No appetite for 200 pages of IPO-speak in Mascoma’s
S-1 registration statement? Here’s our 10-minute version.
In Massachusetts, Mascoma Corporation announced that it has filed
an S-1 registration statement relating to a proposed $100 million
initial public offering. The number of shares to be offered and
the price range for the offering have not yet been determined, and
the company has not indicated yet which exchange it will apply to
for a listing of its shares.
Here’s the S-1 registration, in a conveniently downsized
10-minute Digest version – with some commentary along the way as
to what is driving value in the Mascoma model, what might be
tempting to potential investors, and the risks and pitfalls along
the road to cellulosic ethanol riches. Yes, we’ve marched through
the hours of brain-numbing legalese and disclaimers, so you won’t
have to. Here’s the news you can use.
Mascoma’s IPO: The 10-minute version
It’s been a long journey for Mascoma to develop its technology,
in the glare of attention from an adoring (and heavily invested)
public, entranced by its revolutionary consolidated bioprocessing
“magic bug”, which eliminates the need for costly enzymes in
processing advanced cellulosic feedstocks into ethanol.
What is consolidated bioprocessing? A magic bug
that simultaneously extracts simple sugars from cellulose and then
ferments them into ethanol. As the company observed in it’s S-1:
“In a 2006 report on biomass conversion to biofuels, the DOE
endorsed the view that CBP technology is widely considered the
ultimate low-cost configuration for cellulose hydrolysis and
fermentation…Typically, biomass conversion processes require a
collection of saccharolytic enzymes (cellulases and
hemicellulases), which hydrolyze the carbohydrates present in
pretreated biomass to sugars, and microorganisms capable of
fermenting the liberated sugars into ethanol or other
end-products. When the microorganisms both produce the necessary
saccharolytic enzymes and ferment the liberated sugars to
end-products, the biomass conversion process is called
consolidated bioprocessing, or CBP.”
It needs a good pre-treatment for its feedstocks, which is partly
why Mascoma acquired SunOpta’s cellulosic ethanol business and its
pre-treatment technology last year. The CBP approach bypasses the
need for costly enzymes, which currently are in the $0.50 (per
gallon of ethanol) range and have been a key stumbling block in
the race to make cellulosic biofuels.
The company signed its landmark commercialization deal with JM
Longyear in 2008 with a goal of developing a 20 million gallon
commercial-scale facility in Michigan, but has not yet
commercialized – and the valuations on Mascoma’s stock have been
on a downtrend in the past year, hovering at $3.75 in private
capital raises, after reaching a high of $6.40 in 2009.
Under new CEO Bill Brady, the company has continued to improve
its results, and has its operating costs down to a projected $1.77
per gallon, and has developed what it calls a “capital light”
strategy for getting its CBP magic bug into business. According to
its S-1 registration statement, it expects to commence
construction in Michigan in the next 3-6 months.
But a new, nearer-term, even more capital light product has
emerged – Mascoma Grain Technology, an enzyme-replacement product
for conventional corn ethanol that Mascoma says can reduce costs
by $0.01 to $0.02 per gallon for ethanol producers today, and
could rise to 4% reductions in enzyme costs in the future. Given a
13 billion gallon market, that’s as much as $260 million in
savings for the US corn ethanol industry – but the margins are
razor-thin, and assume that Mascoma can stay ahead of companies
like Genencor and Nozozymes on enzyme cost.
The Commercialization Plan
Phase 1: Mascoma Grain Technology.
From the S-1: “We plan to initially target the large and
established first generation corn ethanol industry with our
proprietary Mascoma Grain Technology, or MGT, yeast product, that
can be used by corn ethanol producers as a drop-in substitute for
existing yeasts. We expect to begin selling this product in 2012.
“Our initial MGT product adds value by alleviating the need to
purchase most of the expensive enzymes currently used in corn
ethanol production, lowering production costs. Based on laboratory
test runs and management estimates of ethanol production costs, we
believe that our initial MGT product will reduce the cost of
producing corn ethanol by approximately $0.01 to $0.02 per gallon.
“Based on laboratory test runs, we believe future generations of
our MGT product will be capable of ethanol yield improvements of
up to 4%.
Phase 2: Hardwood consolidated bioprocessing for fuels
From the S-1: “We expect that our first two hardwood CBP
facilities will be built in Kinross, Michigan and Drayton Valley,
Alberta. We anticipate construction of our hardwood CBP facility
in Kinross, Michigan to start in the next 3 to 6 months and
construction of our hardwood CBP facility in Drayton Valley,
Alberta to start within 12 to 24 months.
