Xethanol Corporation's (AMEX: XNL) mission is to convert biomass that is currently being abandoned or land filled into ethanol and other valuable co-products, such as xylitol. They are committed to the production of ethanol and related products in manufacturing facilities close to the major urban markets for those products, using locally available raw materials. Their strategy calls for the use of locally available biomass rather than corn as the primary raw material for ethanol production. Corn is currently the dominant raw material for ethanol production. As a result this production is now concentrated in the Corn Belt - thousands of miles from the areas of highest ethanol demand on the Atlantic, Gulf and Pacific coasts.
Please see my extensive comments at the end of this post.
On August 15 the company reported record sales of approximately $3.2 million on approximately 1.3 million gallons of ethanol sold. There were no sales during the second quarter of the prior year. The Company also reported record gross profit for the quarter of $673,189 or 21.0% of sales.
Other highlights included in the Company's quarterly report are summarized below:
- Sales of common stock generate $42 million in cash
- $6.6 million of debt is converted into equity
- Expansion of management team and Advisory Board
- Acquisition of biomass gasification technology
- Investment in H2Diesel and licensed use of proprietary biodiesel additive
- Commenced expansion of Blairstown site to add 35 million gallons per year
- Agreed to acquire site in Georgia with plans to construct a 50 million gallons per year facility
- Agreed to acquire site in North Carolina with plans to adapt site to produce 35 million gallons per year
For the six months ended June 30, 2006, the Company reported sales of approximately $5.8 million on approximately 2.8 million gallons. Gross profit for the six months was $633,500 or 11.0% of sales. The net loss for the period was approximately $8.1 million versus approximately $4.5 million in the prior year six month period. Basic and diluted net loss per share was $0.46 compared to $0.33 in the prior year six month period. Included in the net loss for the six months for 2006 was approximately $6.4 million of non-cash charges. Non-cash charges consisted primarily of equity compensation and other equity related expenses.
Commenting on the quarterly results, Christopher d'Arnaud-Taylor, Chairman & CEO of Xethanol, : "Our strategy of acquiring dormant industrial facilities as a platform for developing new ethanol production capacity, as well as expanding on our current Blairstown, Iowa site, continues to be on track. With our announced acquisitions in Augusta, Georgia and Spring Hope, North Carolina, combined with the new plant development on our Blairstown, Iowa site, our planned production capacity has increased to 126 million gallons per year by the end of 2007."
They have acquired a portfolio of proprietary technologies that are designed to enable Xethanol to produce ethanol and co-products using biomass waste feedstocks. In Iowa, Xethanol owns and operates two ethanol production facilities, where it is deploying some of these technologies for testing and development. Listed below are the technologies that are in their portfolio:
- DDS USA and Xethanol have entered into an exclusive marketing and license agreement for its patented dry disaggregation technology to extract materials from agricultural commodities including corn and cellulosic biomass to be used as ethanol production feedstock. It appears that they are not using this process in their current activities.
- It has an ongoing program with NREL for clean separation of biomass into its constituent fractions to reduce fermentation time and decrease the energy costs in the ethanol production process.
- In June 2004, Xethanol acquired Advanced Bioethanol Technologies, Inc. and the exclusive worldwide license to an innovative biomass extraction and fermentation process developed by researchers at Virginia Tech. This technology may be used to convert biomass to ethanol and xylitol. It is being scaled-up to commercial production at Virgina Tech before transfer to Iowa for full production, which was projected for Q3, 2005. In addition it has an ongoing research alliance with Virginia Tech to investigate the effect of newly developed enzymes on feedstocks such as recycled paper sludge, cotton gin mill waste, corn cobs and oat hulls and for steam explosion of biomass.
- They have a Cooperative Research and Development Agreement (CRADA) with Forest Products Laboratory, US Department of Agriculture to engineer genetically modified yeasts that will substantially decrease fermentation time of feedstocks such as xylose in the production of ethanol and/or xylitol, a natural sweetner.
- They have a research agreement with Queens University of Kingston, Ontario, to develop the process of extractive fermentation with a view to reducing the time required to ferment feedstock by removing ethanol at an earlier stage than has hitherto been practicable.
