10-Q 1 amtx_10q.htm QUARTERLY REPORT amtx_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
———————
FORM 10-Q
———————
 
   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2016
 
Or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                                      to
 
Commission File Number: 001-36475
 
———————
AEMETIS, INC.
 (Exact name of registrant as specified in its charter)
———————
 
Nevada
26-1407544
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
 
20400 Stevens Creek Blvd., Suite 700
Cupertino, CA 95014
 (Address of Principal Executive Offices, including zip code)
 
(408) 213-0940
 (Registrant’s telephone number, including area code)
———————
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  ☑     No ◻
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ☑    No ◻
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer    ☐    Accelerated filer    ☐     Non-accelerated filer   ☐   Smaller reporting company   ☑
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ◻   No ☑
 
The number of shares outstanding of the registrant’s Common Stock on October 31, 2016 was 19,858,182 shares.
 

 
 
 
AEMETIS, INC.
 
FORM 10-Q
 
Quarterly Period Ended September 30, 2016
 
INDEX
 
PART I--FINANCIAL INFORMATION    
 
 
 
Item 1
Financial Statements.
4
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
22
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk.
31
 
 
 
Item 4.
Controls and Procedures.
31
     
PART II--OTHER INFORMATION    
     
Item 1.
Legal Proceedings
32
 
 
 
Item 1A.
Risk Factors.
32
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
32
 
 
 
Item 3.
Defaults Upon Senior Securities.
33
 
 
 
Item 4.
Mine Safety Disclosures.
33
 
 
 
Item 5.
Other Information.
33
 
 
 
Item 6.
Exhibits.
34
 
 
 
Signatures  
35
 
 
ii
 
 
SPECIAL NOTE REGARDING FORWARD—LOOKING STATEMENTS
 
On one or more occasions, we may make forward-looking statements in this Quarterly Report on Form 10-Q, including statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events or other statements that are not historical facts.  Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding management’s plans; trends in demand for renewable fuels; trends in market conditions with respect to prices for inputs for our products verses prices for our products; our ability to leverage approved feedstock pathways; our ability to leverage our location and infrastructure; our ability to incorporate lower-cost, non-food advanced biofuels feedstock at the Keyes plant; our ability to adopt value-add byproduct processing systems; our ability to expand into alternative markets for  biodiesel and its byproducts, including continuing to expand our sales into international markets; the impact of changes in regulatory policies on our performance, including the Indian government’s recent changes to tax policies, diesel prices and related subsidies; our ability to continue to develop new, and to maintain and protect  new and existing, intellectual property rights; our ability to adopt, develop and commercialize new technologies; our ability to refinance our senior debt on more commercial terms or at all; our ability to continue to fund operations and our future sources of liquidity and capital resources; our ability to sell additional notes under our EB-5 note program and our expectations regarding the release of funds from escrow under our EB-5 note program; our ability to improve margins; and our ability to raise additional capital.  Words or phrases such as “anticipates,” “may,” “will,” “should,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “projects,” “targets,” “will likely result,” “will continue” or similar expressions are intended to identify forward-looking statements.  These forward-looking statements are based on current assumptions and predictions and are subject to numerous risks and uncertainties.  Actual results or events could differ materially from those set forth or implied by such forward-looking statements and related assumptions due to certain factors, including, without limitation, the risks set forth under the caption “Risk Factors” below, which are incorporated herein by reference as well as those business risks and factors described elsewhere in this report and in our other filings with the Securities and Exchange Commission (the “SEC”), including without limitation, our most recent Annual Report on Form 10-K.
 
 
iii
 
 
PART I - FINANCIAL INFORMATION
 
  Item 1 - Financial Statements.
 
AEMETIS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except for par value)
 
 
 
September 30, 2016
 
 
December 31, 2015
 
Assets
 
(Unaudited)
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $652 
 $283 
Accounts receivable
  1,013 
  1,166 
Inventories
  3,982 
  4,804 
Prepaid expenses
  445 
  527 
Other current assets
  1,271 
  1,222 
Total current assets
  7,363 
  8,002 
 
    
    
Property, plant and equipment, net
  67,543 
  70,718 
Intangible assets, net of accumulated amortization of $404 and $344, respectively
  1,320 
  1,380 
Other assets
  3,118 
  3,041 
Total assets
 $79,344 
 $83,141 
 
    
    
Liabilities and stockholders' deficit
    
    
Current liabilities:
    
    
Accounts payable
 $8,808 
 $10,183 
Current portion of long term debt
  4,991 
  5,607 
Short term borrowings
  7,555 
  6,340 
Mandatorily redeemable Series B convertible preferred stock
  2,818 
  2,742 
Accrued property taxes
  2,676 
  2,244 
Other current liabilities
  2,521 
  2,181 
Total current liabilities
  29,369 
  29,297 
 
    
    
Long term liabilities:
    
    
Senior secured notes
  68,598 
  60,925 
EB-5 notes
  24,000 
  22,500 
Long term subordinated debt
  5,636 
  5,523 
Other long term liabilities
  124 
  190 
Total long term liabilities
  98,358 
  89,138 
 
    
    
Stockholders' deficit:
    
    
Series B convertible preferred stock, $0.001 par value; 7,235 authorized; 1,328 and 1,398 shares issued and outstanding each period, respectively (aggregate liquidation preference of $3,984 and $4,194, respectively)
  1 
  1 
Common stock, $0.001 par value; 40,000 authorized; 19,858 and 19,619 shares issued and outstanding, respectively
  20 
  20 
Additional paid-in capital
  83,267 
  82,115 
Accumulated deficit
  (128,442)
  (114,251)
Accumulated other comprehensive loss
  (3,229)
  (3,179)
Total stockholders' deficit
  (48,383)
  (35,294)
 
    
    
Total liabilities and stockholders' deficit
 $79,344 
 $83,141 
 
 
The accompanying notes are an integral part of the financial statements.
 
 
4
 
 
 
AEMETIS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME / (LOSS)
(Unaudited, in thousands except for earnings per share)
 
 
 
 For the three months ended September 30,
 
 For the nine months ended September 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
Revenues
 $39,377 
 $38,510 
 $105,762 
 $111,303 
 
    
    
    
    
Cost of goods sold
  35,711 
  37,476 
  98,066 
  108,548 
 
    
    
    
    
Gross profit
  3,666 
  1,034 
  7,696 
  2,755 
 
    
    
    
    
Research and development expenses
  87 
  117 
  290 
  330 
Selling, general and administrative expenses
  3,222 
  2,774 
  9,123 
  9,556 
 
    
    
    
    
Operating income (loss)
  357 
  (1,857)
  (1,717)
  (7,131)
 
    
    
    
    
Other income (expense)
    
    
    
    
 
    
    
    
    
Interest expense
    
    
    
    
Interest rate expense
  (3,046)
  (2,610)
  (8,679)
  (7,641)
Amortization expense
  (1,425)
  (1,258)
  (4,269)
  (5,386)
Loss on debt extinguishment
  - 
  - 
  - 
  (330)
Other income (expense)
  19 
  (30)
  480 
  (191)
 
    
    
    
    
Loss before income taxes
  (4,095)
  (5,755)
  (14,185)
  (20,679)
 
    
    
    
    
Income tax expense
  - 
  - 
  6 
  6 
 
    
    
    
    
Net loss
 $(4,095)
 $(5,755)
 $(14,191)
 $(20,685)
 
    
    
    
    
Other comprehensive income (loss)
    
    
    
    
Foreign currency translation adjustment
  56 
  (104)
  (50)
  (150)
Comprehensive loss
 $(4,039)
 $(5,859)
 $(14,241)
 $(20,835)
 
    
    
    
    
Net loss per common share
    
    
    
    
Basic
 $(0.21)
 $(0.29)
 $(0.72)
 $(1.04)
Diluted
 $(0.21)
 $(0.29)
 $(0.72)
 $(1.04)
 
    
    
    
    
Weighted average shares outstanding
    
    
    
    
Basic
  19,833 
  19,521 
  19,741 
  19,898 
Diluted
  19,833 
  19,521 
  19,741 
  19,898 
 
The accompanying notes are an integral part of the financial statements.
 
