO will also coordinate supply chain management and ensure timely delivery of
microreactors to FFL’s warehouse and assembled microreactor systems to customers.
C. Management Compensation and Ownership
        Compensation rates for FFL’s management team are not comparable with other well-
known corporations. Compensation for the management team in the first five years of FFL’s
operation will be a combination of a low base salary and monetary bonuses which rely on the
level of responsibilities and performance outcomes of each position.
D. Employment and Bonus Plans
        Every member of the management team and employees will be hired on a full-time or
part-time basis (sales representatives). In the first year of operation, FFL will have ten employees
of which two will be members of a sales and marketing team working on promoting biodiesel
production and selling the microreactor production system. Since the heart of the business is to
promote and sell the product, compensation for sales and marketing representatives will differ
from other staff members. In order to provide an incentive for sales and marketing
representatives, compensation for these employees will be based on their sales volume in
addition to a low base salary and monetary bonuses that all employees will receive.


Farm Fuels, LLC.                                                                                                      - 21 -
E. Members – Rights and Responsibility
        All FFL members will have a right to vote; membership meetings will be held annually.
Any member who wishes to sell their membership or resign from the management team may do
so by putting their membership in escrow for three months. Occasional membership meetings
will be held to determine the ownership of this membership portion.
F. Other Investors, Supporting Professional Advisors and Services
        In addition to the five founding members who will provide part of the start-up money to
the company, FFL will seek out a combined total $2.75 million from a few angel investors and
venture capitalists to make an initial investment. These investors will be given an equity position
in the company, totaling 15% ownership. The membership interests in FFL are restricted
securities and cannot be readily resold for 5 years.
        FFL considers university professors, industry experts, and suppliers as potential investors
for the company. This is due to the fact that the complexity of the patent and manufacturing
issues is beyond the competency of the management team and requires experienced professionals
who have strong familiarity with the industry. FFL, therefore, will retain outside legal and
technological services from a broad range of consultancies. Having some of the relevant advisors
such as university professors and industry experts as members will not only give the company
access to critical resources but will also help these advisors buy in to the company, which will
enhance the company’s success and future growth.
        FFL will acquire a license for the microreactor technology from Oregon State University.
FFL will pay a 3% royalty on net sales, plus annual patent reimbursement royalties. These are
apart from an up-front license fee of $100,000 that FFL has to pay to Oregon State University.

Chapter 11: Overall Schedule
A. Key Milestones and Target Dates
        To analyze tasks Table 11.1 Key Milestones and Target Dates
necessary to                                        Activities                         Target dates
successfully launch the      Assemble management team                                        January 28
venture, key activities      Obtain patent license from OSU                                  February 4
and target dates are         Formation of local sales team complete                             April 7
shown in Table 11.1.         Contracts with outsourcing companies complete                     April 14
The key tasks are            Building of the final prototype complete                            July 1
classified into six          Delivery of the first microreactor system complete           September 11
categories: formation of
business entity, operations, marketing/sales, facilities/distribution, IT infrastructure, and
management team/employees. See Appendix 11 for a complete list of the activities and target
dates established.
B. Summary of Overall Implementation Schedule
       After establishing a management team and selecting a business entity, many of the
remaining start-up tasks will begin. The first major task is to obtain a licensing agreement from
Oregon State University. Then, FFL will request for proposals from potential suppliers and select
the suppliers. This entire process should take roughly three and a half months.
       While FFL is researching suppliers, the promotional campaign will occur concurrently. A
local marketing/sales team will be selected to provide input on the marketing campaign,



Farm Fuels, LLC.                                                                                  - 22 -
distribute promotional materials, and begin negotiations with farmers to select potential sites for
demonstrating the product.
        Additionally, the construction and performance testing phases will be an important piece
to the process. While FFL’s marketing team is promoting the product, warehouse employees will
be working diligently with OSU designers/researchers to fine tune all production aspects of the
system. While the technology and process has already been proven successful, FFL would like to
ensure its efficiency/quality with performance testing.
        In brief, FFL anticipates that it takes around seven months after establishing the company
to receive the first order. The first farmer will be able to fully run the microreactor biodiesel
production system within two months after placing an order with FFL.

