Pink Sheet Persuasion

For many start-up companies in the clean energy sector, success means seeing its stock trade on the floor of a major stock exchange such as NASDAQ or the New York Stock Exchange. Until they have the revenue and profits, they must build their identities and persuade investors to their base with big statements and even bigger dreams.
By Nicholas Zeman | February 23, 2010
It's a world of memorandums of understanding, research and development partnerships, letters of intent, big statements and big dreams. Big dreams that prophesize the end of the hydrocarbon economy, reduced global pollution and a new economy based on rural development in impoverished countries, environmental conscientiousness and decentralized production. The companies that foretell this vision, however, often face the harsh realities involved with intense capital needs, technological development and the cut-throat competition inherent in commercializing scientific breakthroughs. It's the world of over-the-counter bulletin board stock trading in the clean energy sector.

Pink Sheets-the largest securities exchange after the New York Stock Exchange and NASDAQ-will list virtually any company, and the over-the-counter-market often features the thinly traded, the bankruptcy cases, and the shell companies whose financials are markedly difficult for the investor to investigate. It's where many companies must get their start. "Everybody wants to go to a bigger exchange and do everything possible to increase shareholder value," says Richard Craven, CEO of Mississippi's Universal Bioenergy. "We are working to bring increased filings and greater transparency to the market."

Universal Bioenergy reports that there is now more venture capital involved in the green tech sector than there is in medical devices, telecommunications and semiconductors. The harsh reality, however, is that much of this money will be spent in vain and many of these projects will fail. "Then there are these situations where companies sought public money, got investors and their projects were either not thought out or downright shady and now these projects don't exist, the money's gone and that casts a shadow on all of the biofuels industries," says Brad Alvis of Biodiesel Business Plans.

Bad projects have "cast a shadow" over the biofuels industries when it comes to public funding. "There was this exuberance in advanced biofuels and hundreds of millions of dollars got thrown into projects, and some of them were less founded on good technology than others," says Mark Yancey, principal for the Denver-based project development firm NEAtech. "Obviously there are winners and there are losers-it's the nature of our capitalist system to throw money at a new thing."

The field is huge, and firms are jockeying for position, flying bold colors looking to catch the eye of money and distinguish themselves as winners. It's a new industry. Also, the stock market crash combined with the bottom falling out of crude oil prices has led to a waning of interest in alternative energy starting in summer 2008. "When diesel prices are high, my phone is ringing off the hook, but when they're low, nobody is thinking about the environment," Alvis says.

For young companies that need a fast infusion of capital for quick growth, Craven says the public model offers the best route. Conversely, that strategy can involve a lot of capital expense and overhead, which can manifest itself as a disadvantage while similar companies fight for limited resources-and the competition is fierce. "The race has actually been going on for a couple of years," Yancey says. "Companies like Mascoma and others have got millions poured into them and now it's starting to intensify to see who can perform, and who can deliver on the promise of some of these technologies."

On that note, companies trading on NASDAQ's over-the-counter bulletin board and the Pink Sheets work hard to distinguish themselves in today's market, and look for leverage among their coffers, education and experience. "I'm a scientist, I have a background in chemistry, so I think that gives us an advantage in analyzing the potentials of certain opportunities," Craven says. "You have to remember-look at VHS and beta-the best technology doesn't always win out. We have to make sure that science, and not lobbies, are driving this market."

The American Recovery and Reinvestment Act has thrown billions of dollars at the clean energy sector, and has started to increase investor confidence in wind, solar, biofuels and other industries vying for roles in the world's future energy portfolio. But again, critics say that this money is available to the wealthy and well-connected more so than to the most qualified or promising firms or projects. "There have been a lot of dollars going toward advanced biofuels like cellulosic ethanol and biobutanol, but almost 100 percent of this is going toward the development and demonstration of new technologies, not commercial facilities," Yancey tells Biodiesel Magazine. "The ARRA money is going toward things that are by and large pre-commercial."

Patents, Partnerships and Big Plans

Talking about competition, Origin Oil, the Los Angeles-based algae oil extraction firm, reports that there are approximately 1,400 companies working in the field. As a former Greenline Industries employee, Alvis says that he heard rumors of a major company pumping $1 million per day into algae research, but couldn't get it done. "They've been working on cracking the algae problem for 10 years and it hasn't happened," he says.

Origin Oil's stock price in late January was 26 cents per share with a 52 week high of 48 cents per share and low of 22 cents per share. Standard & Poor's, a financial markets intelligence provider, reports that Origin Oil has 224 investors. The poor economic conditions haven't caused interest in the company to fade though. "We saw no loss in valuation throughout the course of the crash," says Origin Oil CEO Riggs Eckelberry. "We have a resilient funding model, and put substantial additional effort into reaching-and responding to the needs of-the investor base that we've built."

The company reportedly lost $2 million in 2009, spending its cash on research and development efforts. Further, a decrease of $256,742 in working capital was due primarily to ongoing costs of developing the company and preparing its technologies for market. These figures, easily found on Origin Oil's Web site, are important to publish even if they are less than shining. "Investors are able to tell the difference between the companies that do provide information and transparency and those that don't, and who is responsive to their concerns," Eckelberry says. "They can tell."

