AEMETIS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
|
|
For the nine months ended September 30,
|
|
|
|
2014
|
|
|
2013
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,873
|
|
|
$
|
(27,695
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activitites:
|
|
Share-based compensation
|
|
|
447
|
|
|
|
1,585
|
|
Depreciation
|
|
|
3,486
|
|
|
|
3,471
|
|
Debt related amortization expense
|
|
|
5,361
|
|
|
|
10,366
|
|
Intangibles and other amortization expense
|
|
|
95
|
|
|
|
164
|
|
Change in fair value of warrant liability
|
|
|
102
|
|
|
|
(197
|
)
|
Loss on extinguishment of debt
|
|
|
1,346
|
|
|
|
3,709
|
|
(Gain) loss on sale/ Disposal of assets
|
|
|
119
|
|
|
|
(282
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,330
|
|
|
|
(704
|
)
|
Inventory
|
|
|
(1,112
|
)
|
|
|
(675
|
)
|
Prepaid expenses
|
|
|
432
|
|
|
|
149
|
|
Other current assets and other assets
|
|
|
(341
|
)
|
|
|
(332
|
)
|
Accounts payable
|
|
|
(308
|
)
|
|
|
(3,231
|
)
|
Accrued interest expense and fees, net of payments
|
|
|
667
|
|
|
|
8,494
|
|
Other liabilities
|
|
|
(1,487
|
)
|
|
|
(908
|
)
|
Net cash provided by (used in) operating activities
|
|
|
22,010
|
|
|
|
(6,086
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(1,834
|
)
|
|
|
(429
|
)
|
Proceeds from the sale of assets
|
|
|
99
|
|
|
|
1,175
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,735
|
)
|
|
|
746
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
|
8,070
|
|
|
|
8,830
|
|
Repayments of borrowings
|
|
|
(27,721
|
)
|
|
|
(3,617
|
)
|
Issuance of common stock for services, option and warrant exercises
|
|
|
5
|
|
|
|
1,082
|
|
Net cash (used in) provided by financing activities
|
|
|
(19,646
|
)
|
|
|
6,295
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(61
|
)
|
|
|
(133
|
)
|
Net cash and cash equivalents increase for period
|
|
|
568
|
|
|
|
822
|
|
Cash and cash equivalents at beginning of period
|
|
|
4,926
|
|
|
|
291
|
|
Cash and cash equivalents at end of period
|
|
$
|
5,494
|
|
|
$
|
1,113
|
|
Supplemental disclosures of cash flow information, cash paid:
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
6,751
|
|
|
$
|
2,068
|
|
Income tax expense
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information, non-cash transactions:
|
|
|
|
|
|
Proceeds from exercise of stock options applied to accounts payable
|
|
|
16
|
|
|
|
-
|
|
Issuance of warrants to subordinated debt holders
|
|
|
1,301
|
|
|
|
1,127
|
|
Transfer between debt and other liabilities
|
|
|
438
|
|
|
|
-
|
|
Stock issued in connection with services
|
|
|
715
|
|
|
|
-
|
|
Payments of principal, fees and interest paid in stock
|
|
|
-
|
|
|
|
3,211
|
|
Issuance of shares to related party for repayment of line of credit
|
|
|
-
|
|
|
|
822
|
|
Issuance of warrants to non-employees to secure procurement and working capital
|
|
|
-
|
|
|
|
336
|
|
Other asset transferred to related party
|
|
|
-
|
|
|
|
170
|
|
Warrant liability transferred to equity upon exercise
|
|
|
-
|
|
|
|
1,007
|
|
Exercise of conversion feature on note to equity
|
|
|
47
|
|
|
|
-
|
|
The accompanying notes are an integral part of the financial statements
.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
1. Nature of Activities and Summary of Significant Accounting Policies
Nature of Activities
. These consolidated financial statements include the accounts of Aemetis, Inc., a Nevada corporation, and its wholly owned subsidiaries (collectively, “Aemetis” or the “Company”):
●
|
Aemetis Americas, Inc., a Nevada corporation and its subsidiary AE Biofuels, Inc., a Delaware corporation;
|
●
|
Biofuels Marketing, Inc., a Delaware corporation;
|
●
|
Aemetis International, Inc., a Nevada corporation and its subsidiary International Biofuels, Ltd., a Mauritius corporation and its subsidiary Universal Biofuels Private, Ltd., an India company;
|
●
|
Aemetis Technologies, Inc., a Delaware corporation;
|
●
|
Aemetis Biochemicals, Inc., a Nevada corporation;
|
●
|
Aemetis Biofuels, Inc., a Delaware corporation and its subsidiary Energy Enzymes, Inc., a Delaware corporation;
|
●
|
AE Advanced Fuels, Inc., a Delaware corporation and its subsidiaries Aemetis Advanced Fuels Keyes, Inc., a Delaware corporation and Aemetis Facility Keyes, Inc., a Delaware corporation;
|
●
|
Aemetis Advanced Fuels, Inc., a Nevada corporation; and,
|
●
|
Aemetis Advanced Products Keyes, Inc., a Delaware corporation.
|
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 by the conversion of first generation ethanol and biodiesel plants into advanced biorefineries. The Company owns and operates a plant in Keyes, California where the Company manufactures and produces ethanol, wet distillers’ grain (WDG), condensed distillers solubles (CDS) and corn oil and a manufacturing and refining facility in Kakinada, India where the Company manufactures and produces fatty acid methyl ester ( biodiesel), crude and refined glycerin and refined palm oil. In September 2013, the Company received approval by the US Environmental Protection Agency to produce ethanol using grain sorghum and biogas along with the Keyes plant existing combined heat and power systems to generate higher value D5 Advanced Biofuel Renewable Identification Numbers (RIN’s). In April 2014, the Company received the International Sustainability and Carbon Certification for the production of biodiesel at the India plant from certain oils and fats for sale into European markets. The Company completed the EPA Process for importation of our India biodiesel into the United States. In addition, the Company is continuing research and development focused on microbial technologies for the commercialization of renewable industrial biofuels and biochemicals.
Basis of Presentation and Consolidation
. The consolidated condensed financial statements include the accounts of Aemetis, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accompanying consolidated condensed balance sheet as of September 30, 2014, the consolidated condensed statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013, and the consolidated condensed statements of cash flows for the nine months ended September 30, 2014 and 2013 are unaudited. The consolidated condensed balance sheet as of December 31, 2013 was derived from the 2013 audited consolidated financial statements and notes thereto. The consolidated condensed financial statements in this report should be read in conjunction with the 2013 audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2013.
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, 2014 and 2013 have been prepared on the same basis as the audited consolidated statements as of December 31, 2013 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, 2014 are not necessarily indicative of the operating results for any subsequent quarter, for the full fiscal year or any future periods.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
Reverse Stock Split.
In April 2014, our board of directors approved, and submitted a proposal to our stockholders for approval of a 1 for 10 reverse split of our common stock (the “Reverse Stock Split”). The Reverse Stock Split was intended to increase the market price of our common stock to enhance our ability to meet the initial listing requirements of the NASDAQ Global Market and to make our common stock more attractive to a broader range of institutional and other investors. Our stockholders approved the Reverse Stock Split on May 9, 2014 and we filed a Certificate of Change with the Secretary of State of the State of Nevada to effect the Reverse Stock Split on May 9, 2014. The Reverse Stock Split became effective with the Financial Industry Regulatory Authority (FINRA) on May 15, 2014. Trading on the NASDAQ Global Market commenced on June 5, 2014.