Chapter 12: Critical Risks, Problem, and Assumptions
A. Assumptions Implicit in the Business Plan
        FFL’s business plan regarding its proposed biodiesel system is contingent upon numerous
assumptions regarding the external economic environment, the targeted customer, and its
technological and production capabilities. This includes the primary assumptions that the
microreactor can be scaled up to a commercially viable size and be integrated into the biofuel
system with a proven and reliable manufacturing process. Further assumptions are that the
production process will produce a predictable quantity and quality of output and yield the same
output rate regardless of the type of input feedstock utilized.
        An additional assumption is that FFL will be able to effectively negotiate and acquire a
license agreement from Oregon State University at a reasonable cost and for an adequate time
period. In terms of financial assumptions, all revenue and expense figures have been calculated
based on availability of current information and prices.
B. Major Risks to the Venture and Investors
        In order for the business to minimize potential setbacks, it is imperative for FFL to
identify any potential risks or problems that might occur. By analyzing and developing
contingency plans and responding to risk factors, business operations can assist in alleviating and
minimizing their impacts (see detailed risk analysis in Appendix 12). All potential risks are
divided into the following three categories: technological risks, customer risks, and external
economic risks.
        Technological Risks
        Currently, the microreactor technology has only been developed on a small scale in a
laboratory setting. It is possible that the microreactor will not proceed as planned when scaled up
and combined with the entire production system. The conversion rate and duration of processing
may vary under different temperature conditions or due to different kinds and qualities of
feedstock. FFL will be responsible for building and constructing the production prototype
development and for testing the capabilities of the production process. This could be very
expensive and hard to scale up and will have an effect on the cost/benefits analysis of the
microreactor system and the overall project schedule.
        Customer Risks
        The target customer groups are owners of mid-large size farms who grow, or have the
potential to grow, canola oilseed feedstock. From this feedstock, these customers will be able to
run their operations for the entire year with the biodiesel they produce from the microreactor.
However, these farms might not be in a strong financial position to purchase this new production


Farm Fuels, LLC.                                                                              - 23 -
system or they may have low demand for biodiesel consumption, which, in turn, provides them
with no incentive to invest in this system. Moreover, it is possible that some farmers will not use
enough fuel to realize the advantages of using the microreactor system. Some farms might
already be invested in the traditional production of biodiesel and might not be willing to pay
switching costs to use FFL’s system.
        Through the use of a trained sales force, the advantages of producing biofuel as a cost
reduction mechanism for their own use will assist in convincing farmers to purchase the
microreactor system. Seeking cooperation and support from green organizations to promote this
microreactor technology in order to capture more potential farmers as customers is another
option that FFL is considering in its marketing plan.
        External Economic Risks
        Generally, this category of risk is somewhat uncontrollable. Unexpected economic
upturns in major agricultural products will cause an increase in feedstock prices, which, in turn,
would make the costs of biodiesel production higher. In the worst case scenario, the costs of
production become greater than the cost of buying petroleum based fuel. This would have a
significant impact on the sales of the microreactor system. In contrast, a continuous rise in the
price of fuel could cause FFL to be unsuccessful in fulfilling an increasing amount of customer
orders. By outsourcing the production process, it would enable the venture to be flexible and
scalable to meet any level of demand.
        Furthermore, changes in governmental support and regulations might also affect FFL’s
performance. For instance, the U.S. Government currently subsidizes biodiesel producers by
giving a tax credit of $86.57 per biodiesel production. If the government reduces the amount of
subsidy, it will have an adverse effect on the entire biodiesel producers. This, in turn, devalues
FFL’s product economics.

Chapter 13: The Financial Plan
A. Financial Summary
         The overall financial outlook for this venture is expected to be very strong. Favorable
market and political conditions towards the biodiesel industry are helping to fuel high growth
rates. FFL enters this market with a sustainable competitive advantage with its licensed, patented
microreactor technology. These factors will enable FFL to charge a premium price for its turnkey
biodiesel system and achieve healthy gross margins of 70%. The use of an experienced, local,
sales staff combined with an aggressive marketing campaign will lead to rapid adoption of the
biodiesel system. Detailed financial assumptions and projections for the first five years of
operations are included in Appendix 13.
         Before operations commence, it will be necessary to support the R&D effort to scale up
the microreactor. To accomplish this, FFL will use a combination of financing from venture
capitalists, angel investors and founders’ equity. Year 1 operations will incur losses due to the
R&D effort, but will turn positive during the first portion of year 2. The agriculture industry is
highly seasonal and will impact profitability differently throughout the year. See the attached
monthly cash budget in Appendix 13. FFL is forecasting that 70% of its sales will occur during
the first four months of the year and is the lead-up period to the spring harvest season. 25% of
sales will occur during the next three months (May, June, and July), with the remaining 5% of
sales occurring during the last five months of the year (August through December).
         Adoption of the venture’s products and services by the target customer (mid-large size
farmers) is based on discussions with a local expert consultant. It was determined that if a


