Jim Lane
The first zero-cost feedstock biofuels company comes to the
public markets with its IPO.
Like to see how this “Back the the Futuresque” technology
unlocks value by converting household garbage into transportation
fuel?
Here’s our 10-minute version of the IPO from Fulcrum Bioenergy.
In California, Fulcrum Bioenergy has filed an S-1 registration
statement for a proposed $115 million initial public offering. The
number of shares to be offered and the price range for the
offering have not yet been determined. The company proposes to
list under the symbol FLCM. UBS Investment Bank is the underwriter
for the offering.
The company is currently ranked #45 in the world in the 50
Hottest Companies in Bioenergy. The rankings recognize innovation
and achievement in fuels and are based on votes from a panel of
invited international selectors, and votes from Digest
subscribers.
Fulcrum becomes the 12th company to file for an IPO in the
industrial biotech boom, which began with a successful listing on
the NASDAQ by Codexis
(CDXS) in 2010. IPOs by Amyris
(AMRS), Gevo
(GEVO), Solazyme
(SZYM), and KiOR
(KIOR) have followed. In recent months, PetroAlgae (PALG.OB),
Myriant,
Ceres, Genomatica, Mascoma
and Elevance
have also filed S-1 registrations for proposed IPOs.. Three in the
past week, in fact.
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 Fulcrum model, opportunities for
the intrepid investor, and some risks which we have translated
from the ancient and original SEC into modern English.
Company Overview
Fulcrum produces advanced biofuel from garbage. Its business
model combines a proprietary process and zero-cost municipal solid
waste, or MSW, feedstock to provide them with what they term “a
significant competitive advantage over companies using alternative
feedstocks such as corn, sugarcane and other sources of biomass in
the production of renewable fuel”. According to the filing, they
have entered into long-term, zero-cost contracts for enough MSW
located throughout the United States to produce more than
700 million gallons of ethanol per year; the core element of
their technology, they confirm, has been demonstrated at full
scale.
They intend to use a substantial portion of the IPO proceeds of
this offering to fund the construction of its first
commercial-scale ethanol production facility, the Sierra BioFuels
Plant. At this facility, they expect to produce approximately 10
million gallons of ethanol per year at an unsubsidized cash
operating cost of less than $1.30 per gallon, net of the sale of
co-products such as renewable energy credits.
For a company that believes in waste, they sure don’t believe in
large overhead. It’s a poster child for lean management in the
development of advanced bioenergy. Employee headcount is just 17,
at IPO time, with just 2 in research and development.
Development costs to date: net losses of $12.4 million, $16.5
million, and $18.0 million for 2008, 2009 and 2010, respectively
and $13.8 million for the six months ended June 30, 2011.
Total: $63.8 million.
The Technology
From the S-1: “In collaboration with a leading global
engineering, consulting and construction company, we conducted an
extensive review of more than 100 technologies and processes for
producing large volumes of advanced biofuel and concluded that
thermochemical technologies offered the most commercially viable
solution. Based on this review, we developed a two-step process
that consists of gasification followed by alcohol synthesis to
produce ethanol from MSW. For the gasification step, we worked
with InEnTec LLC, or InEnTec, to combine two gasification
technologies into a single energy-efficient process to produce
syngas from MSW. For the second step, we worked with Saskatchewan
Research Council, or SRC, and Nipawin Biomass Ethanol New
Generation Co-operative Ltd., or Nipawin, to integrate their
thermochemical catalyst into our proprietary alcohol synthesis
process to convert syngas to ethanol.”
The Market
The market-limiting factor for this biofuels process is not the
overall demand for transport fuel, or ethanol, but the
availability of MSW as a feedstock and the availability of
sufficient tipping fees to ensure that arrival of zero-cost or
negative-cost feedstock at the manufacturing facility gate.
From the S-1: “According to the EPA, annual MSW generation in the
United States has trended upwards over the past several decades,
increasing from 88 million tons in 1960 to 243 million
tons in 2009. On average, each person in the United States
generates approximately one ton of MSW per year. More than 85% of
the MSW generated in 2009 was comprised of carbon- and
hydrogen-based organic materials with latent energy content.
