AEMETIS, INC - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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☑   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2017

Or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-36475

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AEMETIS, INC.

 (Exact name of registrant as specified in its charter)

———————

Nevada	26-1407544
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

 

20400 Stevens Creek Blvd., Suite 700

Cupertino, CA 95014

 (Address of Principal Executive Offices, including zip code)

 

(408) 213-0940

 (Registrant’s telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

The number of shares outstanding of the registrant’s Common Stock on October 31, 2017 was 19,822,962 shares.

 

 

AEMETIS, INC.

FORM 10-Q

Quarterly Period Ended September 30, 2017

INDEX

PART I--FINANCIAL INFORMATION
Item 1 Financial Statements.		4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	23
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	33
Item 4.	Controls and Procedures.	34
PART II--OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors.	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	35
Item 3.	Defaults Upon Senior Securities.	36
Item 4.	Mine Safety Disclosures.	36
Item 5.	Other Information.	36
Item 6.	Exhibits.	36
Signatures		37

 

 

 

SPECIAL NOTE REGARDING FORWARD—LOOKING STATEMENTS

On one or more occasions, we may make forward-looking statements in this Quarterly Report on Form 10-Q, including statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events or other statements that are not historical facts. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding management’s plans; trends in demand for renewable fuels; trends in market conditions with respect to prices for inputs for our products versus prices for our products; our ability to leverage approved feedstock pathways; our ability to leverage our location and infrastructure; our ability to incorporate lower-cost, non-food advanced biofuels feedstock at the Keyes plant; our ability to adopt value-add by-product processing systems; our ability to expand into alternative markets for biodiesel and its by-products, including continuing to expand our sales into international markets; the impact of changes in regulatory policies on our performance, including the Indian government’s recent changes to tax policies, diesel prices and related subsidies; our ability to continue to develop new, and to maintain and protect new and existing, intellectual property rights; our ability to adopt, develop and commercialize new technologies; our ability to refinance our senior debt on more commercial terms or at all; our ability to continue to fund operations and our future sources of liquidity and capital resources; our ability to sell additional notes under our EB-5 note program and our expectations regarding the release of funds from escrow under our EB-5 note program; our ability to improve margins; and our ability to raise additional capital. Words or phrases such as “anticipates,” “may,” “will,” “should,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,” “will continue” or similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on current assumptions and predictions and are subject to numerous risks and uncertainties. Actual results or events could differ materially from those set forth or implied by such forward-looking statements and related assumptions due to certain factors, including, without limitation, the risks set forth under the caption “Risk Factors” below, which are incorporated herein by reference as well as those business risks and factors described elsewhere in this report and in our other filings with the Securities and Exchange Commission (the “SEC”), including without limitation, our most recent Annual Report on Form 10-K.

 

 

 

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements.

AEMETIS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands except for par value)

 

	September 30, 2017	December 31, 2016
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$1,749	$1,486
Accounts receivable	2,199	1,557
Inventories	5,742	3,241
Prepaid expenses	2,717	555
Other current assets	233	206
Total current assets	12,640	7,045
Property, plant and equipment, net	79,360	66,370
Intangible assets, net of accumulated amortization of $485 and $424, respectively	1,239	1,300
Other assets	3,092	3,095
Total assets	$96,331	$77,810
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable	$9,367	$7,842
Current portion of long term debt	1,822	2,027
Short term borrowings	12,737	9,382
Mandatorily redeemable Series B convertible preferred stock	2,920	2,844
Accrued property taxes	3,658	2,648
Other current liabilities	3,312	2,473
Total current liabilities	33,816	27,216
Long term liabilities:
Senior secured notes	70,865	61,631
EB-5 notes	34,000	33,000
GAFI secured and revolving notes	23,373	-
Long term subordinated debt	5,786	5,674
Other long term liabilities	37	102
Total long term liabilities	134,061	100,407
Stockholders' deficit:
Series B convertible preferred stock, $0.001 par value; 7,235 authorized; 1,323 and 1,328 shares issued and outstanding each period, respectively (aggregate liquidation preference of $3,969 and $3,984 respectively)	1	1
Common stock, $0.001 par value; 40,000 authorized; 19,823 and 19,858 shares issued and outstanding, respectively	20	20
Additional paid-in capital	84,128	83,441
Accumulated deficit	(151,911)	(129,887)
Accumulated other comprehensive loss	(3,077)	(3,388)
Total stockholders' deficit attributable to Aemetis, Inc.	(70,839)	(49,813)
Non-controlling interest - GAFI	(707)	-
Total stockholders' deficit	(71,546)	(49,813)
Total liabilities and stockholders' deficit	$96,331	$77,810

 

The accompanying notes are an integral part of the financial statements.

 

AEMETIS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

LOSS

(Unaudited, in thousands except for earnings per share)

 

	For the three months ended September 30,		For the nine months ended September 30,
	2017	2016	2017	2016
Revenues	$38,935	$39,377	$111,273	$105,762
Cost of goods sold	36,980	35,711	108,200	98,066
Gross profit	1,955	3,666	3,073	7,696
Research and development expenses	1,876	87	2,072	290
Selling, general and administrative expenses	3,182	3,222	9,739	9,123
Operating income (loss)	(3,103)	357	(8,738)	(1,717)
Other (income) expense:
Interest expense
Interest rate expense	3,867	3,046	9,873	8,679
Amortization expense	1,265	1,425	4,112	4,269
Other (income) expense	(18)	(19)	2	(480)
Loss before income taxes	(8,217)	(4,095)	(22,725)	(14,185)
Income tax expense	-	-	6	6
Net loss	$(8,217)	$(4,095)	$(22,731)	$(14,191)
Less: Net loss attributable to non-controlling interest	(707)	-	(707)	-
Net loss attributable to Aemetis, Inc.	$(7,510)	$(4,095)	$(22,024)	$(14,191)
Other comprehensive income (loss)
Foreign currency translation adjustment	(87)	56	311	(50)
Comprehensive loss	$(8,304)	$(4,039)	$(22,420)	$(14,241)
Net loss per common share attributable to Aemetis, Inc.
Basic	$(0.38)	$(0.21)	$(1.11)	$(0.72)
Diluted	$(0.38)	$(0.21)	$(1.11)	$(0.72)
Weighted average shares outstanding
Basic	19,804	19,833	19,760	19,741
Diluted	19,804	19,833	19,760	19,741

 

The accompanying notes are an integral part of the financial statements.

 

 

AEMETIS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 (Unaudited, in thousands)

 

	For the nine months ended September 30,
	2017	2016
Operating activities:
Net loss	$(22,731)	$(14,191)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Share-based compensation	800	573
Depreciation	3,471	3,523
Debt related amortization expense	4,112	4,269
Intangibles and other amortization expense	98	95
Change in fair value of warrant liability	3	34
Loss on sale/disposal of assets	-	11
Changes in operating assets and liabilities:
Accounts receivable	(932)	150
Inventories	(2,456)	795
Prepaid expenses	89	82
Other current and long-term assets	(41)	(175)
Accounts payable	1,507	(1,315)
Accrued interest expense and fees, net of payments	8,091	5,910
Other liabilities	1,633	683
Net cash provided by (used in) operating activities	(6,356)	444
Investing activities:
Capital expenditures	(681)	(479)
Net cash used in investing activities	(681)	(479)
Financing activities:
Proceeds from borrowings	13,146	8,535
Repayments of borrowings	(8,889)	(8,091)
GAFI proceeds from borrowings	2,810	-
Net cash provided by financing activities	7,067	444
Effect of exchange rate changes on cash and cash equivalents	233	(40)
Net cash and cash equivalents increase for period	263	369
Cash and cash equivalents at beginning of period	1,486	283
Cash and cash equivalents at end of period	$1,749	$652
Supplemental disclosures of cash flow information, cash paid:
Interest paid	$1,875	$2,518
Income taxes paid	6	6
Supplemental disclosures of cash flow information, non-cash transactions:
Subordinated debt extension fees added to debt	680	680
Fair value of warrants issued to subordinated debt holders	321	578
Repurchase of common stock added to TEC promissory note	451	-
Senior debt extension and waiver fees added to debt	4,446	4,940
TEC promissory note fees and fees for Goodland transaction	1,169	-
Settlement of accounts payable through transfer of equipment	-	66
GAFI plant, property & equipment acquired	15,431	-
Payment of TEC bridge loan added to GAFI Revolving loan	3,669	-
Prepaid interest on GAFI Term loan	2,250	-

 

The accompanying notes are an integral part of the financial statements.