Farm Fuels, LLC.                                                                               - 24 -
product improves a farmer’s bottom line, they would adopt it at a rate of 90% (cumulative) after
two years31. Because revenues are highly dependent on these adoption rates, FFL has analyzed
different levels of acceptance by the customer to determine the sensitivity on revenues, margins,
and investor returns for best-case, most-likely, and worst-case scenarios.
        Numerous large overhead expenditures are a necessary part of the venture’s operations.
These include employee compensation, outsourced manufacturing, marketing, R&D
expenditures, and eventually royalty payments. The sales staff will be compensated solely from
performance related bonuses based on the number of systems sold. According to industry
experts, the commission should be approximately 15%. Because of all these expenditures,
operating margins will not be positive until year 2 (6.6%). As sales increase during years 3
through 5, operating margins are expected to improve to approximately 33%. See the
assumptions spreadsheet in Appendix 13 to view the adjustments that were made to various cost
categories. For example, adjustments were made to account for such variables as inflation,
modest pay raises, employee healthcare costs, and social security, tax, and retirement
obligations.
        Finally, FFL’s inventory consists of only microreactor units and is based on 10% of the
predicted number of units sold each year. FFL’s other suppliers are expected to carry the
necessary overhead and inventory costs for the commodity-type supplies.
B. Breakeven Analysis and Chart (See Appendix 13)
         The breakeven point, where net income becomes positive for the first time, occurs during
the first month of year 2. During month 29, FFL and its investors reach the equity breakeven
point. This is the point in which the original investment capital ($3M) is recovered by the
investors. These two points can be seen in the break-even chart located in Appendix 13.
C. Income Statement, Balance Sheet, and Cash Flow Analysis
        Capital inputs in the initial phase of the venture are adequate enough to continue
operations during the first year losses. The last month of year 1 is where FFL incurs its lowest
ending cash position of $217,556. This point represents the riskiest portion of the venture for
FFL as it has issued $2 million for R&D and product testing. The prime sales season for year 2 is
underway and FFL must remain conservative and cost-conscious through this lean time. FFL is
taking numerous measures to control costs including leasing office/warehouse space and
outsourcing the manufacturing of the microreactor unit. This last measure will help the company
maintain focus on its core competency of marketing the biodiesel system to mid-large size
farmers.

Chapter 14: Proposed Company Offering
A. Required Financing and Investor Profile
        FFL requires $3,000,000 in initial funding. This money will cover the costs of developing
and testing the prototype, purchasing/leasing of equipment, materials and facilities, advertising
and promotions and human resource needs. The founders of this company will contribute
$250,000 with an additional $2.75 million to be raised from venture capitalists and angel
investors.



31
     Whitaker, Dan. Statement concerning focus group results. Personal meeting on February 6, 2007.


Farm Fuels, LLC.                                                                                      - 25 -
B. Offering
                                                               As stated in Chapter 10: Management
                                                       Team, the founders will retain 85% of the
     40,000,000                                        ownership of the company, while investors will
     35,000,000                                        hold 15%. The 15% stake was determined by
     30,000,000                                        comparing the future value ($14.8M) of their
     25,000,000
                                                       original investment ($2.75M) with the future
  Equity in $