Waste collectors are charged fees for landfill waste disposal,
which are referred to as tipping fees. According to the Waste
Business Journal, the national average for tipping fees increased
from $28.52 per ton in 1991 to $45.62 per ton in 2011, with
considerably higher tipping fees in more densely populated
regions.”
Based on the Fulcrum yields of 50 gallons per ton of MSW, the
addressable US market is 12.15 billion gallons of ethanol.
The Strategy
Commence production at Sierra. They plan to
commence construction of the first commercial-scale ethanol
production facility by the end of 2011, with ethanol production
expected to begin in the second half of 2013, at a total capacity
of 10 million gallons per year.
Expand production capacity. They will use the
the modular design of the technology to construct new, larger
facilities quickly and efficiently, with future production
capacity at 30- and 60-million gallons per year at future
facilities. Such larger facilities would also lower both the
capital cost per gallon and the fixed cost component of per gallon
production costs (to as low as $0.90 per gallon), enhancing the
economics.
Execute fixed-price offtake and hedging contracts.
For each facility, we intend to enter into physical and/or
financial fixed-price arrangements to lock in sufficient economics
to cover a substantial portion of our fixed costs, including debt
service.
Secure additional MSW contracts. Longer term,
they intend to expand our business by entering into additional MSW
feedstock agreements to increase the amount of resources we have
available to supply our commercial facilities.
Explore new market opportunities. They may
license the technology to third parties and/or partner with large
strategic players, such as major oil and chemical companies,
outside of the base model to build, own, and operate facilities
within the United States.
The Commercialization Plan
Coming online in 2013 and located in the Tahoe-Reno Industrial
Center approximately 20 miles east of Reno, Nevada, the cost of
constructing the 10 million gallon Sierra project is estimated at
$180 million, which will be financed through existing equity
capital and proceeds from this IPO.
The State of Nevada currently has a demand for ethanol of more
than 50 million gallons per year. Today, there are no ethanol
producers in the state of Nevada, nor to our knowledge are there
any slated for development other than Sierra. The State of
California currently has a demand for more than 950 million
gallons of ethanol per year and imports 80% of its total ethanol
supply .
Future locations will have capacities of 30 or 60 million
gallons, and unsubsidized cash operating costs of less than $0.90
per gallon.
They have identified more than 20 potential site locations across
the United States for future development, located in the 19 states
in which they have contractually secured zero-cost MSW. They
believe opportunities may exist to co-locate our facilities at
sites with significant infrastructure in place, such as
refineries, which could lower our per-gallon capital costs.
Fulcrum as it sees itself: 11 Competitive Strengths
Zero cost feedstock. We have executed feedstock
contracts with some of the largest waste service companies in the
United States that will supply us with sufficient feedstock, at
zero cost, to produce more than 700 million gallons of
advanced biofuel annually for up to 20 years. Our use of MSW at
zero cost removes the largest, and most volatile, component of
traditional renewable fuels production cost from our cost
structure. We believe this provides us with a significant cost
advantage over competitors paying for feedstock or utilizing
purpose-grown feedstocks.
Transportation advantage. Significant volumes
of MSW are generated near metropolitan areas, providing us with a
transportation advantage compared to feedstocks harvested or grown
in rural areas that must ultimately transport either the feedstock
or the fuel to metropolitan areas.
Reliable supply. The United States generates
more than 243 million tons of MSW annually, the majority of
which is rich in organic carbon, providing sufficient feedstock
for our process to produce approximately 12 billion gallons of
biofuel annually.
Established infrastructure. By using MSW, we
benefit from existing infrastructure for collection, hauling and
handling. No new logistical networks would be required to
transport the feedstock to our facilities.
No competing use. We produce advanced biofuel
from a true waste product that has no competing use, is not sought
after by food producers and has no impact on food prices.
