Aemetis: Solvency Concerns And An Upcoming Equity Offering

Aemetis: Solvency Concerns And An Upcoming Equity Offering by Richard Pearson, Seeking Alpha

New campaign announcement:

Company: Aemetis, Inc.

Short-seller: Richard Pearson

Announcement date: 08-11-2014

Summary: On 8-11-2014, Richard Pearson said Aemetis was deeply in debt with $90 million in short-term debt and only $4.7 million in cash. Pearson said predatory lenders that the company had used had already taken 100% of the company’s generated cash for the year and were attempting to seize its assets as well. Because of an “accounting technicality,” Pearson said much of the company’s real short-term debt was hidden as long-term debt, and he questioned if there were more serious accounting issues that had been missed. Pearson expected a “huge” equity offering and a 50-80% decline in the stock.

Investment overview

Aemetis, Inc (NASDAQ:AMTX) is a company which is totally off the radar for most investors. The company only recently uplisted to the Nasdaq from the OTC BB, and has no institutional following. As a result, the mostly retail investor base has missed some critical issues with the company.

Between May and July, shares of Aemetis rose from $5.00 to over $12.00. But now, the shares have been dropping daily. Even though earnings on August 7th were relatively positive, the shares have fallen by 20% since then, and are already down by more than 30% in just three weeks.

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The reason that the positive earnings did not cheer the stock is because Aemetis, Inc (NASDAQ:AMTX) is very deeply in debt and is already defaulting on obligations in both the US and India. Creditors have already taken 100% of the cash generated by Aemetis this year, and are first in line to take anything else that Aemetis can make. Creditors are already attempting to seize assets.

It is clear that Aemetis must issue a massive amount of new stock to pay creditors, and it must do so quickly. Aemetis has over $90 million in short-term debt coming due, and only $4.7 million in cash.

Aemetis has already filed an S3 registration statement to raise up to $100 million, and has engaged an investment bank to help with financing. The equity offering will put extreme pressure on the share price. This is what is driving the share price down.

Because Aemetis MUST complete a financing regardless of price and because of the urgency, the share price will continue to fall sharply. No one wants to be the last one holding shares when the company conducts a huge equity offering.

The shares could fall by a further 50%-80% due to the “death spiral” nature of this financing situation. Past examples will illustrate this problem clearly and why it applies to Aemetis.

Again, the reason that the market has missed this is simply because:

a) Aemetis, Inc (NASDAQ:AMTX) is an under-followed stock

b) Aemetis is mostly held by retail and has no legitimate research coverage

c) Aemetis only recently uplisted to the Nasdaq from the OTC BB

Background

In 2013, I wrote an article describing a “death spiral” at Biolase Inc. (NASDAQ:BIOL) which saw the stock plunge by 80% in a week. The situation was very similar to what we are starting to see now with Aemetis.

In early 2013, the Biolase share price was quite strong and traded as high as $6.00. In August 2013, Biolase had just reported earnings and reported a very mild miss. It certainly should not have been a big deal. But still, the share price plunged by 25% that day. The death spiral had already begun… however, many investors had not yet realized it.

By the time I could finish my article within a few days, the stock had already fallen by 50%. Despite this massive drop in less than a week, I still predicted even further declines. The stock then fell an additional 30% on the day of my article alone.

With the stock down 80% in a week, Biolase took the unusual step of halting its own stock when it hit $1.16, down from $3.60 before earnings. It was an epic plunge in just days, and a far cry from $6.00 just weeks earlier.

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Biolase was ultimately able to stabilize and raise some of the money it needed. The stock has recovered to around $2.00, still down by 45% from where it was before.

Biolase offers a good lesson in what triggers a death spiral. Biolase was in violation of its loan covenants and needed to raise money urgently. Issuing stock was the only option, and investors could plainly see that Biolase had filed a large S3 registration statement to sell stock. The situation with Aemetis is nearly identical, except that Aemetis has far more debt than Biolase.

In general, a death spiral will occur when a company needs to pay a fixed obligation (i.e. debt) and when it must use a variable number of shares to do so. Investors know that the stock will fall upon the equity offering, so they sell and the share price falls. But then, the subsequent investors know that the equity offering has not yet happened, so they know that the stock will continue to fall further. They sell, the stock falls, and the cycle repeats again.

No one wants to get caught holding the stock, because it is pre-determined that it will continue falling by even more. As the share price gets lower and lower, the relative dilution becomes larger and larger, which then exacerbates the share price decline even more.

