Aemetis: Solvency Concerns And An Upcoming Equity Offering

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In July 2012, Third Eye lent around $40 million to Aemetis, Inc (NASDAQ:AMTX) by means of loans, notes and a revolving credit facility. The “stated” interest rates have been as high as 17%, but due to a creative variety of fees, the real rate of interest has approached 100% per year.

Aemetis clearly had no ability to repay these debts. In fact, it could not ever even service the interest alone. Within less than 6 months, the company was already in default.

As a result, in October of 2012, Aemetis and Third Eye entered into Waiver and Amendment #1. This extended the maturity of the obligations to July 2014 and increased the lending amounts by $6 million.

But… the $6 million could not actually be drawn upon by Aemetis, it was simply extended to account for the unpaid interest. For Aemetis, the only real result was that its debt increased to $46 million instead of $40 million, with no new cash coming in the door.

Aemetis was just borrowing more money from Third Eye so that it could pay the money directly back to Third Eye. This is how Third Eye makes a fortune. In mafia movies, it’s called “the vig”.

But wait, it gets better.

In order to compensate Third Eye for this extension and waiver, Aemetis was required to “pay” an additional “waiver fee” of $4 million. But again, Aemetis had no cash, so this was just tacked on to the debt. So now the obligation became $50 million, instead of $40 million. And again, there was not even any new cash coming in the door at Aemetis.

The balance of the debt therefore increased by 25% in just 4 months!

That equates to an annualized rate of over 95%!

That was October, 2012. Within just 4 more months (February 2013), the company was again in default. So Aemetis agreed to Waiver and Amendment #2.

This time, Aemetis was required to issue shares to pay an additional extension fee of $1.5 million. In addition, Third Eye required McAfee Capital to pledge millions of shares as collateral. McAfee Capital is the investment company owned by Aemetis’ CEO, Eric McAfee, and which holds some of his shares.

That was the second default waiver within 8 months.

The third default and waiver happened just 3 more months later, with more waiver fees and increased debt balances in respect of unpaid interest.

Then, there was a fourth default and waiver. And a fifth. And a sixth. And a seventh.

At each new waiver just a few months apart, Third Eye would impose additional fees and would jack up the interest rates. The net result was that by late 2013 (less than 18 months), Aemetis’ debt to Third Eye had ballooned to over $72 million from just $40 million.

The “vig” was quickly compounding at a truly unsustainable rate.

By the end of 2013 (within 18 months), total annual debt service amounts were accruing and almost $30 million per year – and this for a debt that started at just $40 million.

But Third Eye still wasn’t satisfied, and was repeatedly demanding warrants. Aemetis was already in default. If Aemetis attempted to say no, Third Eye could just foreclose on the assets of the entire company. Third Eye could now call all of the shots.

As a result of the heavy warrants and shares being issued, Third Eye quickly owned over 17% of the entire company!

But at the current valuation, Third Eye’s equity stake is worth just $34 million – only half of what it has lent to Aemetis, Inc (NASDAQ:AMTX). And the problem now is that Aemetis has demonstrated a very limited capacity to pay down these debts.

As a result, Third Eye is now agitating for the equity offering. In one default waiver amendment, Aemetis agreed to give Third Eye 100% of the proceeds of any equity offering it conducts in excess of $7 million. This is how Third Eye plans to get its money back.

The stock will clearly be crushed and Aemetis will end up getting almost none of the proceeds, but Third Eye will get its incredible pound of flesh out of the deal after just 2 years.

What happened with earnings? Why is the stock falling?

Last Thursday, Aemetis reported Q2 earnings, and the numbers appeared good on the surface. But the share price quickly fell by 10% that day, and continued its descent on Friday. This is just what we saw with Biolase.

In the press release, the company noted the following:

  • Revenues increased 21% vs. Q2 2013
  • Net income was $2.7 million, compared to a loss of $9 .6 million in Q2 2013
  • Aemetis paid down $13.6 million of debt (interest and principal)

These all would appear to be very positive developments. As such, retail investors were likely confused by the sharp drop in the stock.

More savvy investors quickly realized that positive comparisons to 2013 are unfair, because the plant had been idled for almost a month during Q2 2013. Had it not been idled, revenues would have come out as being largely flat, despite a very buoyant ethanol market in 2014.

In reality, the results are actually a bit of a disappointment.

As for the debt, a closer read of the subsequently released 10Q reveals that debt service expenses are still accruing at over $5 million per quarter (a run rate of over $20 million per year). In addition, every penny of cash generated by Aemetis has already been handed over to creditors, mostly to Third Eye.

But even after handing every penny of cash that came in the door, Aemetis still has over $95 million in short-term liabilities coming due. Aemetis has made virtually no progress whatsoever, even in the best ethanol market in a decade.

Note: Many investors could have easily missed the short-term nature of $65 million these liabilities, because in the Form 10Q, they are classified as “long-term liabilities”. The reason for this classification is that Aemetis agreed with Third Eye to set the new maturity date as July 1, one day after Q2 ends. As a result, they were technically considered to be “long-term” obligations in the most recent 10Q – but only by a single day. These obligations are now clearly short-term liabilities.

For those who care about accounting ratios, Aemetis has a stated “current ratio” of 0.4. That should already be extremely concerning. Anything below 1.0 indicates meaningful financial weakness. Anything below 0.5 indicates a severe liquidity issue.

But in fact, it is much worse. Because all of these liabilities are now short term, the real current ratio for Aemetis is just 0.1. The company is visibly insolvent.