Clear path to commercialization. Our first
commercial-scale ethanol production facility is expected to begin
production in the second half of 2013. We expect to construct
additional commercial-scale production facilities across the
United States that will be supplied with MSW under our existing
contractual arrangements with Waste Connections, Inc. Our modular
plant design not only significantly reduces scale-up risk, but
will also allow us to construct new facilities and deploy our
capital efficiently to capture a meaningful share of the ethanol
market in the United States.
Proprietary process not dependent on yield improvement.
Our process integrates a catalyst that converts syngas into
ethanol, and we have demonstrated the success of this process at
full scale at our demonstration facility. We believe our process
will produce ethanol at net yields of approximately 70 gallons per
ton of MSW, which we believe is sufficient for us to operate
profitably in the absence of economic subsidies.
Business model built for long-term and sustainable
profitability. We do not rely on government subsidies
to make our product commercially viable. While we benefit from
policies such as RFS2 and the LCFS, and will access incentives
available for the production of our advanced biofuel, we expect
our product to be sold on a cost-competitive basis with existing
transportation fuels without any reliance on subsidies.
Flexible production process. We have designed
our proprietary alcohol synthesis process to give us the
flexibility to produce alcohols other than ethanol and take
advantage of opportunities in other renewable fuels and chemical
markets.
Benefits for our customers. Zero-cost feedstock;
stable cost structure. Access to
domestically-produced advanced biofuel. Large-scale
development program.
Benefits for our MSW suppliers. A cheaper source
of waste diversion than traditional landfill disposal. Extend
landfill life at existing capacity levels. Avoidance of
methane gas emissions.
The Risks, Translated from SEC-speak
In SEC speak: We are a development stage company with a
limited operating history, and we have not yet generated any
revenue. We currently expect to begin constructing our first
commercial ethanol production facility, the Sierra BioFuels
Plant, or Sierra, by the end of 2011, and to begin production in
the second half of 2013.
In English: We ain’t sold nuttin’, honey. Cause we ain’t
built it yet.
In SEC speak: To date, the components of our process have
been demonstrated or used separately, but we have not previously
demonstrated the processes on a fully-integrated basis at a
single location or on a commercial scale.
In English: “Salagadoola mechicka boola
bibbidi-bobbidi-boo. Put ‘em together and what have you got?
Bibbidi-bobbidi-boo.”
In SEC speak: We are currently in the process of negotiating
a term sheet with the U.S. Department of Energy, or DOE, for a
loan guarantee to fund a portion of the construction costs
associated with Sierra. As a part of the loan guarantee process,
the DOE and its independent consultants conduct due diligence on
projects which includes a rigorous investigation and analysis of
the technical, financial, contractual, market and legal
strengths and weaknesses of each project.
In English: S-O-L-Y-N-D-R-A.
In SEC speak: In order to produce sufficient yields of
ethanol to make our facilities economically viable, we will
require large volumes of MSW feedstock. Though we have entered
into long-term MSW feedstock supply agreements with waste
companies to provide enough feedstock to produce more than
700 million gallons of ethanol annually at zero cost,
deliveries by such companies may be disrupted due to weather,
transportation or labor issues or other reasons outside of our
control.
In English: “Keep America Beautiful” – throw lots and
lots of litter in the general direction of Lake Tahoe, please.
In SEC speak: We will also apply to the State of California
to have our ethanol certified under California’s Low Carbon Fuel
Standard, or LCFS, which would make our ethanol eligible for the
carbon intensity reduction credits that will be available under
this program for reducing the carbon intensity of California’s
transportation fuels.
In English: Not that California might actually pull the
rug out from underneath any biofuels venture. Nah, never happen.
In SEC speak: As of June 30, 2011, our executive
officers, directors and beneficial holders of 5% or more of our
outstanding stock owned almost all of our outstanding voting
stock. As a result, these stockholders, acting together, would
be able to significantly influence all matters requiring
approval by our stockholders, including the election of
directors and the approval of mergers or other business
combination transactions.
In English: Ah, Skywalker, you will not be a full member
of the Jedi Council at this time.
Financing to date
In 2007, James A. C. McDermott, the Managing
Partner of USRG Management Company had contributed or made
commitments to contribute $1.0 million to the LLC, for
6,741,573 shares of Series A convertible preferred stock.
