In Massachusetts, Qteros CEO John McCarthy and an unconfirmed cadre of key people left the company yesterday, with a swiftness that was sure to confuse not only the industry but even Massachusetts Governor Deval Patrick, who was expected to travel to Brazil in early December with McCarthy on a trade mission.
Rumors were spreading like wildfire by mid-afternoon that the company was being shut down and that the owners were going to sell the facilities and IP.
But late in the afternoon, Qteros board member Jason Matlof, a Bettery Ventures partner, advised the Digest that the rumors were unfounded. “To be clear, we are NOT selling IP, assets, et al,” she wrote in an email. “John M is no longer with the Company and a new CEO will be announced in the next couple days.”
Shortly before the close of business, another rumor emerged – that Qteros commercialization chief Mick Sawka would become CEO. The rumor has yet to be confirmed, but made it into a CNN Money summary of the day’s drama.
Rumors also discussed the fact that the company had struggled mightily in a planned $40 million capital round.
What does Qteros exactly do, again?
Qteros, which ranked #28 this year in the 50 Hottest Companies in Bioenergy, is one of the hottest companies with a consolidated bioprocessing “magic bug” that can simultaneously saccharify and ferment both C5 and C6 sugars.
Consolidated bioprocessing has long considered a “holy grail” of cellulosic biofuels because of its potential to save on the operating and capital costs of biorefineries.
So, here’s where Qteros has staked its all, on a licensing strategy for its consolidated bioprocessing technology. The company believes it will reduce, by $50 to $100 million, the capital expense for cellulosic ethanol at scale, and dramatically lower the operating costs.
Qteros’ CBP platform is based on its broadly protected, feedstock-agnostic micro-organism, the Q Microbe. Qteros’ near-term feedstock strategy includes corn stover, wet distiller grains (WDGs) and bagasse processed at cellulosic ethanol facilities that are co-located with existing corn and sugarcane ethanol plants.
McCarthy joined Qteros in early 2010. At the time, he noted, “The company had a great technology, but really no had strategy — it was directional at best. What we focused on was: 1) scale the platform to commercially relevant levels, and 2) get partners on board that will get us commercial as quickly as possible.
Why was Qteros chasing $1 per gallon, and how fast was it moving?
“I know, in excruciating detail from the Verenium years,” said John McCarthy, “that its the lowest cost that will succeed, and that it’s at the scaled design level that it happens. I well remember BP’s view of the designs to date, and knowing Abengoa and others, there’s no mystery about the difficulties of commercialization and optimization in a low cost manner. The industry needs to reach $1 per gallon to be competitive at large commercial scale, and we are not there yet.”
Speaking in January, McCarthy ominously added, “We have about 12-24 months, or we will not continue to have political support.”
Just ten months later, McCarthy is out.
Why were so many analysts and observers high on Qteros?
Earlier this year, Qteros received a positive review from Raymond James energy analyst Pavel Molchanov, in which the advanced biofuels company was compared to three newly-public advanced biofuels companies, Amyris, Codexis, and Gevo.
“Qteros, for example, achieved a total cash production cost of $2.40/gal last year,” writes Molchanov, “and is targeting $1.50/gal by mid-2011 and $1.00/gal by 2013. By comparison, at current corn prices of ~$7.00/bushel, just the corn itself equates to $2.50/gal (before netting out co-product revenue)…Qteros has a capital-light commercialization strategy, aimed at technology licensing.
“In addition to gaining access to CBP technology, licensees get a comprehensive, turnkey Process Design Package (PDP) – comprising all the know-how required to construct and operate a commercial-scale cellulosic ethanol plant. In January, Qteros announced a strategic partnership with Praj Industries, a leading Indian-based engineering firm that designs and builds biofuel plants, mainly in Asia and South America. The two companies are currently focusing their efforts on developing PDPs for feedstocks that include sugarcane, corn, and wheat residuals, with the goal of achieving commercial readiness by year-end 2012.”
The problem of the Series C investment round
At the Digest, we have been hearing of companies having increasing trouble raising Series C and Series D venture capital rounds.