 

Nature of Activities. Headquartered in Cupertino, California, Aemetis is an advanced renewable fuels and biochemicals company focused on the acquisition, development and commercialization of innovative technologies that replace traditional petroleum-based products through the conversion of second-generation ethanol and biodiesel plants into advanced biorefineries.  Founded in 2006, the Company owns and operates a 60 million gallon per year ethanol production facility in the California Central Valley near Modesto where it manufactures and produces ethanol, wet distillers’ grains (“WDG”), condensed distillers solubles (“CDS”) and distillers’ corn oil. The Company also owns and operates a 50 million gallon per year renewable chemical and advanced fuel production facility on the East Coast of India producing high quality distilled biodiesel and refined glycerin for customers in India and Europe. It also operates a research and development laboratory and holds a portfolio of patents and related technology licenses for the production of renewable fuels and biochemicals.

Basis of Presentation and Consolidation. These consolidated financial statements include the accounts of Aemetis, Inc., a Nevada corporation, and its wholly owned subsidiaries (collectively, “Aemetis” or the “Company”). Additionally, we consolidate all entities in which we have a controlling financial interest. A controlling financial interest is usually obtained through ownership of a majority of the voting interests. However, there are situations in which an enterprise is required to consolidate a variable interest entity (VIE), even though the enterprise does not own a majority of the voting interests. An enterprise must consolidate a VIE if the enterprise is the primary beneficiary of the VIE. The primary beneficiary is the party that has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

In July 2017, we closed on a transaction with Goodland Advanced Fuels, Inc. (GAFI). Upon application of consolidation guidance in ASC 810 Consolidation, we determined that GAFI is a variable interest entity and Aemetis, Inc. is the primary beneficiary. Accordingly, the consolidated financial statements include the accounts of GAFI (see Note 6).

All intercompany balances and transactions have been eliminated in consolidation including any transactions between GAFI and Aemetis, Inc. The accompanying consolidated condensed balance sheet as of September 30, 2017, the consolidated condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2017 and 2016, and the consolidated condensed statements of cash flows for the nine months ended September 30, 2017 and 2016 are unaudited. The consolidated condensed balance sheet as of December 31, 2016 was derived from the 2016 audited consolidated financial statements and notes thereto. The consolidated condensed financial statements in this report should be read in conjunction with the 2016 audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2016.

The accompanying consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and pursuant to the rules and regulations of the SEC.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.

 

In the opinion of management, the unaudited interim consolidated condensed financial statements for the three and nine months ended September 30, 2017 and 2016 have been prepared on the same basis as the audited consolidated statements as of December 31, 2016 and reflect all adjustments, consisting primarily of normal recurring adjustments, necessary for the fair presentation of its statement of financial position, results of operations and cash flows. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the operating results for any subsequent quarter, for the full fiscal year or any future periods.

Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, revenues, and expenses during the reporting period. To the extent there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected.

Revenue Recognition. The Company recognizes revenue when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed or determinable and collection is reasonably assured. The Company records revenues based upon the gross amounts billed to its customers. Revenue from nonmonetary transactions, principally in-kind by-products received in exchange for material processing where the by-product is contemplated by contract to provide value, is recognized at the quoted market price of those goods received or by-products.

Cost of Goods Sold. Cost of goods sold includes those costs directly associated with the production of revenues, such as raw material consumed, factory overhead and other direct production costs. During periods of idle plant capacity, costs otherwise charged to cost of goods sold are reclassified to selling, general and administrative expense.

Accounts Receivable. The Company sells ethanol, WDG, CDS, and distillers’ corn oil through third-party marketing arrangements generally without requiring collateral. The Company sells biodiesel, glycerin, and processed natural oils to a variety of customers and may require advance payment based on the size and creditworthiness of the customer. Accounts receivables consist of product sales made to large creditworthy customers. Trade accounts receivable are presented at original invoice amount, net of any allowance for doubtful accounts.

The Company maintains an allowance for doubtful accounts for balances that appear to have specific collection issues. The collection process is based on the age of the invoice and requires attempted contacts with the customer at specified intervals. If, after a specified number of days, the Company has been unsuccessful in its collection efforts, a bad debt allowance is recorded for the balance in question. Delinquent accounts receivable are charged against the allowance for doubtful accounts once un-collectability has been determined. The factors considered in reaching this determination are the apparent financial condition of the customer and the Company’s success in contacting and negotiating with the customer. If the financial condition of the Company’s customers were to deteriorate, additional allowances may be required. We did not reserve any balance for allowance for doubtful accounts as of September 30, 2017 and December 31, 2016.

Inventories. Finished goods and work-in-process are valued using methods, which approximate the lower of cost (first-in, first-out) or net realizable value (NRV). Distillers’ grains and related products are stated at NRV. In the valuation of inventories, NRV is determined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

 

Property, Plant and Equipment. Property, plant and equipment are carried at cost less accumulated depreciation after assets are placed in service and are comprised primarily of buildings, furniture, machinery, equipment, land, and the plants in Keyes, California, Goodland, Kansas and Kakinada, India. As part of our variable interest entity, the plant in Kansas is partially completed and is not ready for operation; hence, we are not depreciating these assets yet. Otherwise, it is the Company’s policy to depreciate capital assets over their estimated useful lives using the straight-line method.

The Company evaluates the recoverability of long-lived assets with finite lives in accordance with Accounting Standards Codification (ASC) Subtopic 360-10-35 Property, Plant and Equipment –Subsequent Measurements, which requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, based on estimated undiscounted cash flows, the impairment loss would be measured as the difference between the carrying amount of the assets and its estimated fair value.

Basic and Diluted Net Income (Loss) per Share. Basic net income (loss) per share is computed by dividing net income or loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the dilution of common stock equivalents such as options, convertible preferred stock, debt and warrants to the extent the impact is dilutive. As the Company incurred net losses for the three and nine months ended September 30, 2017 and 2016, potentially dilutive securities have been excluded from the diluted net loss per share computations, as their effect would be anti-dilutive.

The following table shows the number of potentially dilutive shares excluded from the diluted net income (loss) per share calculation as of September 30, 2017 and 2016:

	September 30, 2017	September 30, 2016
Series B preferred (post split basis)	132	133
Common stock options and warrants	2,554	1,965
Debt with conversion feature at $30 per share of common stock	1,194	861
Total number of potentially dilutive shares excluded from the diluted net loss per share calculation	3,880	2,959

 

Comprehensive Loss. ASC 220 Comprehensive Income requires that an enterprise report, by major components and as a single total, the change in its net assets from non-owner sources. The Company’s other comprehensive income (loss) and accumulated other comprehensive loss consists solely of cumulative currency translation adjustments resulting from the translation of the financial statements of its foreign subsidiary. The investment in this subsidiary is considered indefinitely invested overseas, and as a result, deferred income taxes are not recorded related to the currency translation adjustments.

Foreign Currency Translation/Transactions. Assets and liabilities of the Company’s non-U.S. subsidiary that operates in a local currency environment, where that local currency is the functional currency, are translated into U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive loss. Income and expense accounts are translated at average exchange rates. Gains and losses from other foreign currency transactions are recorded in other income (expense).

 

Operating Segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Aemetis recognizes two reportable geographic operating segments: “North America” and “India.”

The “North America” operating segment includes the Company’s 60 million gallons per year capacity Keyes plant in Keyes, California, the GAFI plant in Goodland, Kansas and the research and development facility.

The “India” operating segment encompasses the Company’s 50 million gallon per year capacity biodiesel plant in Kakinada, India, its administrative offices in Hyderabad, India, and the holding companies in Nevada and Mauritius.

Fair Value of Financial Instruments. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximate their estimated fair values due to the short-term maturities of those financial instruments. These financial instruments are considered Level 1 measurements under the fair value hierarchy. Due to the unique terms of our notes payable and lines of credit and the financial condition of the Company, the fair value of the debt is not readily determinable.

Share-Based Compensation. The Company recognizes share-based compensation expense in accordance with ASC 718 Stock Compensation, requiring the Company to recognize expense related to the estimated fair value of the Company’s share-based compensation awards at the time the awards are granted, adjusted to reflect only those shares that are expected to vest.

Commitments and Contingencies. The Company records and/or discloses commitments and contingencies in accordance with ASC 450 Contingencies. ASC 450 applies to an existing condition, situation or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur.