On June 14, 2006 they announced that that had acquired ABGT from UTEX. ABGT holds the exclusive worldwide license for MicroGasification technology developed at the Energy and Environmental Research Center (EERC) at the University of North Dakota in Grand Forks. The MicroGasifier produces syngas from carbon matter. Syngas drives a portable, power generation system that provides energy solutions for companies and municipalities with simultaneous waste disposal and power needs. Xethanol and EERC are mutually funding a CRADA to further apply the MicroGasifier in the production of ethanol. EERC will perform system integration of the MicroGasifier for customers. This technology provides a lower cost alternative to steam boiler power generation with a small footprint waste-to-energy technology utilizing low-cost biomass feedstocks and waste streams, such as lignin, a byproduct of cellulosic ethanol production. Creating energy from industrial and biomass waste may be cost effective in light of the high cost of oil and natural gas
As part of its growth plans to roll out small footprint ethanol plants regionally, it has organized CoastalXethanol LLC to develop ethanol plants in the Georgia, South Carolina and Jacksonville, Florida region. CoastalXethanol, to be based in Savannah, GA, will focus on a region rich in wood biomass residues from its huge forest products industry. They have also joined with Global Energy and Management, LLC to form a venture to develop ethanol production in Connecticut, Massachusetts, Rhode Island, New Hampshire, Maine and Vermont. The venture, known as NewEnglandXethanol, LLC or NEX, plans to open several ethanol plants throughout the region deploying Xethanol's proprietary technologies. Additionally, Xethanol may co-locate biodiesel production in its facilities under Xethanol's sub-license from H2Diesel, Inc.
Their long-term goal for Coastal Ethanol is to develop production capacity of 250 million gallons of ethanol per year. Harris Group Inc., a leading U.S. consulting engineering firm with offices in 11 cities, has been selected to provide Owner's Engineering services to Xethanol as it expands its ethanol production capacity nationwide.
PRAJ Technologies of India been retained to do detailed engineering services, process design and licensing as well as the supply of vital sections of the process plants.
On July 5, 2006 they announced that they were adding a 35 milllion gallon per day ethanol facility to its Blairstown, Iowa site. The new plant will be developed alongside the company's existing plant which will continue to operate at maximum capacity. They expect this plant to come on line in the second half of 2007. Thereafter, they will retrofit their current 6 million gallon facility at Blairstown by adopting their technology platform and converting that plant to cellulosic feedstocks.
On July 20, 2006 they announced that they will construct a 50 million gallon per year cellulosic ethanol plant, scheduled for operation by mid 2007, on the site it is acquiring from Pfizer pharmaceutical in Augusta, Georgia. The Pfizer, 40 acre site includes: an 89,100 square foot manufacturing facility, a 25,000 square foot warehouse facility, 7,300 square feet of laboratory space, and 16,000 square feet of offices and conference rooms. This biomass-to-ethanol facility will be the first of its kind in the region. In addition, CoastalXethanol may produce biodiesel in this facility under Xethanol's sublicense from H2Diesel, Inc.
On Aug 9 the company announced that it has organized BlueRidgeXethanol, LLC to manage Xethanol's expansion into the Carolinas. BlueRidge has entered into a definitive agreement to acquire its first production plant. The facility, located in Spring Hope, North Carolina, is a former medium-density fiberboard factory. The plant has an excellent existing infrastructure that can readily be converted to production of ethanol. It will be re-engineered to support a 35 million gallons per year plant.
It is anticipated that, after retrofitting the plant to produce ethanol, production will reach 5 million gallons per year in approximately 6 months and then progress rapidly to capacity. The primary feedstock of local hardwood chips and wood waste has already been established. Xethanol plans to deploy established forest products processing technologies, leveraging the plant's existing pulp digesters. These powerful digesters are fed by a large scale, biomass pre-processing and preparation module that is in working order. Simple and proven dilute acid hydrolysis technology will be used to convert the cellulose to fermentable sugars. Enzymatic hydrolysis will progressively be introduced as it becomes economically feasible.
Recently the company has came under fire by Sharesluth.com, a new blog, which made the following accusations, too long to publish in their entirety, about Xethanol in a post on August 7:
- The company’s minimal spending on research and development.
- An absence of scientists on its staff.
- The relatively low price it paid for the outside technology upon which its waste-to-ethanol dreams are based.
- Key alliances with two companies founded by the same person -- a former stock broker who now functions as a financial consultant and promoter.
- They found no evidence that Xethanol has produced significant quantities of ethanol from wood chips, corn stalks and paper sludge.
- They discovered that the shareholders whose names appeared in the company’s SEC filings over the past year and a half included no fewer than eight current or former stock brokers who have been the subjects of disciplinary actions by the Securities and Exchange Commission, the National Association of Securities Dealers or other regulatory bodies.