Phase 3: Consolidated bioprocessing of multiple fuel and
chemical products from multiple feedstocks
From the S-1: “Beyond corn and hardwood, we have already shown
the flexibility of our CBP technology platform through the
conversion into ethanol of a number of additional feedstocks in a
laboratory setting, including corn stover, sugarcane bagasse, palm
residue, softwood, miscanthus, switchgrass, paper sludge and
sorghum…we have demonstrated in a laboratory setting the
production of propanol and fatty acids. These chemicals can in
turn be used to create propylene and alkanes, which are the
building blocks of many petrochemical replacements.”
The Yields and Cost Improvements
From the S-1:
“The operating cost of $3.00 for 2009 is based on a hardwood to
ethanol conversion yield of 52 gallons per bone dry short ton.
“The operating cost of $2.13 for 2010 is based on a hardwood to
ethanol conversion yield of 67 gallons per bone dry short ton.
“The current operating cost of $2.00 is based on a hardwood to
ethanol conversion yields of 71 gallons per bone dry short ton.
“The estimated operating cost of $1.77 [per gallon] for our
planned hardwood CBP facility in Kinross, Michigan assumes that
the facility is built to our specifications with a hardwood to
ethanol conversion yield of 83 gallons per bone dry short
ton, which is what we expect when the facility is fully
“All of the operating cost estimates set forth in the table above
assume a hardwood feedstock cost of $66 per bone dry short ton of
The Mascoma Markets: First generation ethanol
From the S-1: “According to the Renewable Fuels Association, or
RFA, U.S. corn ethanol production increased from 3.6 billion
gallons in 2005 to over 13 billion gallons in 2010, which
represented a compound annual growth rate of over 30% for that
period, and ethanol exports in 2010 hit a record high of
350 million gallons. As of 2010, over 200 ethanol plants
existed in the United States. We believe this large and
established industry presents a compelling market for our drop-in
MGT yeast product.”
Second generation ethanol
From the S-1: “Of the 36 billion gallons of renewable fuels
mandated by 2022, 20 billion gallons are mandated to be
advanced biofuels (excluding 1 billion gallons of
biomass-based diesel), with at least 16 billion gallons required
to be cellulosic biofuels. The vast majority of ethanol consumed
in the United States today is produced from corn and does not
satisfy RFS2 advanced biofuels requirements. We expect the ethanol
produced at our hardwood CBP facilities will be a cellulosic
biofuel and we intend to capitalize on this mandated market.”
From the S-1: “The market for renewable fuels and chemicals has
evolved significantly over the past several years, with many
companies seeking to capitalize on the growing market potential
and the environmental benefits offered by these products. However,
many challenges exist and we believe that companies will need to
satisfy the following criteria to succeed in this market:
• Demonstrated and Validated Technology.
• Comprehensive, Integrated Process.
• Low Cost.
Mascoma as it sees itself: 10 Competitive Strengths
The company cites 10 factors in its filing.
1. Proven CBP Technology. It has demonstrated
the performance of our MGT yeast product and hardwood CBP
technology as follows:
2. Validation of the performance of its initial
MGT yeast product by ICM, Inc., the leading provider of
engineering services to the ethanol industry.
3. Successful production runs using its hardwood
CBP microorganisms, including more than 1,000 continuous hours of
operating data on a fully-integrated basis at our demonstration
facility in Rome, New York;
4. Validation of its hardwood CBP technology by
independent engineers at the U.S. Department of Energy and by
independent third parties; and
5. Proven commercial use of the core equipment
used in its biomass conversion process, with the front-end
pretreatment equipment traditionally used in the pulp and paper
industries, and the back-end distillation equipment used in the
fuels and petrochemical industries.
6. Comprehensive and Efficient Biochemical Solution
for Biomass Conversion. Mascoma contends that no other solution
for biofuels and chemicals from multiple feedstocks that covers
the full spectrum of the biomass conversion process, including
pretreatment, hydrolysis and fermentation.
7. Low All-in Cost Solution. CBP is distinct
from other, less integrated configurations, in that it alleviates
the need to purchase most of the expensive enzymes associated with
most other ethanol production methods while also improving yields.
8. Capital-Light Path to Revenue Generation. The
commercialization of its initial MGT yeast product is not
dependent on any meaningful capital expenditures. The hardwood CBP
commercialization strategy is based on collaboration with third
parties to fund, build, develop and operate the facilities.
9. Feedstock Flexible and Adaptable Technology.
Beyond corn and hardwood, Mascoma has demonstrated in a laboratory
setting the ability to convert corn stover, bagasse, palm residue,
softwood, miscanthus, switchgrass, paper sludge and sorghum.