Debt Modification Accounting. The Company evaluates amendments to its debt in accordance with ASC 470-50 Debt – Modification and Extinguishments for modification and extinguishment accounting. This evaluation includes comparing the net present value of cash flows of the new debt to the old debt to determine if changes greater than 10 percent occurred. In instances where the net present value of future cash flows changed more than 10 percent, the Company applies extinguishment accounting and determines the fair value of its debt based on factors available to the Company.

Convertible Instruments. The Company evaluates the impacts of convertible instruments based on the underlying conversion features. Convertible instruments are evaluated for treatment as derivatives that could be bifurcated and recorded separately. Any beneficial conversion feature is recorded based on the intrinsic value difference at the commitment date.

Recently Issued Accounting Pronouncements.

In May 2014, the FASB issued new guidance on the recognition of revenue. The guidance stated that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company’s adoption of this accounting standard begins with the first quarter of fiscal year 2018. In March and April 2016, the FASB issued further revenue recognition guidance amending principal vs. agent considerations regarding whether an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The Company is currently evaluating the impact of the adoption of this accounting standard update on its consolidated results of operations and financial condition and will be providing guidance in its Form 10-K for the year ended December 31, 2017.

 

 

Inventory consists of the following:

 

	September 30, 2017	December 31, 2016
Raw materials	$2,306	$1,044
Work-in-progress	1,946	1,360
Finished goods	1,490	837
Total inventories	$5,742	$3,241

 

Property, plant and equipment consist of the following:

 

	September 30, 2017	December 31, 2016
Land	$2,734	$2,713
Plant and buildings	82,390	81,755
Furniture and fixtures	983	572
Machinery and equipment	3,951	4,308
Construction in progress	522	88
GAFI property, plant & equipment	15,431	0
Total gross property, plant & equipment	106,011	89,436
Less accumulated depreciation	(26,651)	(23,066)
Total net property, plant & equipment	$79,360	$66,370

 

Depreciation on the components of property, plant and equipment is calculated using the straight-line method to allocate their depreciable amounts over their estimated useful lives as follows:

 

	Years
Plant and buildings	20 - 30
Machinery and equipment	5 - 7
Furniture and fixtures	3 - 5

For the three months ended September 30, 2017 and 2016, the Company recorded depreciation expense of $1.2 million for each period. For the nine months ended September 30, 2017 and 2016, the Company recorded depreciation expense of $3.5 million for each period.

Management is required to evaluate these long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Management determined there was no impairment of long-lived assets during the three and nine months ended September 30, 2017 and 2016.

 

Debt consists of the following:

	September 30, 2017	December 31, 2016
Third Eye Capital term notes	$6,832	$6,577
Third Eye Capital revolving credit facility	32,778	24,927
Third Eye Capital revenue participation term notes	11,473	11,042
Third Eye Capital acquisition term notes	19,782	19,085
Cilion shareholder seller notes payable	5,786	5,674
Subordinated notes	8,445	7,565
EB-5 long term promissory notes	35,822	35,027
Unsecured working capital loans	4,292	1,817
GAFI Term and Revolving loans	23,373	-
Total debt	148,583	111,714
Less current portion of debt	14,559	11,409
Total long term debt	$134,024	$100,305

Third Eye Capital Note Purchase Agreement

On July 6, 2012, Aemetis, Inc. and Aemetis Advanced Fuels Keyes, Inc. (“AAFK”), entered into an Amended and Restated Note Purchase Agreement with Third Eye Capital (the “Note Purchase Agreement”). Pursuant to the Note Purchase Agreement, Third Eye Capital extended credit in the form of (i) senior secured term loans in an aggregate principal amount of approximately $7.2 million to replace existing notes held by Third Eye Capital (the “Term Notes”); (ii) senior secured revolving loans in an aggregate principal amount of $18.0 million (“Revolving Credit Facility”); (iii) senior secured term loans in the principal amount of $10.0 million to convert the prior revenue participation agreement to a note (“Revenue Participation Term Notes”); and (iv) senior secured term loans in an aggregate principal amount of $15.0 million (“Acquisition Term Notes”) used to fund the cash portion of the acquisition of Cilion, Inc. (the Term Notes, Revolving Credit Facility, Revenue Participation Term Notes and Acquisition Term Notes are referred to herein collectively as the Original Third Eye Capital Notes). After this financing transaction, Third Eye Capital obtained sufficient equity ownership in the Company to be considered a related party. The Original Third Eye Capital Notes have a maturity date of April 1, 2018.

On January 31, 2017, a Promissory Note (the “January 2017 Note”, together with the Original Third Eye Capital Notes, the “Third Eye Capital Notes”) for $2.1 million was advanced by Third Eye Capital to Aemetis, Inc., as a short-term credit facility for working capital and other general corporate purposes with an interest rate of 14% per annum maturing on the earlier of (a) receipt of proceeds from any financing, refinancing, or other similar transaction, (b) extension of credit by payee, as lender or as agent on behalf of certain lenders, to the Company or its affiliates, or (c) May 30, 2017. In addition, as part of the January 2017 Note agreement, Aemetis used $0.5 million of the total proceeds to buy back 275 thousand common shares that were held by Third Eye Capital. In consideration of the January 2017 Note, $133 thousand of the total proceeds were paid to Third Eye Capital as financing charges. As of June 30, 2017, the outstanding balance on the January 2017 Note was $2.1 million. On July 10, 2017, the January 2017 Note was paid in full.

On March 1, 2017, Third Eye Capital agreed to Amendment No. 13 to the Note Purchase Agreement to: (i) extend the maturity date of the Third Eye Capital Notes to April 1, 2018 in exchange for a 5% extension fee consisting of adding $3.1 million to the outstanding principal balance of the Note Purchase Agreement and allowing for the further extension of the maturity date of the Third Eye Capital Notes to April 1, 2019, at the Company’s election, for an additional extension fee of 5% of the then outstanding Third Eye Capital Notes outstanding balance, (ii) waive the free cash flow financial covenant under the Note Purchase Agreement for the three months ended December 31, 2016, (iii) provide that such covenant will be deleted prospectively from the Note Purchase Agreement, (iv) waive the default under the Note Purchase Agreement relating to indebtedness outstanding to Laird Cagan and (v) waive the covenant under the Note Purchase Agreement to permit the Company to pay off the defaulted Laird Cagan subordinated note by issuing stock. The borrowers agreed to use their best efforts to close the transaction to purchase assets in Goodland, Kansas from Third Eye Capital as described in a non-binding offer to purchase letter between an affiliate of the Company and Third Eye Capital, which closed on July 10, 2017. As consideration for such amendment and waiver, the borrowers agreed to pay Third Eye Capital an amendment and waiver fee of $750 thousand to be added to the outstanding principal balance of the Revolving Credit Facility. As a result of the extension of the maturity date in Amendment No. 13, the Third Eye Capital Notes are classified as non-current debt. We evaluated the Amendment of the Notes and applied modification accounting treatment in accordance with ASC 470-50 Debt – Modification and Extinguishment.

On April 28, 2017, a Promissory Note (the “April 2017 Note”, and together with the Original Third Eye Capital Notes, the “Third Eye Capital Notes”) for $1.5 million was advanced by Third Eye Capital to Aemetis, Inc., as a short-term credit facility for working capital and other general corporate purposes with an interest rate of 14% per annum maturing on the earliest of (a) closing of the Financing, (b) receipt of proceeds from any financing, refinancing or other similar transaction, (c) extension of credit by the Lender, or Agent on behalf of certain lenders or the Noteholders, to the Debtors or their affiliates, and (d) June 15, 2017. In addition, $1.0 million of this note represents fees payable by Goodland Advanced Fuels, Inc. upon the closing of the Goodland transaction. On July 10, 2017, the April 2017 Note was paid in full and the fees payable by Goodland Advanced Fuels, Inc., were paid.

Terms of Third Eye Capital Notes

The Company can extend the maturity date of the Term Notes, Revolving Credit Facility, Revenue Participation Notes, and Acquisition Term Notes to April 2019. As a condition to any such extension, the Company would be required to pay a fee of 5% of the carrying value of the debt. By this ability to extend the maturity at the Company’s will, the Third Eye Capital Notes are classified as non-current debt.

The Third Eye Capital Notes contain various covenants, including but not limited to, debt to plant value ratio, minimum production requirements, and restrictions on capital expenditures.