                                                       value of the company in Year 5 ($99M). Due to
     20,000,000
                                              Founder  the risk involved with this venture, the investors
                                              Investor
     15,000,000
                                                       would expect a 40% yearly compounded return.
     10,000,000                                        To obtain the $99M, it was necessary to multiply
      5,000,000                                        an industry P/E ratio times the profit after tax, to
            -
                                                       determine the future value of the company in
                1   2     3     4    5                 Year 5. The industry P/E ratio of 20 was
                         Year
                                                       discounted by 40% to account for the risk of a
  Figure 14.1 Farm Fuels, LLC. Equity Structure        start-up venture.
                                                               Given this offering, the membership
interests in FFL are restricted securities and cannot be readily resold for 5 years. And based on
the amount invested, investors shall receive voting rights that are proportional to their capital.
Finally, FFL’s license agreement with OSU will provide them with 3% of revenue for royalties
but they will not maintain ownership in the company.
C. Use of Funds
          Summarized below are the anticipated cash outlays of the initial investments:
Table 14.1 Use of Funds
           Cash Outlays                Year 1          Year 2
 Cash Paid to Suppliers                   150,600       1,964,600
 SG & A                                   666,375       2,510,876
 Marketing                                250,000         300,000
 Royalties                                 14,850         194,684
 Utilities                                 10,000          10,350
 Building                                  36,000          37,260
 Inventory                                  3,000          12,360
 Research and Development               2,000,000         500,000
              Total                     3,130,825       5,530,130
D. Estimated Investor Returns
         As stated in the financial projections, FFL is expected to perform well. It is assumed that
profits are not distributed to investors from years 1 through 5. Even with this reinvestment of
profits, the investors’ IRR is projected to be 40.1% annually over the first five years of the
venture’s operations.

E. Exit Strategy/Harvest Options
         The harvesting options available for FFL include buying the ownership back from the
investors, outright sale of the company to a larger corporation, converting to a C-Corporation and
take the company public or merge/strategically align with an existing firm. FFL will consult with
an outside advisor to assist with crafting and selecting the most beneficial harvest strategy for the
members of the company. One of the most likely exit strategies will be partnering with a more
well-known firm, such as Bunge or Archer Daniels Midland, and then selling them the company
when FFL decides to enter the global market. By partnering with a company, we can gain access
to their resources and in turn, they will be familiar with the business.


Farm Fuels, LLC.                                                                                    - 26 -
Appendix 3: Market Research and Analysis
Table A3.1 Total Numbers of Farms
                                      State                                Oregon          Washington      Idaho                           North      Montana      Minnesota          Total
                                                                                                                                           Dakota
Total # of Farms                                                              40,033              35,939         25,017                      30,619     27,870        80,839          240,317
Average Size of Farms in Acres                                                   427                 426            470                       1,283      2,139           340            5,085
# of Farms with $25,000-49,000 Fuel Costs                                        496                 672            534                         844        499         1,590            4,635
# of Farms with $50,000up Fuel Costs                                             200                 422            356                         230        184           483            1,875
                   Total                                                         696               1,094            890                       1,074        683         2,073            6,510
Less 50%                                                                         348                 547            445                         537        342         1,036            3,255
Divided by 2.5                                                                   142                 218            178                         215        137           414            1,304
(Co-operatives)
Total # of Farms Targeted of Sales                                                   142            218                          178            215       137            414            1,304

Figure A3.1 Total Number of Farms Targeted for Sales
                                  Total Number of Farms Targeted for Sales
                                            State, # of Farms (%)




                                                            Oregon, 142
                                                              (11%)

                        Minnesota, 414
                            (31%)                                        Washington,
                                                                         218 (17%)




                                                                        Idaho, 178
                               Montana, 137                               (14%)
                                  (11%)
                                                 North Dakota,
                                                  215 (16%)




Figure A3.2 Estimated Biodiesel Production by                                                              Figure A3.3 Estimated Revenue
Microreactor
                    18000000                                                                                                    1600000

                    16000000
                                                                                                                                1400000

                    14000000
                                                                                                                                1200000

                    12000000
                                                                                                            Revenue in Dollar




                                                                                                                                1000000
  Gallon per Year




                    10000000
                                                                                                                                800000
                     8000000
                                                                                                                                600000
                     6000000

                                                                                                                                400000
                     4000000

                                                                                                                                200000
                     2000000


                           0                                                                                                           0
                                         2008                    2009                      2010                                                2008         2009               2010




Farm Fuels, LLC.                                                                                                                                                                       - 27 -
Appendix 4: The Economics of the Business
Table A4.1 Land Acreage (Year 2000 and 1997)