10. Deep Domain Expertise. Mascoma believes
believe that its business is differentiated by our ability to
leverage the deep domain expertise of an exceptional and
distinguished group of executives, scientists and partners.
Commercialization and Grant Partners
JM Longyear. In December 2008, Mascoma and
Longyear formed Frontier to develop and operate an integrated
commercial-scale cellulosic fuel production facility in the state
of Michigan. As of June 30, 2011, we had a 75% ownership
interest in Frontier and Longyear owned the remaining 25%.
The operating agreement was amended in June 2010 to provide that
Longyear will contribute the land at a date to be determined by
the board of Frontier on or after January 1, 2012, upon
commencement of development at the site.
The U.S. Department of Energy. In October 2007,
Mascoma entered into a $4.3 million DOE grant agreement for the
development of an organism for the conversion of lignocellulose to
ethanol. As of June 30, 2011, Mascoma has received
$4.1 million in proceeds from the DOE under this grant. In
September 2008, the company entered into a $20 million grant
agreement for the construction of an industrial scale fermenter
system and the design, construction and operation of an integrated
cellulosic ethanol plant for transforming locally grown mixed
hardwoods or switchgrass into ethanol. As of June 30, 2011,
Mascoma has received approximately $16.5 million.
The BioEnergy Science Center. In June 2008,
Mascoma entered into a subcontract with UT-Battelle as one of more
than a dozen participants in the BioEnergy Science Center, or
BESC, supporting the multi-year effort to overcome recalcitrance
of cellulosic biomass to conversion. BESC will provide up to
approximately $6.3 million to fund our portion of the project. As
of June 30, 2011, we have received $5.1 million from BESC.
The contract lasts through 2012.
The Michigan Strategic Fund. In December 2008,
Mascoma entered into a grant agreement with the Michigan Strategic
Fund for the planned hardwood CBP facility in Kinross, Michigan,
for up to $20 million. As of June 30, 2011, Mascoma has
received $12.1 million from MSF.
The New York State Energy Research and Development
Authority. In October 2007, Mascoma entered into a
grant agreement NYSERDA, to build and operate a biomass-to-ethanol
demonstration plant in Rome, New York. In connection with this
grant agreement, we were awarded a grant of up to $14.8 million,
to be paid in installments upon certain milestones. As of June 30,
2011, we have received $13.8 million.
The Province of Alberta, Canada. In March 2010,
Mascoma entered into an Agreement with the Province of Alberta,
Canada for the development of a planned commercial cellulosic
ethanol facility in Alberta, Canada. Under this arrangement,
Alberta will provide up to $0.8 million in funding to be used
exclusively for this project.
• Kinross, Michigan: The hardwood CBP facility
in Kinross, Michigan is expected to be a 20 million gallon
per year facility.
• Drayton Valley, Alberta: The hardwood CBP
facility in Drayton Valley, Alberta is expected to be a
20 million gallon per year facility that will produce
ethanol, as well as coproducts such as renewable electricity and
In addition to Kinross and Drayton Valley Mascoma has identified
additional potential development sites in the Great Lakes region
Financing along the way
From inception in 2005 through June 30, 2011, Mascoma funded
operations primarily through $105.3 million in proceeds from the
sale of preferred equity securities, $10.0 million in proceeds
from the sale of convertible notes, $20.0 million in borrowings
under secured debt financing arrangements, and $34.5 million in
As of June 30, 2011, cash, cash equivalents and short-term
investments totaled $12.1 million.
Series A. In March 2006, Mascoma sold an
aggregate of 5,000,000 shares of Series A preferred stock at a
price of $0.80 per share for gross proceeds of approximately $4.0
Series A-1. In September 2006, Mascoma sold an
aggregate of 5,000,000 shares of Series A-1 preferred stock at a
price of $1.00 per share for gross proceeds of approximately $5.0
Series B. In November 2006, Mascoma sold an
aggregate of 11,241,573 shares of Series B preferred stock at a
price of $2.67 per share for gross proceeds of approximately $30.0
Series B-1. In October 2007, former
shareholders of Celsys Biofuels, Inc., or Celsys, received shares
of Mascoma Series B-1 preferred stock, with an aggregate fair
value of the shares of $5,250,000 at the time of issue.
Series C. Between February and April 2008,
Mascoma sold an aggregate of 9,531,250 shares of Series C
preferred stock at a price of $6.40 per share for gross proceeds
of $61.0 million.
Series D. In August 2010, Mascoma issued
2,702,883 shares of Series D preferred stock at a price of $3.75
per share in connection with the conversion of 2010 Notes.
