With only a patented technique to accelerate the growth of algae for its eventual use as protein and biodiesel, Melbourne-based PetroAlgae's plans to raise up to $200 million in an initial public offering have been greeted with skepticism by some analysts.
They say the algae and biodiesel markets are not mature enough to allow PetroAlgae to become profitable, even with the money it could generate from the stock sale. The company has spent nearly $60 million between 2007 and 2009 without collecting on a sale.
If it proceeds with its IPO -- that's when a company makes its first attempt to raise money by selling its stock on an exchange -- PetroAlgae will use that money for continuing operations and to repay its principal stockholder, the hedge fund Laurus Capital Management LLC.
PetroAlgae's financial situation is not unique.
Biofuel companies across the country are struggling to become established as industries worldwide make an effort to find commercially viable alternatives to fossil fuels even as dwindling crude oil supplies, objections to oil drilling and U.S. government support of alternative fuels have made algae-based biofuel companies attractive in theory.
But just a few companies -- often those with hefty government grants or the backing of major businesses -- have succeeded in creating pilot projects that manufacture biodiesel from algae.
"Certainly as part of a long-run energy solution, there's a place for this," Sean Snaith, director of University of Central Florida's Institute for Economic Competitiveness, said.
Algae uses less land than other biofuel crops and doesn't compete with food crops, but its attractiveness to investors fluctuates with the price of oil. Some of the investor interest generated by high fuel prices in the summer of 2008 has since declined.
"If we see a prolonged period of low oil prices, that's going to put pressure on these firms," Snaith said.
Despite the present interest in biofuels, a business model for consistent profits from the sale of biodiesel has not evolved. Nevertheless, PetroAlgae, a four-year-old company with 115 employees, said it believes its licensees can sell the protein and biofuel products they will make with the company's technology.
"Yes, we do have to help develop those markets for our licensed partners, as they will be doing as well," David Szostak, PetroAlgae's chief financial officer and one of its founders, said. The company licenses technology that speeds up production of a protein feedstock, which can be used for human or animal food, and a biofuel feedstock, which can be refined to biodiesel. Both are made from algae.
"We do believe those markets do exist, and there is already demand in them for those two products," Szostak said.
Earlier this month, the Brevard County company filed documents with the Securities and Exchange Commission seeking permission to launch an IPO late this year, if, Szostak added, economic conditions are right. The company has not announced a stock price or a date for the sale.
The company's stock currently trades on the OTC Bulletin Board under the PALG symbol, where it last sold for $19.99 per share.
PetroAlgae is not a manufacturer. The company only sells a licensee the knowledge of how to grow algae quickly and then collects a royalty on what is produced. The company has demonstrated its growing techniques on its research farm in Fellsmere.
Several financial commentators have written that the products created with the company's technology license face a tough market. They complain that the company has no revenue and that in the place of income, it relies too heavily on five memoranda of understanding with clients who promise to pay royalties if they use PetroAlgae's technology.
The analysts point out that the company has had $58 million in losses over the last three years. Additionally, rival biofuel developers apparently are ahead of PetroAlgae and have not tried to raise money on the scale of a $200 million IPO.
"It's a bad idea for not only the industry but the company because it could give algae a bad name," industry watcher Camille Ricketts, who writes for the GreenBeat investor blog, said in an interview with FLORIDA TODAY.
Another green market watcher, Katie Fehrenbacher, editor of Earth2Tech.com, said that PetroAlgae might be overextending itself with the IPO.
"The company, in general, seems to be very, very risky," Fehrenbacher said in an interview with FLORIDA TODAY, adding that she didn't think investors would find the PetroAlgae stock attractive. "I wouldn't be surprised if they didn't pull their IPO."
Fehrenbacher, however, believes that biodiesel production from algae eventually will evolve into a profitable industry.
"Algae is going to be one of the most efficient ways to produce a biofuel," Fehrenbacher said. "It is not fundamentally a bad idea. It's just going to take a really long time, five to 10 years. It's going to take a lot longer than people think."
Meanwhile, several green technology companies have advanced through sales to the government, joint ventures with giant energy industries or the award of stimulus grants for demonstration projects.
Among them:
- Solazyme, based in South San Francisco, has technology to produce biodiesel from fermentation. The company has a Navy contract to supply algae-based jet fuel.
- Synthetic Genomics, based in La Jolla, Calif., is working with Exxon Mobile, the world's largest publicly traded international oil and gas company, to develop biodiesel from algae. The green company also has a lucrative chemical business.
- Sapphire Energy, based in San Diego, Calif., was awarded $100 million in federal stimulus money and loan guarantees last year to build a 300-acre demonstration project for algae-based fuel. Sapphire also has an additional $100 million pledged by private investors.
PetroAlgae acknowledges the competition's funding advantage but said it can hold its own.
"Our claim to fame is our technology and how to produce and grow the algae in a faster way than anyone else can," Szostak said.
"We do keep an eye on (the competition) and there's really nobody near where we are in commercialization of a technology that produces the output that we believe we can. We have attracted some very significant bank names to our prospective offering."
Underwriters of the IPO listed on federal documents include Goldman, Sachs & Co., UBS Investment Bank, Baird, Cowen and Co. and Piper Jaffray.
Contact Peterson at 242-3673 or ppeterson@floridatoday.com.
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