Xethanol Corp.’s partner in developing ethanol projects in New England has terminated their joint venture, citing concerns about the company and its technology.
Global Energy and Management LLC notified Xethanol (AMEX: XNL) of the decision late last week. Lee R. Tyrol, a principal of Global Energy, also resigned as manager of the partnership, called NewEnglandXethanol LLC.
Tyrol confirmed the termination to Sharesleuth.com on Friday. He said that Global Energy had lined up suppliers of raw materials for conversion to ethanol, had located plant sites and had identified buyers for the end product.
In the end, Tyrol said, Xethanol was unable to deliver a production process that would enable the plants to turn organic waste into ethanol on a large-scale, commercial basis.
Xethanol has billed itself as a leader in the race to develop a method for making ethanol from biomass, such as wood chips or plant material, instead of conventional feedstocks like corn
“They were supposed to provide us with technology, which they didn’t,” Tyrol said. “Obviously, there is no silver bullet.’’
Sharesleuth published an investigative report on Aug. 7 questioning Xethanol’s claims that it was poised to produce so-called cellulosic ethanol. The story noted that Xethanol had acquired nearly all of its technology from government and university labs, had spent relatively little on research and development and had offered no evidence that it was able to produce cellulosic ethanol in large batches or at prices competitive with other fuels.
The story also raised questions about the backgrounds of Christopher d’Arnaud-Taylor, Xethanol’s then-chairman and chief executive, and others involved in the company.
Xethanol and Global Energy had announced their partnership in April. At the time, the partners told the Associated Press that they hoped to use waste products from breweries, pulp from paper plants, grass clippings and other materials to make ethanol.
The agreement called for Global Energy to contribute $1.5 million to NewEnglandXethanol — $250,000 on the signing of the organizational and operating agreements, $250,000 within 90 days of that event, and $1 million upon approval of the plan to build the first plant.
Xethanol, which is based in New York, has two other joint ventures in the Southeast. Those entities each have acquired an idled factory that they plan to retrofit for ethanol production. One is an Augusta, Ga.; the other is in Spring Hope, N.C.
Tyrol said Global Energy initially had no qualms about getting involved with Xethanol, because several big investment firms, including Goldman Sachs and Co., had already bought millions worth of stock in the company.
“I assumed that the folks on Wall Street had more than done their due diligence on this project,” he said.
Xethanol’s shares have fallen from a high of $16.18 in April to a closing price of $2.39 on Friday. Tyrol said Global Energy, which got Xethanol warrants as part of its deal, suffered along with other Xethanol stockholders.
“I lost money on the deal also,” he said.
A NEW CEO
Xethanol replaced d’Arnaud-Taylor as chief executive on Aug. 23, although he remains on the company’s board. Louis B. Bernstein, another Xethanol director and former assistant general counsel at Pfizer Inc, took over as president and interim CEO.
Berstein parted ways with the company last month, when it tapped David R. Ames as the new CEO. Xethanol’s press release said that Bernstein resigned his executive positions and also stepped down as a director. The release said that Marc J. Oppenheimer, who had joined the board in October, also resigned “after not being selected as chief executive officer.’’ The company added that both men cited philosophical differences with other board members as reason for their resignations.
Bernstein offered a different account of the events. He said in a letter to Xethanol that his departure stemmed in part from what he called “a lack of full disclosure” regarding some of the company’s business dealings. The letter was included in a filing that Xethanol submitted to the SEC on Nov. 16.
Bernstein also said that the press release Xethanol issued about management changes at the company was inaccurate and misleading.
Xethanol identified Ames, who lives in the Atlanta area, as co-founder of a company called Alterna Energy and an active venture capital investor in alternative energy projects. He had joined Xethanol’s board in October.
William P. Behrens was chosen as Xethanol’s non-executive chairman. Behrens is vice chairman of Northeast Securities Inc, which was placement agent for Xethanol when it raised $34 million in capital this spring.
Xethanol said Ames would receive a salary of $1 a year, plus options on 205,000 shares of stock and additional non-cash compensation.
A POSSIBLE CONFLICT?
