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 Rick SmithRick Smith has been covering Eastern Iowa for 28 years. In the last decade, he has reported on City Hall [...] |
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Risky business
AgSugar International lands state aid and then changes course
Multimedia
Photo: AgSugar map
Photo: AG SUGAR INTERNATIONAL
Photo: AGSUGAR INTERNATIONAL INC.
AgSugar International, photographed in December at 1129 Wenig Rd. NE in Cedar Rapids, has changed its name to Vertecra Inc. (Jim Slosiarek/The Gazette)
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.
Building owner Don Ross talks about the building he’s constructing for AgSugar International in northeast Cedar Rapids. (Jim Slosiarek/The Gazette)
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.
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Very, verywell written article. Sounds like the State of Iowa and Cedar Rapids are investing in quackery. What are they thinking with the tax incentives. Look at the salaries for the executives of the company and the money should have been taken away when they changed to producing light bulbs. What a farce.
Taxpayers money going down the tube, Thank you to our City Leaders
Look at the pictures they chose to display for this article, a man standing in an EMPTY warehouse paid for by CR and Iowa taxpayers. Take a look at the Executive compensation and you will see that we have been deceived by our government once again. This article is simply a load of malarkey! Look at the previous article and you can see Ron Corbett’s name all over this deal.
Did I read the article right. They only plan on creating 24 jobs in three years. A worth while investment should create at least a 100 jobs.
“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.”
“FBI, BS. There are plenty of web services that research, collate and provide public record information of malfeasance and crime. If a loan officer at a bank did something like this, would they have a job anymore? It is what Priority One demands, not is the debt secured, when it comes to tax payers money.
Okay, folks, you can now stop griping about the Obama administration’s support for Solyndra. Seriously, this is the kind of reporting I’d like to see more of: kudos to Rick Smith and his editors for writing and running this story.
However, the AgSugar story is really an indictment of capitalism on several levels. First, if the “free market” really worked as its defenders claimed, there would be no need for the state or federal governments to provide such seed money for start-up firms: it would magically flow from ptrivate investors, guided by the chimerical “invisible hand.” But this kind of subsidy goes back to at least the Gilded Age with its land grants to railroads and homesteaders.
Second, the disbursement of tax funds to firms like AgSugar is very much a political decision, and shows how well-connected folks like Ron Corbett will manipulate economic development programs for the benefit of their colleagues. It is sheer fantasy to think that economic development programs like Iowa’s cannot be worked to advantage by crony networks like Corbett’s. Indeed, I bet many self-styled “conservatives” on this board would offer apologies for AgSugar if Corbett weren’t involved. I also have to wonder how many of those folks would gripe about Corbett’s attempt, while in the legislature, to reimpose the death penalty in Iowa?
Finally, capitalism has driven human progress over the past two hundred years, but for what purpose and at what cost? When an economic system privileges creating profit over meeting human needs, poverty will be a necessary outcome. Yet, most people get more worked up over Chicago blacks moving to Eastern Iowa than they do over crony deals like this.
That’s sad, and sick…
“there would be no need for the state or federal governments to provide such seed money for start-up firms:”
See here’s where your “understanding” of capitalism fails. In a capitalistic model, the company would’ve gotten investors to put their money up for the project. What we have here is slack jawed politicians thinking they’re businessmen with taxpayer money, none of their own. We should pass a law whereby before any elected official does something like this, they need to put up their wealth/pension as collateral. If they had skin in the game, they wouldn’t be so stupid with OUR money. As a side note Solyndra had a failed business model and BO pushed through the loan. Payback for a supporter, the Chicago way.
Read the rest of Jeff’s comment, John: “…it would magically flow from private investors, guided by the chimerical ‘invisible hand.’”
It speaks directly to your comment,”In a capitalistic model, the company would’ve gotten investors to put their money up for the project.”
You’re making the same arguement as Jeff, yet you claim that Solyndra had a “failed business model” that Obama pushed through as payback for a supporter. What’s different about Corbett and others investing in a “failed business model” that leaves taxpayers on the hook?
Or are you simply a Ayn Rand laissez faire apologist?
I laughed so hard when as I read this article as it hits home harder than anyone could ever imagine.
What would you do if it was your “OWN” city that was using bogus numbers to get government aid at any cost.
At the below link you will find a I-jobs application by the City Finance Director containing these job creation for building a $16 Million parking structure:
Number of full-time permanent jobs to be created: 354
Number of part-time permanent jobs to be created: 0
Number of full-time temporary jobs to be created: 238
Number of part-time temporary jobs to be created: 0
Total number of jobs to be created: 592
Are you starting to get the impression something is awfully wrong at City Hall; Well, much like this story, its much worse than anyone could ever imagine.
http://www.ijobsiowa.gov/en/submitted_projects/details.cfm?ProjectID=158
FYI: The state did not believe these numbers either and declined to provide the requested grant.
And who did Corbett irate! The gazatte has always supported the capitalistic cronyism we currently call city government. The most recent city electiion involved their big time support of an even bigger and much farther reach of some well connected biz’s controlling the public purse. This is really just the tip of the IceBurg, when these folks get control of the $100 of miiions of sales tax revenue from the up coming vote, we will see the whole council with ” private investments in small little companies that will be quite fornate with the funneling of funds to part time council members.”
Why has this been exposed?
State money is involved. A multitude of competent, competing media companies cover state news. Somebody would uncover and run the story. This could not be obscured like the City Council vote on a raft of expenditures bundled together, including Agsugar.
So, what’s the big deal? Just institute legal proceedings against the AgSugur corporation to recover state-provided funding that was provided based on a fraudulent basis.. Doesn’t matter that the AgSugar owners were suckered, too- they signed for the funding and need to make good on it.
Not a company I want in my town. Google Dan J. Kazanas – Chief Operating Officer (COO) & Corporate Secretary for them. Nasty history on this guy.
Exactly – they have this new thing called the google machine – you can find a lot of information by trying that new device out before committing dollars to a “project”.
So a couple of hucksters play the State for suckers seemingly with some assistance from a local Mayor whom they may well have also BS’ed. Nothing glaringly unusual here. It has become a common business model… be connected with govt. entities and move tax revenue to private, profit seeking supposed entrepreneurs who essentialy pocket it. Playing with public $$ is the standard means of eliminating risk these days. OR… call it what it is— Corporate wellfare. The beat goes on.
Exactly, Paul. Privatize everything and make it MORE expensive for the taxpayers.
Not sure I follow here, Julie. Are you saying we must have public money put up to eliminate private party risk? Socialize investment and privatize profit?
Socialize investment AND profit…
Hmmmmm….
I have more capitalist left in me than you do, I think. Just say’in.
I purged my inner capitalist long ago…
Sorry, I was being snarky, Paul. I agree with you.
The “privatize everything” crowd, whether it’s the military, health care, Social Security, toll roads or private prisons, WILL socialize investment through taxes AND privatize corporate profit. BofA, Halliburton and Xe ring a bell?
Sorry I’m being snarky, but I’m reading “Pity the Billionaire” by Thomas Frank and it’s making me mad(again).
No sorry needed at all. I just confuse easily. And… you have much more intestinal fortitude than I. Judging from your book title, and strongly suspecting it carries sarcasm (my favortie smart *** personility trait) I just could not read it without having to get my meds re-balanced.
“”"personality”"