 
5
 
 
AEMETIS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 
 
 
For the nine months ended September 30,
 
 
 
2016
 
 
2015
 
Operating activities:
 
 
 
 
 
 
Net loss
 $(14,191)
 $(20,685)
 
Adjustments to reconcile net loss to net cash provided by (used in) operating activitites:
 
Share-based compensation
  573 
  694 
Stock issued in connection with consultant services
  - 
  204 
Depreciation
  3,523 
  3,560 
Debt related amortization expense
  4,269 
  5,386 
Intangibles and other amortization expense
  95 
  96 
Change in fair value of warrant liability
  34 
  (57)
Loss on extinguishment of debt
  - 
  330 
Loss on sale/disposal of assets
  11 
  - 
 
    
    
Changes in operating assets and liabilities:
    
    
Accounts receivable
  150 
  (988)
Inventories
  795 
  650 
Prepaid expenses
  82 
  698 
Other current assets and other assets
  (175)
  (49)
Accounts payable
  (1,315)
  (481)
Accrued interest expense and fees, net of payments
  5,910 
  7,446 
Other liabilities
  683 
  384 
Net cash provided by (used in) operating activities
  444 
  (2,812)
 
    
    
Investing activities:
    
    
Capital expenditures
  (479)
  (22)
 
    
    
Net cash used in investing activities
  (479)
  (22)
 
    
    
Financing activities:
    
    
Proceeds from borrowings
  8,535 
  28,987 
Repayments of borrowings
  (8,091)
  (23,900)
Issuance of common stock for services, option and warrant exercises
  - 
  23 
Net cash provided by financing activities
  444 
  5,110 
 
    
    
Effect of exchange rate changes on cash and cash equivalents
  (40)
  (92)
Net cash and cash equivalents increase for period
  369 
  2,184 
Cash and cash equivalents at beginning of period
  283 
  332 
Cash and cash equivalents at end of period
 $652 
 $2,516 
Supplemental disclosures of cash flow information, cash paid:
    
    
Interest payments
 $2,518 
 $356 
Income tax expense
  6 
  6 
 
    
  - 
 
Supplemental disclosures of cash flow information, non-cash transactions:
 
    
Proceeds from exercise of stock options applied to accounts payable
  - 
  21 
Fair value of warrants issued to subordinated debt holders
  578 
  1,087 
Repurchase of common stock on revolver loan advance
  - 
  8,218 
Stock issued in connection with services
  - 
  432 
Settlement of accounts payable through transfer of equipment
  66 
  - 
 
The accompanying notes are an integral part of the financial statements.
 
 
6
 
 
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. (formerly AE Biofuels, 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;
Aemetis Advanced Products Keyes, Inc., a Delaware corporation; and,
Aemetis Advanced Fuels Goodland, Inc., a Delaware corporation.
 
We are an advanced renewable fuels and biochemicals company focused on the acquisition, development and commercialization of innovative technologies that replace traditional petroleum-based products by converting first generation biofuel plants into advanced biorefineries.  Founded in 2006, we own and operate a 60 million gallon per year ethanol production facility (Keyes plant) in California’s Central Valley where we manufacture and produce ethanol, Wet Distiller’s Grain (WDG), Condensed Distillers Solubles (CDS) and distillers’ corn oil and a 50 million gallon per year renewable chemical and advanced fuel production facility on the East Coast of India (Kakinada plant), where we manufacture and produce high quality distilled biodiesel and refined glycerin.  In addition, we operate a research and development laboratory at the Maryland Biotech Center and hold a portfolio of patents and related technology licenses for the production of renewable fuels 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, 2016, the consolidated condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2016 and 2015, and the consolidated condensed statements of cash flows for the nine months ended September 30, 2016 and 2015 are unaudited. The consolidated condensed balance sheet as of December 31, 2015 was derived from the 2015 audited consolidated financial statements and notes thereto. The consolidated condensed financial statements in this report should be read in conjunction with the 2015 audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2015.
 
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.
 
 
7
 

AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
In the opinion of management, the unaudited interim consolidated condensed financial statements for the three and nine months ended September 30, 2016 and 2015 have been prepared on the same basis as the audited consolidated statements as of December 31, 2015 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, 2016 are not necessarily indicative of the operating results for any subsequent quarter, for the full fiscal year or any future periods.
 
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements 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 or by-products received.
 
Cost of Goods Sold. Cost of goods sold includes those costs directly associated with the production of revenues, such as raw material consumed, factory overhead and other direct production costs.  During periods of idle plant capacity, costs otherwise charged to cost of goods sold are reclassified to selling, general and administrative expense.
 
Accounts Receivable.  The Company sells ethanol, WDG, corn syrup and corn oil through third-party marketing arrangements generally without requiring collateral.  The Company sells biodiesel, glycerin and processed natural oils to a variety of customers and may require advanced payment based on the size and creditworthiness of the customer.  Accounts receivable consists 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 uncollectibility 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. There is no balance for allowance for doubtful accounts at September 30, 2016 and December 31, 2015.
 
Inventories. Ethanol inventory, raw materials, and work-in-process are valued using methods which approximate the lower of cost (first-in, first-out) or net realizable value (NRV).  Distillers’ grains and related products are stated at NRV.  In the valuation of inventories, NRV is determined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
 
 
8
 
 
 
Property, Plant and Equipment. Property, plant and equipment are carried at cost less accumulated depreciation after assets are placed in service and are comprised primarily of buildings, furniture, machinery, equipment, land, and the biodiesel plant in India. It is the Company’s policy to depreciate capital assets over their estimated useful lives using the straight-line method.
 
The Company evaluates the recoverability of long-lived assets with finite lives in accordance with Accounting Standards Codification (ASC) Subtopic 360-10-35 Property Plant and Equipment –Subsequent Measurements, which requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, based on estimated undiscounted cash flows, the impairment loss would be measured as the difference between the carrying amount of the assets and its estimated fair value.
 
Basic and Diluted Net Income (Loss) per Share.  Basic net income (loss) per share is computed by dividing net income or loss attributable to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted net income (loss) per share reflects the dilution of common stock equivalents such as options, convertible preferred stock, debt and warrants to the extent the impact is dilutive.  As the Company incurred net losses for the three and nine months ended September 30, 2016 and 2015, potentially dilutive securities have been excluded from the diluted net loss per share computations as their effect would be anti-dilutive.
 
The following table shows the number of potentially dilutive shares excluded from the diluted net loss per share calculation as of September 30, 2016 and 2015:
 
 
 
As of    
 
 
 
September 30, 2016
 
 
September 30, 2015
 
 
 
 
 
 
 
 
Series B preferred (1:10 post split basis)
  133 
  141 
Common stock options and warrants
  1,965 
  1,307 
Debt with conversion feature at $30 per share of common stock
  861 
  783 
Total number of potentially dilutive shares excluded from the diluted net loss per share calculation
  2,959 
  2,231 
 
Comprehensive Loss. ASC 220 Comprehensive Income requires that an enterprise report, by major components and as a single total, the change in its net assets from non-owner sources. The Company’s other comprehensive income (loss) and accumulated other comprehensive loss consists solely of cumulative currency translation adjustments resulting from the translation of the financial statements of its foreign subsidiary. The investment in this subsidiary is considered indefinitely invested overseas, and as a result, deferred income taxes are not recorded related to the currency translation adjustments.
 
 
9
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
Foreign Currency Translation/Transactions. Assets and liabilities of the Company’s non-U.S. subsidiary that operates in a local currency environment, where that local currency is the functional currency, are translated into U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded to a separate component of accumulated other comprehensive loss. Income and expense accounts are translated at average exchange rates. Gains and losses from other foreign currency transactions are recorded in other income (expense).
 
Operating Segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company recognizes two reportable geographic segments: “North America” and “India.”
 
The “North America” operating segment includes the Company’s 60 million gallons per year capacity Keyes plant in Keyes, California and its research facilities in College Park, Maryland.
 