- William Scott Smith one of the biggest shareholders in Xethanol was accused by the SEC of misusing or misappropriating 70 percent of the $246,000 that a company raised from investors. The SEC assessed $256,000 in financial penalties and barred Smith from serving as an officer or director of any public company.
- They could find no record that Christopher d’Arnaud-Taylor, Xethanol’s chairman and chief executive officer had employment with two of the companies he claimed to have worked for.
- Its Hopkinton,Iowa plant, that the company has characterized as a testbed for evaluating potential feedstocks and technologies, suspended production in April 2005.
- Xethanol’s trading volume was amplified by questionable practices and D’Arnaud-Taylor and his wife sold some of their stock, near the stocks high, for $1.37 million.
- They quoted Spencer Kelly, ethanol analyst for the Oil Price Information in Rockville, Md.as saying that Xethanol’s plan to open a commercial cellulosic ethanol plant within a year seems overly ambitious.
On Aug 10 Xethanol responded to ShareSlueth with the following points:
- Its Blairstown, Iowa, facility is producing ethanol at the rate of 450,000 gallons per month currently generating a gross profit of over $.50 per gallon.
- It has research and development agreements in effect with two Federal Laboratories - The National Renewable Energy Laboratory (NREL) in Boulder, Colorado and the USDA Forest Product Laboratory in Madison, Wisconsin. In addition, there are research and development agreements with Virginia Tech and with The Energy & Environmental Research Center (EERC) at the University of North Dakota. All of these institutions are populated by eminent scientists. In addition, Mark Austin, our Chief Technology Strategist, is a respected technology innovator.
- Criticisms of its low level of research and development expenditures are misleading. Though our expenditures are increasing, Xethanol considers it a source of pride that it has obtained the benefit of what it believes to be valuable technology without either the time delay or the expenditure of the cash necessary for internal research and development. Xethanol is presently evaluating several cellulosic technologies that may be deployed in its expansion program.
- Xethanol further states for the record that it has a Board of Directors which includes independent experienced business persons. The Company operates under and is in compliance with AMEX Company Guidelines and reports regularly and on a timely basis to the SEC.
- Xethanol stated that it is in possession of information validating Mr. Taylor's employment history. The Company reported that at its last meeting the Board of Directors decided to enter into a new 2-year employment contract with Mr. Taylor.
On August 12 John Bradshaw Layfield, writing in TheStreet.com had this to say about the controversy:
This week was something out of the Wild West for Xethanol. A new blog, ShareSleuth.com, accused Xethanol of being a sham, which caused its shares to tank. Xethanol answered those claims this week, and the stock regained a significant amount of the losses. Shares rose more than 10% Friday to $5.63.
What is awful about this blog is that its owner, Mark Cuban, readily admits that he has been shorting the stock. I beg these people to not to be so egregiously transparent about their lack of ethics. Real money is at stake, and I would dare say this article could end up in front of those public servants who wear robes and carry gavels.
I have met Cuban a couple of times, and I like him. I just can't believe he would allow something that seems so highly unethical.
While I could explain why the list of charges was wrong, Xethanol has already done a good job of answering them publicly.
Suffice it to say that Xethanol does produce ethanol (at a rate of 450,000 gallons per month at a profit of 50 cents per gallon) and has announced that it will be country's first commercial producer of cellulosic ethanol by next April.
If Xethanol produces it merely sometime in 2007 then it will still be first, and this stock will take off like it has ethanol rocket fuel attached to it.
Although I hope that Xethanol succeeds, because I like their business plan and I have been encouraged about their recent announcements, their are still unanswered questions from the Sharesluth's accusations:
- Why is the Hopkinton plant not operating?
- Why are there no scientists on their direct payroll? If you are going to be in a technical business you have to have someone, with a small staff, to evaluate and direct the process designs that they are buying.
- Why are there so many questions about the ethics of the people involved with the company?
I see no problem in their buying their technology, if due diligence was done on buying the technology. I would agree that their plans for building new plants appear to be overly ambitious. I have to take their word that they have done sufficient testing. Their emphasis on marketing, although important and time consuming, does not seem justified to me--I have learned from many years of experience that marketing can get ahead of technology and you may be put in the position of either selling junk or going out of business, it is hard to retrench to the development mode if you have made too many promises. It appears to me that they may be under financed and that they have found out that their technology is not as good as they thought. That is why they are using weak acid hydrolysis and have not built up their technical staff. We will see sometime next year whether they have anything real to offer.