Farm Fules, LLC.                               - 28 -
Appendix 10: Management Team
10.1: Background of Management Team
William Fleck, graduated from Indiana University in 1992 with a Bachelor’s degree in Finance.
He has over 5 years experience in real estate valuation and financial consulting. He also
graduated in 2004 from Oregon State University with a Master’s degree in Marine Resource
Management. Other relevant responsibilities include business start-up experience, project
management, and specialized training in sustainability.
Rick Leeper, graduated from Oregon State University in 2005 with a Bachelor’s degree in
Industrial Psychology with a minor in Business Administration. He has 5 years of experience in
the recreational sports industry working for the Department of Recreational Sports at Oregon
State University and for the United States Tennis Association. His past responsibilities include
event management, program marketing, and managing human resources.
Frank Shala, holds B.S., M.S. and PhD degrees in Chemistry from Drexel University in
Philadelphia, PA. He has many years experience working as an Analytical Chemist in several
large corporations. His most recent experience included over 13 years working in supply chain
management at Hewlett Packard Co. Responsibilities in this position included managing the
technical aspects of supplier relationships for material development and the subsequent
knowledge transfer to offshore sites. While in this position, he identified annual cost savings of
$300,000 in ink materials and led a project on material test technologies to reduce R&D costs.
Pinyarat Sirisomboonsuk, a 2001 graduate of Chulalongkorn University, Thailand, where she
graduated with a Bachelor’s degree in Economics. She has 4 years experience working as a
credit analyst of the Export-Import Bank of Thailand, marketing and analyzing customers’
creditworthiness. Her clients were mainly involved in the agricultural product industry,
achieving annual revenues of over $2 million. Her international background has proven
invaluable in providing management discussion with a unique viewpoint, especially regarding
the Asian market.
Hiroshi Tashiro, graduated from Oregon State University in 2006 with a Master’s degree in
Computer Science. He has 4 years of experience working in the Department of Electronic
Engineering and Computer Science Department at Oregon State University as a research and
teaching assistant. His past responsibilities include programming, software design, system
administration and project management.




Farm Fuels, LLC.                                                                               - 29 -
Appendix 11: Overall Schedule
Figure A11.1 Gantt Chart for Implementation Plan




Farm Fules, LLC.                                   - 30 -
Appendix 12: Critical Risks, Problems, and Assumptions
12.1 Detailed Risk Analysis
        Table A12.1 shows the risk assessment form that the management team used for
categorizing the risk events, the likelihood, impact, and difficulty of detecting of each event, and
when the risk event is most likely to occur. The risk severity matrix, which provides a basis for
prioritizing which risks to address, is presented in Figure A12.1.
Table A12.1 Risk Assessment Form
                                                                             Detection
                     Risk Event                     Likelihood Impact                   Risk Value            When
                                                                             Difficulty
Technical Risks
Scale up of Microreactor                                4            5          2                  40         Start-up
Output Quality                                          2            3          4                  24        Operation
Input System Failure                                    4            2          1                   8        Operation
Customer Risks
Market Acceptance/Marketing Effectiveness               2            5          1                  10     Pre-Operation
External Economic Environment Risks
Increased Competition                                   3            3          3                  27        Anytime
Assembly Plant Damage                                   1            5          5                  25        Anytime
Increase in Feedstock Price                             4            4          1                  16        Anytime
Decrease in Diesel Fuel Price                           3            4          1                  12        Anytime
Outsourced Component Quality                            1            3          2                   6        Anytime
Government Support/Subsidy                              1            5          1                   5        Anytime

Figure A12.1 Risk Severity Matrix

             5


                                     Input System                                Increase in             Scale up of
             4                          Failure                                Feedstock Price           Microreactor
Likelihood




                                                              Increased       Decrease in Diesel
             3                                               Competition         Fuel Price

                                                                                                            Market
                                                                                                         Acceptance/
             2                                              Output Quality
                                                                                                          Marketing
                                                                                                         Effectiveness
                                                                                                          Government
                                                          Outsourced                                    Support/Subsidy,
             1                                         Component Quality                                 Assembly Plant
                                                                                                            Damage
                      1                  2                       3                   4                        5
                                                              Impact

             Red Zone (Major Risk)           Yellow Zone (Moderate Risk)                 Green Zone (Minor Risk)