Upon the effectiveness of the Reverse Stock Split, every ten shares of issued and outstanding and authorized Aemetis common stock was automatically combined into one share of common stock with any fractional shares rounded up to the next whole share and without any change in the per share par value. The Reverse Stock Split reduced the number of outstanding shares of Aemetis common stock from approximately 201.7 million shares to approximately 20.2 million shares. The authorized shares of Aemetis common stock were also proportionally reduced from 400 million shares to 40 million shares.
Unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying consolidated financial statements have, where applicable, been adjusted
to reflect the Reverse Stock Split.
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 and 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, 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.
Shipping and Handling Costs
. Shipping and handling costs are classified as a component of cost of goods sold in the accompanying consolidated statements of operations.
Reclassifications.
Certain prior quarter amounts were reclassified to conform to current period presentation. These reclassifications had no impact on previously reported net loss or accumulated deficit.
Research and Development.
Research and development costs are expensed as incurred, unless they have alternative future uses to the Company.
Cash and Cash Equivalents
. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances at various financial institutions domestically and abroad. The Federal Deposit Insurance Corporation (FDIC) insures domestic cash accounts. The Company’s accounts at these institutions may at times exceed federally insured limits. The Company has not experienced any losses in such accounts.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
Accounts Receivable.
The Company sells ethanol, wet distiller grains, condensed distillers solubles and corn oil directly and 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 advanced payment based on the size and creditworthiness of the customer. Accounts receivable consist of product sales made to large creditworthy customers. Trade accounts receivable are presented at original invoice amount, net of the 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 a lack of 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.
Inventories
. Inventories are stated at the lower of cost, using the first-in and first-out (FIFO) method, or market.
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 plants in North America and India. When property, plant and equipment are acquired as part of an acquisition, the items are recorded at fair value on the purchase date. It is the Company policy to depreciate capital assets over their estimated useful lives using the straight-line method.
Goodwill and Intangible Assets.
Intangible assets consist of intellectual property in the form of patents pending, in-process research and development and goodwill. Once the patents pending or in-process R&D have secured a definite life in the form of a patent or product, they will be carried at cost less accumulated amortization over their estimated useful life. Amortization commences upon the commercial application or generation of revenue and is amortized over the shorter of the economic life or patent protection period.
Company intangible assets such as goodwill have indefinite lives and as a result need to be evaluated at least annually, or more frequently, if impairment indicators arise. In the Company’s review, the Company determines the fair value of the reporting unit using market indicators and discounted cash flow modeling. The Company compares the fair value to the net book value of the reporting unit. An impairment loss is recognized when the fair value is less than the related net book value, and an impairment expense is recorded in the amount of the difference. Forecasts of future cash flows are judgments based on the Company’s experience and knowledge of the Company’s operations and the industries in which the Company operates. These forecasts could be significantly affected by future changes in market conditions, the economic environment, including inflation, and the purchasing decisions of the Company’s customers. No indicators warranting reevaluation arose during the three months ended September 30, 2014.
California Ethanol Producer Incentive Program
. The Company is eligible to participate in the California Ethanol Producer Incentive Program (“CEPIP”). Under the CEPIP an eligible California ethanol facility may receive up to $3 million in cash per plant per year of operations through 2013 when current production corn crush spreads, measured as the difference between specified ethanol and corn index prices, drop below $0.55 per gallon. The California Energy Commission determines on an annual basis the funding allocated to the program. No funds were allocated to this program during the government’s 2012 fiscal year. For any month in which a payment is made by the CEPIP, the Company may be required to reimburse the funds within the subsequent five years from each payment date, if the corn crush spreads exceed $1.00 per gallon. Since these funds are provided to subsidize current production costs and encourage eligible facilities to either continue production or start up production in low margin environments, the Company records the proceeds, if any, as a credit to cost of goods sold. With respect to CEPIP payments received and applied as reductions to cost of goods sold, the Company recorded none for the three and nine months ended September 30, 2014 and 2013, respectively. The strength of the crush spread resulted in the accrual and obligation to repay CEPIP funding in the amount of $1.8 million, the entire remaining amount of funds received from the program. As of September 30, 2014 and December 31, 2013, the Company carried an obligation of $1.1 million and $0.1 million. As a result of the current accrual, there are no further contingent liabilities related to this program.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
Basic and Diluted Net Income (Loss) per Share.
Basic income (loss) per share is computed by dividing income or loss attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted 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 income for the three and nine months ended September 30, 2014, potentially dilutive securities have been included in the diluted net income per share computations and any potentially anti-dilutive shares have been excluded and are shown below. As the Company incurred net loss for the three and nine months ended September 30, 2013, potentially dilutive securities have been excluded from the diluted net loss per share computations as their effect would be anti-dilutive.
The following table reconciles the number of shares utilized in the net income (loss) per share calculations for three and nine months ended September 30, 2014 and 2013:
|
|
Three months ended
Level 1
|
|
|
Nine months ended
|
|
|
September 30, 2014
|
|
|
September 30, 2013
|
|
|
September 30, 2014
|
|
|
September 30, 2013
|
|
|
|
|
(In thousands, except per share amounts
|
|
|
|
(In thousands, except per share amounts
|
|
Net income (loss)
|
|
$
|
464
|
|
|
$
|
(8,289
|
)
|
|
$
|
10,873
|
|
|
$
|
(27,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding—basic
|
|
|
20,555
|
|
|
|
19,390
|
|
|
|
20,284
|
|
|
|
18,863
|
|
Weighted average dilutive share equivalents from preferred shares
|
|
|
217
|
|
|
|
-
|
|
|
|
231
|
|
|
|
-
|
|
Weighted average dilutive share equivalents from stock options
|
|
|
460
|
|
|
|
-
|
|
|
|
242
|
|
|
|
-
|
|
Weighted average dilutive share equivalents from common warrants
|
|
|
244
|
|
|
|
-
|
|
|
|
189
|
|
|
|
-
|
|
Weighted average shares outstanding—diluted
|
|
|
21,476
|
|
|
|
19,390
|
|
|
|
20,946
|
|
|
|
18,863
|
|
Earnings (loss) per share—basic
|
|
$
|
0.02
|
|
|
$
|
(0.43
|
)
|
|
$
|
0.54
|
|
|
$
|
(1.47
|
)
|
Earnings (loss) per share—diluted
|
|
$
|
0.02
|
|
|
$
|
(0.43
|
)
|
|
$
|
0.52
|
|
|
$
|
(1.47
|
)
|
The following table shows the number of potentially dilutive shares excluded from the diluted net income (loss) per share calculation as of September 30, 2014 and September 30, 2013:
|
|
As of
|
|
|
September 30, 2014
|
|
|
September 30, 2013
|
|
|
|
|
|
|
|
|
Series B preferred
|
|
|
-
|
|
|
|
3,021
|
|
Common stock options and warrants
|
|
|
30
|
|
|
|
1,531
|
|
Convertible promissory note
|
|
|
-
|
|
|
|
18
|
|
Total number of potentially dilutive shares excluded from the basic and diluted net income (loss) per share calculation
|
|
|
30
|
|
|
|
4,570
|
|
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
Comprehensive Income.
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 and accumulated other comprehensive income consists solely of cumulative currency translation adjustments resulting from the translation of the financial statements of its foreign subsidiaries. The investment in these subsidiaries is considered indefinitely invested overseas, and as a result, deferred income taxes are not recorded for the currency translation adjustments.
Foreign Currency Translation/Transactions.
Assets and liabilities of the Company’s non-U.S. subsidiaries that operate 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 income. Income and expense accounts are translated at average exchange rates during the year. Gains and losses from foreign currency transactions are recorded in other income.