The Third Eye Capital Notes are secured by first priority liens on all real and personal property of, and assignment of proceeds from government grants and guarantees from Aemetis, Inc. The Third Eye Capital Notes contain cross-collateral and cross-default provisions. McAfee Capital, LLC (“McAfee Capital”), owned by Eric McAfee, the Company’s Chairman and CEO, provided a guaranty of payment and performance secured by all of its Company shares. In addition, Eric McAfee provided a blanket lien on substantially all of his personal assets, and McAfee Capital provided a guarantee for $8.0 million.

 

Cilion shareholder seller notes payable. In connection with the Company’s merger with Cilion, Inc., on July 6, 2012, the Company issued $5.0 million in notes payable to Cilion shareholders as merger consideration, subordinated to the senior secured Third Eye Capital Notes. The liability bears interest at 3% per annum and is due and payable after the Third Eye Capital Notes have been paid in full. As of September 30, 2017, Aemetis Facility Keyes, Inc. had $5.8 million in principal and interest outstanding under the Cilion shareholder seller notes payable.

Subordinated Notes. On January 6 and January 9, 2012, AAFK entered into Note and Warrant Purchase Agreements with two accredited investors pursuant to which it issued $0.9 million and $2.5 million in original notes to the investors (Subordinated Notes). The Subordinated Notes mature every six months. Upon maturity, the notes are generally extended with a fee of 10% added to the balance outstanding plus issuance of warrants exercisable at $0.01 with a two-year term. Interest is due at maturity. Neither AAFK nor Aemetis may make any principal payments under the Subordinated Notes until all loans made by Third Eye Capital to AAFK are paid in full.

Interest is due at maturity. Neither AAFK nor Aemetis may make any principal payments under the Subordinated Notes until all loans made by Third Eye Capital to AAFK are paid in full.

On January 1, 2017, the Subordinated Notes were amended to extend the maturity date until the earlier of (i) June 30, 2017; (ii) completion of an equity financing by AAFK or Aemetis in an amount of not less than $25.0 million; or (iii) after the occurrence of an Event of Default, including failure to pay interest or principal when due and breaches of note covenants. A 10% cash extension fee was paid by adding the fee to the balance of the new note and warrants to purchase 113 thousand shares of common stock were granted with a term of two years and an exercise price of $0.01 per share. We evaluated the January 1, 2017 amendment and the refinancing terms of the notes and applied modification accounting treatment in accordance with ASC 470-50 Debt – Modification and Extinguishment.

On July 1, 2017, the Subordinated Notes were amended to extend the maturity date until the earlier of (i) December 31, 2017; (ii) completion of an equity financing by AAFK or Aemetis in an amount of not less than $25.0 million; or (iii) after the occurrence of an Event of Default, including failure to pay interest or principal when due and breaches of note covenants. A 10% cash extension fee was paid by adding the fee to the balance of the new note and warrants to purchase 113 thousand shares of common stock were granted with a term of two years and an exercise price of $0.01 per share. We evaluated the July 1, 2017 amendment and the refinancing terms of the notes and applied modification accounting treatment in accordance with ASC 470-50 Debt – Modification and Extinguishment.

On January 14, 2013, Laird Cagan, a related party, loaned $0.1 million through a promissory note maturing on December 31, 2016 with a five percent annualized interest rate and the right to exercise 5 thousand warrants exercisable at $0.01 per share.

At September 30, 2017, the Company owed, in aggregate, the amount of $8.4 million in principal and interest net of $0.3 million in debt issuance costs under the Subordinated Notes.

EB-5 long-term promissory notes. EB-5 is a U.S. government program authorized by the Immigration and Nationality Act designed to foster employment-based visa preference for immigrant investors to encourage the flow of capital into the U.S. economy and to promote employment of U.S. workers. The Company entered into a Note Purchase Agreement dated March 4, 2011, (as further amended on January 19, 2012 and July 24, 2012) with Advanced BioEnergy, LP, a California limited partnership authorized as a Regional Center to receive EB-5 investments, for the issuance of up to 72 subordinated convertible promissory notes (the “EB-5 Notes”) bearing interest at 3%, with each note in the principal amount of $0.5 million and due and payable four years from the date of each note, for a total aggregate principal amount of up to $36.0 million (the “EB-5 Phase I funding”). The EB-5 Notes are convertible after three years at a conversion price of $30 per share.

 

Advanced BioEnergy, LP arranges investments with foreign investors, who each make loans to the Keyes plant in increments of $0.5 million. As of September 30, 2017, the Company has sold an aggregate principal amount of $36.0 million of EB-5 Notes under the EB-5 Phase I funding since 2012, of which $34.5 million have been released from the escrow account to the Company, with $1.0 million remaining in escrow and $0.5 million to be funded to escrow. As of September 30, 2017, $34.5 million in principal and $1.3 million in accrued interest remained outstanding.

On October 16, 2016, the Company launched its EB-5 Phase II funding, with plans to issue $50.0 million in additional EB-5 Notes on substantially similar terms and conditions as those issued under the Company’s EB-5 Phase I funding to refinance indebtedness and capital expenditures of Aemetis, Inc.

Unsecured working capital loans. In November 2008, the Company entered into an operating agreement with Secunderabad Oils Limited (“Secunderabad Oils”). Under this agreement, Secunderabad Oils agreed to provide the Company with working capital, on an as needed basis, to fund the purchase of feedstock and other raw materials for its Kakinada biodiesel facility. Working capital advances bear interest at the actual bank-borrowing rate of Secunderabad Oils of fifteen percent (15%). In return, the Company agreed to pay Secunderabad Oils an amount equal to 30% of the plant’s monthly net operating profit and recognized these as operational support charges in the financials. In the event that the Company’s biodiesel facility operates at a loss, Secunderabad Oils owes the Company 30% of the losses. Either party can terminate the agreement at any time without penalty. On January 1, 2016, Secunderabad Oils suspended the agreement to use any funds provided under the agreement to buy feedstock until commodity prices returned to economically viable levels. On June 1, 2016, the agreement was reinitiated on the terms described above. On July 15, 2017, the agreement with Secunderabad Oils was amended to provide the working capital funds for British Petroleum business operations (“BP Operations”) in the form of inter-corporate deposit for an amount of approximately $2.3 million for a period of 95 days at 14.75% per annum interest rate. The Secunderabad Oils has a second priority lien on the assets of the Kakinada biodiesel facility after this agreement. During the nine months ended September 30, 2017 and 2016, the Company made principal and interest payments to Secunderabad Oils of approximately $2.3 million and $4.5 million, respectively. As of September 30, 2017, the Company had $0.7 million outstanding under the Secunderabad Oils agreement.

On April 16, 2017, the Company entered into a similar operating agreement with Gemini Edibles and Fats India Private Limited (“Gemini”). Under this agreement, Gemini agreed to provide the Company with working capital, on an as needed basis, to fund the purchase of feedstock and other raw materials for its Kakinada biodiesel facility. Working capital advances bear interest at the actual bank-borrowing rate of Gemini of twelve percent (12%). In return, the Company agreed to pay Gemini an amount equal to 30% of the plant’s monthly net operating profit and recognized these as operational support charges in the financials. In the event that the Company’s biodiesel facility operates at a loss, Gemini owes the Company 30% of the losses as operational support charges. Either party can terminate the agreement at any time without penalty. Additionally, Gemini received a first priority lien on the assets of the Kakinada biodiesel facility. Since the inception of this agreement, the Company made principal and interest payments to Gemini of approximately $6.2 million. As of September 30, 2017, the Company had $3.6 million outstanding on this raw material purchase agreement.

In October 2016, the Company made an agreement with a supplier of palm stearin to its Kakinada plant to pay 12% interest on an unpaid balance under the raw material purchase agreement of $1.9 million. As of September 30, 2017 and December 31, 2016, the Company had nil and $1.5 million outstanding on this raw material purchase agreement, respectively.

 

Variable Interest Entity (GAFI) Term loan and Revolving loan

 

On July 10, 2017, GAFI entered into a Note Purchase Agreement (“VIE Note Purchase Agreement”) with Third Eye Capital Corporation. See further discussion regarding GAFI in Note 6. Pursuant to the VIE Note Purchase Agreement, the Noteholders agreed, subject to the terms and conditions of the VIE Note Purchase Agreement and relying on each of the representations and warranties set forth therein, to make (i) a single term loan to GAFI in an aggregate amount of fifteen million dollars (“Term Loan”) and (ii) revolving advances not to exceed ten million dollars in the aggregate (“Revolving Loan”). The interest rate per annum applicable to the Term Loan is equal to ten percent (10%). The interest rate per annum applicable to the Revolving Loans is the greater of (a) the prime rate plus seven and three quarters percent (7.75%) and (b) twelve percent (12%). The maturity date of the Loans (“Maturity Date”) is July 10, 2019, provided that the Maturity Date may be extended at the option of GAFI for up to two additional one-year periods upon prior written notice and upon satisfaction of certain conditions and the payment of a renewal fee for such extension. An initial advance under the Revolving Loan was made for $2.2 million as a prepayment of interest on the Term Loan for the first eighteen months of interest payments. In addition, a fee of $1.0 million was paid in consideration to Noteholders.

