Smoking gun found in Biofuels’ Billion Dollar Baby Brawl?

April 2, 2017 |

The sudden, exciting and apparently material news arrived via press release last week that Edeniq has succeeded in knocking down two counts of the Aemetis lawsuit against it.

It’s unusual to get press releases about lawsuits and cross-filings. Most companies avoid them like the plague — usually they come out at judgment time, not filing time, because lawsuits frighten investors while resolutions and rulings encourage them.

But almost nothing about the Billion Dollar Baby Brawl has been standard fare as Aemetis, Edeniq, a string of investors and more lawyers than you can easily chain to the bottom of the ocean duke it out over the future of Edeniq’s technologies.

Who’s going to own Edeniq at the end of the day? Courts have yet to rule — but for sure, the red-hot court action has been validating the value of Edeniq’s product suite just as surely as the arrival of a locust suggests the presence of food.

So, it prompts us to look deeper into the bioeconomy’s dirty diaper bin of allegations and cross-allegations between companies and technologies that reside right next to each other in the 50 Hottest Companies rankings. As Aemetis and Edeniq coincidentally do.

The dismissal and the re-file

About those two dismissed counts. They consist of a 3rd party defendant known as Trinity Capital getting out of  the California suit on the grounds that it doesn’t have a nexus in California. The predictable outcome is the suit was filed in Arizona, where that 3rd party does have offices. So we are essentially back where we started.

And, um, yikes!

We’ll leave it to the SEC to determine if Edeniq sending a press release out without framing the trivial, jurisdictional nature of the dismissal and the inevitable and immediate re-filing elsewhere — constitutes a “truth but not the whole truth” violation under Section 10(b)(5) of the Securities Exchange Act of 1934, just in case Edeniq has been circulating any securities memoranda of late. Let’s hope not.

The Frog Prince

The case seems to revolve around a variation of the Grimm Brothers’ fairy tale The Frog Prince.

You probably remember that one. A princess loses her golden ball in a deep pond. A frog offers to retrieve it, but asks for the reward of living in the palace and sleeping in the princess’ bed. She’s revolted, but desperate, and agrees. Frog retrieves golden ball, claims rewards, and gets promptly blown off by the princess. Frog appeals to the King, King insists the princess keeps her promise. Frog moves in, she’s disgusted. Frog offers to trade his place in her bed for a single kiss. Princess kisses frog, frog becomes handsome prince. They live happily ever after.

The Edeniq-Aemetis problem

In the Edeniq-Aemetis version of The Frog Prince, the golden ball is an EPA pathway approval for the company’s transformative cellulosic ethanol technology. Edeniq and its clientele struggled to obtain it — most specifically, Pacific Ethanol was struggling to get an OK. Investor fatigue set in, investors agreed to sell what we described as “Biofuels’ Billion-Dollar Baby” to Aemetis for $23M in cash and stock.

Here’s where we descend a little into the world of “he said-she said”. In the lawsuit filed by Aemetis last year against Edeniq, It was alleged:

Aware of Plaintiff’s past successes in navigating the EPA approval process for biofuels technologies and operating plants, EdenIQ solicited Plaintiff’s assistance in obtaining EPA approval of its technology.  To that end, with EdenIQ’s consent and the written approval of Pacific Ethanol that was seeking EPA approval for the EdenIQ technology at its California plant, Plaintiff’s CEO was asked to personally use his contacts and influence to manage the EdenIQ EPA approval process…On June 8, 2016, Plaintiff’s CEO arranged and hosted a conference call with a large team of EPA regulators and attorneys to determine the status of the EdenIQ application for cellulosic ethanol production.  The EPA reported that the EdenIQ application was delayed beyond the 90-day approval period because the EPA was having significant difficulty finding a way to approve the EdenIQ application due to a structural problem with the application:  EdenIQ was not willing to disclose its proprietary process for measuring cellulosic ethanol production to the plant operator, Pacific Ethanol, yet Pacific Ethanol would be reporting a certain volume of valuable cellulosic ethanol to the EPA. Since Pacific Ethanol could not be held responsible for EdenIQ’s errors in calculating the amount of cellulosic ethanol being produced, the EPA “company registration” of the Pacific Ethanol plant would not be enforceable against Pacific Ethanol.