What about “alternative” financing sources?

California Energy Commission Grant

In late July, Aemetis put out a press release stating that “Aemetis, Inc (NASDAQ:AMTX) announces $3M CEC grant award”. Even though $3 million is not enough to move the needle vs. over $90 million in upcoming debts, the $3 million would serve as a small amount of welcome relief.

However, it appears that investors may have assumed that this money was already distributed to Aemetis. This is wrong.

There are several problems here. First, the grant is still contingent upon approval of the project. It has not even been distributed. Second, the grant is a matching grant, which means that Aemetis itself must put up $3 million in order to receive the grant. But Aemetis only has $4.7 million in cash total. Third (and most importantly), as part of one of the default waivers, Aemetis already agreed that any proceeds from grants would go straight to Third Eye. Aemetis will see none of the money from this grant.

California Ethanol Producer Incentive Program.

Aemetis is eligible to participate in this California program, which subsidizes ethanol producers in times when crush spreads are too low to make money.

Unfortunately, the program also requires ethanol producers to repay the funds when times improve. Because times are good for ethanol right now, Aemetis actually owes money to this program.

As a result of this, Aemetis noted in the most recent 10Q that:

During the six months ended June 30, 2014, the strength of the crush spread resulted in the accrual and obligation to repay CEPIP funding in the amount of $1.8 million, the entire remaining amount of funds received from the program.

This is in addition to the other debts listed for Aemetis.

EB-5 Visa program

This is an odd one. In an attempt to obtain funding, Aemetis enrolled in a program by which it can effectively sell US immigration visas to foreigners. Foreigners can “invest” $500,000 each into notes issued by Aemetis. Because they are investing in a US business and presumably creating jobs, the foreigner then gets a US immigration visa.

The notes can be converted into Aemetis stock at a price of $3.00 – but only after 3 years.

Even though this appears to be a great deal (getting stock at $3.00), Aemetis has only managed to sell 3 of these visa investments since 2012, raising just $1.5 million. The reason that there has been no demand is that investors need to wait for 3 years in order to get their stock. These investors will know that they come behind over $90 million in debt, such that there is a very real chance that they may never get paid. In fact, in 2013, Aemetis was not even paying the owed interest to these investors who paid their $500,000 each. Not surprisingly, selling more of these has been difficult.

Despite only selling 3 of these in the past 2 ½ years, Aemetis continues to state that this is a source of funding which they hope to rely upon.

But once again (and of greatest importance), Third Eye has already laid claim to any potential proceeds from this source. In Default Waiver #5, Third Eye forced Aemetis to agree to remit any proceeds from EB-5 sales to Third Eye.

Loans from board members

In the recent past, CEO Eric McAfee has already forgone actual cash payment of his salary and benefits, because Aemetis is unable to pay. Aemetis simply accrues these expenses along with the other debts which it is not paying. But because 100% of his personal assets have been claimed by Third Eye as collateral, Mr. McAfee is no longer able to extend any form of credit to Aemetis.

As early as 2009, board member Laird Cagan extended $5 million of credit to Aemetis, which was secured by assets of the company. But as usual, the company was unable to even pay the interest. As a result, the company issued stock to Mr. Cagan in exchange for the $5-million debt. As a result of this, Mr. Cagan ended up quickly owning 12% of the entire company, which he acquired at just 45 cents per share.

This once again demonstrates what we are about to see: when the company has debts which it cannot pay, and when issuing stock is the only option, the price at which stock can be issued tends to be very, very low. Aemetis will truly issue stock at any price, because it has no other options.

Complications for an equity offering – accounting issues

I was an investment banker on Wall Street for nearly a decade. I helped many troubled companies raise money when the situation looked very desperate. One thing I learned is that there is almost always a price at which a deal can get done.

I do believe that Aemetis will be able to complete some amount of financing to stave off insolvency. But it is also clear that the price at which a deal gets done for Aemetis will be very, very low.

We already know that nearly all proceeds of the offering will simply be handed to Third Eye. This is already a problem for potential investors, because they know that a financing will not go to improve the business or increases capacity. The financing itself does nothing for Aemetis and everything for Third Eye.

But, in fact, there is a much larger problem looming for Aemetis.

Aemetis may have additional accounting problems. which could require an even bigger discount from anyone who might choose to finance the company.

In its annual 10K filed in March, Aemetis, Inc (NASDAQ:AMTX) noted that:

We have identified material weaknesses in our internal control over financial reporting which have materially adversely affected our ability to timely and accurately report our results of operations and financial condition. These material weaknesses have not been fully remediated as of the filing date of this report.

The deficiencies in internal control were not minor, in fact, they were very significant.

The 10K (p. 28) explained that there may be significant problems with the numbers, most importantly, including cash flow numbers.

The material weaknesses identified are: Ineffective controls exist to ensure that the accounting and reporting for complex accounting transactions are recorded in accordance with GAAP. A number of significant audit adjustments were made to the general ledger, which collectively could have a material effect on the financial statements. These adjustments were made up of entries to properly record the carrying value of debt issue costs, warrant accounting and various other adjustments summarized in our Report to the Audit Committee communication.

As part of our review of the financial statements included in the 10-K, we also made significant revisions to the statement of cash flows and various notes to the financial statements, which indicate that additional controls over disclosures need to be evaluated.

The company also noted that it was making efforts to remediate these problems.

But here is where it becomes much more problematic.

A few weeks later, when Q1

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