GAFI, the Company and its subsidiary Aemetis Advanced Products Keyes, Inc. (“AAPK”) also entered into separate Intercompany Revolving Promissory Notes, dated July 10, 2017 (“Intercompany Revolving Notes”), pursuant to which GAFI may, from time to time, lend a portion of the proceeds of the Revolving Loan borrowed under the VIE Note Purchase Agreement.

 

In consideration for the direct and indirect benefits from the transactions contemplated by the VIE Note Purchase Agreement and the Intercompany Revolving Notes, Aemetis, Inc. and AAPK ("Guarantors") agreed to enter into a Limited Guaranty. Pursuant to the Limited Guaranty, the Guarantors guarantee the prompt payment and performance of all unpaid principal and interest on the Loans and all other obligations and liabilities of GAFI to any Noteholders in connection with the VIE Note Purchase Agreement. The obligations of the Guarantors pursuant to the Limited Guaranty are secured by a first priority lien over all assets of the Guarantors subject to lien existing in connection with the Existing Note Purchase Agreement of Guarantors. Each Guarantor agreed to make the following regulatory and financial covenants: i) maintenance of existence and compliance, ii) payment of obligations; iii) reporting requirements on financials of Guarantors annually, quarterly; iv) delivery of  cellulosic ethanol project progress reports within 15 days of the month end, v) ensuring the ratio of: (a) the sum of (i) the most recent Mortgaged Property Market Value, and (ii) the most recent AAPK’s cellulosic ethanol project value to (b) the Note Indebtedness, to be less than 2.00:1.00, tested as of the last day of each fiscal quarter, and (iv) permit the amount of trade payables due to exceed the sum of the amount of the GAFI’s Cash Equivalents plus the revolving advances available to be advanced under the Revolving Loan, tested as of the last day of each month.

 

As of September 30, 2017, GAFI obligations are as follows:

 

	As of
	September 30, 2017
Term loan	$15,000
Revolving loan	9,248
Total debt	$24,248
Less: Debt issuance costs	(875)
Total debt	$23,373

 

Scheduled debt repayments for loan obligations follow:

Twelve months ended September 30,	Debt Repayments
2018	$14,559
2019	119,381
2020	5,000
2021	12,536
Total debt	151,476
Discounts	(2,643)
Total debt, net of discounts	$148,833

 

 

5. Stock-Based Compensation

Plan Stock Options

Aemetis authorized the issuance of 2.6 million shares of common stock under its Zymetis 2006 Stock Plan and Amended and Restated 2007 Stock Plan (together, the “Company Stock Plans”), which include both incentive and non-statutory stock options. These options generally expire five to ten years from the date of grant with a general vesting term of 1/12th every three months and are exercisable at any time after vesting subject to continuation of employment. On January 19, 2017, 637 thousand stock option grants were issued to employees and directors under the Company Stock Plans. As of September 30, 2017, 2.2 million options are outstanding under the Company Stock Plans.

Non-Plan Stock Options

In November 2012, the Company issued 98 thousand stock options to board members and consultants outside of any Company stock option plan. As of September 30, 2017, all options are vested and 89 thousand options are outstanding.

Inducement Equity Plan Options

In March 2016, the Board of Directors of the Company approved an Inducement Equity Plan authorizing the issuance of 100 thousand non-statutory stock options to purchase common stock. As of September 30, 2017, 37 thousand options were outstanding.

Common Stock Reserved for Issuance

The following is a summary of options granted under the Company Stock Plans:

	Shares Available for Grant	Number of Shares Outstanding	Weighted-Average Exercise Price
Balance as of December 31, 2016	98	1,632	$4.37
Authorized	655	-	-
Granted	(637)	637	1.72
Forfeited/expired	46	(46)	21.04
Balance as of September 30, 2017	162	2,223	$3.27

 

Stock-based compensation for employees

Stock-based compensation is accounted for in accordance with the provisions of ASC 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.

For the three months ended September 30, 2017 and 2016, the Company recorded stock compensation expense in the amount of $196 thousand and $172 thousand, respectively. For the nine months ended September 30, 2017 and 2016, the Company recorded stock compensation expense in the amount of $800 thousand and $573 thousand, respectively.

Valuation and Expense Information

All issuances of stock options or other issuances of equity instruments to employees as the consideration for services received by us are accounted for based on the fair value of the equity instrument issued. The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock based compensation expense requires us to make assumptions and judgments about the variables used in the calculation, including the fair value of our common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of our common stock, a risk-free interest rate, and expected dividends. We also estimate forfeitures of unvested stock options. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for options that do not vest. We use the simplified calculation of expected life described in the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, and volatility is based on an average of the historical volatilities of the common stock of four entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. We use an expected dividend yield of zero, as we do not anticipate paying any dividends in the foreseeable future. Expected forfeitures are assumed zero due to the small number of plan participants and the plan.

There were no stock options granted during the three months ended September 30, 2017.

 

As of September 30, 2017, the Company had $1.1 million of total unrecognized compensation expense for employees that the Company will amortize over the 1.81 years of weighted average remaining term.

Goodland Advanced Fuels, Inc., (GAFI) was formed to acquire the Goodland plant in Goodland, Kansas. On July 10, 2017, GAFI entered into the VIE Note Purchase Agreement with Third Eye Capital Corporation. GAFI, the Company and its subsidiary AAPK also entered into separate Intercompany Revolving Notes, pursuant to which GAFI may, from time to time, lend a portion of the proceeds of the Revolving Loan incurred under the VIE Note Purchase Agreement. Guarantors also agreed to enter into that certain Limited Guaranty. Pursuant to, which the Guarantors guarantee the prompt payment and performance of all unpaid principal and interest on the Loans and all other obligations and liabilities of GAFI to Noteholders in connection with the VIE Note Purchase Agreement. The obligations of the Guarantors pursuant to the Limited Guaranty are secured by a first priority lien over all assets of the Guarantors pursuant to separate general security agreements entered into by each Guarantor. The aggregate obligations and liabilities of each Guarantor is limited to the sum of (i) the aggregate amount advanced by GAFI to such Guarantor under and in accordance with the Intercompany Revolving Notes and (ii) the obligation of the Guarantor pursuant to its indemnity and expense obligations under the Limited Guaranty prior to the date on which the Option is exercised. Additionally, on July 10, 2017, the Company entered into an Option Agreement by and between GAFI and the sole shareholder of GAFI, pursuant to which Aemetis was granted an irrevocable option to purchase all, but not less than all, of the capital stock of GAFI for an aggregate purchase price equal to $0.01 per share (total purchase price of $10.00). This Option provides for automatic triggering in the event of certain default circumstances. After the automatic exercise upon default, the Limited Guaranty no longer applies and the Guarantors are responsible for the outstanding balances of the GAFI term and revolving loan.

 

After consideration of the above agreements, we concluded that GAFI did not have enough equity to finance its activities without additional subordinated support. Additionally, GAFI’s shareholder did not have a controlling financial interest in the entity. Hence, we concluded that GAFI is VIE. GAFI is also not a business since it also does not have processes or inputs that have the ability to create an output and in turn provide the return to the investor. The primary beneficiary of a VIE is the party that has both the power to direct the activities that most significantly affect the economic performance of the VIE and the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. In determining whether Aemetis is the primary beneficiary, a number of factors are considered, including the structure of the entity, contractual provisions that grant any additional rights to influence or control the economic performance of the VIE, and obligation to absorb significant losses. Through providing Limited Guaranty and signing the Option Agreement, the Company took the risks related to operations, financing the Goodland plant, and agreed to meet the financial covenants to GAFI to be in existence. Based upon this assessment, Aemetis has enough power to direct the activities of GAFI and has been determined to be the primary beneficiary of the GAFI and accordingly the assets, liabilities, and operations of GAFI are consolidated into those of the Company. The assets and liabilities were recognized at fair value. In addition, the interest for 18 months was prepaid which can be used to pay the interest on GAFI term loan only and the Goodland plant is collateral for the term loan obligation.