Its patent-pending technology, "quantum fracturing," is based on the "science of mass transfer and fluid fracturing and addresses some of the challenges of industrializing algae oil production," Origin Oil reports. Using quantum fracturing, "water, carbon dioxide and other nutrients are fractured at very high pressure to create a slurry of micron-sized nutrition-bubbles," which is then channeled to the algae culture awaiting it in a lower-pressure growth vessel, the Helix BioReactor. "Investors are very sophisticated and they want to see the patent filings," Eckelberry says.

"You can have all kinds of patents and not have a sound business plan," Alvis tells Biodiesel Magazine. "I could decide to buy a McDonald's franchise, which would be nothing new or groundbreaking, hold no patents, have nothing secret or proprietary, but still find a group of investors and have a sound business plan."

In addition to patent filings, agreements and partnerships with established companies help build investor interest, and startups know this. Memorandums of understanding, letters of intent and other documentation of business agreements are often highly publicized by new clean energy companies. Greenhunter Energy Inc. of Grapevine, Texas-trading at press time as stock symbol "GRH" on the NYSE for $1.34 per share-is involved in a lawsuit defending its inability to fulfill a tolling agreement with Canada's Bioversel, which was slated to utilize 25 percent of its Houston refinery's widely touted 105 MMgy capacity. Shortly after the deal was announced, GRH's stock hit an all-time high.

Bioversel alleges, "by speaking out of both sides of its mouth, and trumpeting the contract with Bioversel for the purchase of refined biodiesel, but failing to publicize the fact that it does not possess the ability to produce biodiesel that meets the specifications required by the contract," Greenhunter failed to provide the investing public with a full and accurate picture of its true position. "It is not resolved," Bioversel tells Biodiesel Magazine in a late January conversation. With this suit ongoing, Greenhunter has until May to get its financials in order to meet a deadline to fulfill its listing requirements with NYSE. These two situations, however, are not connected.

Feedstock Development

Investors follow stock quotes, 52 week highs and lows, analyses from outlets such as CNN Money and Bloomberg, press releases, patent filings and Securities and Exchange Commission reports, trying to pick companies for their portfolio that will perform and deliver. The criteria, however, are fairly simple as to who will succeed and who will fail in the biodiesel world.

Technological prowess, a team of accomplished scientists, even loads of capital can help, but biodiesel success stories often boil down to one element-a dedicated supply of feedstock. "Technology, management, strategies-nothing else really matters," Alvis says. "About once a week I get a call from somebody who wants me to sell them a business plan for algae oil. I listen and say, 'I'll sell you a business plan, but it's going to be based on something that works, and not some shiny new machine.'"

Feedstock development is a significant driver of other progressive biofuels companies often focused on jatropha, camelina, pennycress, and other fringe oil-bearing fruits that have been responsible for relatively little commercial biodiesel volume.
Australian jatropha developer, Jatoil Ltd., is preparing to integrate a crop into its Asian biofuel farms that is valued for its sweet leaves, being 40 times sweeter than sugar. At press time, Jatoil (stock symbol: JAT) was trading on the Australian Securities Exchange for 3 cents per share. Along with two other Australian firms, Nuflora and Floraquest, Jatoil will "intercrop" Stevia, a member of the sunflower family with origins in the Americas, which is said to be in strong demand from global food and beverage manufacturers as a natural low-calorie sweetener.

"Feedstock cost is 70 percent to 80 percent of a biodiesel's producer's operation," Craven says. Universal Bioenergy's plant in Nettleton, Miss., is currently being subleased to another company. Universal Bioenergy was trading at 11 cents per share at press time. The 52 week high was $1.80 and the low was $.0085. The company says it hopes to "develop new feedstocks with greater sustainability and volume, such as algae and Jatropha, to achieve higher sustainable production outputs to meet the growing demand for alternative transportation fuels."

Amelot Holdings of Norfolk, Va. (traded on the Pink Sheets as AMHD) reported the brokering of an agreement with a Ghana-based consulting company for the development of an initial 100,000 hectare jatropha plantation. The company says that it is currently in the midst of negotiating a 49-year lease with the land-owners, organizing local licenses, and providing initial logistics for the project plantation that, when it reaches maturity, will contain 200 million jatropha trees and "conservatively" produce 100 million gallons of jatropha oil annually.

"I read about this company that uses jatropha and camelina to make jet fuel and they have this 'sustainable, secret' process-I don't see them making gobs of jet fuel," Alvis says. "If they could, they would be. The guy that owns Fed Ex is up in arms because he can't buy biofuel, and that's what he wants to use."

Amelot says that it has several biodiesel production projects in the Caribbean underway, in Barbados, Trinidad and Tobago. "In 2010, we hope to prove to you that nothing can hold us back," said Amelot Holdings Inc., president and CEO Fred Guarnieri. Amelot Oil Barbados Ltd. is based on a waste cooking oil-to-biodiesel platform. In late January, the company was trading at $0.0.

Nicholas Zeman is an associate editor for Biodiesel Magazine. Reach him at (701) 738-4972 or [email protected].
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