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 segments: “North America” and “India.”
The “North America” operating segment includes the Company’s 55 million gallon per year nameplate capacity ethanol plant in Keyes, California and the research facilities in College Park, Maryland.
The “India” operating segment encompasses the Company’s 50 million gallon per year nameplate capacity biodiesel plant in Kakinada, India, the administrative offices in Hyderabad, India, and the holding companies in Nevada and Mauritius.
Fair Value of Financial Instruments.
The Company’s financial instruments include cash and cash equivalents, accounts receivable, and accounts payable, other current liabilities, mandatorily redeemable Series B preferred stock, warrant liability and debt. The fair value of current financial instruments was estimated to approximate carrying value due to the short term nature of these instruments. The carrying amount of debt obligations, including discount issuance costs, held by the senior lender, subordinated debt and the seller note payable, at September 30, 2014 amounted to an aggregate of approximately $64.6 million in outstanding obligations. The debts were determined to have an estimated fair value of $62.0 million based on interest rates for comparable debt. The Company’s debt was valued using inputs from independent consultants evaluating external market inputs and internal financings to determine appropriate discount rates to determine fair value. It was not practicable to determine the fair market value of the Company’s remaining debt obligations due to the lack of availability of comparable credit facilities and the related party nature of the financial arrangements. The warrant liability fair value was estimated using the Black-Scholes valuation pricing model at the end of each reporting period.
Share-Based Compensation.
The Company recognizes share based compensation 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. To estimate the discount for lack of marketability on restricted stock issued, the Company uses the Black-Scholes valuation pricing model, which assists in deriving the implied price of put options using the put-call parity principle. The price of the put option divided by the market price quoted on the NASDAQ Global Market implies the discount for lack of marketability in valuing issued shares to consultants, debt holders, employees or affiliated investors.
Warrant liability
: The Company adopted guidance related to distinguishing liabilities from equity for certain warrants which contain a conditional obligation to repurchase feature. The Company estimates the fair value of future liability on warrants using the Black-Scholes pricing model. Assumptions within the pricing model include: 1) the risk-free interest rate, which comes from the U.S. Treasury yield curve for periods within the contractual life of the warrant 2) the expected life of the warrants is assumed to be the contractual life of the warrants, and, 3) the volatility is estimated based on an average of the historical volatilities.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
The Company computes the fair value of the warrant liability at each reporting period and the change in the fair value is recorded through earnings. The key component in the value of the warrant liability is the Company's stock price, which is subject to significant fluctuation and is not under the Company's control. The resulting effect on the Company's net income (loss) is therefore subject to significant fluctuation and will continue to be so until the warrants are exercised, amended or expired. Assuming all other fair value inputs remain constant, the Company will record non-cash expense when the stock price increases and non-cash income when the stock price decreases.
Long - Lived Assets.
The Company evaluates the recoverability of long-lived assets with finite lives in accordance with 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 is measured as the difference between the carrying amount of the assets and its estimated fair value.
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.
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.
Debt Modification Accounting
. The Company evaluates amendments to its debt in accordance with ASC 540-50
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 changes more than 10 percent, the Company applies extinguishment accounting and determines the fair value of its debt based on factors available to the Company. See Note 5 for discussion on debt extinguished during the current period.
2. Inventory
Inventory consists of the following:
|
|
September 30, 2014
|
|
|
December 31, 2013
|
|
Raw materials
|
|
$
|
3,087
|
|
|
$
|
597
|
|
Work-in-progress
|
|
|
1,457
|
|
|
|
1,724
|
|
Finished goods
|
|
|
634
|
|
|
|
1,777
|
|
Total inventory
|
|
$
|
5,178
|
|
|
$
|
4,098
|
|
As of September 30, 2014 and December 31, 2013, the Company recognized a lower of cost or market reserve of $7 thousand and none, respectively, related to inventory.
3. Property, Plant and Equipment
Property, plant and equipment consist of the following:
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
|
|
September 30, 2014
|
|
|
December 31, 2013
|
|
Land
|
|
$
|
2,765
|
|
|
$
|
2,765
|
|
Plant and Buildings
|
|
|
82,570
|
|
|
|
82,355
|
|
Furniture and fixtures
|
|
|
488
|
|
|
|
558
|
|
Machinery and equipment
|
|
|
3,989
|
|
|
|
2,076
|
|
Construction in progress
|
|
|
53
|
|
|
|
539
|
|
Total gross property, plant & equipment
|
|
|
89,865
|
|
|
|
88,293
|
|
Less accumulated depreciation
|
|
|
(12,817
|
)
|
|
|
(9,365
|
)
|
Total net property, plant & equipment
|
|
$
|
77,048
|
|
|
$
|
78,928
|
|
Depreciation on the components of the 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 & Equipment
|
|
|
5 - 7
|
|
Furniture & Fixtures
|
|
|
3 - 5
|
|
For the three months ended September 30, 2014 and September 30, 2013, the Company recorded depreciation expense of $1.2 million for each period respectively. For the nine months ended September 30, 2014 and September 30, 2013, the Company recorded depreciation expense of $3.5 million each period, respectively.
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 were no triggering events on the long-lived assets during the three and nine months ended September 30, 2014.
4. Intangible Assets and Goodwill
Intangible assets and goodwill consist of $1.0 million in patents, $0.6 million in in-process research and development and $1.0 million in goodwill. Following ASC 350-20-35 guidance, goodwill and indefinite lived intangibles are tested annually in December for impairment at the Aemetis Technologies, Inc. reporting unit level. During the three months ended September 30, 2014 and 2013, the Company recognized amortization expense of $20 thousand each period respectively, related to patents. During the nine months ended September 30, 2014 and 2013, the Company recognized amortization expense of $60 thousand and $164 thousand, respectively, related to patents.
Future patent and in-process research and development amortization for the next five years and beyond consists of the following:
For the twelve months ending September 30,
|
|
Amortization
|
|
2014
|
|
$
|
104
|
|
2015
|
|
|
112
|
|
2016
|
|
|
112
|
|
2017
|
|
|
112
|
|
2018
|
|
|
179
|
|
Thereafter
|
|
|
937
|
|
Total
|
|
$
|
1,556
|
|
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
5. Notes Payable
Debt consists of the notes from our senior lender, Third Eye Capital, acting as Agent for the Purchasers and other secured lenders, other working capital lenders and subordinated lenders as follows:
|
|
September 30, 2014
|
|
|
December 31, 2014
|
|
Third Eye Capital term note
|
|
$
|
7,369
|
|
|
$
|
7,193
|
|
Third Eye Capital revolving credit facility
|
|
|
19,095
|
|
|
|
38,349
|
|
Third Eye Capital revenue participation term note
|
|
|
10,162
|
|
|
|
9,465
|
|
Third Eye Capital acquisition term note
|
|
|
17,677
|
|
|
|
17,280
|
|
Cilion shareholder seller note payable
|
|
|
5,335
|
|
|
|
4,869
|
|
State Bank of India secured term loan
|
|
|
5,950
|
|
|
|
5,857
|
|
Subordinated notes
|
|
|
5,265
|
|
|
|
5,317
|
|
EB-5 long term promissory notes
|
|
|
1,538
|
|
|
|
1,037
|
|
Unsecured working capital loans and short-term notes
|
|
|
5,232
|
|
|
|
2,391
|
|
Total debt
|
|
|
77,623
|
|
|
|
91,758
|
|
Less current portion of debt
|
|
|
16,446
|
|
|
|
17,966
|
|
Total long term debt
|
|
$
|
61,177
|
|
|
$
|
73,792
|
|
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”); (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. After this financing transaction, Third Eye Capital obtained sufficient equity ownership in the Company to be considered a related party (the Term Notes, Revolving Credit Facility, Revenue Participation Term Notes and Acquisition Term Notes are referred to herein collectively as, the “Notes”). Initially, the Acquisition Term Notes and the Revenue Participation Term Notes matured on July 6, 2014, the Term Notes matured on October 18, 2012 and the Revolving Credit Facility matured on July 6, 2013 with extension rights subject to satisfaction of certain conditions. The Notes have all been amended to extend the maturity date to July 1, 2015*, as described below.