The following are the Balance Sheet and Statement of Operations of GAFI:

 

	As of
	September 30, 2017
Assets
Current assets:
Cash and cash equivalents	$482
Prepaid expenses	1,978
Total current assets	2,460
Property, plant and equipment, net	15,408
Promissory note receivable from Aemetis	4,802
Total assets	$22,670
Liabilities and stockholder's deficit
Accounts Payable	$4
Secured and Revolving notes	23,373
Total liabilities	23,377
Accumulated deficit	(707)
Total liabilities and stockholder's deficit	$22,670

 

	From July 10, 2017 to
	September 30, 2017
Selling, general and administrative expenses	$131
Operating loss	(131)
Interest expense
Interest rate expense	584
Amortization expense	125
Other (income) expense	(133)
Net loss	$(707)

 

 

Aemetis, Inc. borrowed $4.8 million under the Intercompany Revolving Notes to pay off agent advances and pay costs associated with the testing of cellulosic ethanol production. Aemetis paid GAFI fees of $1.0 million associated with the entry into the VIE Note Purchase Agreement, and accordingly holds an account receivable from GAFI. In the consolidation process, these intercompany borrowings were eliminated.

Working Capital Arrangement. Pursuant to a Corn Procurement and Working Capital Agreement with J.D. Heiskell, the Company agreed to procure whole yellow corn and milo primarily from J.D. Heiskell. The Company has the ability to obtain grain from other sources subject to certain conditions, however, in the past all of our grain purchases have been from J.D. Heiskell. Title and risk of loss of the corn and milo pass to the Company when the corn and milo are deposited into the weigh bin. The term of the Agreement expires on December 31, 2017 and is automatically renewed for additional one-year terms. J.D. Heiskell further agrees to sell all ethanol to Kinergy Marketing or other marketing purchasers designated by the Company and all WDG and corn oil to A.L. Gilbert. Our relationships with J.D. Heiskell, Kinergy Marketing, and A.L. Gilbert are well established and the Company believes that the relationships are beneficial to all parties involved in utilizing the distribution logistics, reaching out to widespread customer base, managing inventory, and building working capital relationships. Revenue is recognized upon delivery of ethanol to J. D. Heiskell as revenue recognition criteria have been met and any performance required of the Company subsequent to the delivery to J.D. Heiskell is inconsequential. These agreements are ordinary purchase and sale agency agreements for the Keyes plant.

The J.D. Heiskell sales activity associated with the Purchasing Agreement, Corn Procurement and Working Capital

Agreements during the three and nine months ended September 30, 2017 and 2016 are as follows:

	As of and for the three months ended September 30,		As of and for the nine months ended September 30,
	2017	2016	2017	2016
Ethanol sales	$26,394	$24,687	$75,695	$68,993
Wet distiller's grains sales	5,735	6,114	15,523	16,918
Corn oil sales	1,043	788	2,693	2,232
Corn/milo purchases	25,751	23,098	75,478	67,766
Accounts receivable	776	345	776	345
Accounts payable	1,976	1,241	1,976	1,241

 

Ethanol and Wet Distillers Grains Marketing Arrangement. The Company entered into an Ethanol Marketing Agreement with Kinergy Marketing and a Wet Distillers Grains Marketing Agreement with A. L. Gilbert. Under the terms of the agreements, subject to certain conditions, Kinergy agreed to market on an exclusive basis all the ethanol we produce and A. L. Gilbert agreed to market on an exclusive basis all the WDG we produce. The agreements with Kinergy Marketing and with A.L. Gilbert expire on August 31, 2018 and on December 31, 2017, respectively, each with automatic one-year renewals thereafter.  For the three months ended September 30, 2017 and 2016, the Company expensed marketing costs of $0.6 million for each period, respectively, under the terms of both ethanol and wet distiller’s grains marketing agreements. For the nine months ended September 30, 2017 and 2016, the Company expensed marketing costs of $1.8 million and $1.7 million, respectively.

The Company entered into forward purchase contracts for approximately 0.9 million bushels of corn, which is the principal raw material for ethanol production. The delivery of this grain will be expected through December 2017.

 

In addition, the Company has forward sales commitments for approximately 56 thousand tons of WDG. These committed sales will be expected through December 2017.

Unrealized gains and losses on forward contracts and commitments, in which delivery has not occurred, are deemed “normal purchases and normal sales”, and therefore are not marked to market in the Company’s financial statements, but are subject to a lower of cost or market assessment.

Aemetis recognizes two reportable geographic operating segments: “North America” and “India.” The “North America” operating segment includes the Company’s owned ethanol plant in Keyes, California, the GAFI plant in Goodland, Kansas and its technology research and development lab. As the Company’s technology gains market acceptance, this business segment will initially include its domestic commercial application of cellulosic ethanol technology, its plant construction projects and any acquisitions of ethanol or ethanol related technology facilities in North America.

The “India” operating segment includes the Company’s 50 million gallon per year nameplate capacity biodiesel manufacturing plant in Kakinada, the administrative offices in Hyderabad, India, and the holding companies in Nevada and Mauritius. The Company’s biodiesel is marketed and sold primarily to customers in India through brokers and by the Company directly.

Summarized financial information by reportable segment for the three and nine months ended September 30, 2017 and 2016 follows:

	For the three months ended September 30,		For the nine months ended September 30,
	2017	2016	2017	2016
Revenues
North America	$36,012	$33,889	$101,430	$93,979
India	2,923	5,488	9,843	11,783
Total revenues	$38,935	$39,377	$111,273	$105,762
Cost of goods sold
North America	$33,995	$30,391	$99,003	$86,174
India	$2,985	5,320	9,197	11,892
Total cost of goods sold	$36,980	$35,711	$108,200	$98,066
Gross profit (loss)
North America	$2,017	$3,498	$2,427	$7,805
India	(62)	168	646	(109)
Total gross profit (loss)	$1,955	$3,666	$3,073	$7,696

 

North America. During the three and nine months ended September 30, 2017, the Company’s revenues from ethanol, WDG, and corn oil were earned pursuant to the Corn Procurement and Working Capital Agreement established between the Company and J.D. Heiskell. Sales of ethanol, WDG, and corn oil to J.D. Heiskell accounted for 92% and 93% of the Company’s North America segment revenues for the three and nine months ended September 30, 2017, respectively.

 

During the three and nine months ended September 30, 2016, the Company’s revenues from ethanol, WDG, and corn oil were earned pursuant to the Corn Procurement and Working Capital Agreement established between the Company and J.D. Heiskell. Sales of ethanol, WDG, and corn oil to J.D. Heiskell accounted for 93% and 94% of the Company’s North America segment revenues for the three and nine months ended September 30, 2016, respectively.

India. During the three months ended September 30, 2017, three biodiesel customers accounted for 41%, 29%, and 13% and no refined glycerin customers accounted for more than 10% of consolidated India segment revenues, compared to two biodiesel customers accounted for 57% and 17% and no refined glycerin customers accounted for more than 10% of consolidated India segment revenues during the three months ended September 30, 2016.

During the nine months ended September 30, 2017, two biodiesel customers accounted for 47% and 12% and no refined glycerin customers accounted for more than 10% of consolidated India segment revenues, compared to two biodiesel customers accounted for 55% and 11% and no refined glycerin customers accounted for more than 10% of consolidated India segment revenues during the nine months ended September 30, 2016.

Total assets consist of the following:

	As of
	September 30,	December 31,
	2017	2016
North America	$82,036	$67,279
India	14,295	10,531
Total Assets	$96,331	$77,810

The Company owes Eric McAfee, the Company’s Chairman and CEO, and McAfee Capital, owned by Eric McAfee, $0.4 million in connection with employment agreements and expense reimbursements previously accrued as salaries expense and accrued liabilities. The balance accrued related to these employment agreements was $0.4 million as of September 30, 2017 and December 31, 2016. For the three months ended September 30, 2017 and 2016, the Company expensed $5 thousand and $16 thousand, respectively, to reimburse actual expenses incurred by McAfee Capital and related entities. For the nine months ended September 30, 2017 and 2016, the Company expensed $28 thousand and $57 thousand, respectively, to reimburse actual expenses incurred by McAfee Capital and related entities. The Company previously prepaid $0.2 million to Redwood Capital, a company controlled by Eric McAfee, for the Company’s use of flight time on a corporate jet. As of September 30, 2017, $0.1 million remained as a prepaid expense related to Redwood Capital. As consideration for the reaffirmation of guaranties required by Amendment No. 12 to the Note Purchase Agreement, which the Company entered into with Third Eye Capital on March 21, 2016, the Company also agreed to pay $0.2 million in consideration to McAfee Capital in exchange for their willingness to provide the guarantees. The balance of $156 thousand for guarantee fee remained as accrued liability as of September 30, 2017 and December 31, 2016.