In commenting at the Biofuels International Canada conference last month in Calgary, Alberti Advisors principal Doug Cameron said that later stage investors would look for deeply credible management teams, proven technologies at the pilot or demo scale, a well-articulated business model, and the presence of strategic investors to provide market access and technology validation. He said that investors at these stages were comfortable with commercialization risk, but uncomfortable with regulatory risk.
Regulatory risk that, in the case of cellulosic ethanol, could not be more vivid and present, given the current fog over the fate of the cellulosic ethanol production credit of $1.01 per gallon, scheduled to expire at the end of 2013, the US Renewable Fuel Standard, and the cellulosic ethanol carve-out within the RFS.
All of which should have been driving cellulosic ethanol companies like Qteros to explore their options in India and Brazil, where the company’s increasing experience with bagasse and cane trash would come in handy. But given the fractious nature of Indian biofuels development today, overwhelmingly the attention would have been growing in terms of Brazil.
Qteros and its Series C round
Back in January of this year, Qteros announced that it closed the initial $22 million tranche in its Series C financing, with an undisclosed group of new and existing investors. The completion of this $22M financing was expected to provide sufficient funding to accelerate the Company’s development and commercialization plans.#rewpage#
Qteros said the complete series C was expected to complete in Q2 or Q3, and would be the last round – before the company would get to cash break even. It didn’t happen.
At the time, CEO John McCarthy commented, “There has been a lot of interest in Series C. One thing was clear – for some partners, we needed have the validating partnership or one of the potential strategics before we closed on financing, so we have closed with some participants, but with others the process will move forward now that we have finalized the partnership with Praj. In the announcement, we haven’t named the Series C investors, because we didn’t want to disaggregate the participants. The first half of the year will be active for us – closing on discussion on strategy. But overall, we do expect to have all our existing investors participate in this round. We have a great group of investors, and there are plenty of deep pockets. But as the company makes progress – one challenge for all companies in this space as we make continuous progress – is to broaden the investor base.
The Praj partnership
In January, Qteros and Praj Industries announced a strategic partnership to accelerate commercialization efforts for industrial-scale cellulosic ethanol production.
Under the agreement, Qteros and Praj will collaborate on a highly focused, multi-year development program with the objective of rapidly developing and commercializing Process Design Packages (PDPs) that enable cellulosic ethanol production using Qteros’ Q Microbe-enabled CBP platform and Praj’s technology and expertise in the conversion of biomass to ethanol. This unique licensing model serves to provide both a highly efficient and low-cost solution to the market, while also allowing Qteros and Praj to deploy their capital in an efficient and leveraged manner. Importantly, the companies plan to retrofit Praj’s existing pilot plant in Pune, India with Qteros’ technology platform, which will then become the foundation for accelerated production scaling as part of its commercial planning.
The goal of the partnership? The main milestone was to reach, on a cash based opex level, the $1.50 per gallon level by mid 2011. By 2013, the goal was to reach $1 or less per gallon. The technology would be fully integrated in Pune – who were retrofitting their pilot plant with Qteros technology.
At the time, McCarthy commented, “A top quality management team for one – and the fact that they have built 450 plants around the world. No one has more expertise, especially in India, and SE Asia – which is a region of the world that, frankly, is moving more quickly and in more interesting ways in this space than the US. On our side, we saw this as a way to partner with a company that had the expertise and customer base to get us into the kind of discussions about getting commercial, and not be dependent on, for example, on DOE loan guarantees.”
For Praj, why Qteros?
Praj CEO Pramod Chaudhary added, “Consolidated bioprocessing has been on our agenda in lignocellulosic conversion for quite a while, but we have been working step by step very meticulously. At the same time, we have been looking at technologies that would give us the low cost conversion. Sun Ethanol formed in Boston and we first met back then, and we found the microbe interesting then, and kept track of its development. Now, there’s an inflection point in this space, and we believe that this collaborative approach will give us an advantage in the market. 2011 is crucial. We’d like to stabilize the process at our desktop bench level, and then fully introduce it in our pilot. In the next 18-24 months, we hope to have this in the demo plant.”