The “India” operating segment encompasses the Company’s 50 million gallon per year capacity biodiesel plant in Kakinada, India, its administrative offices in Hyderabad, India, and the holding companies in Nevada and Mauritius.
 
Fair Value of Financial Instruments. Financial instruments include cash and cash equivalents, accounts receivable, accounts payable, current and non-current portion of notes payable and long-term debt and accrued expenses.  Due to the unique terms of our notes payable and long-term debt and the financial condition of the Company, the fair value of the debt is not readily determinable.  Upon the application of extinguishment accounting to our debt instruments, we use outside valuation experts to estimate the applicable discount rate using similar instruments.  The fair value, determined using level 3 inputs, of all other current financial instruments is estimated to approximate carrying value due to the short-term nature of these instruments.
 
Share-Based Compensation. The Company recognizes share-based compensation expense in accordance with ASC 718 Stock Compensation, requiring the Company to recognize expense related to the estimated fair value of the Company’s share-based compensation awards at the time the awards are granted adjusted to reflect only those shares that are expected to vest.
 
Commitments and Contingencies. The Company records and/or discloses commitments and contingencies in accordance with ASC 450 Contingencies.  ASC 450 applies to an existing condition, situation or set of circumstances involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur.
 
Debt Modification Accounting. The Company evaluates amendments to its debt in accordance with ASC 470-50 Debt – Modification and Extinguishments for modification and extinguishment accounting.  This evaluation includes comparing the net present value of cash flows of the new debt to the old debt to determine if changes greater than 10 percent occurred.  In instances where the net present value of future cash flows changed more than 10 percent, the Company applies extinguishment accounting and determines the fair value of its debt based on factors available to the Company.
 
10
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
Convertible Instruments. The Company evaluates the impacts of convertible instruments based on the underlying conversion features. Convertible instruments are evaluated for treatment as derivatives that could be bifurcated and recorded separately. Any beneficial conversion feature is recorded based on the intrinsic value difference at the commitment date.
 
Recently Issued Accounting Pronouncements.
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The new standard will be effective for us on January 1, 2018. We are currently evaluating the potential impact that Topic 606 may have on our financial position and results of operations.
 
2.           Inventory
 
Inventory consists of the following:
 
 
 
September 30, 2016  
 
 
December 31, 2015  
 
Raw materials
 $1,465 
 $1,219 
Work-in-progress
  1,638 
  1,807 
Finished goods
  879 
  1,778 
Total inventories
 $3,982 
 $4,804 
 
3.         Property, Plant and Equipment
 
Property, plant and equipment consist of the following:
 
 
 
September 30, 2016  
 
 
December 31, 2015  
 
Land
 $2,724 
 $2,727 
Plant and buildings
  81,975 
  81,821 
Furniture and fixtures
  504 
  494 
Machinery and equipment
  4,314 
  4,052 
Construction in progress
  25 
  147 
Total gross property, plant & equipment
  89,542 
  89,241 
Less accumulated depreciation
  (21,999)
  (18,523)
Total net property, plant & equipment
 $67,543 
 $70,718 
 
 
11
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
Depreciation on the components of property, plant and equipment is calculated using the straight-line method to allocate their depreciable amounts over their estimated useful lives as follows:
 
 
 
 Years
 
 Plant and buildings
  20-30 
 Machinery & equipment
  5-7 
 Furniture & fixtures
  3-5 
 
For the three months ended September 30, 2016 and 2015, the Company recorded depreciation expense of $1.1 million and $1.2 million, respectively. For the nine months ended September 30, 2016 and 2015, the Company recorded depreciation expense of $3.5 million and $3.6 million, 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, 2016.
 
4.         Debt
 
Debt consists of the following:
 
 
 
September 30, 2016
 
 
December 31, 2015
 
Third Eye Capital term notes
 $6,459 
 $6,269 
Third Eye Capital revolving credit facility
  32,525 
  25,870 
Third Eye Capital revenue participation term notes
  10,846 
  10,526 
Third Eye Capital acquisition term notes
  18,768 
  18,260 
Cilion shareholder seller notes payable
  5,636 
  5,523 
State Bank of India secured term loan
  3,161 
  4,200 
Subordinated notes
  7,114 
  6,340 
EB-5 long term promissory notes
  25,830 
  23,907 
Unsecured working capital loans
  441 
  - 
Total debt
  110,780 
  100,895 
Less current portion of debt
  12,546 
  11,947 
Total long term debt
 $98,234 
 $88,948 
 
Third Eye Capital Note Purchase Agreement
 
On July 6, 2012, Aemetis, Inc. and Aemetis Advanced Fuels Keyes, Inc. (AAFK), entered into an Amended and Restated Note Purchase Agreement with Third Eye Capital (the Note Purchase Agreement).  Pursuant to the Note Purchase Agreement, Third Eye Capital extended credit in the form of (i) senior secured term loans in an aggregate principal amount of approximately $7.2 million to replace existing notes held by Third Eye Capital (the Term Notes); (ii) senior secured revolving loans in an aggregate principal amount of $18.0 million (Revolving Credit Facility); (iii) senior secured term loans in the principal amount of $10.0 million to convert the prior revenue participation agreement to a note (Revenue Participation Term Notes); and (iv) senior secured term loans in an aggregate principal amount of $15.0 million (Acquisition Term Notes) used to fund the cash portion of the acquisition of Cilion, Inc. (the Term Notes, Revolving Credit Facility, Revenue Participation Term Notes and Acquisition Term Notes are referred to herein collectively as the Third Eye Capital Notes). The Third Eye Capital Notes have a maturity date of April 1, 2017, extendable by the Company to April 2018 upon payment of a fee equal to 5% of the carrying value of the debt. After this financing transaction, Third Eye Capital obtained sufficient equity ownership in the Company to be considered a related party.
 
12
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
On March 21, 2016, Third Eye Capital agreed to Amendment No. 12 to the Note Purchase Agreement to: (i) extend the maturity date of the Third Eye Capital Notes to April 1, 2017 in exchange for a 5% extension fee consisting of adding $3.1 million  to the outstanding principal balance of the Revolving Credit Facility, with an allowable further extension of the maturity date of the Third Eye Capital Notes to April 1, 2018, at the Company’s election, for an additional extension fee of 5% of the then outstanding Third Eye Capital Notes, (ii) waive the free cash flow financial covenant under the Note Purchase Agreement for the three months ended December 31, 2015, (iii) provide that such covenant need not be complied with for the fiscal quarters ending March 31, June 30 and September 30, 2016, (iv) revise the Keyes Plant market value to note indebtedness ratio to 70%, (v) add a covenant that the Company shall have received I-924 approval from the U.S. Citizenship and Immigration Services (USCIS) for additional EB-5 Program financing of at least $35 million by June 1, 2016 and (vi) increase the basket for all costs and expenses that may be reimbursed to directors of the Company and its affiliates to $0.3 million in any given fiscal year.  As consideration for such amendment and waiver, the borrowers agreed to pay Third Eye Capital an amendment and waiver fee of $1.5 million to be added to the outstanding principal balance of the Revolving Credit Facility, and to deliver a binding letter of intent from Aemetis Advanced Fuels Goodland, Inc. to acquire the plant, property and equipment located in Goodland, Kansas and previously owned by New Goodland Energy Center for $15,000,000 in assumed debt.  In addition, a Promissory Note dated February 9, 2016 for $0.3 million was added to the outstanding principal balance of the Revolving Credit Facility as part of the Amendment No. 12 to the Note Purchase Agreement.
 
 
On April 15, 2016, a Promissory Note for $1.2 million (April Promissory Note) was advanced by Third Eye Capital to Aemetis Inc., as a bridge loan with 12% interest per annum maturing on the earlier of (a) receipt of proceeds from any financing to Aemetis Advanced Fuels Goodland, Inc., and (b) 60 days from the April Promissory Note date or June 14, 2016. The April Promissory Note was subject to cross default provisions on other Third Eye Capital Notes and the waiver was obtained on July 31, 2016 to extend the maturity date of the April Promissory Note to September 30, 2016 with an increase in interest per annum to 18%. As of September 30, 2016, the Company had repaid all of the principal and interest outstanding on the bridge loan Promissory Note.
 