In May 2014, Third Eye Capital agreed to the Limited Waiver and Amendment No. 7 to the Note Purchase Agreement to extend the maturity date of the Notes to July 1, 2015*, to modify the waterfall table, to fix the interest rate of the Term Notes at 14%, and to redefine the operating cash available to the Company for operating expenses. As consideration, the Company is required to pay an additional extension fee of $2.0 million plus an escalating monitoring fee beginning January 2015.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
On November 7, 2014, Third Eye Capital agreed to Amendment No. 8 to the Note Purchase Agreement to extend a line of credit in the amount of $6.0 million available for advance to Aemetis, such advance to be added to the outstanding principal balance of the existing notes under the Note Purchase Agreement. In addition, Third Eye Capital agreed to give Aemetis the right to extend the maturity date of the notes to January 1,
2016 upon notice and payment of a 3% extension fee. Pursuant to the terms of Amendment No.8, Aemetis agreed to a covenant to complete an equity offering of its preferred stock for net proceeds of not less than $20 million with all of such net proceeds to be used to repay the principal outstanding under the Note Purchase Agreement in accordance with the priorities set forth there in. As consideration for Amendment No.8, the unconditional personal Guaranty from Chairman of the Company, the guaranties from Company parties and McAfee Capital, LLC owned by Mr. Eric McAfee were all reaffirmed. The Company also agreed to pay $0.2 million in consideration to Mr. McAfee and McAfee Capital in exchange for their willingness to provide the guaranties. In addition, Company agreed to an amendment fee to Third Eye Capital in the amount of $0.3 million which will be paid from the proceeds of the advance. As a result of Company’s ability to extend the maturity of the notes under Amendment No.8, the note balances have been classified as long term debt in the accompanying September 30, 2014 balance sheet. See Note 14 - Subsequent Events.
Terms of Third Eye Capital Notes
Details about each portion of the Third Eye Capital financing facility are as follows:
A.
|
Term Notes
.
As of September 30, 2014, AAFK had $7.4 million in principal and interest outstanding, net of unamortized fair value discounts of $0.2 million. The Term Notes mature on July 1, 2015*. Interest on the Term Notes accrues at 14% per annum. The Term Notes contain various covenants, including but not limited to, minimum free cash flow and production requirements and restrictions on capital expenditures. On July 26, 2013 and October 28, 2013, the Company received waivers for certain covenants by Amendment No. 5 and Amendment No. 6 to the Note Purchase Agreement, respectively. Additionally, Amendment No. 5 waived the requirement for minimum monthly base payments, interest payments and mandatory tiered redemption payments in favor of a daily cash flow sweep equal to 20% of cash deposits from operating activities.
|
B.
|
Revolving Credit Facility
.
On July 6, 2012 AAFK entered into a Revolving Credit Facility with a commitment of $18.0 million. Through various amendments to the Note Purchase Agreement, the amount of the Revolving Loan Facility was increased to approximately $39.0 million. Interest on the Revolving Credit Facility accrues at the prime rate plus 13.75% (17% as of September 30, 2014) payable monthly in arrears. The Revolving Credit Facility matures on July 1, 2015*. As of September 30, 2014, AAFK had $19.1 million in principal and interest outstanding, net of unamortized debt issuance costs of $0.6 million, on the Revolving Credit Facility.
|
C.
|
Revenue Participation Term Notes
.
The Revenue Participation Note bears interest at 5% per annum and matures on July 1, 2015*. As of September 30, 2014, AAFK had $10.2 million in principal and interest outstanding, net of unamortized discounts of $0.2 million, on the Revenue Participation Note.
|
D.
|
Acquisition Term Notes
.
The Acquisition Term Notes accrue interest at prime rate plus 10.75% (14% per annum as of September 30, 2014) and mature on July 1, 2015*. As of September 30, 2014, Aemetis Facility Keyes had $17.7 million in principal and interest outstanding, net of unamortized discounts of $0.4 million, on the Term Notes.
|
* The note can be extended by the Company to January 2016 during the month of May 2015. In doing so, the Company is required to pay a fee of 3% of the carrying value of the debt.
The Third Eye Capital Notes are secured by first-lien deeds of trust on all real and personal property, and assignment of proceeds from all government grants and guarantees from Aemetis, Inc. The Notes all 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 up to the amount of $8 million plus interest, secured by 2.4 million shares of common stock of Aemetis that it owns. McAfee Capital owns 3.4 million shares of common stock of Aemetis. In addition, Mr. McAfee himself also provided a lien on substantially all of his personal assets, and a guaranty of payment and performance up to the amount of $15.0 million plus interest.
Cilion shareholder seller note payable
. The Company’s merger with Cilion on July 6, 2012 provided $5.0 million in notes payable to Cilion shareholders as merger compensation 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, 2014, Aemetis Facility Keyes, Inc. had $5.3 million in principal and interest outstanding under the Cilion shareholder seller note payable.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
State Bank of India secured term loan
. On July 17, 2008, Universal Biofuels Private Limited (“UBPL”), the Company’s India operating subsidiary, entered into a nine year secured term loan with the State Bank of India in the amount of approximately $6.0 million. The term loan matured in March 2014 and is secured by UBPL’s assets, consisting of the biodiesel plant and land in Kakinada.
In July 2008, the Company drew approximately $4.6 million against the secured term loan. The loan principal amount is repayable in 20 quarterly installments of approximately $0.3 million, using exchange rates corresponding to the date of payment, with the first installment due in June 2009 and the last installment payment due in March 2014. As of September 30, 2014, the 12% interest rate under this facility is subject to adjustment every two years, based on 0.25% above the Reserve Bank of India advance rate. The principal payments scheduled for June 2009 through September 2014 were not made. The term loan provides for liquidating damages at a rate of 2% per annum for the period of default.
