Edeniq: the Billion Dollar Baby is Torn between Two Lovers

September 13, 2016 |

bd-ts-091416-edeniq-smEdeniq is torn between two lovers: its current ownership group, which shuffled together a financing this week; and Aemetis, which is supposed to be acquiring Edeniq this year for $23 million.

How Edeniq landed in this situation, we’ll endeavor to explain. And we’ll revisit our long-held belief that Edeniq’s tech is, in fact, a Billion Dollar Baby — and well worth a titanic battle for the rights thereto.

The key news point: the EPA has approved Pacific Ethanol’s registration of its Stockton, CA ethanol plant to generate D3 cellulosic Renewable Identification Numbers using Edeniq’s Pathway Technology, as we reported earlier today here. Pacific Ethanol had begun producing cellulosic ethanol at Stockton last December.

The Pathway Technology combination of cellulase enzyme and Edeniq’s Cellunator high-shear milling equipment produces up to 2.5% cellulosic ethanol, up to a 7% increase in overall ethanol yield due to yield enhancement from starch and cellulose, and up to a 30% increase in corn oil recovery.

Turning to The Maltese Falcon

First, let’s clarify the tangled web with a visit to The Maltese Falcon. In that film, said one Kaspar Gutman to Bogart’s Sam Spade:

“The Knights [of Rhodes] were profoundly grateful to the Emperor Charles…They hit upon the thought of sending, for his first year’s tribute…a glorious golden falcon, crusted from head to foot with the finest jewels in their coffers. [But] it never reached Spain….it eventually appeared in Paris…where a Greek dealer named Charilaos Konstantinides found it in an obscure shop. No thickness of enamel could conceal value from his eyes.”

What you need to know here is that Edeniq is the Maltese Falcon. Aemetis, in this case, appears in the role of Charilaos Konstantinides.

So every time someone says “Edeniq’s cellulosic technology” — before you yawn and turn to another subject, substitute “glorious golden falcon, crusted from head to foot with the finest jewels in their coffers.”  That’ll set your imagination at the proper coordinates.

Meanwhile, you can’t unlock the financial power of Edeniq Pathway technology, at the end of the day, without a letter from the EPA granting you the power to generate RINs at a given facility. Generating cellulosic RINS may well be more profitable than minting gold coins. They sell for $1.94 per gallon, at the moment, those RINs, more than the fuel itself.

A RIN letter from the EPA may therefore be the most precious commodity on Earth.

But at the moment, it’s essentially a commodity produced from the rare element Unobtainium. It may well be easier to snatch gamma rays flying out of a supernova, using a catcher’s mitt, than to obtain pathway approval from the EPA for a new technology at a new facility. The average wait time is more than two years; some companies have waited more than five.

Now, scenes from Casablanca

Let us turn to the film Casablanca for help, here. In that flick, Ugarte says to Bogart’s Rick Blaine:

Look, Rick. Know what this is? Something that even you have never seen. Letters of transit signed by General de Gaulle. Cannot be rescinded. Not even questioned. Tonight I’ll be selling those for more money than I ever dreamed of. And then, adios, Casablanca.

So, every time someone says “EPA pathway approval” — before you yawn and turn to another subject, substitute “Letters of transit signed by General de Gaulle.

So, what’s happened with Edeniq and Aemetis, more or less?

In a nutshell, the previous owners of the Maltese Falcon, nervous over the lack of Letters of Transit, sold the Black Bird to Aemetis for $23 million.

But, in a surprising development, Aemetis and Edeniq’s forces, working together, unexpectedly produced the Letters of Transit before the transaction closed. Sort of like selling a dirt farm for ten bucks, then finding out shortly before closing that the farm is sitting atop an oil field.

As they say in Hollywood, complications ensue.

So, if you were to conclude that the original owners of the Billion Dollar Baby, now possessing the vital Letters of Transit, have an excellent motivation to try and kill the $23 million transaction, you wouldn’t be sent to Stupid School.

Aemetis’ legal team says that Edeniq is in breach, and as long as they are in breach, they can’t terminate. Edeniq’s legal team says they are not in breach, that Aemetis didn’t produce funds by the agreed date, and is seeking to get out.  You get the picture. Disagreement between the parties as to the facts. It’s headed for the courts, but could be a speedy review — this is contract law, not IP in dispute. But we’ll have to stand by and see.

Now, there’s a theory going around that EPA is completely backed up on pathway approvals and might be tempted to put any future Edeniq activities into a special circle of EPA hell known as “we’ll get to it”.

Waiting, waiting, waiting. I’ll never get out of here. I’ll die in Casablanca.

Is there any evidence for a back-up? Yes. Is there any direct evidence that EPA prioritizes on the basis of who might be running out of money soon? Not really.