Terms of Third Eye Capital Notes
 
A.
Term Notes.  As of September 30, 2016, the Company had $6.5 million in principal and interest outstanding under the Term Notes, net of unamortized fair value discounts of $0.2 million.  The Term Notes mature on April 1, 2017* and accrue interest at 14% per annum.
 
B.
Revolving Credit Facility.  As of September 30, 2016, AAFK had $32.5 million in principal and interest outstanding, net of unamortized debt issuance costs of $1.0 million on the Revolving Credit Facility.  The Revolving Credit Facility matures on April 1, 2017* and accrues interest at the prime rate plus 13.75% (17.25% as of September 30, 2016), payable monthly in arrears.
 
 
13
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)

C.
Revenue Participation Term Notes.  As of September 30, 2016, AAFK had $10.8 million in principal and interest outstanding, net of unamortized discounts of $0.4 million, on the Revenue Participation Term Notes. The Revenue Participation Term Notes mature on April 1, 2017* and accrue interest at 5% per annum.
 
D.
Acquisition Term Notes.  As of September 30, 2016, Aemetis Facility Keyes, Inc. had $18.8 million in principal and interest outstanding, net of unamortized discounts of $0.6 million, on the Acquisition Term Notes. The Acquisition Term Notes mature on April 1, 2017* and accrue interest at prime rate plus 10.75% (14.25% per annum as of September 30, 2016).
 
 
The Third Eye Capital Notes contain various covenants, including but not limited to, minimum free cash flow debt ratio and production requirements and restrictions on capital expenditures.
 
 
The Third Eye Capital Notes are secured by first priority liens on all real and personal property of, and assignment of proceeds from all government grants and guarantees from Aemetis, Inc.  The Third Eye Capital 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 secured by all of its Company shares.  In addition, Eric McAfee provided a blanket lien on substantially all of his personal assets, and McAfee Capital provided a guarantee in the amount of $8.0 million.
 
 
*The note maturity date can be extended by the Company to April 2018. As a condition to any such extension, the Company would be required to pay a fee of 5% of the carrying value of the debt. By this ability to extend the maturity at the Company’s will, the Third Eye Capital Notes are classified as non-current debt.
 
Cilion shareholder seller notes payable.  In connection with the Company’s merger with Cilion, Inc. (Cilion) on July 6, 2012, the Company issued $5.0 million in notes payable to Cilion shareholders (Cilion Notes) as merger compensation, subordinated to the Third Eye Capital Notes.  The Cilion Notes bear interest at 3% per annum and are due and payable after the Third Eye Capital Notes have been paid in full.  As of September 30, 2016, Aemetis Facility Keyes, Inc. had $5.6 million in principal and interest outstanding on the Cilion Notes.
 
State Bank of India secured term loan.  On June 26, 2008, Universal Biofuels Private Limited (UBPL), the Company’s India operating subsidiary, entered into a six year secured term loan with the State Bank of India in the amount of approximately $6.0 million.  The term loan is secured by UBPL’s assets, consisting of the Kakinada plant.
 
On August 22, 2015, UBPL received from the State Bank of India a One Time Settlement Sanction Letter allowing for, among other things, four payments over a 360 day period amounting to $4.3 million, an interest rate holiday for 15 days, after which the interest rate is payable at the rate of 2% above the base rate of the Reserve Bank of India, and certain releases by both parties. The base rate was at 9.3% to 9.7% and interest has accrued at 11.3% to 11.7%. Upon performance under the agreement, including the payment of all stipulated amounts, UBPL will receive relief for prior accrued interest in the amount of approximately $2.1 million. We paid the first payment under the settlement on August 23, 2015, the second payment under the settlement on October 22, 2015 and the third payment under the settlement on March 27, 2016. The final payment under the settlement was due on August 25, 2016 with a grace period until October 25, 2016. As of September 30, 2016, the State Bank of India loan had $3.2 million in principal and accrued interest outstanding.  On October 20, 2016, the Company paid the final stipulated amount and received relief for prior accrued interest in the amount of approximately $2.1 million.
 
 
14
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
Subordinated Notes. On January 6 and January 9, 2012, AAFK entered into Note and Warrant Purchase Agreements with two accredited investors pursuant to which it issued $0.9 million and $2.5 million in original notes to the investors (Subordinated Notes). The Subordinated Notes mature every six months. Upon maturity, the notes are generally extended with a fee of 10% added to the balance outstanding plus issuance of warrants exercisable at $0.01 with a two year term. Interest is due at maturity. Neither AAFK nor Aemetis may make any principal payments under the Subordinated Notes until all loans made by Third Eye Capital to AAFK are paid in full.
 
On July 1, 2016, the Subordinated Notes were amended to extend the maturity date until the earlier of (i) December 31, 2016; (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% cash extension fee was paid by adding the fee to the balance of the new note and warrants to purchase 113 thousand shares of common stock were granted with a term of two years and an exercise price of $0.01 per share. We evaluated these July 1, 2016 amendments and the refinancing terms of the notes and determined that modification accounting was appropriate in accordance with ASC 470-50 Debt – Modification and Extinguishment.
 
On January 14, 2013, Laird Cagan, a related party, loaned $0.1 million through a promissory note maturing on April 30, 2013 with a five percent annualized interest rate and the right to exercise 5 thousand warrants exercisable at $0.01 per share (Laird Cagan Note). In February 2015, the Laird Cagan Note was amended to extend the maturity date until the earlier of (i) December 31, 2016; (ii) completion of an equity financing by AAFK or the Company in an amount of not less than $25.0 million; (iii) the completion of an initial public offering by AAFK or Company; or (iv) after the occurrence of an Event of Default, including failure to pay interest or principal when due and breaches of note covenants.
 
At September 30, 2016 and December 31, 2015, the Company had, in aggregate, the amount of $7.1 million and $6.3 million in principal and interest outstanding, respectively, under the Subordinated Notes including the Laird Cagan Note.
 
EB-5 long-term promissory notes.  EB-5 is a U.S. government program authorized by the Immigration and Nationality Act designed to foster employment-based visa preference for immigrant investors to encourage the flow of capital into the U.S. economy and to promote employment of U.S. workers. The Company entered into a Note Purchase Agreement dated March 4, 2011, (as further amended on January 19, 2012 and July 24, 2012) with Advanced BioEnergy, LP, a California limited partnership authorized as a Regional Center to receive EB-5 investments, for the issuance of up to 72 subordinated convertible promissory notes (EB-5 Notes) bearing interest at 3%, with each note in the principal amount of $0.5 million and due and payable four years from the date of the note, for a total aggregate principal amount of up to $36.0 million (EB-5 Phase I funding).  The EB-5 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 loans to the Keyes plant in increments of $0.5 million. The Company has sold an aggregate principal amount of $36.0 million of EB-5 Notes under the EB-5 Phase I funding since 2012 to the report date of this filing. As of September 30, 2016, $25.0 million have been released from the escrow amount to the Company, with $11.0 million remaining in escrow. On Oct. 12, 2016, an additional $6.0 million was released from the escrow amount, with the availability of the remaining $5.0 million dependent on USCIS approval of those investors who have made escrow deposits.  As of September 30, 2016, $25.0 million in principal and $0.8 million in accrued interest was outstanding on the EB-5 Notes.
 
15
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
On October 16, 2016, the Company launched a new $50.0 million EB-5 Phase II funding, issuing EB-5 Notes on the same terms and conditions as those issued under the Company’s EB-5 Phase I funding.
 
Unsecured working capital loans.  In November 2008, the Company entered into an operating agreement with Secunderabad Oils Limited (Secunderabad Oils).  Under this agreement, Secunderabad Oils agreed to provide the Company with working capital, on an as needed basis, to fund the purchase of feedstock and other raw materials for its Kakinada biodiesel facility.  Working capital advances bear interest at the actual bank borrowing rate of Secunderabad Oils of 15%.  In return, the Company agreed to pay Secunderabad Oils 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 Oils would owe the Company 30% of the losses.  The agreement can be terminated by either party at any time without penalty.  On January 1, 2016, Secunderabad Oils suspended the agreement to use any funds provided under the agreement to buy feedstock until commodity prices returned to economically viable levels.  On June 1, 2016, the agreement was reinstated on the terms described above.
 