McCaryhy added, “By end of 2011, our goal is broad, commercially reliable data from pilots at multiple facilities. I know that may sound aggressive.”
The Brazil options
In a Digest interview earlier this year, McCarthy said, “When I first came to Qteros – we weren’t developed enough to take on Brazil. Now we are. Brazil is extremely important, and we have a large investor in Soros who is a player in Brazil. My takeaways from experiences with Verenium and other stops in my career, in terms of Brazil? It’s a complicated market. You have got to be working with one of right big 5 or 6 players. You got to create a very compelling economic argument with bagasse in terms of its conversion to fuel instead of power.”
We noted earlier in 2011, “it wouldn’t take a rocket scientist to speculate that Qteros is deep in discussions with Tropical Bioenergia, a joint venture between BP, Santelisa Vale and Maeda Group, which is developing 264 Mgy in sugarcane ethanol capacity. The project is scheduled to open this year in Goias state, northwest of Sao Paulo in the heart of sugar country. BP is an investor in Qteros. The Tropical Bioenergia venture will not only refine fuels, but will farm the cane, and will have a lot of bagasse. In the near-term, bagasse is burned to generate renewable power for ethanol processing, and often creates a side business distributing power up to the Brazilian grid.”
We added: “If BP is not your preferred flavor this month, think Soros, another investor in Qteros. Soros Capital Management has announced a plan, through its Adecoagro unit, to increase its cane-crushing capacity from 4.8 million tones to 11 million tones by 2016, and is in the process of building its own 6-million tonne cane processing unit in Mato Grosso do Sul. They are even, reportedly, looking at an IPO to raise funds for Brazilian expansion. Soros is also an investor in Qteros.
“Soros, BP — those are our guesses for Qteros, which has its corporate lips tightly sealed. The other massive source of bagasse is in India — but sugar and ethanol are, to put it mildly, in some degree of chaos after the failure of the sugar crop last year. Our guess is that conversations there may well have started, but it would take a real visionary to project out India’s ethanol strategy over the long term, right now.”
McCarthy? Well, he was noted for forming and guiding the BP partnership while at Verenium. Could a decision by BP not to use the Qteros process in Brazil influenced the board’s decision to move on, while installing McCarthy lieutenant Mick Sawka at the helm of the company?
Show me the gallons
Cellulosic ethanol is cruel to individuals and companies. As Advanced Biofuels Association president Mike McAdams challenged listeners at FEW earlier this year, “Show me the gallons.”
Not much to show. Some pilot and demonstration activity. The world production leader is the sub-2 million gallon demonstration plant that Inbicon is running in Denmark. In a letter last month to EPA Administrator Lisa Jackson, EIA Acting Administrator Howard Gruenspecht projected 3.94 million gallons of cellulosic biofuels production in the US in 2012. The original RFS target was 500 million gallons. Fiberight, Ineos New Planet BioEnergy, and KiOR were cited as the producers who would be up and running next year, with ZeaChem, KL Energy and American Process having small volumes from their demonstration plants available for sale.
Gallons — that’s what policymakers, investors, and the public want, the Digest observed last summer. With so many announcements of big partners like Shell, BP, Exxon, and so many companies talking about the low cost of their fuels, where is the gallonage in cellulosic ethanol?
The Bottom Line
It may be some time before the exact story of what went down this week in Massachusetts comes clear. Problems finding pilots to test with, problems with the Series C round, inability to stabilize the policy outlook — perhaps a combination of all three.
For sure, it should be seen as a warning sign that the timeline for commercialization of cellulosic ethanol needs now to be measured in months, not years. And, given the number of companies that are kicking the tires but not ponying up balance sheets in the pursuit of cellulosic biofuels — there may be real problems with the licensing model which requires multiple clients to emerge quickly.
As McCarthy said himself, “Right now [you go the DC] and its like, “you have BP, Shell, ExxonMobil as investors, and you guys can’t raise $300 million without a loan guarantee? — come on.”