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Follow-up: State tells upstart Cedar Rapids company with failed, bio-based gizmo to return its state economic-development grant

Rick Smith, CR Gazette –

CEDAR RAPIDS — The state of Iowa wants its money back.

An upstart company that surfaced in Cedar Rapids in 2011, secured support from local economic-development officials and won public incentives for two purported breakthrough technologies that didn’t perform has been told to return a $250,000 state grant and not to use other public help awarded to it.

The Iowa Economic Development Authority (IEDA) has ruled that the company — once called AgSugar International and now Vertecra Inc., the travails of which were featured in a Gazette story on Jan. 15 — is in default of its contract with the state of Iowa for “non-compliance with (contract) covenants” and “material misrepresentation.”

In a letter that the company says it received on March 26, Craig Block, IEDA’s chief operating officer and general counsel, states that AgSugar International/Vertecra did not comply:

– With “project performance obligations” and the requirement to “use award funds only for (the) project.”

– With a stipulation that the contract not be “materially” changed “unless approved in writing by (IEDA) before the change.”

– With a requirement that the company “promptly provide (IEDA) with written notice of any major changes that would impact the success of the project.”

In stating that the company also was in default of its contract for “material misrepresentation,” IEDA’s letter says such a finding results if any representation from the company “proves untrue in any material respect.”

The letter concludes: “Due to the nature of this default and the impossibility of cure, demand is hereby made for full repayment of the award in the amount of $250,000. This notice also will prevent the claiming of any tax credits associated with this award.”

A small piece worth about $17,000 of the incentive package totaling an estimated $600,000, which also included worker-training assistance, involved a local property-tax break from the city of Cedar Rapids.

In similar fashion to IEDA, the Cedar Rapids City Council intends to end its financial commitment to the project, Cedar Rapids City Manager Jeff Pomeranz said Friday.

In response to the IEDA action, Dan Kazanas, Vertecra’s chief operating officer, responded in writing to the agency on March 30, disagreeing that the company is in default of its contract with the state agency and asking the agency to reconsider.

Kazanas states that the company had spent the $250,000 state grant — before it signed the state contract in October for it and before it got the money in November — on testing and “related expenses” for the two bio-based technologies specified in the state contract. Those tests proved in September that the two technologies “were probably not viable” for the commercial market, Kazanas says in his letter.

Now the company, he continues, is moving ahead on other bio-based projects, which he says the company earlier had told IEDA it would do. In the near term, though, the company plans to assemble LED lighting products in a brand-new building that the company will lease at 615 J Ave. NE.

Don Ross, a Cedar Rapids builder and developer who has been listed as a partner with Kazanas and others in the initial AgSugar International venture, owns the new building, the cost of which he puts at $800,000.

On Thursday, the 92-year-old Ross was working outside the building and was upbeat about the LED-assembly venture that he said he understood was still slated to come to pass.

The LED venture is with Hybra Energy Corp., Traverse City, Mich. Last week, Joe Thiel, Hybra’s managing director, said Hybra is “currently finalizing contract negotiations for the assembly rights” with Vertecra.

Walter “Skip” Emig, the AgSugar International/Vertecra CEO, was in Ross’ building late last week but declined to come out of the locked building to talk. Both Kazanas and Emig reside in the St. Louis, Mo., area. Ross said Emig did not want to comment.

A Gazette story on Jan. 15, 2012, reported that company officials acknowledged that they had determined in September that the two technologies that were the basis of the IEDA award did not do what the inventor and brains behind the products, former Missouri dentist Ted Lewis, said they would do. Company officials then ended their relationship with the inventor and his ideas that month.

Among the central points at issue between the company and the state is the fact that the company’s application to the state of Iowa for economic development help and the subsequent signed contract with the state specified that state grant award was to help AgSugar International/Vertecra assemble two technologies, the CCM or cellulose conversion module and the FDM or fermentation driver module. The company had moved on from those two in September, yet signed the contract in October with IEDA and accepted the $250,000 grant in November.

Tina Hoffman, IEDA’s marketing and communications director, noted last week that IEDA’s decision to end its contract with AgSugar International/Vertecra came after a meeting with company officials on Jan. 30, 2012, a meeting which economic development representatives from the Cedar Rapids Metro Economic Alliance attended. The alliance and the Cedar Rapids Entrepreneurial Development Center helped AgSugar International prepare its application for state assistance leading up to the IEDA announcement of an award in July 2011.

Information disclosed at the Jan. 30, 2012, meeting and additional information provided to the IEDA led to the agency’s conclusion that the company had not abided by its contract with the state, IEDA’s Block states in his March 2012 letter to the company.

Hoffman said the agency will review Vertecra’s subsequent letter of response to the agency’s demand that it return its grant money to the state. But she added: “If you don’t’ follow the terms of the contact — that’s the standard we’re holding companies to … Even if you mean well, that doesn’t mean that a contract got met.”

In news stories in January 2012, The Gazette reported how Missouri dentist Ted Lewis’ longtime interest in turning cellulosic material like cornstalks into ethanol — which the biggest players in the ethanol industry are now working to try to accomplish — led him to play off an established technology with his own add-on device that could do what no other machine could.

Over the course of the last couple years, Lewis attracted believers and private investors. A company in New Jersey, which built a prototype for Lewis, said in January it was owed at least $250,000. Then the prototype and Lewis made their way to Keokuk, Iowa, where a group of businessmen was trying to start up an ethanol plant. They, too, said they were out $250,000. A Missouri-based company associated with inventor Lewis incorporated in early 2011, calling itself AgSugar. Along the way, Kazanas and Emig, who had worked with the Keokuk group, connected with a group of businessmen in Cedar Rapids. Kazanas and Emig moved their own effort to Cedar Rapids and formed AgSugar International with three Cedar Rapidians. Here, part-owner Ross invested $800,000 in a new Cedar Rapids building for the enterprise and the Cedar Rapids Metro Economic Alliance, the Cedar Rapids Entrepreneurial Development Center and City Hall backed the new company’s pursuit of state funds.

In interviews in December 2012 and early January 2012, AgSugar International/Vertecra’s Emig and company technology chief at the time Glenn Richards, who has a Ph.D in chemical engineering, explained that the main machine that the company intended to assemble in Cedar Rapids and for which it secured public funding was to feature a special secret adaptation — some kind of “quantum” box or mechanism, invented by Lewis. With the quantum box, the machine purportedly could cheaply squeeze out more ethanol from feedstock byproducts of the ethanol process, byproducts now used for animal feed or otherwise not turned into ethanol.

However, at a moment of truth in September of 2011, AgSugar International executives needed to complete a computer process flow diagram so it knew how much it would cost to produce the machine. But, when the time came to add the quantum box, Richards said inventor Lewis turned to him and said there was not such quantum box to add to the machine.

In a lengthy interview in January, inventor Lewis disagreed with Richards’ account and said the AgSugar International group too abruptly cut off ties with him.

“I think they misunderstood. … We worked on it for like three days, and they say, ‘We’re done.’”


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