During the three months ended September 30, 2016 and 2015, the Company made principal and interest payments to Secunderabad Oils of approximately $3.6 million and $2.4 million, respectively.  During the nine months ended September 30, 2016 and 2015, the Company made principal and interest payments to Secunderabad Oils of approximately $4.5 million and $3.5 million, respectively.  As of September 30, 2016 and December 31, 2015, the Company had approximately $0.4 million and none outstanding under this agreement, respectively.
 
Scheduled debt repayments for loan obligations follow:
 
Twelve months ended September 30,
 
Debt Repayments
 
2017
 $12,546 
2018
  73,335 
2019
  20,500 
2020
  6,636 
2021
  - 
Total debt
  113,017 
Discounts
  (2,237)
Total debt, net of discounts
 $110,780 
 
5.      Stock-Based Compensation
 
Common Stock Reserved for Issuance
 
Aemetis authorized the issuance of 1.9 million shares of common stock under its Zymetis 2006 Stock Plan and Amended and Restated 2007 Stock Plan (together, the “Company Stock Plans”), which include both incentive and non-statutory stock options. These options generally expire five to ten years from the date of grant with a general vesting term of 1/12th every three months and are exercisable at any time after vesting subject to continuation of employment.
 
Non-Plan Stock Options
 
In November 2012, the Company issued 98 thousand stock options to board members and consultants outside of any Company stock option plan. As of September 30, 2016, all options are vested and 89 thousand options are outstanding.
 
16
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
Inducement Equity Plan Options
 
In March 2015, the Board of Directors of the Company approved an Inducement Equity Plan authorizing the issuance of 100 thousand non-statutory stock options to purchase common stock.  As of September 30, 2016, 37 thousand options were outstanding.
 
The following is a summary of options granted under all stock plans:
 
 
 
Shares Available for Grant
 
 
Number of Shares Outstanding
 
 
Weighted-Average Exercise Price
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2015
  95 
  980 
 $5.76 
Authorized
  655 
  - 
  - 
Granted
  (711)
  711 
  2.52 
Exercised
  - 
  - 
  - 
Forfeited/expired
  69 
  (69)
  4.70 
Balance as of September 30, 2016
  108 
  1,622 
 $4.39 
 
Stock-based compensation for employees
 
Stock-based compensation is accounted for in accordance with the provisions of ASC 718, Compensation-Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. We estimate the fair value of stock-based awards on the date of grant using the Black-Scholes option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method.
 
For the three months ended September 30, 2016 and 2015, the Company recorded stock compensation expense in the amount of $172 thousand and $161 thousand, respectively. For the nine months ended September 30, 2016 and 2015, the Company recorded stock compensation expense in the amount of $573 thousand and $694 thousand, respectively.
 
Valuation and Expense Information
 
All issuances of stock options or other issuances of equity instruments to employees as the consideration for services received by us are accounted for based on the fair value of the equity instrument issued. The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock based compensation expense requires us to make assumptions and judgments about the variables used in the calculation, including the fair value of our common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of our common stock, a risk-free interest rate, and expected dividends. We also estimate forfeitures of unvested stock options. To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for options that do not vest. We use the simplified calculation of expected life described in the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment, and volatility is based on an average of the historical volatilities of the common stock of four entities with characteristics similar to those of the Company. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. We use an expected dividend yield of zero, as we do not anticipate paying any dividends in the foreseeable future. Expected forfeitures are assumed to be zero due to the small number of plan participants and the plan.
 
17
 
 
 AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
12,000 new hire stock options were issued during the three months ended September 30, 2016. The following assumptions were used to calculate the fair value of the stock options issued.
 
 
Description
 
Value
 
Dividend-yield
  0%
Risk-free interest rate
  1.38%
Expected volatility
  75.9%
Expected life (years)
  7 
Market value per share on grant date
 $1.63 
Fair value per share on grant date
 $1.01 
 
As of September 30, 2016, the Company had $1.3 million of total unrecognized compensation expense for employees which the Company will amortize over the 2.35 years of weighted average remaining term.
 
6.         Agreements
 
Working Capital Arrangement.  Pursuant to a Corn Procurement and Working Capital Agreement with J.D. Heiskell & Co. (J.D. Heiskell).  The Company agreed to procure whole yellow corn and grain sorghum, primarily from J.D. Heiskell.  The Company has the ability to obtain grain from other sources subject to certain conditions; however, in the past all the Company’s grain purchases have been from J.D. Heiskell.  Title and risk of loss of the corn pass to the Company when the corn is deposited into the Keyes plant weigh bin.  The term of the Agreement expires on December 31, 2016 and is automatically renewed for additional one-year terms.  J.D. Heiskell further agrees to sell all ethanol the Company produces to Kinergy Marketing or other marketing purchasers designated by the Company and all WDG the Company produces to A.L. Gilbert.  The Company markets and sells distillers corn oil to A.L. Gilbert and other third parties.  The Company’s relationships with J.D. Heiskell, Kinergy Marketing, and A.L. Gilbert are well established and the Company believes that the relationships are beneficial to all parties involved in utilizing the distribution logistics, reaching out to widespread customer base, managing inventory, and building working capital relationships.  Revenue is recognized upon delivery of ethanol to J. D. Heiskell as revenue recognition criteria have been met and any performance required of the Company subsequent to the sale to J.D. Heiskell is inconsequential.  These agreements are ordinary purchase and sale agency agreements for the Keyes plant.
 
18
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
The J.D. Heiskell sales activity associated with the Purchasing Agreement, Corn Procurement and Working Capital Agreements during the three and nine months ended September 30, 2016 and 2015 are as follows:
 
 
 
 As of and for the three months ended September 30,
 
 
As of and for the nine months ended September 30,
 
 
 
2016  
 
 
2015  
 
 
2016  
 
 
2015  
 
Ethanol sales
 $24,687 
 $23,906 
 $68,993 
 $70,765 
Wet distiller's grains sales
  6,114 
  5,609 
  16,918 
  19,568 
Corn oil sales
  788 
  835 
  2,232 
  2,771 
Corn/milo purchases
  23,098 
  24,056 
  67,766 
  74,949 
Accounts receivable
  345 
  312 
  345 
  312 
Accounts payable
  1,241 
  1,539 
  1,241 
  1,539 
 
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 with Kinergy Marketing and with A.L. Gilbert mature on August 31, 2017 and on December 31, 2016, respectively, each with automatic one-year renewals thereafter.   For the three months ended September 30, 2016 and 2015, the Company expensed marketing costs of $0.6 million for each period, respectively, under the terms of both ethanol and wet distiller’s grains marketing agreements. For the nine months ended September 30, 2016 and 2015, the Company expensed marketing costs of $1.7 million and $1.8 million, respectively.
 
7.         Segment Information
 
The Company 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 gains market acceptance, this business segment will include its domestic commercial application of cellulosic ethanol technology, its plant construction projects and any acquisitions of ethanol or ethanol related technology facilities in North America.
 
The “India” operating segment includes the Company’s 50 million gallon per year nameplate capacity biodiesel manufacturing plant in Kakinada, the administrative offices in Hyderabad, India, and the holding companies in Nevada and Mauritius. The Company’s biodiesel is marketed and sold primarily to customers in India through brokers and by the Company directly.
 