Plaintiff’s CEO negotiated a compromise in which EdenIQ and Pacific Ethanol would enter into a “joint and several liability” agreement as a part of the license for the technology.  After arranging additional technical descriptions and third-party technology expert opinions to strengthen the EdenIQ application, the EPA and Plaintiff’s CEO agreed to a process that would require about two months to receive final EPA approval of the EdenIQ company registration at its first biofuels plant.  On June 8, 2017, Plaintiff’s CEO issued a memo to EdenIQ and Pacific Ethanol, and then directly worked with the technical teams of EdenIQ and Pacific Ethanol during June, July and August 2017 to fulfill the revised EPA approval process based on the June 8th conference call.

So, this is the part where the frog retrieves the golden ball.

But note that what we had here was “significant inroads” — which is not quite exactly the same thing as getting EPA approval. But EPA approval did arrive not long after.

A Smoking Gun?

So here’s the allegation relating back to the party in Arizona. Note, “alleged”. No jury has tried the facts in any of this.

Just one day after the successful June 8th EPA conference call arranged by the CEO of Plaintiff in which a quick EPA approval of the EdenIQ technology was negotiated, on June 9, 2016, Erhart, acting on behalf of Trinity, proposed in an email to the President and CEO of EdenIQ that, in light of EdenIQ’s recent sales performance and the impact EdenIQ’s technology would have on future sales after EPA approval, EdenIQ should forego the merger with Aemetis (despite the Merger Agreement) and enter into an equity relationship with Trinity.  

An email on June 9, 2016 from Erhart to the CEO of EdenIQ specifically cites the enormous financial impact such approval would have on EdenIQ’s future sales and profits, describing the financial impact of the EPA approval as “I feel it could really explode” and “get a big multiple on the current value,” if EdenIQ would breach the Aemetis merger agreement in order to allow Defendant Trinity to take a larger ownership stake in EdenIQ.  As clearly described in the June 9th email, Defendants Trinity and Erhart saw an opportunity to prevent the closing of the Merger Agreement and instead obtain an equity stake in EdenIQ for Defendants.  With 190 ethanol plants in the US that should use the EdenIQ technology after the EPA approval, and estimated earnings to EdenIQ of $4.2 million per year for each ethanol plant, only 100 ethanol plants as customers could be worth $420 million per year in recurring positive cash flow to EdenIQ.  The value of EdenIQ could become $2 billion or more with only a 50% market adoption of the EdenIQ technology – after an EPA approval was obtained. 

The Money Shot

The Aemetis lawsuit against Trinity Capital further alleges that:

Aware that Plaintiff’s CEO had developed good rapport with EPA officials and was making significant progress towards securing EPA approval of EdenIQ’s technology, upon information and belief, Defendants urged EdenIQ to maintain its contractual relationship with Plaintiff for as long as possible, until it became evident that EPA approval was done.

The across-the-board denial from Edeniq

It wouldn’t cause anyone to die of shock to learn that Edeniq is vigorously denying and defending. What’s curious about the case is that turns on an obscure provision relating to termination, because Edeniq took the Terminator option in August 2016 and that’s what Aemetis is suing to un-do. Edeniq said that, in a nutshell, Aemetis couldn’t come up with the cash to fund all the requirements of the deal. Aemetis says “bosh!”. Mud-slinging has ensued, pies flying into faces, you get the idea.

The vast value of this technology, as now cleared for deployment, is becoming more and more clear— that’s why Edeniq has labored over it, why Aemetis loves it, and frankly why we have always loved it in Digestville.

Is it a breach?

The obscure provision? In this agreement, a party in breach can’t terminate, and Aemetis alleges that Edeniq breached a requirement in the deal that Edeniq furnish a manifest prior to close, indicating which combination of cash and stock would be required by each Edeniq investor, and that the list was not received by the July 22, 2016 date unto which the Aemetis-Edeniq agreement had been extended.

Edeniq says, not surprisingly that they were not in breach, that the manifest was due until two days before closing and a closing was never scheduled by Aemetis and Edeniq, and they sent stuff over in any case. Aemetis, not surprisingly, says that when the completed manifest was not delivered by July 20th, two days before the expiration of the merger agreement, Edeniq was in breach.

The Bottom Line

We’ve seen a lot of funky closes, but this is a new one on us.

The takeaway is that Edeniq is hot, hot, hot, Aemetis wants it, and now Edeniq has raised money with existing shareholders and is seeking some other transaction or to stay independent. We’ll stand by as events develop in the story of the Frog Prince and the Bioeconomy.

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