Bernstein said in a Nov. 9 letter to Xethanol that his resignation “is the result of my recent discovery of what I perceive to have been the lack of full disclosure both to certain members of the previous board, including myself, with respect to a certain transaction involving the company, and to certain members of the current board, including myself, with respect to certain current relationships with the company, and my disagreement with new management over its proposed business strategy for the company.’’
Bernstein suggested in a follow-up letter that the company failed to disclose a prior relationship between Ames and one or more of the people involved in Coastal Energy Development Inc. That company is Xethanol’s partner in CoastalXethanol LLC, which is pursuing the new ethanol venture in Augusta.
Bernstein asked how Xethanol was able to state in a recent SEC filing that ‘there has been no transaction during the past two years, or proposed transaction, to which Xethanol was or is to be a party, in which Mr. Ames had a direct or indirect interest required to be disclosed” under federal securities regulations.
Bernstein did not offer additional details, and our search of corporation records, SEC filings and other documents did not reveal an obvious connection. However, Sharesleuth has learned that John J. Murphy Jr., who has been helping Coastal Energy raise money for its plant, has assumed a broader role within Xethanol as a key advisor to Ames.
Sharesleuth’s initial story in August noted that a Florida corporation filing from 2002 listed Murphy as a director of London Manhattan Limited Inc., a company that provided management services to Xethanol in its formative years. The president at the time was William Scott Smith, a former stockbroker who had previously settled fraud charges with the SEC. The most recent filing for London Manhattan, dated Aug. 23, lists d’Arnaud-Taylor as president, Smith as vice president and Franz Skryanz, a current Xethanol officer, as treasurer and secretary.
Another Florida filing for a company called Trafalgar Resources Inc. listed Murphy as president and d’Arnaud-Taylor as chairman of the board.
A DIFFERENCE OF OPINION
Bernstein also has taken issue with Xethanol’s characterization of the events that precipitated the resignations. In a letter dated Nov. 16 to Xethanol and its lawyers, he said that he was not given an opportunity to review the company’s press release before it was issued, despite a written request to see it.
Xethanol’s press release said the Oppenheimer “resigned his board position after not being elected chief executive officer” and that Bernstein “resigned as interim CEO, president and director.’’
Bernstein said both statements were misleading.
“There was never a vote as to whether Mr. Oppenheimer should be CEO, so the company’s ‘sour grapes’ version of Mr. Oppenheimer’s resignation is totally misleading and inaccurate,’’ he wrote. “In fact, as I stated at the November 9 board meeting following the vote to elect Mr. Ames, I had notified certain board members in advance of that meeting that if Mr. Ames were elected CEO, both Mr. Oppenheimer and I would resign “for philosophical differences. I emphasize and repeat that our resignations had nothing to do with whether or not Mr. Oppenheimer would be elected CEO.’’
Oppenheimer noted in his resignation letter that Xethanol’s board had adopted a plan of action that he deemed “unachievable” and “not in the interests of shareholders.”
“As directors, we have clear fiduciary duties, and I believe that continuing to serve on this board, given the direction we are taking today, will result in our violation of those obigations,’’ he wrote.
Bernstein added that the board’s decision to appoint Ames as president and CEO automatically ended Bernstein’s own tenure as presidennt and interim CEO. He noted that he neither quit nor resigned from those positions.
Xethanol disputed Bernstein’s assertions.
“Management believes the press release accurately reflects Mr. Bernstein’s conduct at the meeting of the board of directors at which he resigned,’’ the company said. “Moreover, management categorically rejects the suggestions of impropriety on the part of the board of directors or management of Xethanol set forth in Mr. Bernstein’s letters. Management is considering what resource Xethanol has a company or they as individuals may have against Mr. Bernstein as a result of these mischaracterizations and baseless suggestions.’’
Despite his differences with others at Xethanol, Bernstein said he wished the company well.
“It is my hope that the company will succeed in its worthy goals, and my belief that the fundaments for such success continue to abide within the company, its healthy financial condition, its promising research relationships and its very dedicated and capable staff and employees.’’