 

10.  Management’s Plan

 

The accompanying financial statements have been prepared contemplating the realization of assets and satisfaction of liabilities in the normal course of business. The Company has been reliant on their senior secured lender to provide additional funding and has been required to remit substantially all excess cash from operations to the senior secured lender. Management’s plans for the Company include, but are not limited to:

 

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

The following discussion should be read in conjunction with the Aemetis, Inc. consolidated financial statements and accompanying notes included elsewhere in this report. The following discussion contains forward-looking statements that reflect the plans, estimates and beliefs of Aemetis, Inc. As discussed in further detail above, the actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Report, and in other reports we file with the SEC, specifically our most recent Annual Report on Form 10-K. All references to years relate to the calendar year ended December 31 of the particular year.

Overview

 

Headquartered in Cupertino, California, Aemetis is an advanced renewable fuels and biochemicals company focused on the acquisition, development and commercialization of innovative technologies that replace traditional petroleum-based products through the conversion of second-generation ethanol and biodiesel plants into advanced biorefineries.  Founded in 2006, we own and operate a 60 million gallon per year ethanol production facility in the California Central Valley near Modesto where we manufacture and produce ethanol, wet distillers’ grains (“WDG”), condensed distillers solubles (“CDS”), and distillers’ corn oil. We also own and operate a 50 million gallon per year renewable chemical and advanced fuel production facility on the East Coast of India producing high quality distilled biodiesel and refined glycerin for customers in India and Europe. We operate a research and development laboratory and hold a portfolio of patents and related technology licenses for the production of renewable fuels and biochemicals. Goodland Advanced Fuels, Inc., (GAFI) was formed to acquire the Goodland plant in Goodland, Kansas. GAFI is a VIE since it does not have enough equity to support its own activities. GAFI entered into a VIE Note Purchase Agreement with Third Eye Capital Corporation. GAFI, the Company and its subsidiary AAPK also entered into separate Intercompany Revolving Notes, pursuant to which GAFI may lend a portion of the proceedsof the Revolving Loan incurred under the Note Purchase Agreement. Aemetis, Inc. and AAPK (Guarantors) also agreed to provide certain Limited Guaranty on the VIE Note Purchase Agreement terms and also entered into Option Agreement with GAFI shareholder to purchase all shares of GAFI at $0.01 per share ($10.00). Given acceptance of more risk and direct and indirect benefits received through the VIE Note Purchase Agreement and providing guarantees on repayment of debt of GAFI, Aemetis has the power to direct the activities of GAFI and has plans to apply cellulosic ethanol technology to Goodland plant.

 

Our revenue development strategy for the second half of 2017 and 2018 in North America is based on supplying ethanol into the fuel markets in Northern California and supplying feed products in the form of WDG to dairy and feed operations in Northern California. We are actively seeking higher value markets for our ethanol in an effort to improve our overall margin and are actively educating local dairy and feed potential customers on the value of our WDG product in an effort to further strengthen demand for this product. During the third quarter, we entered into an agreement with a major industrial gas company to sell CO2 produced at the Keyes ethanol plant, which will add incremental income for the North America segment. In addition to these efforts, we are developing an advanced cellulosic ethanol project near our plant in Keyes, CA for the deployment of the combined LanzaTech and InEnTec technologies using primarily orchard wood and shells from the Central Valley as feedback. Technology agreements have been signed, the site location has been leased, and an Integrated Demonstration Unit is operating, which we expect will demonstrate the effectiveness of the technologies to produce cellulosic ethanol at profitable yields.

Our revenue strategy in India is based on continuing to sell biodiesel to our bulk fuel customers, beginning sales to retail customers using recent regulatory changes in India that allow sales of biodiesel at retail fuel stations, pursuing tender offers placed by India government oil companies for bulk purchases of fuels, and delivering biodiesel under our agreement with British Petroleum Singapore for sales into the European markets. Recent changes in July 2017 in India's Goods and Services Tax (GST) raised the combined tax rate from 11% to 18% on our sales into the Indian domestic markets, though this higher tax rate is under review. This increase in GST taxation is expected to hamper domestic India revenue expansion and generate lower margins. Further increases in the price of crude oil, which sets a ceiling on the price we receive for our biodiesel, could offset the impact of the GST legislation. We believe the deployment of these strategies will allow for continued growth in revenue through the fourth quarter of 2017 and into 2018.

Results of Operations

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

Revenues

Our revenues are derived primarily from sales of ethanol and Wet Distillers Grains (WDG) in North America and biodiesel and glycerin in India.

Three Months Ended September 30 (in thousands)

	2017	2016	Inc/(dec)	% change
North America	$36,012	$33,889	$2,123	6%
India	2,923	5,488	(2,565)	-47%
Total	$38,935	$39,377	$(442)	-1%

 

North America. For the three months ended September 30, 2017, we generated 78% of our revenue from sales of ethanol, 19% from sales of WDG, and 3% from sales of distillers’ corn oil and CDS. During the three months, ended September 30, 2017, plant production averaged 111% of the 55 million gallons per year nameplate capacity. The increase in revenues during the three months ended September 30, 2017 was due to ethanol sales volumes increasing by 4% to 15.4 million gallons from 14.8 million gallons while average ethanol prices also increased by 4% to $1.81 per gallon from $1.75 per gallon compared to September 30, 2016. The average price of WDG decreased by 11% to $66.29 per ton while WDG sales volumes increased 8% to 104.7 thousand tons during the three months ended September 30, 2017 compared to the three months ended September 30, 2016. WDG pricing was impacted by lower pricing of the competing products as well as customer pressure caused by narrowing dairy margins in the California region where we sell our product.

India.   For the three months ended September 30, 2017, we generated 86% of our sales from biodiesel and 14% of our sales from refined glycerin, compared to the three months ended September 30, 2016 when we generated 90% of our sales from biodiesel and 10% of our sales from refined glycerin. The decrease in revenues was primarily attributable to decreases in overall sales volumes by 50% in the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, as GST tax was increased from 11% to 18%. The Company was to bear the difference of increased taxes and could not make the margins as average sales prices could not make up the difference, hence the sales decreased in the three months ended September 30, 2017. Biodiesel sales volumes decreased to 3 thousand metric tons from 6 thousand metric tons in the three months ended September 30, 2016 while the average sales prices increased by 2% to $837 per metric ton. Similarly, sales volumes of refined glycerin decreased to 438 metric tons from 852 metric tons in the three months ended September 30, 2016 while average sales prices of glycerin increased by 46% to $905 per metric ton.

Cost of Goods Sold

 

Three Months Ended September 30 (in thousands)

 

	2017	2016	Inc/(dec)	% change
North America	$33,995	$30,391	$3,604	12%
India	2,985	5,320	(2,335)	-44%
Total	$36,980	$35,711	$1,269	4%

 

North America. We ground 5.5 million bushels of corn at an average price of $4.65 per bushel during the three months ended September 30, 2017 compared to 5.2 million bushels of corn at an average price of $4.45 per bushel during the three months ended September 30, 2016. Our cost of feedstock increased by 5% during the three months ended September 30, 2017 compared to the same period in 2016.

India. The decrease in costs of goods sold was attributable to decreases in sales volumes of biodiesel by 50% to 3 thousand metric tons from 6 thousand metric tons and refined glycerin by 49% to 4 hundred metric tons from 8 hundred metric tons compared to three months ended September 30, 2016.

Gross Profit

Three Months Ended September 30 (in thousands)

 

	2017	2016	Inc/(dec)	% change
North America	$2,017	$3,498	$(1,481)	-42%
India	(62)	168	(230)	-137%
Total	$1,955	$3,666	$(1,711)	-47%

 

North America. Gross profit decreased by 42% due to Brazilian imports to California which placed pricing pressure on West Coast ethanol which did not rise as fast as corn prices combined with sluggish international demand for dry distillers’ grains which placed pricing pressure on locally sold WDG.

