By Andy Ostmeyer

aostmeyer@joplinglobe.com

CARTHAGE, Mo. — Renewable Environmental Solutions, which has struggled with accusations of odor emissions since its Carthage plant went online, faces yet another challenge.

And that hurdle is that its parent company, Changing World Technologies, launched a bid to go public at a time when investment has dried up and public offerings have ground to a standstill.

The company announced in August that it wants to raise $100 million and is considering building additional plants similar to the one in Carthage, which is the only one of its kind in the country.

Citing U.S. Securities and Exchange Commission rules for a “quiet period” when going public, company spokeswoman Julie Gross Gelfand said neither she nor Brian Appel, chairman and chief executive officer, could comment on their plans or what market activity means for those plans.

Carthage Mayor Jim Woestman is doubtful.

“There is no way anybody in this city is going to recommend them to another community,” he said this week. “I don’t think anybody would be investing in that business. I’m an investor and I would not consider investing in a business where the local people are not happy with it.”

SEC picture

While company officials say they cannot talk, documents filed last month and earlier with the SEC outline the business side of Changing World Technologies, which has been praised for its technology in everything from “Discover” magazine to “The History Channel.”

But while its technology has been heralded, RES also has been simultaneously vilified for an odor that settles over Carthage and has provoked lawsuits and Missouri regulatory violations.

Woestman said the odor is hurting business in the community, and noted that he recently spoke with people at a restaurant in Joplin who told him that the odor was the reason they wouldn’t move to Carthage.

“It has to affect us. Would you move here?” he asked.

For its part, in its filings, Changing World Technologies, said it believes the lawsuits will be “settled favorably.”

But odors have been just part of the problem.

According to company filings, there also have been other setbacks at the plant, including design shortcomings and “inadequate metallurgical selection and suboptimal equipment design” in the startup phase.

The company noted in filings that it is still in a dispute with the mechanical contractor and is suing the contractor for $5 million over equipment problems; the mechanical contractor, meanwhile, is countersuing Changing World Technologies.

SEC filings also indicate the company is losing tens of millions of dollars per year, has not been able to operate the Carthage plant at full capacity, and has experienced times when the plant temporarily shut down.

According to the filings, RES has the capacity to convert up to 78,000 tons of animal and food processing waste per year into between 4 million and 9 million gallons of renewable diesel fuel.

Through September, the company generated about 1.1 million gallons and sold about 684,000 gallons. The average price for the fuel was $1.19 per gallon, which would produce nearly $814,000 in revenue.

The Carthage plant was commissioned in 2005, but it wasn’t until 2007 that it began commercial sales of its fuel and it wasn’t until this year that it began to sell fertilizer.

The company reported a net loss of $21.8 million in 2006, followed by a net loss of $19.9 million for 2007 and a net loss of $18.8 million through Sept. 30. The company had an accumulated deficit of $117.8 million as of Sept. 30, the filings state.

Schreiber Foods is the company’s largest customer, accounting for between 73 and 78 percent of the sales last year and in the first nine months of this year.

Schreiber uses the animal-based oil in industrial boilers at its plants in Monett and Mount Vernon. It recently extended its contracts with RES through May 2010.

Meanwhile, Dyno Nobel just signed on to a two-year deal to buy about 2 millions of the renewable fuel annually.

Advantages

At the same time, the company argues in its documents that the need for its product will drive demand.

According to the company’s filings, there are about 23.5 million tons of animal and food waste generated annually in North America, and another 18.7 million tons in Europe.

And all of it can be converted into oil and other marketable products like fertilizer through the company’s patented Thermal Conversion Process (TCP).

“Based on our analysis of optimal plant size, initially we intend to establish (TCP) facilities that can convert from 500 to 2,000 tons of animal and food processing waste per day and produce approximately 13 million to 54 million gallons of renewable diesel per year,” the company filings note.

Such plants would cost an estimated $38 million to $125 million.

While the Carthage plant is losing money, the company argues that its business model can work at “higher capacity TCP facilities. We should benefit from substantial economies of scale and improve our operating margins because a majority of our operating costs are fixed and do not vary with production levels.”

The average price of petroleum-based No. 2 Heating Oil on the New York Mercantile Exchange from Aug. 1, 2005, to Aug. 1, 2008, was $2.19 per gallon, the company noted. Since its animal-based fuel has 9 percent lower Btu’s than the comparable No. 2 Heating Oil, it would be priced 9 percent lower, the company stated. That would put the RES product at about $1.99 per gallon.

“We estimate that our cash production cost, including the cost of feedstock ... will ultimately be in the range of $1.30 to $1.80 per gallon for our larger production facilities,” according to company filings.

Supplementing that with a federal tax credit of $1 per gallon for renewable diesel, net costs will be in the range of 30 cents to 80 cents per gallon, according to the company’s model. That business model is built on an extension of the tax credit, which is set to expire in Dec., 2009 but is, like the product, renewable.

The company cites other advantages of its products in its documents.

“Our renewable diesel has a significantly higher net energy balance, which is defined as the ratio of the amount of energy contained in a fuel to the energy required to produce that fuel, than conventional diesel, ethanol or biofuels,” according to filings.

The process also does not consume food crops, as happens with ethanol (corn) and soy diesel.

For his part, Woestman said he supports the technology, providing the process can be done odor-free.

“It’s something that is definitely needed worldwide,” he added.

Woestman continues to meet with the company and with state regulators to try to resolve the problem. The company, meanwhile, has said it has spent $3 million on odor-control equipment since problems were first reported, and now denies it is the source of problems in the Carthage Bottoms.

“It was a knee-buckling odor. Now we’re down to a lose-your-appetite odor,” Woestman said of the improvements, using an expression he has picked up from area residents.

“What I do know about is that what they have done so far is not satisfactory,” Woestman added.

IPOs dry up

Company officials also wouldn’t comment on details of their proposed public offering or any time frame.

“The quiet period starts when they first start talking about going public,” said John Fitzgibbon, Jr., founder of IPOScoop.com, which tracks Initial Public Offerings. It ends 45 days after the stock is priced and traded.

At a time when blue-chip companies are selling for a fraction of what they have previously brought, it is not an investor-friendly climate, he noted.

“It’s going to make it very difficult for startup companies or companies that have some problems,” Fitzgibbon said.

According to his analysis, from 1970 through 2007, the average number of IPOs came to 30.2 per each December.

No companies are expected to be priced this month, he said, noting that nothing was priced in September or October and only one company was priced in November.

“We hardly had a deal priced since last summer,” he explained.

Officials with WR Hambrect and Co., of California, which is handling the offering, did not return calls for comment.



‘Quiet Period’

The federal securities laws do not define the term “quiet period,” which is also referred to as the “waiting period.” However, historically, a quiet period extended from the time a company files a registration statement with the SEC until SEC staff declared the registration statement “effective.” During that period, the federal securities laws limit what information a company and related parties can release to the public.

Source: U.S. Securities and Exchange Commission