I will gladly pick it apart then. Good questions btw.
How could a professional organization issue such a misleading report? They didn't. It was published anonymously on the interwebs. There is no way of knowing that it is accurate word-for-word. SAIC may have done some work, but someone could easily have created that document and published it, and JBI could have referred to it as being authentic. Anyway, I am going to focus on the document and just leave that be. See my conclusions at the end. As far as I am concerned, the entire document is unreliable and not to be considered in any decisions, just because of the way it was handled.
The SAIC Summary. I studied it last night so it makes more sense to me now.
The first paragraph is fine with some weirdness. This is not a typical FEL-type study, although it morphs into that. The purpose is to look at the existing technology, perform an audit, for the benefit of investors. OK. There is one weird statement... "the end result of our work is a White Paper which can be obtained through JBI". The use of the term White Paper is strange. It sounds like something written by a PHD out of an R&D group. And why would the author say that it is available from JBI when clearly it is not? One would think that they would know those kind of things.
The second paragraph and bullet points is fine. This is purely operational data. There is no Cost information there, so that has to be interpreted.
The third paragraph. Here is where it morphs into a typical FEL-type document. FEL stands for Front-End Loading. You can Google that. It means successive phases of engineering analysis to design a capital project and to determine the economic viability. It originated in the Mining industry and is widely used. The intent is to perform extensive analysis (front end load) the project before big bucks are spent so as to ensure success. There are 3 phases (FEL 1, FEL 2, FEL 3). A the end of each phase, there is a stage gate where a Go/ No Go decision is made. It is about the best use of company funds, given a predetermined Cost of Capital for borrowed money. How can they get the best return? At the end of a FEL3, a final Go/ No Go decision must be made, as Detailed Design is complete, and Long Lead items are ready to order. The accuracy of the estimate is now +- 10%. Committed Cost is about 30%. If a Go decision is made and LL items are ordered, Committed Cost now goes to about 60%. The orders for the LL items cannot be cancelled without severe penalties. It becomes a race to the finish to complete on budget. The rest of the money goes to construction and Project Management.
I have just described the Capital Budgeting process in use by most companies today. If JBI wants to sell machines, they have to do this, like it or not. And the SAIC summary demonstrates that. I can explain.
The third paragraph opens with:
"We also prepared an Order of Magnitude capital cost estimate for the proposed... based on preliminary layouts done by JBI's engineer."
Makes perfect sense, but has implications for investors. See below the link to the AACE website where an OOM estimate is explained:
http://www.aacei.org/non/rps/56r-08.pdf
An Order of Magnitude (OOM) estimate is also known as a Class 5 Estimate. Look on page 6 at the table. Under Alternate Names you will see "rough order of magnitude". It is a very high level estimate and has an accuracy range of -20% up to +50%. See that on page 3. It is used at the very first stages of a project, when alternatives analysis is being done, conceptual analysis.
The statement beginning paragraph 3 makes perfect sense. JBI showed them layout drawing and there was little else to go on. I would suspect that JBI has no detailed plans or drawings. This is what I have always suspected. The machines were built by JB and his buds with the help of the machine shop. It is all custom. Without detailed drawings, also not constructible. And if it is not constructible, it is not saleable as-is. The implication for investors is that there is considerable engineering effort in order to build a JBI machine on another site, especially a 3-unit cluster.
Layout drawings are typically used at the outset of a project and are critically important. It usually determines the placement of buildings on the site. At this time basic Civil work is being done. Seismic studies, bore holes, etc so that the soil properties can be determined and the proper foundations designed. In JBI's case, since it is a small project, it may be just the placement of key pieces of equipment. I would suspect that a 3-unit cluster wold be outdoors.
This layout is critical because it determines the necessary piping, which determines cost. If the payout can be optimized, the need for piping is diminished. It should be as compact s possible.
The next statement in para. 3 concerns costs. 6.5 Million plus 2 million in design fees for a total of 8.5 Let's break that down. A FEL 1 typically costs 5% of the total budget, which would be $425k. 4250 MH of work. Consider that complete, done by SAIC.
A FEL2 typically costs 10% of the budget. $850k. A FEL 3 typically costs 15%. $1.275 Million. 1.275 + .85 = 2 Million. Therefore the statement about the costs of Engineering work is in line with my expectations and experience. Good.
The remainder $6.5 million would be for Construction and Project Management. I don't quite know what a Contractor Distributable Cost is. My guess is that it would be the money that they have to pay their subs in order to do their contracts. Not sure why they do not include that in Construction cost.
btw... that is a lot more than you expected in terms of Capital Cost, isn't it? I think it is a bit high. Quick calc... if the engineering fees total 2.5 Million and are 30% of the cost.... that makes the total... 8 Million... not bad.
All good so far.
Now... " based on the assumptions discussed in our White Paper... w expect the facility to generate an average EBITDA of $28 Million ..."
Whoa!!!
That is a leap. Where did they get that number from? In order to arrive t that you need feedstock cost to determine costs, pricing to determine revenues, etc... plus it includes accounting numbers like SG&A, R&D, etc, which have nothing to do with the project at hand . SAIC would not concern themselves with these line items.
I do not think that that claim is credible, and is certainly not evidenced by JBI's performance.
How did they arrive at that given the accuracy of the estimate (-30/+50)????
The rest of it is Grade 2 math. Yes, if you play with the uptime and yield you get different results, all fantastic. It would be more useful to make some statement in the Summary about assumptions concerning the price of feedstock.
It is interesting how it makes specific reference to the assumptions in the White Paper. These, then, become critical to what is really important here, which is profitability. And JBI has conveniently distanced themselves from those assumptions.
So I have picked apart the SAIC Executive Summary for you.
My worst case scenario... JBI engaged SAIC to perform an audit of their existing facility for the purpose of Wowing the whales. That was done and went well. They then did an OOM estimate (basically a FEL 1), and realized what was ahead of them in terms of effort to build at Jacksonville.
I would be surprised of SAIC concerned themselves with accounting data and predicted an EBITDA. I would suspect that they provided an ROI or NPV analysis. I wold believe that JBI's accounting staff may have taken SAIC's work, combined it with some proforma accounting data, and come up with an EBITDA to WOW the whales.
Based on the representations made to the whale investors, here is what they should have done:
- built at Jacksonville, requiring most of the $10 Million resulting from the financing.
- achieved an EBITDA as stated of $28 Million, dependent on uptime, etc... yield, etc..
Here is what they did do:
- tinkerfarted
- built processor #3 (I can't remember if this audit was on 2 or 3)
- pissed it away on SG&A
Misrepresentation at C-levels (COO, CEO, etc) is very serious. They cannot say after the fact that they did not know at the time. The standard is they ought to have known . I think it is safe to say that if this document was used to Wow the whales into giving them $10 Million, that might have been misrepresentation. JBI did not deliver as promised and are responsible for that.
As for the leak, etc... we do no know if the leaked document is valid word-for-word. To me, Some of the problems I have pointed out would have to be explained to me before I would believe it is genuine. Possible someone put what we see now together and published it anonymously. Obviously, that could have been done to pump the stock.
The retraction by JBI means that they are not responsible, although the Summary is out there boosting the stock.
Thanks for reading if you got this far.