 

India. The decrease in gross profit was attributable to an increase in the average feedstock costs of biodiesel by 20% to $713 per metric ton, and in the average feedstock costs of refined glycerin by 78% to $775 per metric ton partially offset by increase in average selling price of refined glycerin by 46% in the three months ended September 30, 2017, as compared to the three months ended September 30, 2016. In addition, introduction of GST by the Government of India affected sales volumes due to the additional burden of costs to the Company.

Operating Expenses

R&D

 

Three Months Ended September 30 (in thousands)

 

	2017	2016	Inc/(dec)	% change
North America	$1,876	$87	$1,789	2056%
India	-	-	-	0%
Total	$1,876	$87	$1,789	2056%

 

The increase in R&D expenses in our North America segment for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 was due to recognition of the expenses toward building and testing the Integration Demonstration Unit for cellulosic ethanol of $1.8 million and increases in professional fees of $14 thousand driven by the relocation of our research and development facility from Maryland to Minnesota, offset by decreases in salaries and wages of $19 thousand and supplies and rent expenses of $20 thousand.

Selling, General & Administrative (SG&A)

 

Three Months Ended September 30 (in thousands)

 

	2017	2016	Inc/(dec)	% change
North America	$2,941	$3,015	$(74)	-2%
India	241	207	34	16%
Total	$3,182	$3,222	$(40)	-1%

 

SG&A expenses consist primarily of salaries and related expenses for employees, marketing expenses related to sales of ethanol and WDG in North America and biodiesel and other products in India, as well as professional fees, other corporate expenses, and related facilities expenses.

North America SG&A expenses as a percentage of revenue during the three months ended September 30, 2017 decreased to 8% as compared to 9% in the corresponding period of 2016. SG&A expenses during the three months ended September 30, 2017 decreased by 2% compared to the three months ended September 30, 2016. The decrease was due to decreases in insurance and penalties on property taxes of $0.3 million, professional fees of $0.1 million offset by increases in salaries and supplies of $140 thousand and marketing and other expenses of $58 thousand. In addition, GAFI expenses added $131 thousand to SG&A expenses during the three months ended September 30, 2017.

 

India. SG&A expenses as a percentage of revenue in the three months ended September 30, 2017 increased to 8% as compared to 4% in the corresponding period of 2016. The increase relative to revenue was driven by the fixed cost nature of SG&A expenses in an environment of decreasing revenues. More specifically, SG&A expenses increased due to increases in salaries, utilities, and other expenses by $14 thousand, professional fees by $51 thousand and offset by decreases in supplies and depreciation expense of $30 thousand.

Other (Income) and Expense

Three Months Ended September 30 (in thousands)

	2017	2016	Inc/(dec)	% change
North America
Interest rate expense	$3,713	$2,951	$762	26%
Amortization expense	1,265	1,425	(160)	-11%
Other (income) expense	(5)	5	(10)	-200%
India
Interest rate expense	154	95	59	62%
Other (income)	(13)	(24)	11	46%
Total	$5,114	$4,452	$662	15%

 

Other (Income)/Expense. Other (income) expense consists primarily of interest and amortization expense attributable to debt facilities acquired by our parent company and our subsidiaries, and interest accrued on the judgment obtained by Cordillera Fund and The Industrial Company (TIC). The debt facilities include stock or warrants issued as fees. The fair value of stock and warrants are amortized as amortization expense, except when the extinguishment accounting method is applied, in which case refinanced debt costs are recorded as extinguishment loss or gain.

North America. Interest expense was higher in the three months ended September 30, 2017 due to higher outstanding debt balances. GAFI interest expense of $584 thousand was recorded as part of North America interest rate expense. The decrease in amortization expense is due to debt issuance costs added during the first quarter were amortized offset by debt issuance costs added during the third quarter through refinancing the Subordinated Notes. In addition, GAFI related debt discount issuance costs of $1.0 million were paid and $125 thousand amortization was recognized in the three months ended September 30, 2017.

India. Interest expense for the three months ended September 30, 2017 was higher due to two working capital agreements with Gemini and Secunderabad Oils. The decrease in other income was caused by a decrease in foreign exchange gains of $25 thousand offset by increase in other income by $15 thousand.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

 

Revenues

 

Our revenues are derived primarily from sales of ethanol and WDG in North America and biodiesel and glycerin in India.

 

 

Nine Months Ended September 30 (in thousands)

 

	2017	2016	Inc/(dec)	% change
North America	$101,430	$93,979	$7,451	8%
India	9,843	11,783	(1,940)	-16%
Total	$111,273	$105,762	$5,511	5%

 

North America. For the nine months ended September 30, 2017, we generated 79% of our revenue from sales of ethanol, 19% from sales of WDG, and 2% from sales of distillers’ corn oil and CDS.  During the nine months, ended September 30, 2017, plant production averaged 108% of the 55 million gallon per year nameplate capacity.  The increase in revenues between the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 is due to increases in ethanol sales volumes by 8% to 44.5 million gallons, combined with an average ethanol price increase by 3% to $1.79 per gallon. In addition, the average price of WDG decreased by 13% to $63.21 per ton while WDG sales volumes increased by 8% to 300 thousand tons during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

India. For the nine months ended September 30, 2017, we generated 76% of our sales from biodiesel and 24% of our sales from refined glycerin, compared to 87% of our sales from biodiesel and 13% of our sales from refined glycerin during the nine months ended September 30, 2016. Biodiesel sales volumes decreased by 39% to 8.5 thousand metric tons while average prices of biodiesel increased by 19% to $873 per metric ton. Sales volumes of refined glycerin increased by 13% to 3.0 thousand metric tons while average prices of glycerin also increased by 36% to $770 per metric ton during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. In addition, the introduction of new GST by the Government of India in July 2017 affected sales volumes due to the additional burden of costs to the Company.

Cost of Goods Sold

 

Nine Months Ended September 30 (in thousands)

 

	2017	2016	Inc/(dec)	% change
North America	$99,003	$86,174	$12,829	15%
India	9,197	11,892	(2,695)	-23%
Total	$108,200	$98,066	$10,134	10%

 

North America.   We ground 15.8 million bushels of corn at an average price of $4.78 per bushel during the nine months ended September 30, 2017, compared to 14.4 million bushels of corn at an average price of $4.58 per bushel during the nine months ended September 30, 2016. The increase in cost of goods sold was attributable to increase in cost of corn by 4% coupled with increases in gallons sold by 8% in the nine months ended September 30, 2017 compared to the same period in 2016.

 

India.  The decrease in cost of goods sold was attributable to a decrease in overall sales by 16% offset by the average prices of feedstock for all products increased by 40% to $745 per metric ton for the nine months ended September 30, 2017 compared to $533 per metric ton in the nine months ended September 30, 2016.

Gross Profit

Nine Months Ended September 30 (in thousands)

 

	2017	2016	Inc/(dec)	% change
North America	$2,427	$7,805	$(5,378)	-69%
India	646	(109)	755	693%
Total	$3,073	$7,696	$(4,623)	-60%

 

 

North America. Gross profit decreased due to Brazilian imports to California which placed pricing pressure on West Coast ethanol which did not rise as fast as corn prices combined with sluggish international demand for dry distillers’ grains which placed pricing pressure on locally sold WDG. In addition, the usage of milo, which allowed us to receive grant income of $2.0 million for the nine months ended September 30, 2016, increased the gross profit during the nine months ended September 30, 2016.

India. The increase in gross profit was attributable to increase in overall average sales price for all products by 19% to $845, offset by an increase in overall feedstock costs by 40% to $745. In addition, the introduction of new GST by the Government of India in July 2017 affected sales volumes due to the additional burden of costs to the Company.

Operating Expenses

 

R&D

Nine Months Ended September 30 (in thousands)

 

	2017	2016	Inc/(dec)	% change
North America	$2,072	$290	$1,782	614%
India	-	-	-	0%
Total	$2,072	$290	$1,782	614%

 

The increase in R&D expenses in our North America segment for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was due to recognition of the expenses toward building and testing the Integration Demonstration Unit for cellulosic ethanol of $1.8 million, increase in professional fees by $59 thousand, and travel and other expenses of $10 thousand due to the moving of research facility from Maryland to Minnesota, offset by a decrease in salaries and wages of $71 thousand and supplies and rent expenses of $26 thousand.

 

Selling, General & Administrative (SG&A)

 

Nine Months Ended September 30 (in thousands)

 

	2017	2016	Inc/(dec)	% change
North America	$8,832	$8,177	$655	8%
India	907	946	(39)	-4%
Total	$9,739	$9,123	$616	7%