19
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
Summarized financial information by reportable segment for the three and nine months ended September 30, 2016 and 2015 follows:
 
 
 
For the three months
ended September 30,
 
 
For the nine months
ended September 30,
 
 
 
2016
 
 
2015
 
 
2016
 
 
2015
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $33,889 
 $32,444 
 $93,979 
 $99,795 
India
  5,488 
  6,066 
  11,783 
  11,508 
    Total revenues
 $39,377 
 $38,510 
 $105,762 
 $111,303 
 
    
    
    
    
Cost of goods sold
    
    
    
    
North America
 $30,391 
 $31,603 
 $86,174 
 $97,489 
India
  5,320 
  5,873 
  11,892 
  11,059 
    Total cost of goods sold
 $35,711 
 $37,476 
 $98,066 
 $108,548 
 
    
    
    
    
Gross profit (loss)
    
    
    
    
North America
 $3,498 
 $841 
 $7,805 
 $2,306 
India
  168 
  193 
  (109)
  449 
 
    
    
    
    
Total gross profit
 $3,666 
 $1,034 
 $7,696 
 $2,755 
 
North America. During the three and nine months ended September 30, 2016, the Company’s revenues from ethanol, WDG, and corn oil were earned pursuant to the Grain Procurement and Working Capital Agreement established between the Company and J.D. Heiskell.  Sales of ethanol, WDG, and corn oil to J.D. Heiskell accounted for 93% and 94% of the Company’s North America segment revenues for the three and nine months ended September 30, 2016, respectively.
 
During the three and nine months ended September 30, 2015, the Company’s revenues from ethanol, WDG, and corn oil were earned pursuant to the Grain Procurement and Working Capital Agreement established between the Company and J.D. Heiskell.  Sales of ethanol, WDG, and corn oil to J.D. Heiskell accounted for 94% and 93% of the Company’s North America segment revenues for the three and nine months ended September 30, 2015, respectively.
 
India. During the three months ended September 30, 2016, two biodiesel customers accounted for 57% and 17% and no refined glycerin customers accounted for more than 10% of consolidated India segment revenues compared to one biodiesel customer accounting for 72% and no refined glycerin customers accounting for more than 10% of the consolidated India segment revenues during the three months ended September 30, 2015.
 
During the nine months ended September 30, 2016, two biodiesel customers accounted for 55% and 11% and no refined glycerin customers accounted for more than 10% of consolidated India segment revenues, compared to one biodiesel customer accounting for 55% and no refined glycerin customers accounting for more than 10% of consolidated India segment revenues during the nine months ended September 30, 2015.
 
20
 
 
AEMETIS, INC.
 
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited, tabular data in thousands except par value and per share data)
 
Total assets consist of the following:
 
 
 
As of      
 
 
 
September 30,
 
 
December 31,
 
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
North America
 $67,616 
 $69,165 
India
  11,728 
  13,976 
    Total Assets
 $79,344 
 $83,141 
 
8.         Related Party Transactions
 
As of September 30, 2016 and December 31, 2015, the Company owes Eric McAfee and McAfee Capital, solely owned by Eric McAfee, $360 thousand each in connection with employment agreements and expense reimbursements, which are included in accrued expenses and accounts payable on the balance sheet.   For the three months ended September 30, 2016 and 2015, the Company expensed $16 thousand each,  respectively, to reimburse actual expenses incurred by McAfee Capital and related entities.  For the nine months September 30, 2016 and 2015, the Company expensed $57 thousand and $54 thousand, respectively, to reimburse actual expenses incurred by McAfee Capital and related entities.
 
9.       Subsequent Events
 
State Bank of India:  On October 20, 2016, UBPL paid the final stipulated amount due to the State Bank of India as required by the One Time Settlement Sanction Letter and received relief for prior accrued interest in the amount of approximately $2.1 million.
 
On October 16, 2016, the Company launched a new $50.0 million EB-5 Phase II funding, issuing EB-5 Notes on the same terms and conditions as those issued under the Company’s EB-5 Phase I funding.
 
10.     Management’s Plan
 
The accompanying financial statements have been prepared contemplating the realization of assets and satisfaction of liabilities in the normal course of business.  The Company has been reliant on their senior secured lender to provide additional funding and has been required to remit substantially all excess cash from operations to the senior secured lender.  Management’s plans for the Company include, but are not limited to:
 
Operating the Keyes plant;
Continuing to incorporate lower-cost, non-food advanced biofuels feedstock at the Keyes plant when economical;
Obtaining the remaining $5.0 million of EB-5 Phase I funding from escrow;
Obtaining $50.0 million in funding from EB-5 Phase II funding currently being offered to investors;
Refinancing the senior debt with a lender who is able to offer terms conducive to the long term financing of the Keyes plant;
Use the Company’s India facility as collateral for additional working capital or for reducing current financing costs;
Securing higher volumes of shipments from the plant; and
Offering the Company’s common stock by the ATM Registration Statement.
 
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.
 
21
 
 
 
Item 2.                      Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
 
 
Overview. Discussion of our business and overall analysis of financial and other highlights affecting us to provide context for the remainder of MD&A.
 
Results of Operations. An analysis of our financial results comparing the three and nine months ended September 30, 2016 to the three and nine months ended September 30, 2015.
 
Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows and discussion of our financial condition.
 
Critical Accounting Estimates. Accounting estimates that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
  
The following discussion should be read in conjunction with the Aemetis, Inc. consolidated financial statements and accompanying notes included elsewhere in this report. The following discussion contains forward-looking statements that reflect the plans, estimates and beliefs of Aemetis, Inc. As discussed in further detail above, the actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Report, and in other reports we file with the SEC, specifically our most recent Annual Report on Form 10-K. All references to years relate to the calendar year ended December 31 of the particular year.
 
Overview
 
We are an advanced renewable fuels and biochemicals company focused on the acquisition, development and commercialization of innovative technologies that replace traditional petroleum-based products by converting first generation biofuel plants into advanced biorefineries.  Founded in 2006, we own and operate a 60 million gallon per year ethanol production facility (Keyes plant) in California’s Central Valley, where we manufacture and produce ethanol, Wet Distiller’s Grain (WDG), Condensed Distillers Solubles (CDS) and distillers’ corn oil and a 50 million gallon per year renewable chemical and advanced fuel production facility on the East Coast of India (Kakinada plant), where we manufacture and produce high quality distilled biodiesel and refined glycerin.  In addition, we operate a research and development laboratory at the Maryland Biotech Center, and hold a portfolio of patents and related technology licenses for the production of renewable fuels and biochemicals.
 
We continue to evaluate the acquisition of businesses and the licensing of technologies that expand the transition of traditional biofuels plants to the production of valuable advanced biofuels.  During the second quarter of 2016, we announced the entry into an agreement to acquire EdenIQ, Inc., a cellulosic ethanol technology company.  Acquiring EdenIQ would extend our ethanol capabilities into cellulosic ethanol by providing capital light and operationally efficient solutions that can be easily integrated into existing corn ethanol plants.  Using our position as a producer of ethanol and biodiesel, we are also focused on the licensing of technology and the development of capabilities that allow for the production of advanced biofuels at facilities located at or near our current plants.
 
22
 
 
 
Results of Operations
 
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015
 
Revenues
 
Our revenues are derived primarily from sales of ethanol and WDG in North America and biodiesel and glycerin in India.
 
Three Months Ended September 30 (in thousands)
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $33,889 
 $32,444 
 $1,445 
  4%
India
  5,488 
  6,066 
  (578)
  -10%
Total
 $39,377 
 $38,510 
 $867 
  2%
 
North America.  For the three months ended September 30, 2016, we generated 76% of our revenue from sales of ethanol, 21% from sales of WDG, and 3% from sales of distillers corn oil and CDS.  During the three months ended September 30, 2016, plant production averaged 107% of 55 million gallon per year nameplate capacity.  The slight increase in revenues between the three months ended September 30, 2016 compared to September 30, 2015 was due to ethanol sales volumes increasing by 4% to 14.8 million gallons while average ethanol prices decreased by 1% to $1.75 per gallon.  The average price of WDG also decreased 1% to $74.74 per ton while WDG sales volumes increased 10% to 97.2 thousand tons during the three months ended September 30, 2016 compared to the three months ended September 30, 2015.
 
