Big week for biodiesel firm Methes Energies Int'l
Methes Energies International Ltd. had a big week after pricing its initial public offering, announcing the RFS2 registration of its Sombra (Ontario) facility as a certified foreign renewable fuel producer, which allows it to sell its biodiesel fuel into the U.S. market and generate RINs, and finally the closing of its initial public offering.
If you haven’t heard of them before, Methes Energies is a rather diversified company in the biodiesel space as it not only produces biodiesel at its Sombra and Mississauga facilities, but it also manufactures automated production units (the Denami 600 and the Denami 3000).
The company’s services also include selling commodities to its network of biodiesel producers, selling their biodiesel production, and providing clients with proprietary software to operate and control their processors. It also remotely monitors the quality and characteristics of its clients’ production, upgrades and repairs their processors and advises clients on adjusting their processes to use varying feedstock to improve the quality of their biodiesel.
The IPO grossed $2.8 million and netted (after underwriting and other fees) $2.3 million (560,000 shares at $5 a share). The 560,000 shares sold in the IPO represent about 8.5 percent of the total company shares. The other shares are held by executive officers, other officers and company directors (24.8 percent of the shares); and other existing stockholders (66.6 percent of the shares). While that’s the breakdown of the number of shares, the total consideration value breakdown is different. While the executives hold 24.8 percent of the shares, the average price per share is about 1 cent, representing less than 1 percent of the total consideration value. Existing stockholders’ average price per share is $3.28, representing more than 83 percent of the total consideration value.
For the year ending Nov. 30, 2011, the firm’s revenue breaks down like this: biodiesel resales made up $6.26 million, or about 53 percent of the company’s annual revenue; internal production constituted $3.47 million, or about 29.5 percent. Feedstock sales represented about 7 percent of its revenue; while equipment sales made up just 2.2 percent. Government incentives made up 4.4 percent of its revenue. Interestingly, the year before (2010), Methes Energies made $1.67 million in equipment sales, but just over $256,000 in equipment sales in 2011.
The company has outlined for what it intends to use the proceeds. In its public Securities and Exchange filings, Methes Energies says it intends to, first, purchase production and storage equipment and upgrade rail tracks. “We intend to use approximately $1.5 million of the proceeds to purchase and install an evaporator at our Sombra plant that will allow us to recycle methanol that can be reused in the production process, to add additional storage tanks for feedstock and for biodiesel produced at the plant, and to upgrade part of our rail track system to provide greater flexibility in loading and unloading tank cars,” the company states. “We intend to use approximately $300,000 in increased marketing and sales expense related to the expansion of our computer-linked network of biodiesel producers and the sale of Denami processors to new network members and to support the marketing and sale of processors in Europe, Asia and North and South America. These expenses may include appearances at trade shows, advertising in trade publications and additional sales personnel. We intend to use $484,000 of the proceeds for capital expenditures and working capital required for general corporate purposes, including the potential addition of processors at our Sombra plant, increasing investments in marketing, and acquiring or constructing one or more additional processing facilities. Working capital may also be used to support new production facilities until they generate positive cash flow. If the representative exercises the over-allotment option, we intend to add the additional net proceeds of approximately $382,200 to our working capital.”
Among the risks in its business that the company lists—over and above typical biodiesel industry risks of potential feedstock shortages and fuel, RIN and feedstock pricing fluctuations—Methes Energies states that its larger processor, the Denami 3000, while based on the same technology as its smaller 600 unit, has only been tested during full-scale operation for “a few days and we could still experience unexpected problems during sustained operations that might make it difficult to produce quality biodiesel. Potential problems with the Denami 3000 could increase costs and delay the start of full-scale prudction, and could adversely affect our ability to sell our Denami processors and adversely affect our revenues and results of operations.”
In fairness though, if you’ve read the risks in public filings before, these sorts of precautions are not unusual, and certainly do not mean that these worst-case scenarios will play out.
One of the other risks advised about in the public filings is the fact that the company has “a history of losses.” It states, “We have never earned a profit. For the years ended Nov. 30, 2010 and 2011 and for the six-month period ended May 31, 2012, we reported net losses of approximately $1 million, $811,000 and $1.2 million, respectively. As of May 31, 2012, our accumulated deficit was approximately $7.5 million. Investors should consider this history of losses in assessing the likelihood of our operating profitably in the future.” It also states that its ability to continue and expand operations depended in part on the success of this offering. “Due in part to the funds spent to develop Sombra, at May 31, 2012 we had a working capital deficiency of $1,947,002, and during the six months then ended a loss of $1,212,535 and negative cash flow from operations of $41,000. In addition, our current operating cash requirement is approximately $213,000 per month. We have fully drawn our recently obtained credit line. Our ability to continue and expand our operations through full-scale commercial operation of the Sombra plant will depend in large part upon the successful completion of this offering. We anticipate that Sombra will generate positive cash flow from operations and will operate profitably once full-scale commercial operation commences and, if completed, that the proceeds of this offering will therefore be sufficient to meet our cash requirements for at least the next 12 months.”
The company’s growth plan includes developing a computer-linked, North American network of small and medium-scale independent biodiesel producers; adding to its production capacity at the Sombra location; marketing and selling its Denami processors in Europe, Asia and South America; and expanding its consulting services.
“The network is intended to provide us not only with royalties but also with opportunities to offer additional services to network members, such as sales of feedstock and process monitoring services,” the company states. “Purchasers of our Denami processors benefit from the computer-linked, real-time monitoring services which improve the quality of processor output and processor efficiency. Other small and intermediate producers can take advantage of our upgrade, repair and service capabilities. We may also offer to purchase biodiesel from computer-linked network members and others.”
To read more about the company through its public filings, click here.