|Shares Out. (in M):||19||P/E||0||0|
|Market Cap (in $M):||1,046||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
|Borrow Cost:||Tight 15-50% cost|
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Bio-on S.p.A.: Trouble in Bologna?
Equity Report by Quintessential Capital Management
This report reflects the opinions and projections of Quintessential Capital Management ("QCM") as of the date of publication, which is subject to change without notice at any time following the date of issue. QCM does not represent that any opinion or projection will be realized. While the information presented in this report is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented in this report or its attachments. All information provided in this report is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security.
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Quintessential Capital Management (QCM) has completed its in-depth investigation into Bio-on S.p.A., a Bologna-based bioplastics company listed on the AIM market. After meticulous collection and analysis of information, we came to the opinion that Bio-on is a "house of cards", a scheme conceived by management to enrich themselves on at the expense of shareholders.
A seemingly successful company boasting growing revenue and profits, Bio-on is actually a massive bubble based on flawed technology and "fictitious" sales thanks to a network of empty shell companies.
Despite high-sounding announcements and ambitious projects, several years after its IPO Bio-on has not yet produced or sold anything in significant quantities, except to shell companies controlled by or affiliated to itself. Of the many production facilities announced over the years, only one has been built at exorbitant prices and it would seem neither completed nor in operation.
The real financial situation is precarious and the accounting has serious irregularities. Given the facts as a whole, we believe that the Bio-on situation is unsustainable: the company is heading towards total collapse and its equity is correspondingly worthless.
Quintessential and its goals
We are an American investment fund based in New York. Our main activity consists in identifying, investigating and exposing catastrophic corporate situations in publicly-traded companies, such as fraud, criminal conduct or bankrupt business models. We use state-of-the-art investigative techniques and only intervene after acquiring a large amount of overwhelming information to confirm our claims.
Since 2015, we have completed seven activist transactions exposing various dishonest companies with a 100% success rate.¹ In May last year our campaign against the Greek giant "Folli Follie" led to the collapse and de-listing of the company in just three weeks, as well as the uncovering of a multibillion-dollar fraud. Last December, our action against Aphria, a Canadian cannabis company with a market capitalization of more than USD 4 billion, led to the immediate collapse of the stock and to the dismissal of the entire board of directors. In 2015, our report entitled "A Greek Parmalat" on Globo Plc led to the immediate and permanent suspension of the stock and the resignation of the executives after only 48 hours, with a full confession of their responsibilities (the event appeared on the Italian newspaper "La Repubblica").
We are a commercial enterprise and we work for profit. However, we firmly believe in the moral character of our work which has the effect of removing dishonest companies from the markets. These "bad apples" take financial and human resources away from legitimate companies and it makes sense to inform the public as quickly as possible to minimize the number of investors and creditors involved.
The unlikely science of Bio-on
To clarify the veracity of Bio-on management's statements about its technology, we consulted a substantial number of scientists, established executives from companies operating in the same sector, consultants and technicians. Their opinion, in some cases based on direct interaction with the company, was fundamentally unanimous in a strong skepticism about Bio-on's statements. In some cases, the technology has even been called "absurd" and management's statements "rambling.”
Without going into too much technical detail (some complete documents will be made available on our website), we present the most important conclusions from our investigation:
1. The concept is dated: PHA technology is based on a discovery made almost a century ago in 1926. Bio-on claims to have an innovative method for PHA production processes, but our experts have expressed strong doubts about the validity of these claims, which have never been proven in practice.
2. Production control is problematic: PHA manufacturing processes are highly complex and the finished "product" is uncertain. This is because the variables in polymer chemistry are numerous and controlling them becomes haphazard. In addition, it involves working with bacteria which increases complexity. The experts with whom we have discussed are extremely skeptical that Bio-on has the resources to handle an operation of this type.
3. The "scale-up" on an industrial scale is problematic: although the production of small quantities (a few hundred cm3) of PHA is simpler, manufacturing tons of material would be highly challenging for various technical reasons such as contamination and interaction of different types of bacteria, temperature control, etc.
4. Doubts about 'biodegradability: several scientists have questioned the concept of biodegradability of bioplastics and it seems that their impact on the environment²³ may be, in many cases, even more harmful than that of traditional plastics.
5. Numerous failures: the production of PHA on an industrial scale is not a new challenge. It has been attempted by several industrial groups in the past, many of which have far greater financial, technological and scientific resources (e.g. Zeneca, Monsanto and Metabolix have tried and failed to carry out a similar project.) Many of these attempts have not been successful mainly because of the difficulty in finding demand for a plastic that is significantly more expensive than the traditional one.â´ For example, Metabolix was forced to liquidate its business after producing a 50,000-tonne production facility due to a lack of demand. It’s market cap reached a peak of $500m, but in 2016 the company closed its doors, liquidating its patents and infrastructure for only $10m.
6. Lack of scientific talent: several experts have pointed out that Bio-on does not have sufficient scientific talent to undertake the projects it claims to pursue. In 2017, for example, there were only 17 employees, most of whom had no scientific background.âµ For example, Simone Begotti, Bio-on's "Chief Biologist", does not even have a PhD, only a simple college degree in biology.
7. Lack of transparency: several experts have highlighted the paucity of scientific information that Bio-on reveals to the public: our requests for clarification on this matter have been ignored by the Company.