In August 2010, Mascoma also issued 11,268,868 shares of Series D
preferred stock at a price of $3.75 per share to SunOpta in
connection with the SunOpta acquisition.
In January 2011, Mascoma sold 1,333,333 shares of our Series D
preferred stock at a price of $3.75 per share for gross proceeds
of approximately $5.0 million.
In August 2011, Diamond Alternative Energy, LLC, or Valero,
exercised a warrant for 1,333,333 shares of Series D preferred
stock at an exercise price of $3.75 per share for gross proceeds
of approximately $5.0 million.
Financial results along the way
Mascoma has generated $34.5 million in revenue along the way,
primarily government funding for R&D. They have not yet
commercialized their MGT corn ethanol technology or the hardwood
The accumulated deficit as of June 30, 2011 was $118.722
The net loss was $30.4 million, $38.3 million and $25.7 million
for the years ended December 31, 2008, 2009 and 2010,
respectively, and $14.8 million for the six months ended
June 30, 2011.
Valuations along the way
Fair Value Per Share, from the S-1:
February 29, 2008 $2.94
October 31, 2008 $2.86
October 31, 2009 $2.95
August 31, 2010 $1.97
June 30, 2011 $2.93
The Risks, translated from SEC-speak
In S-1 speak: We have a limited operating history, a history
of losses and the expectation of continuing losses.
In English: “We have spent all of Vinod Khosla’s
investment, and would like to spend your investment too.”
In S-1 speak: In order to sell any of our MGT yeast products
to corn ethanol producers we must obtain regulatory approval,
and any delays in receiving approval could have a material
adverse effect on our business, financial condition and results
In English: “Dad, can I borrow the car? I’ll be getting my
license soon, I hope.”
In S-1 speak: “We have no experience applying our CBP
technology to the production of renewable fuels or chemicals at
commercial scale and our management has limited experience in
the renewable fuels and chemicals business, and as a result, we
may not be successful in commercializing our hardwood CBP
In English: “We could be a blockbuster. On the other hand,
we could be Blockbuster.”
In S-1 speak: “The market for renewable fuels and chemicals
may not develop as anticipated.”
In English: “If they mess with the RFS, we own a pub with
In S-1 speak: Our stockholders’ deficit, recurring net losses
and history of negative cash flows from operations raise
substantial doubt about our ability to continue as a going
concern. As a result, our independent registered public
accounting firm included an explanatory paragraph in its report
on our financial statements as of and for the year ended
December 31, 2010 with respect to this uncertainty.
In English: “We’re down to $12 million in the bank and,
er, we lost $14 million in the first half.”
In S-1 speak: We have a history of material weaknesses in our
internal control over financial reporting, including a material
weakness that remains unremediated at December 31, 2010. Failure
to achieve and maintain effective internal control over
financial reporting could result in our failure to accurately
report our financial results.
In English: “Oops, we hired Goofy as our bookkeeper a
while back. But we fixed it, sort of.”
In S-1 speak: We may not be able to enforce our intellectual
property rights throughout the world.
In English: “Technology piracy? Never heard of it.”
The bottom line
Mascoma is the first company primarily chasing cellulosic ethanol
and consolidated bioprocessing, to file for an IPO in quite some
time, so this is an important one in every way. There are two
aspects to this filing. The near-term commercialization, and the
long term in hardwood consolidated bioprocessing.
Near-term. Mascoma Grain Technology – hmmm,
those are thin margins and no announced customers. That’s a
toughie. The Valero investment in January may well signal that a
customer may emerge there.
Long-term. $1.77 per gallon on an operating
basis – well, we are not sure we are seeing a completely
capitalized cost here – in industry terms, operating cost
generally does not include the capital expenditure. But if we
added 50 cents a gallon, or even $1.00 per gallon for the capex
(assume $7.50 or $15 per gallon in construction, spread over 15
years), the numbers aren’t half bad at all. If the cellulosic
biofuels credit survives a while at anywhere near the lofty $1.01
it is at today, that’s purty darn good. But we’re guessing on the
capex. It would be nice to have that spelled out.
Upside opportunity. There’s room for improvement
in that cost of $66 per dry ton for hardwood.
In the absence of announced customers or partnerships for MGT, or
a strong pre-treatment revenue stream, investors may be tempted to
continue to focus solely on the cellulosic biofuels business.
In that realm, Digest readers have been hugely strong fans of
consolidated bioprocessing for a long, long time, and the numbers
continue to look strong, and the timelines continue to point
toward commercial volumes of cellulosic ethanol in the 2013-14
time frame, at affordable prices.
complete S-1 registration statement is here.
Jim Lane is the Editor and
Publisher of Biofuels