116 3rd St SE
Cedar Rapids, Iowa 52401
CEDAR RAPIDS - Promising inventions lure private investors to startup companies and the promise of jobs attracts government support, but what happens when the dream fizzles and taxpayer dollars are involved?
When he came to Cedar Rapids last year, Walter “Skip” Emig said he and his corporate team at AgSugar International thought they had landed on a gizmo or two that would revolutionize the ethanol industry and make them, and investors, a lot of money.
They believed the biotechnology machines of Missouri inventor Ted Lewis would help run America without foreign oil.
“We want to get off our dependence on foreign oil, and that was the promise,” Emig said.
His team - Emig and chief associate Dan Kazanas, both of St. Louis, and three Cedar Rapids businessmen - successfully mobilized the local economic development machine - the Chamber's Priority One office, the Cedar Rapids Entrepreneurial Development Center and City Hall. By July, the local backing had secured AgSugar International a package of state assistance worth about $600,000.
About two months later though, Emig and his team lost faith in Lewis and his machines. They have changed their business plan from an assembly plant for those inventions to an assembly plant for LED office lights.
And taxpayers are now invested in a new dream.
A change in plans
Two machines of Lewis' invention were the centerpieces of AgSugar International's request for state funding.
After state approval of the aid package, local testing at Diamond V Mills in Cedar Rapids did not go as hoped for one of the machines that AgSugar International planned to release to the market. By mid-September, a central component of the second machine did not materialize, and the company severed its ties to Lewis a few days later.
The company then changed its name to Vertecra Inc. and pivoted its focus from an assembly plant for those machines to an assembly plant for LED office lights.
According to the Iowa Economic Development Authority, Chief Operating Officer Kazanas signed the contract for state assistance on Oct. 6. City Manager Jeff Pomeranz signed it on Oct. 16, and the state signed on Oct. 31. State assistance for the project was released to the company with a letter on Nov. 22.
“AgSugar's business venture is based on two new technologies it is preparing to release,” the agency's project report states. It names them: the FDM, fermentation driver module, and the CCM, the cellulose conversion module - the two machines the company now has set aside.
The signed contract states the state incentives are to support the FDM and CCM.
Kazanas said nothing of note has changed at what is now Vertecra that would have changed the company's application or qualification for state assistance.
“Vertecra is still involved in bio-based processes and products,” Kazanas said. The shift to LED lights is a way to raise working capital as the company works on other ventures, he said.
“Before the contract was returned to the Iowa (Economic Development Authority), they were informed directly and also through Priority One and the (Cedar Rapids Entrepreneurial Development Center), that the vetting process” of the initial two products did not prove successful.
“So we informed the (Iowa Economic Development Authority) that we were going to continue to roll out and commercialize a finished smart solution,” he said. “… Now, did we have to, if you will, try to choose a different pathway to get to the end result of our bio-based processes? Yes. Because we have to generate revenue.”
On Friday, the state agency provided The Gazette with copies of emails between Kazanas and state economic development official Katie Rockey. Those emails on Oct. 20-21 center on Kazanas' notification of AgSugar International's name change and his inquiry of when state funds would be released to the company.
Tina Hoffman, agency spokeswoman, said the agency expects to be informed of material changes to a contract. Such changes would be reviewed by the state committee approving support.
Many are invested in this project
Private investors of unknown number have provided the money to advance the two biotechnology machines that AgSugar International planned to assemble at a new facility in Cedar Rapids.
Among the private investors is the ChemPro Group of Boonton, N.J., which built a module prototype for Lewis and says it is owed a quarter-million dollars. A couple of Keokuk businessmen, who tried to get an ethanol plant off the ground there and currently have a CCM prototype, also say they are owed a quarter-million dollars.
A Florida investor, a college roommate of one of AgSugar International's executives, said he has invested a significant amount.
Don Ross, 91, a longtime and respected Cedar Rapids builder and developer, is one of six owners of AgSugar International. He is now completing construction of a commercial building valued at $1 million that the company is supposed to lease from him.
Ross, who daily is overseeing his latest construction project, said his participation in AgSugar International is mostly in the cost of the building on land he owns at Wenig Road NE and J Avenue NE. The company also has office space in a Ross-owned building next door. Otherwise, Ross said, he's somewhat in the dark about corporate developments.
“I've put money with them, and I sure hope I haven't put it in a rat hole,” said Ross, who adds that his main focus is building a quality building and bringing jobs to Cedar Rapids. “I hope what's professed will pan out.”
Then and now
In July, the local economic development backers announced that AgSugar International would invest some $1.6 million in Cedar Rapids and create 24 jobs in three years.