India.   For the three months ended September 30, 2016, we generated 90% of our sales from biodiesel and 10% of our sales from refined glycerin, compared to the three months ended September 30, 2015 when we generated 86% of our sales from biodiesel and 14% of our sales from refined glycerin. The decrease in revenues was primarily attributable to decreases in overall sales volumes by 22% in the three months ended September 30, 2016 as compared to September 30, 2015, as well as increases in average feed stock costs for biodiesel by 24% with a combination of constraints on working capital to purchase feedstock at these higher prices.  In addition, biodiesel sales volumes decreased by 21% to 6.0 thousand metric tons while the average sales prices increased by 20% to $824 per metric ton.  Similarly, sales volumes of refined glycerin decreased by 28% to 852 metric tons while average sales prices of glycerin decreased by 13% to $619 per metric ton.
 
Cost of Goods Sold
 
Three Months Ended September 30 (in thousands)
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $30,391 
 $31,603 
 $(1,212)
  -4%
India
  5,320 
  5,873 
  (553)
  -9%
Total
 $35,711 
 $37,476 
 $(1,765)
  -5%
 
North America.  We ground 5.2 million bushels of corn at an average price of $4.45 per bushel during the three months ended September 30, 2016 compared to 4.8 million bushels of corn at an average price of $5.01 per bushel during the three months ended September 30, 2015. Our cost of feedstock per ton decreased by 11% in the three months ended September 30, 2016 compared to the same period in 2015.
 
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India.  The decrease in costs of goods sold was attributable to decreases in sales volumes of biodiesel and refined glycerin.  In addition, average biodiesel feedstock costs increased by 24% to $593 per metric ton, partially offset by decreases in average feedstock costs of refined glycerin by 31% to $436 per metric ton in the three months ended September 30, 2016, as compared to the three months ended September 30, 2015.
 
Gross Profit
 
Three Months Ended September 30 (in thousands)
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $3,498 
 $841 
 $2,657 
  316%
India
  168 
  193 
  (25)
  -13%
Total
 $3,666 
 $1,034 
 $2,632 
  254.5%
 
North America.  Gross profit increased by 316% due to decreases in the average prices of corn by 11%.  In addition, ethanol and WDG volumes increased by 4% and 10% respectively, partially offset by average selling prices for ethanol and WDG decreasing by only 1% each in the three months ended September 30, 2016 compared to the same period in 2015.
 
India.  The decrease in gross profit by 13% was attributable to decreases in overall volumes of all products by 22% to 6.9 metric tons and increases in overall average price of feedstock by 15% to $577, resulting in a lower gross profit margin during the three months ended September 30, 2016 as compared to the same period in 2015.
 
Operating Expenses
 
R&D
 
Three Months Ended September 30 (in thousands)
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $87 
 $117 
 $(30)
  -26%
India
  - 
  - 
  - 
  0%
Total
 $87 
 $117 
 $(30)
  -26%
 
The decrease in R&D expenses in our North America segment for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 was due to decreases in professional fees of $17 thousand and supplies and other expenses of $13 thousand.
 
Selling, General & Administrative (SG&A)
 
Three Months Ended September 30 (in thousands)
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $3,015 
 $2,436 
 $579 
  24%
India
  207 
  338 
  (131)
  -39%
Total
 $3,222 
 $2,774 
 $448 
  16%
 
SG&A expenses consist primarily of salaries and related expenses for employees, marketing expenses related to sales of ethanol and WDG in North America and biodiesel and other products in India, as well as professional fees, other corporate expenses, and related facilities expenses.
 
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North America. SG&A expenses as a percentage of revenue in the three months ended September 30, 2016 increased to 9% as compared to 8% in the corresponding period of 2015. The SG&A expenses in the three months ended September 30, 2016 increased by 24% compared to the three months ended September 30, 2015. The increase was due to increases in insurance and penalties on property taxes of $0.5 million, marketing expenses of $48 thousand, and professional fees and supplies expenses of $28 thousand.
 
India.  SG&A expenses as a percentage of revenue in the three months ended September 30, 2016 decreased to 4% as compared to 6% in the corresponding period of 2015. The decrease was due to decreases in supplies and services expenses by $76 thousand, professional fees by $21 thousand, utilities, and travel and entertainment expenses by $19 thousand, and marketing expenses by $40 thousand, partially offset by increase in salaries and depreciation by $25 thousand.
 
Other (Income) and Expense
 
Three Months Ended September 30 (in thousands)
 
Other (income)/expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
North America
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate expense
 $2,951 
 $2,387 
 $564 
  24%
Amortization expense
  1,425 
  1,258 
  167 
  13%
Other (income) expense
  5 
  43 
  (38)
  -88%
 
    
    
    
    
India
    
    
    
    
Interest rate expense
  95 
  223 
  (128)
  -57%
Other (income)
  (24)
  (13)
  (11)
  -85%
Total
 $4,452 
 $3,898 
 $554 
  14%
 
Other (Income)/Expense.  Other (income) expense consists primarily of interest, amortization and extinguishment expense attributable to debt facilities acquired by our parent company and our subsidiaries, and interest accrued on the judgment obtained by Cordillera Fund and The Industrial Company (TIC). The debt facilities include stock or warrants issued as fees. The fair value of stock and warrants are amortized as amortization expense, except when the extinguishment accounting method is applied, in which case refinanced debt costs are recorded as extinguishment loss or gain.
 
North America.  Interest expense was higher in the three months ended September 30, 2016 due to higher outstanding debt balances. The increase in amortization expense is due to debt issuance costs added during the first and third quarters through refinancing the Subordinated Notes and fees on amending the Third Eye Capital Notes. The decrease in other expense in the three months ended September 30, 2016 was due to full amortization of a guaranty fee in prior periods.
 
India.  Interest expense for the three months ended September 30, 2016 was lower compared with the prior period as a result of three settlement payments made with the State Bank of India, which decreased the outstanding loan balance. The increase in other income was caused by an increase in foreign exchange gains of $27 thousand, partially offset by the decrease in other scrap sales by $16 thousand.
 
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015
 
Revenues
 
Our revenues are derived primarily from sales of ethanol and WDG in North America and biodiesel and glycerin in India.
 
25
 
 
 
Nine Months Ended September 30 (in thousands)
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $93,979 
 $99,795 
 $(5,816)
  -6%
India
  11,783 
  11,508 
  275 
  2%
Total
 $105,762 
 $111,303 
 $(5,541)
  -5%
 
 
North America.   For the nine months ended September 30, 2016, we generated 76% of our revenue from sales of ethanol, 21% from sales of WDG, and 3% from sales of distillers corn oil and CDS.  During the nine months ended September 30, 2016, plant production averaged 100% of the 55 million gallon per year nameplate capacity.  The decrease in revenues between the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 is due to decreases in ethanol sales volumes by 4% to 41.0 million gallons, while average ethanol prices stayed consistent at $1.74.  In addition, average prices of WDG decreased by 12% to $73 per ton while WDG sales volumes increased by only 1% to 277 thousand tons in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.
 
India.  For the nine months ended September 30, 2016, we generated 87% of our sales from biodiesel and 13% of our sales from refined glycerin, compared to 77% of our sales from biodiesel and 23% of our sales from refined glycerin during the nine months ended September 30, 2015.  The slight increase in revenues was primarily attributable to increases in biodiesel sales volumes by 15%.  Biodiesel sales volumes increased by 15% to 13.9 thousand metric tons while average prices of biodiesel stayed consistent at $733 per metric ton.  Sales volumes of refined glycerin decreased by 33% to 2.6 thousand metric tons while average prices of glycerin also decreased by 11% to $592 per metric ton in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.
 
Cost of Goods Sold
 
Nine Months Ended September 30 (in thousands)
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $86,174 
 $97,489 
 $(11,315)
  -12%
India
  11,892 
  11,059 
  833 
  8%
Total
 $98,066 
 $108,548 
 $(10,482)
  -10%
 
North America.   We ground 14.4 million bushels of corn and grain sorghum at an average price of $4.58 per bushel during the nine months ended September 30, 2016, compared to 14.9 million bushels of corn at an average price of $5.05 per bushel during the nine months ended September 30, 2015.  The decrease in cost of goods sold was attributable to decrease in cost of corn by 9% coupled with decreases in revenues by 6% in the nine months ended September 30, 2016 compared to the same period in 2015.
 