On March 10, 2011, one of our subsidiaries, UBPL received a demand notice from the State Bank of India with respect to the Agreement of Loan for Overall Limit dated as of June 26, 2008. The notice informs UBPL that an event of default has occurred for failure to make an installment payment on the loan since June 2009 and demands repayment of the entire outstanding indebtedness of 19.60 crore rupees (approximately $3.2 million) together with all accrued interest thereon and any applicable fees and expenses. As of September 30, 2014, UBPL was in default on interest and principal repayments, and all covenants, including asset coverage and debt service coverage ratios. Additional provisions of default include the bank having the unqualified right to disclose or publish the Company’s name and its director’s names as defaulter in any medium or media. At the bank’s option, it may also demand payment of the balance of the loan, since the principal payments have been in default since June 2009. As a result, the Company has classified the entire loan amount as current. The State Bank of India has filed a legal case before the Debt Recovery Tribunal (“DRT”), Hyderabad, for recovery of approximately $5.0 million against the Company and also impleaded Andhra Pradesh Industrial Infrastructure Corporation (“APIIC”) to expedite the process of registration of the factory land for which counter reply is yet to be filed by APIIC. UBPL asserts that the State Bank of India did not provide the committed funding of the working capital loan and only funded a portion of the term loan, thus requiring the Company to enter into a working capital facility at unfavorable terms which served to hinder the business from developing at the planned rate. The State Bank of India has additionally required the personal guarantee of a former Executive Officer and the registration of the land underlying the factory as conditions prior to restructure of the loan. Payments have recently been made against the facility; however, the State Bank of India has rejected these payments as a good faith effort. In January 2014, the Company made payment of $162 thousand (1 crore rupees) against principal on the facility which was accepted by the State Bank of India. UBPL filed for a stay against further collection efforts pending the development of sufficient business in a domestic or international market that would allow UBPL to make meaningful repayments against the facility. In May 2014, UBPL obtained an interim stay subject to payments of 1 crore rupees (approximately $0.2 million) each by May 15, 2014 and June 15, 2014. UBPL made these payments promptly. In the event that the Company is unable to prevail with the aforementioned legal case, DRT may pass a decree for recovery of the amount due, which could include seizing Company property for recovery of amounts due. As of September 30, 2014 and December 31, 2013, the State Bank of India loan had $2.7 million and $3.2 million, respectively, in principal outstanding and accrued interest plus default interest of $3.3 million and $2.7 million respectively.
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 $3.0 million in 5% annual interest rate notes to the investors (the “Sub Notes”). An additional $0.6 million and $0.8 million in Sub Notes were issued to one of the existing accredited investor’s Sub Notes balance in May and December 2012, respectively. This same accredited investor received payments of $0.6 million in principal and $3 thousand in interest in July 2012. The Sub Notes included 2-year warrants exercisable for 170 thousand shares of Aemetis common stock at a price of $0.01 per share, subject to adjustment. Interest is due at maturity. Neither AAFK nor Aemetis may make any principal payments under the Sub Notes until all loans made by Third Eye Capital to AAFK are paid in full, except for a few exceptions where Sub Note investors will receive funds from EB-5 investments or sale of equipment.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
The Company agreed to an Amendment No.1 to the Sub Notes to extend the maturity of the January 2012 Sub Notes to July 1, 2014 and refinanced the additional December 2012 Sub Note as two Sub Notes dated December 2012 and January 19, 2013, with principal amounts of $0.5 million and $0.1 million, respectively. Both the December 2012 Sub Note and the January 19, 2013 Sub Note had a maturity date of April 30, 2013. On January 24, 2013, an additional $0.3 million Sub Note was issued with a maturity date of April 30, 2013. On May 23, 2013, all Sub Notes above with a maturity date of April 30, 2013 were refinanced as a $1.0 million Sub Note (“May 2013 Note”) with a maturity date of December 31, 2013.
On January 1, 2014, the May 2013 Sub Note was amended to extend the maturity date until the earlier of (i) June 30, 2014; (ii) completion of an equity financing by AAFK or Aemetis in an amount of not less than $25.0 million; (iii) the completion of an Initial Public Offering by AAFK or Aemetis; or (iv) after the occurrence of an Event of Default, including failure to pay interest or principal when due and breaches of note covenants. A 10 percent cash extension fee was paid by adding the fee to the balance of the new Note and 30 thousand in common stock warrants were granted with a term of two years and an exercise price of $0.01 per share. These January 1, 2014 amendments and the refinancing terms of the Note were evaluated and it was determined, in accordance with ASC 470-50
Debt – Modification and Extinguishment
, that the loan was extinguished and as a result a loss on debt extinguishment of approximately $0.1 million was recorded in January 2014.
In March 2014, the Company received $0.5 million from EB-5 investments and repaid one of the accredited investors holding a sub note of January 2012 $0.5 million.
On July 1, 2014, the January 2014 Sub Note and two January 2013 Sub Notes with two accredited investors were amended to extend the maturity date until the earlier of (i) December 31, 2014; (ii) completion of an equity financing by AAFK or Aemetis in an amount of not less than $25.0 million; (iii) the completion of an Initial Public Offering by AAFK or Aemetis; or (iv) after the occurrence of an Event of Default, including failure to pay interest or principal when due and breaches of note covenants. A 10 percent cash extension fee was paid by adding the fee to the balance of the new Note and 118,107 in common stock warrants were granted with a term of two years and an exercise price of $0.01 per share. We evaluated these July 1, 2014 amendments and the refinancing terms of the Notes and determined in accordance with ASC 470-50 Debt – Modification and Extinguishment that the loans were extinguished and as a result a loss on debt extinguishment of approximately $1.2 million was recorded in July 2014.
On January 14, 2013, Laird Cagan, a related party, loaned $0.1 million through a promissory note maturing on April 30, 2013 with a five percent annualized interest rate and the right to exercise 5 thousand warrants exercisable at $0.01 per share.
At September 30, 2014 and December 31, 2013, the Company owed, in aggregate, subordinated notes in the amount of $5.3 million for each period in principal and interest outstanding, net of unamortized issuance and fair value discounts of $0.2 million and $0.3 million, respectively.
EB-5 long-term promissory notes
. EB-5 is a US 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. On March 4, 2011, and amended on January 19, 2012, and on July 24, 2012, the Company entered into a Note Purchase Agreement 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 bearing interest at 3%, each note in the principal amount of $0.5 million is due and payable four years from the date of the note for a total aggregate principal amount of up to $36.0 million. The notes are convertible after three years at a conversion price of $30.00 per share.
Advanced BioEnergy, LP arranges investments with foreign investors, who each make investments in the Keyes plant project in investment increments of $0.5 million. The Company sold notes in the amount of $1.0 million to the first two investors during the fourth quarter of 2012 and sold a $0.5 million note to an investor during the first quarter of 2014. As of September 30, 2014, $38 thousand in accrued interest remained outstanding on the notes. The availability of the remaining $35.0 million will be determined by the ability of Advanced BioEnergy, LP to attract additional qualified investors.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
Unsecured working capital loans
. In November 2008, the Company entered into an operating agreement with Secunderabad Oils Limited (“Secunderabad”). Under this agreement Secunderabad 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 of fifteen percent (15%). In return, the Company agreed to pay Secunderabad an amount equal to 30% of the plant’s monthly net operating profit. In the event that the Company’s biodiesel facility operates at a loss, Secunderabad owes the Company 30% of the losses. The agreement can be terminated by either party at any time without penalty.
During the three and nine months ended September 30, 2014, the Company made principal payments to Secunderabad of approximately $1.8 million and $4.2 million, respectively, under the agreement and interest payments of approximately $48 thousand and $127 thousand respectively, for working capital funding. During the three and nine months ended September 30, 2013, the Company made principal payments to Secunderabad of approximately $0.7 million and $3.4 million, respectively, under the agreement and interest payments of approximately $16 thousand and $175 thousand, respectively, for working capital funding. At September 30, 2014 and December 31, 2013 the Company had approximately $5.2 million and $1.9 million outstanding under this agreement, respectively.
Short-term notes
. Aemetis Technologies, formerly Zymetis, Inc., carries certain debt obligations associated with a series of grants issued by the Maryland Department of Business and Economic Development to Zymetis prior to the merger. These grants were converted to promissory notes with interest upon the achievement of certain objectives. In the first quarter of 2014, the Company entered into a payment settlement agreement to pay off the principal and interest of approximately $0.4 million in monthly installments. As part of this agreement, the long term debt of $0.4 million has been classified into other long term liabilities. At September 30, 2014, the Company had approximately $292 thousand and $88 thousand in the other long term liabilities and other current liabilities, respectively. The remaining promissory note with principal and interest of approximately $47 thousand was converted in May 2014 at $2.50 per share into common stock of the Company.
Scheduled debt repayments for loan obligations follow:
Twelve months ended September 30,
|
Debt Repayments
|
2015
|
$
|
16,617
|
2016*
|
|
58,335
|
2017
|
|
3,624
|
2018
|
|
-
|
2019
|
|
500
|
Total debt
|
|
79,076
|
Discounts
|
|
(1,453)
|
Total debt, net of discounts
|
$
|
77,623
|
*Due to the Company’s ability to extend the maturity of the Third Eye Capital notes by six months from the scheduled maturity of July 2015, the amounts are reflected above as a 2016 maturity.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
6. Commitments and Contingencies
Operating Leases
The Company, through its subsidiaries, has non-cancelable operating leases for office space in Cupertino and India. Future minimum operating lease payments as of September 30, 2014 are as follows:
Twelve months ended September 30,
|
|
Future Rent
Paymennts
|
|
2015
|
|
$
|
169
|
|
For the three months ended September 30, 2014 and 2013, the Company recognized lease and rent expense of $108 thousand and $105 thousand respectively, under existing operating leases. For the nine months ended September 30, 2014 and 2013, the Company recognized lease and rent expense of $320 thousand and $316 thousand respectively, under existing operating leases.
Legal Proceedings
On March 10, 2011, one of our subsidiaries, Universal Biofuels Pvt. Ltd. (“UBPL”), received a demand notice from the State Bank of India under the Agreement of Loan for Overall Limit dated as of June 26, 2008. The notice informs UBPL that an event of default has occurred for failure to make an installment payment on the loan commencing June 2009 and demands repayment of the entire outstanding indebtedness of 19.60 crore rupees (approximately $3.2 million) together with all accrued interest thereon and any applicable fees and expenses. Upon the occurrence and during the continuance of an Event of Default, interest accrues at the default interest rate of 2% above the State Bank of India Advance Rate. The default period began on July 1, 2009 when the principal payment was deemed past due; and we have accrued interest at the default rate since the beginning of the default period. In addition, since the bank demanded payment of the balance, we have classified the entire loan amount as current. The State Bank of India has filed a legal case before the Debt Recovery Tribunal (“DRT”), Hyderabad, for recovery of approximately $5.0 million against the Company and also impleaded Andhra Pradesh Industrial Infrastructure Corporation (“APIIC”) to expedite the process of registration of the factory land for which counter reply is yet to be filed by APIIC. UBPL asserts that the State Bank of India did not provide the committed funding of the working capital loan and only funded a portion of the term loan, thus requiring the Company to enter into a working capital facility at unfavorable terms which served to hinder the business from developing at the planned rate. The State Bank of India has additionally required the personal guarantee of our Executive Officer and the registration of the land underlying the factory as conditions prior to restructure of the loan. Payments have recently been made against the facility; however, the State Bank of India has rejected these payments as a good faith effort. In January 2014, the Company made payment of $162 thousand (1 crore rupees) against principal on the facility which was accepted by the State Bank of India. UBPL filed for a stay against further collection efforts pending the development of sufficient business in a domestic or international market that would allow UBPL to make meaningful repayments against the facility. In May 2014, the Company obtained an interim stay subject to payments of 1 crore rupees (approximately $0.2 million) each by May 15, 2014 and June 15, 2014. In the event that the Company is unable to prevail in the aforementioned legal case, DRT may pass a decree for recovery of the amount due, which could include seizing company property for recovery of amounts due.
On August 4, 2013, GS Cleantech Corporation, a subsidiary of Greenshift Corporation (“Greenshift”), filed a complaint in the United States District for the Eastern District of California – Fresno Division against the Company and its subsidiary, AAFK. The case was transferred to the Southern District of Indiana and joined as tag-along defendants to a pending Multidistrict Litigation with over a dozen original defendants. The complaint alleges infringement of patent rights assigned to Greenshift that pertain to certain corn oil extraction processes that the Company employs and seeks royalties, damages, treble damages, and attorney’s fees, along with injunctions precluding the Company from infringing its patent rights. The corn oil extraction process we use is licensed to us by Valicor Separation Technologies LLC, formerly called Solution Recovery Services LLC (“SRS”). The process provider has no obligations to indemnify us. On September 12, 2013, the Company, along with its subsidiary, filed its answer and counterclaims. In response to a motion for summary judgment filed by the original defendants, on October 23, 2014, the Court ruled that all the claims of all the patents at issue in the case are invalid. We expect Greenshift will appeal; however, the likelihood of Greenshift succeeding on appeal is small since the Court’s findings included summary judgments on several grounds for each allegedly infringed patent. Damages being sought in this litigation are based on a reasonable royalty to or lost profits of Greenshift. Because of its recent summary judgment findings, it is highly unlikely the court would find the case exceptional and eligible for an award to Greenshift of attorney’s fees. If Greenshift successfully appeals the District Court’s findings of invalidity, damages may be $1 million or more. The Company believes the claims to be without merit and is vigorously defending itself. If we are not successful in our defense, we would be liable for damages and at least our own attorneys’ fees. The Company’s counterclaims include patent invalidity due to obviousness (and the Court has summarily ruled in favor of the original defendants’ identical counterclaim), non- infringement, and inequitable conduct. We are not currently able to predict the outcome of this litigation against the Company with any degree of certainty.
On August 21, 2012, UBS Securities LLC (“UBS”) filed a complaint in the United States District Court for the Southern District of New York against the Company for damages based on a breach of contract theory in connection with the Cilion acquisition transaction (“UBS Federal Action”). UBS filed a motion for, and the District Court approved, a judgment against the Company in the liquidated amount of $2.3 million which has been accrued by the Company. UBS filed post-judgment discovery requests and pursued the enforcement of the judgment. Subsequently, on March 13, 2014, UBS also filed a complaint against one of our subsidiaries, Aemetis Advanced Fuels Keyes, Inc. in the state court in the State of New York, alleging breach of the same contract involved in the UBS Federal Action. The Company and AAFK entered into a settlement agreement with UBS in September 2014 whereby the Company paid $1.0 million in September 2014 and will make monthly payments of $0.1 million to UBS until the liquidated amount is fully paid.
7. Outstanding Warrants
During the three months ended September 30, 2014, the Company issued 118 thousand common stock warrants. During the nine months ended September 30, 2014, the Company issued 148 thousand common stock warrants, which have the potential to enhance returns for accredited investors who entered into additional Notes and Warrant Purchase Agreements.
For the three and nine months ended September 30, 2014, Note investors and employees exercised 131 thousand and 215 thousand warrant shares at the weighted average exercise price of $0.09 and $1.31 per share respectively.
A summary of warrant activity as of September 30, 2014 follows:
|
|
Warrants Outstanding & Exercisable
|
|
|
Weighted - Average Exercise Price
|
|
|
Average Remaining Term in Years
|
|
Outstanding December 31, 2013
|
|
|
470
|
|
|
$
|
3.40
|
|
|
|
4.85
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Granted
|
|
|
30
|
|
|
|
0.01
|
|
|
|
|
|
Exercised
|
|
|
(30
|
)
|
|
|
0.01
|
|
|
|
|
|
Outstanding March 31, 2014
|
|
|
470
|
|
|
$
|
3.41
|
|
|
|
4.60
|
|
Expired
|
|
|
(47
|
)
|
|
|
4.98
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(54
|
)
|
|
|
4.96
|
|
|
|
|
|
Outstanding June 30, 2014
|
|
|
369
|
|
|
$
|
2.99
|
|
|
|
3.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1
|
)
|
|
|
4.66
|
|
|
|
|
|
Granted
|
|
|
118
|
|
|
|
0.01
|
|
|
|
|
|
Exercised
|
|
|
(131
|
)
|
|
|
0.09
|
|
|
|
|
|
Outstanding September 30, 2014
|
|
|
355
|
|
|
$
|
3.06
|
|
|
|
2.93
|
|
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
8. Fair Value of Warrants
The following tables summarize the assumptions used in computing the fair value of liability warrants subject to fair value accounting at the date of issue during the three months ended September 30, 2014:
Expected dividend yield
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
1.07
|
%
|
Expected volatility
|
|
|
81.02% - 92.51
|
%
|
Expected Life (years)
|
|
|
2.7 - 3.3
|
|
Exercise price
|
|
$
|
0.01
|
|
Company stock price
|
|
$
|
8.68
|
|
9. Fair Value Measurements
The Company complies with the fair value measurements and disclosures standard which defines fair value, establishes a framework for measuring fair value, and expands disclosure for those assets and liabilities carried on the balance sheet on a fair value basis.
The Company's balance sheet contains derivative financial instruments that are recorded at fair value on a recurring basis. Fair value measurements and disclosures require that assets and liabilities carried at fair value be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.
Level 1 uses quoted market prices in active markets for identical assets or liabilities.
Level 2 uses observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3 uses unobservable inputs that are not corroborated by market data.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Warrant liability
: The warrant liability consists of stock warrants issued by the Company that contain conditional obligation to repurchase feature. In accordance with accounting for warrants as liabilities, the Company calculated the fair value of warrants under Level 3 using the assumptions described in “Fair Value of Warrants”. Realized and unrealized gains and losses related to the change in fair value of the warrant liability are included in other income on the Statement of Operations.
The following table summarizes financial liabilities measured at fair value on a recurring basis as of September 30, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Warrant liability
|
|
$
|
162
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
162
|
|
The following table reflects the activity for liabilities measured at fair value using Level 3 inputs as of September 30, 2014:
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
Balance as of December 31, 2013
|
|
$
|
60
|
|
Issuances of warrant liabilities
|
|
|
-
|
|
Exercise of warrant liabilities
|
|
|
-
|
|
Related change in fair value
|
|
|
48
|
|
Balance as of March 31, 2014
|
|
$
|
108
|
|
Issuances of warrant liabilities
|
|
|
-
|
|
Exercise of warrant liabilities
|
|
|
-
|
|
Related change in fair value
|
|
|
71
|
|
Balance as of June 30, 2014
|
|
$
|
179
|
|
Issuances of warrant liabilities
|
|
|
-
|
|
Exercise of warrant liabilities
|
|
|
-
|
|
Related change in fair value
|
|
|
(17
|
)
|
Balance as of September 30, 2014
|
|
$
|
162
|
|
10. Stock-Based Compensation
Common Stock Reserved for Issuance
Aemetis authorized the issuance of 1.2 million shares of common stock under its the Zymetis 2006 Stock Plan and Amended and Restated 2007 Stock Plan (together, the “Company Stock Plans”), which includes both incentive and non-statutory stock options. These options generally expire five years from the date of grant and are exercisable at any time after the date of the grant, subject to vesting.
The following is a summary of options granted under the employee stock plans:
Nine months ended
|
|
Shares Available for Grant
|
|
|
Number of Shares Outstanding
|
|
|
Weighted-Average Exercise Price
|
|
Balance as of December 31, 2013
|
|
|
74
|
|
|
|
913
|
|
|
$
|
4.90
|
|
Authorized
|
|
|
100
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
(148
|
)
|
|
|
148
|
|
|
|
4.20
|
|
Exercised
|
|
|
—
|
|
|
|
(155
|
)
|
|
|
1.66
|
|
Forfeited/expired
|
|
|
70
|
|
|
|
(70
|
)
|
|
|
2.82
|
|
Balance as of September 30, 2014
|
|
|
97
|
|
|
|
835
|
|
|
$
|
5.61
|
|
For the three months ended September 30, 2014 and 2013 the Company recorded option expenses in the amount of $157 thousand and $144 thousand for each period. Included in the three months ended September 30, 2014 and 2013 option expenses were $6 thousand and $1 thousand, respectively, of outstanding consultant options subject to periodic fair value re-measurement under ASC 505-50-30
Equity Based Payments to Non Employees
.
For the nine months ended September 30, 2014 and 2013 the Company recorded option expenses in the amount of $447 thousand and $388 thousand for each period. Included in the nine months ended September 30, 2014 and 2013 option expenses were $17 thousand and $10 thousand, respectively, of outstanding consultant options subject to periodic fair value re-measurement under ASC 505-50-30
Equity Based Payments to Non Employees
.
The valuation using the Black-Scholes valuation pricing model is based upon the current market value of the Company’s common stock and other current assumptions, including the expected term (contractual term for consultant options). The Company records the expense related to consultant options using the accelerated expense pattern prescribed in ASC 505-50-30.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
Valuation and Expense Information.
The weighted-average fair value calculations for consultant and employee options are based on the following weighted average assumptions:
|
|
As of September 30
|
|
|
|
2014
|
|
|
2013
|
|
Dividend-yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk-free interest rate
|
|
|
0. 02 - 0.83
|
%
|
|
|
0.18 - 0.42
|
%
|
Expected volatility
|
|
|
56.35 - 91.33
|
%
|
|
|
74.83 - 142.90
|
%
|
Expected life (years)
|
|
|
0.3 - 3.0
|
|
|
|
0.5 - 3.0
|
|
Market value of common stock
|
|
$
|
8.68
|
|
|
$
|
3.20
|
|
As of September 30, 2014, the Company had $849 thousand and $16 thousand of total unrecognized compensation expense for employees and non-employees that the Company will amortize over the 3.8 weighted remaining term of the option agreements.
Non-Plan Stock Options
In November 2013 the Company issued 98 thousand stock options to board members and consultants outside of the Company Stock Option Plans. As of September 30, 2014, 82 thousand options vested and 7 thousand unvested at remaining contractual term of 3.1 years. 9 thousand options were exercised at a weighted average exercise price of $5.50 and 89 thousand options were outstanding as of September 30,2014.
11. Agreements
Working Capital Arrangement.
In May 2013 we extended the annual Grain Procurement and Working Capital Agreement with J.D. Heiskell that has been in place since March 2011. Pursuant to the agreement we agreed to procure whole yellow corn and grain sorghum (also called “milo”) 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 Heiskell. Title and risk of loss of the corn pass to the Company when the corn is deposited into the weigh bin. The term of the Agreement expires on December 31, 2014 and is automatically renewed for additional one-year terms. Heiskell further agrees to sell all ethanol to Kinergy Marketing or other marketing purchaser designated by the Company and all WDG and condensed distillers solubles 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 has been met and any performance required of the Company subsequent to the sale to J.D. Heiskell is inconsequential. These agreements are ordinary purchase and sale agency agreements for an ethanol plant.
The J.D. Heiskell sales activity associated with the Purchasing Agreement, Grain Procurement and Working Capital
Agreements during the three and nine months ended September 30, 2014 were as follows:
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Ethanol sales
|
|
$
|
33,641
|
|
|
$
|
36,936
|
|
|
$
|
121,388
|
|
|
$
|
69,676
|
|
Wet distiller's grains sales
|
|
|
8,175
|
|
|
|
8,621
|
|
|
|
30,970
|
|
|
|
16,605
|
|
Corn oil sales
|
|
|
1,018
|
|
|
|
925
|
|
|
|
3,263
|
|
|
|
1,555
|
|
Corn purchases
|
|
|
27,616
|
|
|
|
31,381
|
|
|
|
94,563
|
|
|
|
62,970
|
|
Milo Purchases
|
|
|
-
|
|
|
|
6,777
|
|
|
|
-
|
|
|
|
11,425
|
|
Accounts receivable
|
|
|
-
|
|
|
|
928
|
|
|
|
-
|
|
|
|
928
|
|
Accounts payable
|
|
|
1,904
|
|
|
|
2,189
|
|
|
|
1,904
|
|
|
|
2,189
|
|
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, the agreements mature on August 31, 2015 with automatic one-year renewals thereafter. For the three months ended September 30, 2014 and 2013, the Company expensed marketing costs of $0.7 million for each period, respectively, under the terms of both ethanol and wet distiller’s grains agreements. For the nine months ended September 30, 2014 and 2013, the Company expensed marketing costs of $2.3 million and $1.3 million, respectively.
12. Segment Information
Aemetis recognizes two reportable geographic segments: “North America” and “India .” The “North America” operating segment includes the Company’s owned ethanol plant in Keyes, California and its technology lab in College Park, Maryland. As the Company’s technology becomes commercialized, this business segment will include its domestic commercial application of second generation 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, 2014 and 2013 follows:
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
|
|
For the three months ended September 30,
|
|
|
For the nine months ended September 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
42,886
|
|
|
$
|
49,172
|
|
|
$
|
155,966
|
|
|
$
|
92,883
|
|
India
|
|
|
5,462
|
|
|
|
7,516
|
|
|
|
10,242
|
|
|
|
30,578
|
|
Total revenues
|
|
$
|
48,348
|
|
|
$
|
56,688
|
|
|
$
|
166,208
|
|
|
$
|
123,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
35,632
|
|
|
$
|
46,709
|
|
|
$
|
121,754
|
|
|
$
|
89,851
|
|
India
|
|
|
5,001
|
|
|
|
6,943
|
|
|
|
9,762
|
|
|
|
26,576
|
|
Total cost of goods sold
|
|
$
|
40,633
|
|
|
$
|
53,652
|
|
|
$
|
131,516
|
|
|
$
|
116,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
7,254
|
|
|
$
|
2,463
|
|
|
$
|
34,212
|
|
|
$
|
3,032
|
|
India
|
|
|
461
|
|
|
|
573
|
|
|
|
480
|
|
|
|
4,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
7,715
|
|
|
$
|
3,036
|
|
|
$
|
34,692
|
|
|
$
|
7,034
|
|
India
. During the three months ended September 30, 2014, four customers accounted for approximately 86% of the consolidated India segment revenues. During the three months ended September 30, 2013, five customers accounted for approximately 70% of the consolidated India segment revenues.
North America:
During the three months ended September 30, 2014, the Company’s revenues from ethanol, WDG, and corn oil were made pursuant to the Grain Procurement and Working Capital Agreement established between the Company and J.D. Heiskell. Sales of ethanol and WDG to J.D. Heiskell accounted for 97% of the Company’s North America segment revenues for the three months ended September 30, 2014.
During the three months ended September 30, 2013, Company’s revenues from ethanol, WDG, and corn oil were made pursuant to the Grain Procurement and Working Capital Agreement established between the Company and J.D. Heiskell. Sales of ethanol and WDG to J.D. Heiskell accounted for 98% of the Company’s North America segment revenues for the three months ended September 30, 2013.
Total assets consist of the following:
|
|
As of
|
|
|
As of
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
76,981
|
|
|
$
|
83,183
|
|
India
|
|
|
18,124
|
|
|
|
13,959
|
|
Total Assets
|
|
$
|
95,105
|
|
|
$
|
97,142
|
|
13. Related Party Transactions
The Company owes Eric McAfee and McAfee Capital, owned by Eric McAfee, $0.4 million and $1.0 million respectively, for salary and expense reimbursements, which are included in accrued expenses and accounts payable on the balance sheet as of September 30, 2014 and December 31, 2013. For the three months ended September 30, 2014 and 2013, the Company expensed $23 thousand and $40 thousand respectively, to reimburse actual expenses incurred by McAfee Capital and related entities. For the nine months ended September 30, 2014 and 2013, the Company expensed $142 thousand and $110 thousand, respectively, to reimburse actual expenses incurred by McAfee Capital and related entities.
AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
Construction of Carbon Dioxide Liquification Plant
On October 15, 2014, Aemetis Advanced Products Keyes, Inc., a wholly-owned subsidiary of Aemetis, Inc., entered into an agreement with Denmark-based Union Engineering to design and construct a 300 ton per day (about 220 million pound per year) Liquid CO2 facility. The facility will liquify carbon dioxide at the Aemetis ethanol biorefinery in Keyes, California at an expected construction cost of about $15 million. The Liquid CO2 facility will allow us to convert a by-product of the ethanol process into quality liquid carbon dioxide for customers in the food processing, beverage, dry ice and construction sectors.
Third Eye Capital Amendment
On November 7, 2014, Third Eye Capital agreed to Amendment No. 8 to the Note Purchase Agreement to extend a line of credit in the amount of $6.0 million available for advance to Aemetis, such advance to be added to the outstanding principal balance of the existing notes under the Note Purchase Agreement. In addition, Third Eye Capital agreed to give Aemetis the right to extend the maturity date of the notes to January 1,
2016 upon notice and payment of a 3% extension fee. Pursuant to the terms of Amendment No.8, Aemetis agreed to a covenant to complete an equity offering of its preferred stock for net proceeds of not less than $20 million with all of such net proceeds to be used to repay the principal outstanding under the Note Purchase Agreement in accordance with the priorities set forth there in.
As consideration for Amendment No.8, the unconditional personal Guaranty from Chairman of the Company, the guaranties from Company parties and McAfee Capital, LLC owned by Mr. Eric McAfee were all reaffirmed. The Company also agreed to pay $0.2 million in consideration to Mr. McAfee and McAfee Capital in exchange for their willingness to provide the guaranties. In addition, Company agreed to an amendment fee to Third Eye Capital in the amount of $0.3 million which will be paid from the proceeds of the advance.
The foregoing description of Amendment No. 8 is only a summary and does not purport to be complete and is qualified in its entirety by reference to the full text of Amendment No. 8, which is filed as Exhibit 10.1 hereto, and is incorporated, by reference herein.
15. 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. During 2014, 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 lenders. Management’s plans for the Company include:
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Operating the Keyes plant in the current positive margin environment;
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Continuing to incorporate lower-cost, non-food advanced biofuels feedstock at the Keyes plant;
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Attracting investors to financing arrangements including working with Advanced BioEnergy LP to issue up to $34.5 million of additional EB-5 notes at 3% interest rate;
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Refinancing the senior debt with a lender who is able to offer terms conducive to the long term financing of the Keyes plant;
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Restructuring or refinancing the State Bank of India note to allow for additional working capital and reduce current financing costs;
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Securing higher volumes of international shipments from the Kakinada, India biodiesel and refined glycerin facility; and
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AEMETIS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
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Continuing to expand in the India market
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Management believes that through the above mentioned actions it will be able to fund company operations and continue to operate the secured assets for the foreseeable future. There can be no assurance that the existing credit facilities and cash from operations will be sufficient nor that the Company will be successful at maintaining adequate relationships with the senior lenders or significant shareholders. Should the Company require additional financing, there can be no assurances that the additional financing will be available on terms satisfactory to the Company.