According to the company's business plan submitted to the state, CEO Emig and COO Kazanas would receive salaries of $150,000 a year, as would the company's chief technology officer. The vice president for intellectual property would earn $120,000; vice president for quality assurance, $100,000; and the director of international business, $90,000. Among the other jobs were 10 manufacturing assemblers, slated to earn $28,000 a year each.
The contract with the state's Iowa Economic Development Authority provides a startup loan of $250,000, tax credits, a property-tax exemption and worker training help in exchange for jobs and other terms.
Emig and David Snyder, a former engineering manager at Midland Forge in Cedar Rapids and now vice president of intellectual property at AgSugar International and Vertecra, say the company is now setting up an operation in Ross' building to assemble interior LED office lights for a Michigan firm, Hybra Advance Technology.
Hybra's president and CEO, Joe Thiel, confirms the new relationship with Vertecra.
Emig said the shift to LED lights from ethanol was a bit serendipitous. Two days after AgSugar International fell out with Lewis, Emig used his contacts to strike a deal with Hybra.
The LED work, he said, should create cash flow for Vertecra and should add more jobs in Cedar Rapids than the company's ethanol-related business plan.
Meanwhile, Snyder emphasizes that the company's basic mission - to vet new energy-related technologies and try to bring them to the marketplace - hasn't changed at all.
‘It's not foolproof'
Dennis Jordan, vice president of economic development at the former Priority One and now economic development chief for the Cedar Rapids Metro Economic Alliance, said AgSugar International's shift of direction is not typical of companies that secure state and local financial incentives.
However, startup entrepreneurial ventures like AgSugar International do come with more risk, he said.
For now, Jordan said, matters related to AgSugar International “are unfolding as we speak.” He and company leaders are planning to discuss how the company's application to the state might be modified, so the company can reach its primary goals required by the contract - a certain level of capital investment and the creation of a certain number of jobs in a certain amount of time.
“At the end of the day, what's most important to us is that the job commitment is fulfilled and the capital investment commitment is fulfilled,” said Jordan. “So if those two criteria are met, the means by which you get there are, I shouldn't say secondary, but it is not absolutely critical.”
Still, it appears that backers of the public incentives for AgSugar International accepted the company's proposal largely at face value.
“… Sometimes there is not an opportunity to completely vet out the technology,” said Jordan. “That may be the case in this particular play. … It's not foolproof. If everything was a sure bet, then people would be lining up out the door to put money into these things.
“We try to make sure that it's a sound plan, that there's some history there and we, in good faith, can go forward and ask for public investment in a project like this.”
Curt Nelson, president of the Entrepreneurial Development Center in Cedar Rapids, said that because of client confidentiality agreements, he can't share details, but he said internal protocols were followed.
“If you're asking me if we do FBI-level background checks on personalities, no, we don't,” he said. “So like any other entrepreneurial organization or company, you work with the information you have at the time.”
Emig and Kazanas each have their blemishes.
According to a January 2003 Missouri Supreme Court ruling, Kazanas is disbarred from practicing law in Missouri after a federal felony conviction for filing a false federal tax return on which he underreported income. Eight other federal criminal charges against Kazanas, including seven counts of fraud and embezzlement, were dropped in a plea agreement with the U.S. Attorney's Office.
The charges stemmed from a dispute with his former Missouri law firm in which Kazanas “misappropriated at least $169,172.17 in fees” from 1994 and 1996, according to the court's disbarment order. Kazanas left the firm in 1997, and the theft was uncovered a year later.
“It's not relevant,” Kazanas said, adding he disclosed the crime to economic development officials in Cedar Rapids. He has petitioned the Missouri Supreme Court to reinstate his law license.
On Oct. 3, the Missouri Department of Revenue secured a court judgment against Emig and his wife, Kathleen, for $8,062 in unpaid state income tax, interest, penalties and fees, according to the state's website Your Missouri Courts.
Risk is startup reality
Jennifer Pratt, a planner with the city's Community Development Department, said the state requires a city to support incentives like those obtained by AgSugar International. The package in this case, she said, did not involve significant local incentives, so the city was just supporting the application.
The Entrepreneurial Development Center's Nelson notes that the Iowa Economic Development Authority vets projects, too.
“So everybody goes through levels of vetting on these deals,” Nelson said, “and it's pretty difficult to get a deal all the way through with all the eyes that are on it.”
Even so, he said, it's not uncommon for startup companies to struggle, scramble and fail.
“It's not unusual at this early stage (for a company) to do a lot of different things relative to keeping themselves alive to fight another day, so to speak,” Nelson said.