There is also a theory going around that Edeniq would like to sell to Aemetis for, hmm, a slightly elevated price. Say something in the low nine figures. Or, get itself into an auction between motivated buyers eager for the Black Bird now that the Letters of Transit have been obtained.

– But can’t you make it just a little more? Please? 
– Sorry, but diamonds are a glut on the market. Everybody sells diamonds. There are diamonds everywhere. 2400. 
– All right.

Ein Fetzen Papier (“a scrap of paper”)

We asked Edeniq and Aemetis to comment in detail on the status of the transaction. Edeniq passed. But we did catch Aemetis CEO Eric McAfee, who had this to say:

“Last spring, Edeniq’s prospects were not bright on the EPA front. They were looking at another multi-year approval, and their capital was tired after a multi-year process they went through with EPA for the corn kernel technology. They may have been negotiating out of fear in the spring, sure. But we stepped in, and as part of the process they gave us a written authority to represent Edeniq and Pacific Ethanol, and we were able to draw on our experience with the EPA. Now there is EPA approval, and now the investors feel that the transaction price is “just not fair”.”

“I’m sorry they feel that way,“ McAfee said. “But this is biofuels and stuff happens. Commodity prices go crazy. Governments don’t enforce the law. The Saudis crater the oil price to go after fracking. We agreed on terms, and those terms are not a worthless piece of paper.”

Presumably, Edeniq has a different take on it. Lots of companies refuse to comment when there’s litigation in progress. The courts will decide on all this anyway, unless the parties decide to settle and close.

What might produce a quick settlement? Probably, something like EPA stopping work on Edeniq pathways so long as the company is limping along, without a viable capitalization plan to roll out its technology.

Would EPA prioritize approvals based on corporate viability? Will future approvals be no-brainers? Is Edeniq’s ownership group prepared for years in Casablanca waiting for Letters of Transit? Or, will the companies simply argue and then settle their differences? We have more to learn. Stay tuned.

That Glorious Golden Falcon crusted from head to foot, with the finest jewels in their coffers

But before we leave this story, let’s re-iterate why we believe that $23 million is a bargain price for this Billion Dollar Baby. We’ve been championing Edeniq’s technology for some time, and the marketplace is just getting better and better for what Brian Thome and his Visalia Wunderkind have developed, and which companies like FHR astutely backed.

Here’s our math, which differs somewhat from Edeniq’s conservative forecasting of $10 million in revenue gain for a 120 million gallon corn ethanol facility.

$13.776M 7% in additional ethanol, or 8.4 million gallons at $1.64 per gallon.
-$6.88M Subtracting half of that for lost dried distiller’s grains
$0.00 We’ve added nothing for additional starch ethanol RINs at $0.87 each, because we believe these are baked into the ethanol price.
$2.5M Extra corn oil. Based on 30% lift from 0.5 lbs/bushel to 0.65 at $0.36 per pound (and based on 2.8 gallons of ethanol, per bushel).
$3.33M  Extra RIN value from cellulosic production (3M gallons) – the difference between the $0.87 D6 RIN and the $1.98 D3 RIN
$3.03M Cellulosic ethanol production tax credit = $1.01/gallon * 3M gallons
$1.95M LCFS credits (assume 70% reduction compared to base line gasoline), or 0.7*0.93*3=$1.95M

So, we come up with $17.706 million in value, or $0.14 per gallon. And Edeniq touts ‘payback in one year’. Now, that’s a rara avis in its own right.

Some will quibble about the figures. First of all, the tech hasn’t yet been installed in a 120 million gallon facility. No one’s obtained LCFS registration, yet. Maybe the cellulosic ethanol tax credit goes away. Maybe RIN values crater. Maybe ethanol plummets, or corn oil — these are today’s figures. And as Aemetis CEO McAfee notes, this is biofuels, manure happens.

Spade: All those are on one side. Maybe some of them are unimportant. I won’t argue about that. But look at the number of them.

The Bottom Line

So, take that against 14 billion gallons of installed US ethanol capacity, and you have $1.96B in added industry revenue — were everyone to license and deploy, everywhere. That’s why, in our view, Edeniq is a Billion Dollar Baby, the Biofuels Black Bird. Small and hidden from view, as if covered in enamel, but precious, and the only one of its kind.

A view, parenthetically, we have been absolutely unable to inspire in others — not least the Edeniq ownership group. After all, it was they who agreed to the Aemetis transaction last spring.

That was then, this is now — and we’re not surprised at all that the suitors are vying hard for the Black Bird. Now, that is, that those Letters of Transit are in hand.

Gutman: Mr. Spade, have you any conception of how much money can be got for that black bird?
Spade: No.
Gutman: Well, sir, if I told you, if I told you half, you’d call me a liar.
Spade: No, not even if I thought so. But you tell me what it is, and I’ll figure out the profit.

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