Aemetis: Solvency Concerns And An Upcoming Equity Offering

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was reported, Aemetis noted that

There were no changes in our internal controls over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Despite the “no changes”, Aemetis management is now saying that the previously disclosed problems no longer matter.

On page 30 of the Q1 10Q and on page 35 of the Q2 10Q, it is noted that:

Our controls and procedures are designed to provide reasonable assurance that our control system’s objective will be met and our CEO and CFO have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Something is quite wrong here.

When a company discloses serious deficiencies in its accounting controls in one quarter and then says that no changes have been made, it is not possible to suddenly say that the numbers, including cash flow, are all just fine. Yet, this is what Aemetis has done.

The fact that these problems are being swept under the rug at just the time that the company is looking to complete a large equity offering makes the problem that much worse.

This is clearly something that small retail investors will miss, but larger investors who might finance the company will spot immediately. To the extent that they have any concerns over the accuracy of the accounting numbers, they will definitely require a steeper discount on the equity price.

Past 10b5 fraud charges against the CEO, Eric McAfee, will not help that matter either.

In a previous OTC BB oil and gas company, Verdisys, Mr. McAfee was also the largest shareholder and CEO.

According to the SEC, McAfee duped the company’s board into buying useless software from a different company which he controlled. He then diverted that money to a stock promoter to promote the stock.

McAfee then fabricated a large receivable from a supposed customer, and forced the accounting department to put out the 10Q filing without letting the auditor review it. The auditor had already raised revenue recognition issues with the transaction. He did all of this in order to prevent the share price from falling.

This is all pretty bad stuff. As a result, Mr. McAfee was sanctioned for fraud violations, and cease and desist orders were issued.

Here is what happened, according to fraud proceedings with the SEC:

Verdisys issued two million shares of common stock, valued at $1 million, ostensibly to acquire software, but that the software had been deemed not useful, and Verdisys was therefore recording an impairment expense of $1 million.

McAfee had convinced the Verdisys board to purchase the software by claiming it would allow the remote monitoring of oil and gas wells, which would complement Verdisys’ sales of broadband satellite links to oil and gas companies. McAfee controlled the company selling the software, and he knew that the software only screened job applications and resumes of health care executives and did not monitor conditions in oil and gas wells. McAfee did not tell the company’s directors that the transaction compensated a stock promoter, who received half of the two million shares.

As a result, McAfee caused Verdisys, essentially a start-up company, to not disclose that it had issued one million shares and incurred a compensation expense of $500,000, to retain the promoter, before it could claim significant assets, revenues or business operations.

Verdisys delayed the filing of its quarterly report for the quarter ended September 30, 2003 (the “3Q Form 10-QSB”), after its auditor raised revenue recognition issues concerning a material $1.5 million receivable related to the company’s largest drilling contract. While the filing was in abeyance, McAfee caused Verdisys to issue an earnings release predicting the company would soon report record earnings.

McAfee participated in efforts to justify recognition of the $1.5 million receivable. On November 19, 2003, to meet the filing deadline and avoid any drop in the company’s stock price, McAfee ordered Verdisys’ accounting staff to file the 3Q Form 10-QSB, even though the auditor had yet to review the financial statements found in the filing. The 3Q Form 10-QSB filed as a result claimed Verdisys had earned total current period revenues of $2.09 million, including the questioned $1.5 million receivable. The 3Q Form 10-QSB did not disclose that McAfee’s attempts to confirm recognition of the $1.5 million receivable involved a buy-out agreement, by which Verdisys would assume substantial liabilities and forego collecting upon the $1.5 million receivable to purchase the drilling project from which the receivable arose.

As a result of the conduct described above, McAfee caused Verdisys to violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of securities.

Ultimately, McAfee settled with the SEC, paid a fine and moved on to other projects. Verdisys later changed its name to Blast Energy, and is no longer listed.

I don’t expect that any retail investors have conducted this level of research in evaluating their investment in Aemetis. But it should be expected that investors who might choose to participate in an offering of up to $100 million will focus quite clearly on this history.

The fact that Aemetis recently disclosed its internal accounting problems and then quickly covered them up just in time for a financing will certainly be noticed, and will be another factor which will require a steep discount in selling new equity.

It will not be lost on the investors that absolutely all of Mr. McAfee’s personal assets have been pledged to secure the loans of Aemetis. If the Aemetis creditors choose to foreclose, they will take everything he has. As a result, there is a very high amount of pressure on Mr. McAfee to get an equity deal done and to perhaps conveniently overlook the accounting problems which might interfere with getting his personal assets back under his own control and out of the clutches of Third Eye.

Please note: I did attempt to contact Aemetis by phone for comment and clarification on these issues, but my calls have not yet been returned.


Right now, there are very strong tailwinds boosting alt energy stocks such as biodiesel and ethanol plays. This can be clearly seen by looking at the soaring share prices of stocks such as Pacific Ethanol.

But unfortunately, the dire straits in which Aemetis has landed basically ensure that no amount of tailwind is going to benefit Aemetis shareholders. For any amount of cash that comes in, Third Eye Capital stands ready to confiscate it. Third Eye is already “sweeping” cash from Aemetis every night. That applies to cash from biodiesel and ethanol sales, from grants and subsidies and even from Aemetis’ unusual US visa selling program. Third Eye and the lenders take everything.

Aemetis has over $90 million in near-term debts, and just $4.7 million in cash with which to repay it. But as of the last 10Q, much of this was technically referred to as “long-term” debt. There is no mistake that this is currently short-term debt now.

Aemetis has already defaulted on loans, and its creditors have already begun attempting to accelerate the seizure of assets. Each time a default is waived for a few months only adds massive new debt burdens to the company in the form of waiver fees, penalties and new interest. The “vig” is compounding at an unsustainable rate.

But now the burden is getting so high that Aemetis risks collapse, and now Third Eye finally needs to convert these debts into cash.

Aemetis has filed a $100 million S3 in order to sell equity, and has engaged an investment banker to advise on financing. As a result, the share price has already fallen quickly by 30% in 3 weeks.

But now that the financing becomes more visible, the share price decline is likely to accelerate. No one wants to be left holding the stock when all of the other buyers disappear ahead of the offering. This is just what we saw with Biolase last year, when the stock plunged by 80% in a single week.

Concerns over accounting issues and internal controls will likely mean that the discount required in an equity offering is even deeper than might otherwise be the case. Investors will want to know why Aemetis is now ignoring the accounting problems just revealed in March, and why they are being ignored right ahead of a must-complete equity offering. The past history of similar fraud by the CEO will certainly not help this issue with investors.

Based on these issues, a quick drop of 50%-80% in the share price is now entirely predictable.

Editor’s Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Additional disclosure: The author was previously an investment banker for a major global investment bank and was engaged in investment banking transactions with variety of alternative energy companies. The author has not been engaged in any investment banking transactions with US listed companies during the past 5 years. The author is not a registered financial advisor and does not purport to provide investment advice regarding decisions to buy, sell or hold any security. The author currently holds a short interest in AMTX and has provided fundamental and/or technical research to investors who hold a short position. The author may choose to transact in securities of one or more companies mentioned within this article within the next 72 hours. Before making any decision to buy, sell or hold any security mentioned in this article, investors should consult with their financial adviser. The author has relied upon publicly available information gathered from sources, which are believed to be reliable and has included links to various sources of information within this article. However, while the author believes these sources to be reliable, the author provides no guarantee either expressly or implied.

Disclosure: The author is short AMTX. (More…)

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