In August 2007 and February 2008, they sold an
aggregate of 14,000,000 shares of our Series B convertible
preferred stock at $1.00 per share for an aggregate purchase price
of $14.0 million.
In October 2008, they issued two Senior Secured
Convertible Notes, to USRG Holdco III and Rustic
Canyon Ventures III, with an initial maximum principal amount of
$5.0 million for a maximum aggregate principal amount of $10.0
million, which accrued interest at the rate of 8% per year
In March 2010, they issued two new Senior
Secured Convertible Notes to the same parties – the 2010 USRG Note
and the 2010 Rustic Canyon Note, with an initial aggregate
principal amount of $4.0 million.
In June 2010, the 2008 USRG Note and the 2008
Rustic Canyon Note were converted into 13,450,762 shares of Series
B-2 preferred stock, in exchange for the conversion of $26.9
million in principal amounts and accrued interest owed on the
notes.
In September 2011, the 2010 USRG Note and the
2010 Rustic Canyon Note were converted into 12,924,605 shares of
Series C-1 preferred stock at $2.67 per share, in exchange
for the conversion of $32.5 million aggregate principal amount of
our senior secured convertible notes and $2.0 million of accrued
interest.
Also in September 2011, they sold, or expect to
sell prior to completion of this offering, an aggregate of
29,216,738 shares of our Series C-1 convertible preferred stock at
$2.67 per share for an aggregate purchase price of $78.0 million,
including the conversion of the 2010 USRG Note and the 2010 Rustic
Canyon Note.
Fair Valuation by the board of directors
November 1, 2007: $0.24
April 19, 2010: $0.41
June 27, 2011: $1.53
The bottom line
This is the first of the waste-to-biofuels companies to come to
the public markets, which elevates the opportunity and risk for
the investor in the absence of a benchmark IPO offering.
The company has spent $63.8M to date bringing itself to the cusp
of commercialization, which is relatively cheap as advanced
biofuels goes. Several companies have filed IPOs after racking up
more than $100M in development costs to the point of constructing
their first commercial facility.
Like most others (but not all) in this IPO wave, Fulcrum comes to
the market with no revenues, and as a financing event rather than
a liquidity event for existing shareholders. Having had most of
2011to raise capital, they have (after completing their 2011
pre-IPO financing) $49M in the bank as of June 30th.
Attractive aspects of this filing: zero-cost, locked in
feedstock. Assuming we believe the cost estimates from the
demonstration-level work that has proceeded to date, there’s not
much that can go materially wrong in terms of the proposed
production cost of $1.30 per gallon for ethanol.
Unattractive aspects: aside from the absence of a full-scale
demonstration, there’s a high capital cost for this process (at
the Sierra facility) of $18 per gallon of capacity – that’s more
than nine times the cost of building out corn ethanol at scale –
though corn ethanol producers (buying on the spot market) are
looking at feds rock costs in the $2.50 per gallon range. Even
assuming zero-debt and a 20-year life for the facility, the
amortized capital cost of this facility will raise the overall
fixed production cost to $2.20 per gallon on an unsubsidized
basis, which leaves little room for profit at current spot ethanol
prices of $2.50 per gallon and exposed at the CBOT current October
2012 ethanol futures price of $2.12 per gallon.
On the other hand, with its 75 percent GHG reduction, Fulcrum
will not be competing head-to-head against, say, corn ethanol, but
rather be competing within the cellulosic biofuels pool, which in
the RFS is restricted to technologies that produce a 60 percent or
higher GHG savings. There, the prices (given tight supply for some
time to come) are expected to be higher.
Pools of risk: Aside from the aforementioned risks associated
with the Sierra project, we have a sketchy, but not contracted
out, pathway to future facilities.
The
complete S-1 registration statement is here.
Jim Lane is the Editor and
Publisher of Biofuels
Digest.
In Texas, Terrabon
filed for Chapter 7 bankruptcy protection; the company’s operations
will cease and a trustee will be tasked with liquidating the
company’s assets for the benefit of creditors.
In the last week of July,
Waste Management announced a decision to 
