A biofuels startup can't deliver on its promises (cont.)

By Patricia B. Gray and Justin Martin, FSB Magazine

An overview of Xethanol's operations and prospects, dated September 2005 and circulated to investors, described the company as a "biotechnology-based ethanol producer and a leader in the emerging waste-to-ethanol industry."

In a fall 2005 interview with FSB, Taylor laid out big plans: His company intended to launch eight new plants in the coming year, mostly along the East Coast. By the end of 2006 those plants would have the capacity to generate around 100 million gallons of ethanol from waste (enough to fuel 137,000 cars for a year ). The dollars would just flow. "We're waste-to-ethanol," he crowed at the time. "Where there's muck, there's money."

Xethanol's share price exploded during the spring of 2006. Yet SEC filings suggest that it spent at least as much on consulting, investor relations and public relations during the first half of that year as it did on engineering services - this from a company supposedly in the race for a technological breakthrough.

The promise unravels

For a while public relations might have seemed a wise place for Xethanol to spend its money. Faced with a paucity of information (from analysts, say), investors in tiny, thinly traded companies often place considerable reliance on press releases. The company's public relations firm issued a steady stream of Web-based communiqués touting Xethanol's promising innovations.

Those announcements correlated with upticks in the share price. Between January and April, Xethanol's stock shot up sevenfold. During the same period, SEC filings show that Taylor sold 125,000 shares (or about 8 percent of his holdings at the time), netting $1.3 million. Jeffrey Langberg, a director, sold 130,000 shares for $1.4 million. On the advice of his attorney, Taylor refused to comment on any allegation in this article. Langberg did not respond to phone calls from FSB.

Soon after the stock's run-up, Sharesleuth.com published its exposé and brought the party to an abrupt halt. It painted Xethanol as nothing more than a conventional producer of corn-based ethanol. The Sharesleuth.com reporter also paid a surprise visit to the Hopkinton, Iowa, facility and found it locked, dark and lacking basic services such as water. Far from opening new factories, the company had shut down one of its two existing ones after a brief period of operation.

Robin Buller, Xethanol's vice president of strategic development, insisted that his company had disclosed the status of the facility, which had been shuttered in the spring of 2005. The September 2005 business overview, however, is unequivocal on the subject: "We produce and sell ethanol at two plants in Iowa."

"Obviously in the business presentation it's incorrect," admitted Buller. "It was a mistake."

Moreover, Xethanol is not close to producing ethanol from anything but corn. Established players in the waste-to-ethanol race, such as Spanish giant Abengoa (abengoabioenergy.com), DuPont (Charts) (Dupont.com) and a Canadian company called Iogen (iogen.ca), each spend tens of millions a year for R&D.By contrast, Xethanol has spent $239,651 over the past two years. The bulk of the company's R&D spending has gone to buy licenses for experimental processes developed in various university labs.

According to Robert Rapier, a chemical engineer at the energy giant ConocoPhillips, similar licenses are widely available and offer little if any competitive advantage. After all, it is still necessary to perfect the process, build a custom factory around it, then churn out huge quantities of ethanol.

"To make themselves look like a tech-oriented company, they're obtaining licenses that anyone can acquire," says Barry Borak, a Boston-based energy consultant with financial-services clients such as AIM Investments and Loomis Sayles. Thomas Endres, an operations executive at Xethanol, defends his company's approach: "We're a tech company aggressively pursuing a myriad of technologies."

Making ethanol from waste isn't easy. Iogen, generally considered the front-runner in the field, has been chasing the cellulosic dream for 30 years. Since 2004, the company says, it has produced more than 70,000 gallons of experimental ethanol at a $35 million demo plant on the outskirts of Ottawa. Even so, the company admits it is at least a few years away from commercial production (2009 is the target date).

For its part, Xethanol owns the U.S. license for a process developed by Foster Agblevor, an associate professor at Virginia Tech. He's one of Xethanol's competitive trump cards, highlighted in press releases and other company materials. But Agblevor readily admitted to producing only "a few liters at a time, not that much," in a laboratory.