Farm Fuels, LLC.                                                                                                   - 31 -
       The top five events that the management team has chosen to focus on can be handled in
various manners. The responses to risk for FFL are summarized in Table A12.2 and are
described in detail below.
Table A12.2 Risk Response Matrix
 Risk Event        Response         Contingency Plan                Trigger             Who Is
                                                                                      Responsible
Scale up of      Reduce       Consult with researchers;        Doesn’t scale up      COO
Microreactor                  additional testing
Increased        Reduce       Add features/services            Sales expectations    VP Sales and
Competition                   Increase marketing campaign      not met               Marketing
Assembly         Retain       Back up facility                 Uncontrollable        COO
Plant Damage                  Insurance                        events
Output Quality   Sharing      Review equipment operation       Poor output quality   COO
                              and design with suppliers
Increase in      Reduce       Redesign system to utilize       Increased overall     VP Sales and
Feedstock                     additional feedstock;            demand in             Marketing
Price                         monitor/track prices             feedstock
Scale up of Microreactor
        The appropriate response for this potential risky event will be reduction of the risk. Since
the event occurring could potentially have a strong adverse affect on the entire start-up of the
venture, mitigating the risk is the most suitable option.
        To handle this event, the contingency plan will consist of consulting with the researchers
and engineers of the microreactor (as well as other industry researchers) and performing
additional tests to determine the issues with scaling. The event triggering the contingency plan
will be if the microreactor does not scale up according to plan.
Increased Competition
        Increased competition could occur in two ways:
1. A new and improved biodiesel production system could hit the market causing a threat on
FFL’s potential market share or
2. Large scale production plants (batch systems) could expand. Similarly to the scale risks of the
venture, increased competition will be dealt with by taking actions to reduce the risk.
        If sales predictions are not met or are falling behind, the contingency plan for this event
will be activated. The plan involves adding features to the product that will differentiate it from
the competition and increase its perceived value and providing additional services to maintain
the systems in the forms of maintenance service and warranties. A strategic advertising campaign
to promote brand awareness will also be implemented should an increase in competition occur.
Assembly Plant Damage
       When the probability of certain events, such as natural disasters, occurring is slim, the
most logical choice is to just accept the risk (retain). To handle the uncontrollable events, the
most feasible contingency plan is to maintain or partner with a back-up facility as well as
purchasing insurance to recover losses due to catastrophic events.
Output Quality
         The quality of the outputs (biodiesel) will largely depend on the design and operation of
the system. In the event that the quality is not up to standard, the burden of fixing the problem
will lie with the company as well as FFL’s main suppliers. Through a joint effort, system


Farm Fuels, LLC.                                                                                - 32 -
components and equipment will be thoroughly inspected and the overall system design will be
evaluated by all parties. Since the suppliers will be affected by the low level of output quality,
they will have a vested interest in helping to problem solve.
Increase in Feedstock Price
        Given an increased demand in the feedstocks used for the microreactor system, the
potential for a price increase is high. Although there is no solution to have a direct impact on the
event, several plans can be set in place to assist in mitigating the harm done to the company. A
redesign in the system which would allow multiple forms of feedstock can help lessen FFL’s
dependency on specific feedstocks that are experiencing an increase in price. As long as
company members are monitoring feedstock prices, FFL should be prepared for such an event.

Appendix 13: The Financial Plan
Figure A13.1 Net Income Break-Even Chart
              Thousands




                          32,000
                          28,000
                          24,000
 Net Income




                          20,000
                          16,000
                          12,000
                           8,000
                           4,000
                               0
                          -4,000 1   6   11 16 21 26 31 36 41 46 51 56
                                                    Months




Farm Fuels, LLC.                                                                                - 33 -
Figure A13.2 Equity Break-Even Chart




                               1050.0%
                                950.0%
  Loss (% of initial equity)




                                850.0%
                                750.0%
                                650.0%
                                550.0%         Breakeven, 13 Months


                                450.0%
                                350.0%                                               Initial Equity Breakeven, 29 Months

                                250.0%
                                150.0%
                                 50.0%
                                -50.0%
                               -150.0% 1   6   11        16           21   26   31   36        41         46         51    56
                                                                            Months




Farm Fuels, LLC.                                                                                                                - 34 -
                                           References

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“Alternative Fuels.” Wall Street Journal. January 29, 2007.

Bantz, S.G., and Deaton, M.L. “Understanding U.S. Biodiesel Industry Growth using System
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Farm Fuels, LLC.                                                                              - 44 -
Melvin, Sean P. CyberLaw and E-Commerce Regulation: An Entrepreneurial Approach. Ohio:
South-Western. 2005. p. 82.

National Biodiesel Board. “Commercial Biodiesel Production Plants.” Retrieved November 20,
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“National Biodiesel Board Fuel Policy.” National Biodiesel Board. June 21, 2006.

National Biodiesel Board. Retrieved November 20, 2006. <www.biodisel.org>.

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Painter, Kathleen et. al. “Economic of Spring Canola Production in Dryland Eastern
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Farm Fuels, LLC.                                                                            - 45 -

				
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