Bio-on Accounting: Critical issues and violations of the Italian Civil Code
Quintessential has carefully studied the accounting of Bio-on and its related companies, both in-house and hiring experienced auditors and obtaining a formal opinion on the matter.â¶ The conclusions of our investigation are clear and confirm our fears: Bio-on accounting is irregular and does not reflect the actual situation of the company.
Presenting itself on the surface as a solid, high-growth company with over 50m sales, Bio-on in fact has a questionable turnover, consisting almost entirely of "sales" to controlled or related shell companies. In addition, the balance sheet of Bio-on is in our view precarious, being mainly made up of highly uncertain receivables and hard assets whose costs seem disproportionately high compared to its peers and that do not seemâ· economically viable given the margins that can be reasonably obtained on the market.
In practice, Bio-on seems to generate revenue by setting up a series of shell companies to which it "sells" its technology as “licences”. These "empty boxes" are partly or totally controlled by Bio-on, with which they share directors and registered addresses, and do not seem to have any operations, even years after their establishment. For example, they have no dedicated staff, they do not produce any products, nor do they sell to any third party.
These "empty boxes" buy licenses from Bio-on and capitalize them on their balance sheet, while Bio-on recognizes the sale immediately on its income statement. However, the payment for such transactions does not take place and the outstanding account receivables remain open, in many cases for years. Therefore, Bio-on accounts show revenue and earnings growth, which are actually mostly non-existent. This situation is evident by noting the large disparities that exist between profits and cash flows and the level of receivables (customer credits) with respect to sales:
The accounting audit we carried out also shows violations of Articles 2343 and 2343 of the Italian Civil Code regarding the sale and awarding of licenses. In fact, Bio-on should have followed a certain procedure in assigning the value of the licenses sold to its affiliates, which instead appear to have received an arbitrary value.
The value of Bio-on's "sales" and "credits" soared in 2018, as several new shell companies were formed that “acquired” Bio-on licenses at an exponential rate (as usual, such sales were not followed by payments).
We report below some subsidiaries mentioned by Bio-on in its balance sheet and their revenues and payables:
We have analyzed the balance sheets of all Bio-on’s shell companies and conclude that the vast majority (or perhaps all) of the revenues and receivable originates from them. We did not detect any signs of production or sales to third parties in noteworthy quantities. The only activity that seems to be actually operational is the collaboration with Unilever in the production of My Kai sunscreens. The creams are distributed via Amazon.it, but we have verified the number of visitors on the brand's website and it is below the minimum threshold on both SimilarWeb and Alexa. Therefore, we believe that sales of the product are probably modest (this has also been confirmed directly by Unilever, to whom we have reached out on this matter).
Bio-on claims it has completed the construction of a production facility with a capacity of 1000 tonnes in Castel San Pietro Terme, near Bologna, in 2018. The initial estimated costs for the project were around €15m, while the actual costs were around €53m (including patents). It is our firm opinion, reinforced by information gathered during our investigations, that these costs are heavily disproportionate: first, because they are much higher than those of competitors in the same industry. Second, because they involve a cost per kilo of plastic produced well above the reasonably achievable price on the market.
The table and chart below compare Bio-on costs for the construction of a ton of production capacity with those of two competitors: Novamont and Metabolix:
It is clear that the costs for Bio-on production capacity (44,000/tonn) are enormously higher than those of the two competitors (about 3,000), to be exact as much as 15 times higher. In addition, we note that the costs of competitors are very close to each other, while Bio-on costs appear to be an anomaly.
There's more: our sourcesâ¸ note that normal propylene on the market sells for around $2/kilo. Bioplastics might fetch a little more, but probably not more than $4/5 per kilo. Given the development costs of the Castel San Pietro Terme plant, we estimate that Bio-on's operating expenses are around $6.5 per kilo of plastic and $12.5 including overheads. It is then extremely difficult, or impossible, to sell industrial quantities of bioplastics with a cost base that is about six times higher than the cost of propylene (consider that Metabolix has been forced to liquidate having a cost base of $5, less than half of that of Bio-on).
An expertâ¹ surveyed by Quintessential estimates the value of 1000 tonnes of bioplastic production (the capacity of the Bio-on plant) at around $4m. Since the plant cost more than $40m and has a 10-year service life, the value of production would not even cover the development costs. Below our estimates about the operating and total costs for a kilo of plastic Bio-on:
Doubts about the Castel San Pietro Terme plant
Work on the 1000-tonne Bio-on plant Di Castel San Pietro Terme started in September 2017 and were completed, according to Bio-on, in the fall of 2018. The final costs were approximately $53m (patents and intellectual property included), which is about three times higher than initial estimates.
In January 2019, a financial research company contacted by Quintessential booked a guided tour of the Castel San Pietro Terme plant. Immediately before the scheduled time, Bio-on cancelled the visit citing some unconvincing reasons. However, the staff of the research company went to the site and inspected and photographed the outside of the plant as seen from the road. Although the main structure was clearly completed, there were unmistakable signs of work still in progress, such as scaffolding, cranes, piles of building materials and construction workers (a large sign at the entrance also referred to the factory using the term "construction site"). Quintessential visited the plant on June 27, 2019 (six months later) and found it in almost identical conditions: