Aemetis gets a sucker-punch from Seeking Alpha

“There is nothing hid, which shall not be manifested”, so says the good book.

So let’s see who’s right in the case of Short-Seller vs Aemetis, as the company reports Q2 earnings, and Seeking Alpha sets the house on fire.

If there’s anything more annoying in the equity markets than paid agents touting a fly-by-night technology, it would have to be the short seller tearing down a decent technology in hopes of lowering the stock price and reaping a substantial reward.

One of the short-sellers posted an alarming article in Seeking Alpha touting “Solvency concerns” at Aemetis, the California-based diversified advanced biofuels producer. It also appeared at ValueWalk.

The claim presented is that Aemetis “has already begun defaulting on its short-term debts…Creditors have already assumed as collateral ALL of Aemetis’ assets, and are now sweeping cash from Aemetis every night…Creditors are attempting to seize assets…A massive near-term equity offering is the only option for Aemetis…”

Pretty dire stuff.

And it gets worse. In the case of Aemetis, this particular article alleges that “the stock could enter a “death spiral” and decline by 50%-80%.” What’s a death spiral, here?

The author writes: “In general, a death spiral will occur when a company needs to pay a fixed obligation (i.e. debt) and when it must use a variable number of shares to do so. Investors know that the stock will fall upon the equity offering, so they sell and the share price falls. But then, the subsequent investors know that the equity offering has not yet happened, so they know that the stock will continue to fall further. They sell, the stock falls, and the cycle repeats again. No one wants to get caught holding the stock, because it is pre-determined that it will continue falling by even more. As the share price gets lower and lower, the relative dilution becomes larger and larger, which then exacerbates the share price decline even more.”

The Uh-Oh moment

So here a question for you. Why would an investor ever buy a stock if they “know that the stock will continue to fall further”? Would you? Would anyone? No one would. So, our DAR (Digest Agenda Rant) alarm starts to ring.

Let’s look at Aemetis and its situation. Our reference point is the company’s most recent SEC 10-Q filing.

As the Gospel of Mark (4: 22) advises: “For there is nothing hid, which shall not be manifested; neither was any thing kept secret, but that it should come abroad.” Or, as Carl Sagan once wrote, “extraordinary claims require extraordinary evidence.” So, now to the claims and the evidence.

The Claims

1. The Seeking Alpha claim: “Aemetis has over $90 million in short-term debt coming due, and only $4.7 million in cash.”

The reality: According to the SEC, at the end of Q2 2014, Aemetis had only $77.7M in “short & long-term debt and other long-term liabilities”. We asked Aemetis CEO Eric McAfee for more color on this point. He indicated that the company has “$59 million in senior debt, not $90 million.” That leaves an additional $18M in short-term obligations.

2. The claim: “Over $65 million of this debt has been classified as “long term”, simply because it is due 1 day after the end of the quarter. As a result, that $65 million is all, in fact, short-term debt by now.”

We asked Aemetis for comment. “The maturity of the debt was more than a year past the end of the quarter, as confirmed by the auditor review of the quarterly SEC filing,” said McAfee.

3. The claim: “Aemetis is very deeply in debt and is already defaulting on obligations in both the US and India.”

Aemetis responds: “None of the senior debt was in default.”

4. The claim. EB-5 Visa program. “Foreigners can “invest” $500K each into notes issued by Aemetis. Because they are investing in a US business and presumably creating jobs, the foreigner then gets a US immigration visa. The notes can be converted into Aemetis stock at a price of $3 – but only after 3 years…Aemetis has only managed to sell 3 of these visa investments since 2012, raising just $1.5M. The reason that there has been no demand is that…investors will know that they come behind over $90M in debt, such that there is a very real chance that they may never get paid.”

Aside from noting again the over-estimate on debt, we asked Aemetis to comment on the EB-5 investment program, since it is not specifically addressed in the SEC 10-Q.

The company noted: “Aemetis has $36 million of 3% interest EB-5 program debt in the funding process, and has already received $6.5 million into the escrow account or company accounts. Combining the $36 million of EB-5 funding with the $10 million of average quarterly cash flow, the entire $55 million of senior debt should be fully repaid within four quarters or less.”

5. The claim. “Aemetis (and the CEO) are in the situation where they simply MUST issue stock at any price and in very large size. They must also do so as soon as possible. The intention to issue equity should be clear. The company just filed an S3 registration statement for up to $100 million. It is huge for a company of this size.

Now, expanding companies raise capital. It is the primary reason they become public reporting companies in the first place. Aemetis has emerged from a significant investment cycle — moving to distilled biodiesel in India and producing advanced biofuels out of the former Cilion corn ethanol plant it acquired. The transactions and investments were primarily funded by debt — which is a typical strategy for equity holders when they think the stock will rise. That is, fund with debt, gain in market value as a result of an investment, sell equity at the higher price to pay down debt.

But, we asked Aemetis about “must issue” with respect to a cap raise.

Aemetis responds: “The company generated quarterly positive cash flow that exceeded interest payments by about $7 million in the second quarter and exceeded interest costs by about $25 million in the last three quarters. Aemetis has generated about $33 million of positive operating cash flow in just the past three quarters.”

6. The claim. “The company’s internal controls for accounting have been deemed to be ineffective.”

First of all, let’s put this into perspective. A lot of companies have issues with internal controls, in designing accounting reviews to meet SEC and GAAP reporting rules. Doesn’t mean the companies are bad investments, or bad companies. For example, here’s General Electric having the same problem, here. . And oops, here too. And that’s from what Fortune describes as one of the “10 Most Admired Companies in the World.” Nothing against GE — this is offered to put “accounting controls” commentary in SEC filings into context.

The company recently uplisted onto NASDAQ. If you haven’t done that lately — consider it a corporate equivalent to a colonoscopy. The Nasdaq listing process includes detailed reviews of financial audits, management backgrounds, board members, business operations, debt terms, cash balances and an assurance that the company will not have a debt maturity for an extended period of tlme.

Worth adding that the S-3 offering process used by Aemetis for its July $100M filing — well, Investopedia advises that “Companies seeking to use the S-3 must have met all reporting requirements listed under sections 12 or 15(d) of the Securities Exchange Act of 1934.”

We asked Aemetis about the extent to the Nasdaq review. “Aemetis was was listed on Nasdaq only two months ago, so this Nasdaq listing review included all information up to the 2nd quarter announced about a week ago.”

The actual Aemetis results

This Q2, the news was pretty positive. Aemetis announced $13.6 million of debt payments during Q2 and positive Adjusted EBITDA of $9.1 million.  After interest of $2.5 million and fee amortization on debt of $2.5 million, after-tax earnings were $2.7 million. Earnings would have been about $7.7 million without the debt interest and fee amortization, the same as Q1 2014 earnings.  If and as secured debt is paid down, interest costs could decrease from $24.5 million in 2013 to about $1 million per year when only the $36 million of EB-5 funding is outstanding.

The Bottom Line

I’m not buying the Seeking Alpha story. There’s way too many holes here, and items presented out of context. And, there’s a short-seller with something to gain from a falling stock.

For sure, there have been some balance sheets saddled with a lot of debt, overhanging from the 2008-09 financial crisis. Aemetis is one of them. The penalty they pay for that ought to be already baked into the stock price — after all, the debt isn’t new, and the company’s has succeeded in rolling out a differentiated feedstock and technology strategy. There are companies in this sector with 5X the market valuation based on negative cash flow.

Whether that makes Aemetis a good stock to hold — we’ll leave that to the professionals to advise on target prices, rates of return and the like. Our role is simply to muck out the manure, here.

In assessing the company, we see no reason to look beyond the SEC filings and the company’s guidance under SEC rules, where we see a company that is reporting substantial positive strides in liquidity and profits. If there are “solvency concerns” at a company, there are effective SEC procedures for creating market transparency. We’re content to leave oversight to the SEC, not the short-sellers.

Disclosure. The author, Jim Lane, does not, has never, and will never own any renewable energy, biofuels, or renewable chemicals securities or short positions therein.