As with Biolase, Aemetis, Inc (NASDAQ:AMTX) is now facing a death spiral situation, and for very similar reasons. And as with Biolase, it is purely the fault of management for letting the situation get to this point. More prudent management in years past could have prevented this situation from arising.

Aemetis: Company Overview

Aemetis Inc. is a $200-million market cap producer of “alternative fuels”. The company produces biodiesel from a plant in India, and produces mainly ethanol from a plant in California.

During Q1 of 2013, its ethanol plants were idled, as the company was experiencing recurring negative gross margins. It was literally selling its product below cost, so it decided to shut down. In recent quarters, the company has resumed operations, and a buoyant market for ethanol has seen the company begin to eke out tiny profits in two consecutive quarters. But it is still the case that over the past few years, the company has accumulated over $80 million in cumulative losses.

Aemetis Inc. uplisted from the OTC BB to the Nasdaq in May, and its share price quickly shot up from an initial price of $5.00 to over $12.00. One contributing factor was the strong performance of any stock with an ethanol connection. For example, Pacific Ethanol (NASDAQ:PEIX) is up by 400% in the past year. Aemetis has simply ridden on the coattails of the sector.

The share price was also no doubt buoyed by a Seeking Alpha article entitled: “Aemetis Is A Potential Four- Or Five-Bagger“, as well as by the initiation of “research” on the company by SeeThruEquity, which came with a $26 share price target.

See Thru claims (in all caps) that it does not get compensated to write such reports. But instead, See Thru charges its clients $11,000 for slots at its conferences. It then issues hyper-bullish research on the attendees “for free”. As noted on the See Thru website, Aemetis is an attendee in See Thru’s conferences.

In reality, this is all just a very transparent way to pay for positive research on one’s own company.

Both the article and the research report contain materials which are largely a simple repetition of company presentations, including links and direct quotes. As a result, they not surprisingly portray the company in a very optimistic light, and contain multi-bagger share price targets.

Yet, both of them ignore the obvious realities which are contained in Aemetis, Inc (NASDAQ:AMTX)’s SEC filings. Even a quick and cursory read of the company filings reveals the following:

• Aemetis already is and has been in default on its debts, with creditors already attempting to seize assets.
• The company has just $4.7 million in cash and over $95 million in short-term debt coming due.
• Over $65 million of this debt has been classified as “long term”, simply because it is due 1 day after the end of the quarter. As a result, that $65 million is all, in fact, short-term debt by now.
• Aemetis’ major lender is already “sweeping” cash from the company every day, not even trusting the company with cash overnight
• The company’s internal controls for accounting have been deemed to be ineffective.
• Creditors have already claimed as collateral ALL of the assets of Aemetis
• In order to avoid an immediate default, the CEO was forced to personally guarantee $15 million of the debts with 100% of his own personal assets. If Aemetis defaults on even this portion, he loses everything he owns – personally !

As a result of the above, Aemetis (and the CEO) are in the situation where they simply MUST issue stock at any price and in very large size. They must also do so as soon as possible.

The intention to issue equity should be clear. The company just filed an S3 registration statement for up to $100 million. It is huge for a company of this size. The company also disclosed that it has already “engaged an investment bank” to advise on its financing.

An equity offering is desperately needed, there are no alternatives, and the timing is imminent. These are the precursors for a death spiral to occur. This is why the stock has been selling off, even after earnings which were relatively good (compared to the past). Yet, many of the retail holders will have no idea what is coming.

The only reason why the equity offering hasn’t already occurred is that the S3 is not yet effective. This is also identical to what happened with Biolase. But just as with Biolase, the S3 can become effective immediately and with no notice, such that an equity offering could occur at any time.

How has the market missed this?

The reason why this obvious situation has been missed by the market is that aside from existing insiders, the stock is almost exclusively held by retail investors. There is no institutional presence in terms of either investors or research. Because the stock was just recently uplisted to the Nasdaq, it is largely unknown to the wider market.

Furthermore, there are many retail investors who simply invest based on company descriptions who happen to be in hot sectors (i.e. ethanol).

The share price of Aemetis has no doubt benefited from the other soaring ethanol stocks, such as Pacific Ethanol, which has been a stunning 5-bagger in the past year. Aemetis CEO, Eric McAfee was an original founder of Pacific Ethanol, so some people choose to associate the two together, even though Pacific happens to be a far healthier company.

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How did Aemetis get into this situation?

In 2012, Aemetis sought to acquire a company called Cilion, but it didn’t have the money. As a solution, Aemetis went to a predatory distressed lender by the name of Third Eye Capital. This was really the beginning of the end for Aemetis.