India.  The increase in cost of goods sold was attributable to an increase in sales volume from sales of biodiesel and glycerin.  In addition, the average prices of feedstock for all products increased by 6% to $533 per metric ton for the nine months ended September 30, 2016 compared to $502 per metric ton in the nine months ended September 30, 2015.
 
26
 
 
 
Gross Profit
 
Nine Months Ended September 30 (in thousands)
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $7,805 
 $2,306 
 $5,499 
  238%
India
  (109)
  449 
  (558)
  -124%
Total
 $7,696 
 $2,755 
 $4,941 
  179%
 
North America.  Gross profit increased due to decreases in feedstock costs by 9% and the usage of milo which allowed us to receive grant income for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.
 
India.  The decrease in gross profit was attributable to increases in average feedstock costs by 7% to $7.9 million compared to the average feedstock costs of $7.4 million during the nine months ended September 30, 2015.  In addition, average sales prices for all products decreased only 1% to $711 per metric ton in the nine months ended September 30, 2016 compared to $717 per metric ton in the nine months ended September 30, 2015.   
 
Operating Expenses
 
R&D
Nine Months Ended September 30 (in thousands)
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $290 
 $330 
 $(40)
  -12%
India
  - 
  - 
  - 
  0%
Total
 $290 
 $330 
 $(40)
  -12%
 
The R&D expenses decreased 12% was attributable primarily to a decrease in professional fees of $33 thousand.
 
Selling, General & Administrative (SG&A)
Nine Months Ended September 30 (in thousands)
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North America
 $8,177 
 $8,748 
 $(571)
  -7%
India
  946 
  808 
  138 
  17%
Total
 $9,123 
 $9,556 
 $(433)
  -5%
 
SG&A expenses consist primarily of salaries and related expenses for employees, marketing expenses related to sales of ethanol and WDG in North America and biodiesel and other products in India, as well as professional fees, other corporate expenses, related facilities expenses and operational support fees paid to our working capital partner, Secunderabad Oils Limited, as part of an operating profit sharing arrangement.
 
North America.  SG&A expenses as a percentage of revenue in the nine months ended September 30, 2016 were consistent at 9% as compared to the corresponding period of 2015.  The decrease in SG&A expenses was primarily due to decreases in salaries and stock compensation expenses of $0.3 million and professional fees of $0.8 million, partially offset by increases in insurance, utilities, and penalties of $0.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.
 
India.  SG&A expenses as a percentage of revenue in the nine months ended September 30, 2016 increased to 8% as compared to 7% in the corresponding period of 2015.  Overall SG&A expenses increased slightly period over period due to increases in operating support charges of $131 thousand and salaries of $134 thousand, partially offset by decreases in marketing expenses of $55 thousand and professional and travel expenses of $66 thousand.  
 
27
 
 
 
Other Income and Expense
 
Nine Months Ended September 30 (in thousands)
 
Other (income)/expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016
 
 
2015
 
 
Inc/(dec)
 
 
% change
 
North America
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate expense
 $8,461 
 $6,863 
 $1,598 
  23%
Amortization expense
  4,269 
  5,386 
  (1,117)
  -21%
Loss on debt extinguishment
  - 
  330 
  (330)
  -100%
Other (income) expense
  (405)
  247 
  (652)
  -264%
 
    
    
    
    
India
    
    
    
    
Interest rate expense
  218 
  778 
  (560)
  -72%
Other (income)
  (76)
  (56)
  (20)
  -36%
Total
 $12,467 
 $13,548 
 $(1,081)
  -8%
 
Other (Income)/Expense.  Other (income) expense consists primarily of interest, amortization and extinguishment expense attributable to debt facilities acquired by our parent company and our subsidiaries, and interest accrued on the judgments obtained by Cordillera Fund and The Industrial Company (TIC).  The debt facilities include stock or warrants issued as fees.  The fair value of stock and warrants are amortized as amortization expense, except when the extinguishment accounting method is applied, in which case refinanced debt costs are recorded as extinguishment expense.
 
North America.  Interest expense was higher in the nine months ended September 30, 2016 due to higher debt balances.  The decrease in amortization expense was due to full amortization of several amendment fees under the Third Eye Capital Notes and Subordinated Note refinancing fees added in 2015, offset by debt issuance costs associated with the amendment and refinancing.  The debt extinguishment costs were lower in the nine months ended September 30, 2016 than in the corresponding period of 2015 as extinguishment accounting was not applied to two Subordinated Notes with two accredited investors in the 2016 period compared to the extinguishment accounting that was applied once to Subordinated Notes that were refinanced in the 2015 period.  The increase in other income in the nine months ended September 30, 2016 was due to receipt of $0.5 million from a mandated gas credit from PG&E compared to increases in expenses due to amortization of a debt guarantee fee.
 
India.  Interest expense decreased as a result of decreases in the outstanding balance on the State Bank of India loan during the nine months ended September 30, 2016 and decreases in the utilization of working capital with Secunderabad Oils by 68% in the nine months ended September 30, 2016 compared to the same period in 2015.  The slight increase in other income was caused primarily by increases caused by other scrap sales and foreign exchange gains in the nine months ended September 30, 2016.
 
Liquidity and Capital Resources
 
Cash and Cash Equivalents
 
Cash and cash equivalents were $0.7 million at September 30, 2016, of which $0.6 million was held in our North American entities and $0.1 million were held in our Indian subsidiary. Our current ratio at September 30, 2016 was 0.25 compared to a current ratio of 0.27 at December 31, 2015. We expect that our future available capital resources will consist primarily of cash generated from operations, remaining cash balances, EB-5 program borrowings, amounts available for borrowing, if any, under our senior debt facilities and our subordinated debt facilities, and any additional funds raised through sales of equity.
 
28
 
 
 
Liquidity
 
Cash and cash equivalents, current assets, current liabilities and debt at the end of each period were as follows (in thousands):
 
 
 
September 30, 2016
 
 
December 31, 2015
 
Cash and cash equivalents $
 $652 
 $283 
Current assets (including cash, cash equivalents, and deposits)
  7,363 
  8,002 
Current and long term liabilities (excluding all debt)
  16,947 
  17,540 
Current & long term debt
  110,780 
  100,895 
 
Our principal sources of liquidity have been cash provided by operations and borrowings under various debt arrangements. Under the Company’s EB-5 Phase I program, the Company has sold notes in the amount of $36.0 million since 2012. As of October 2016, $31.0 million in funds from the EB-5 program have been released to Aemetis’s subsidiary, AE Advanced Fuels, Inc.; the EB-5 escrow account is holding funds from 10 investors pending approval by the USCIS. These funds remaining in escrow represent $5.0 million of funding that is expected to be released from the escrow account in the fourth quarter of 2016 to early 2017. On October 16, 2016, the Company launched a new $50.0 million EB-5 Phase II funding, issuing EB-5 Notes on the same terms and conditions as those issued under the Company’s EB-5 Phase I funding. Our principal uses of cash have been to service indebtedness and capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future.  Global financial and credit markets have been volatile in recent years, and future adverse conditions of these markets could negatively affect our ability to secure funds or raise capital at a reasonable cost or at all.  For additional discussion of our various debt arrangements see Note 4. Debt of the Notes to Consolidated Condensed Financial Statements in Part I, Item 1 of this Form 10-Q.
 
We operate in a volatile market in which we have little control over the major components of production costs and product revenues.  As such, we expect cash provided by operating activities to fluctuate in future periods primarily as a result of changes in the prices for corn, ethanol, WDG, distillers corn oil, CDS, biodiesel, waste fats and oils, non-refined palm oil and natural gas. To the extent that we experience periods in which the spread between ethanol prices and corn and energy costs narrow or the spread between biodiesel prices and waste fats and oils or palm oil and energy costs narrow, we may require additional working capital to fund operations. 
 
Management believes that through:  (i) operating the Keyes plant, (ii) continuing to incorporate lower-cost, non-food advanced biofuels feedstock at the Keyes plant when economical, thereby increasing operating margins, (iii) obtaining the remaining $5.0 million of EB-5Phase I funding from escrow, (iv) obtaining $50.0 million in funding from EB-5 Phase II funding currently being offered to investors, (v) refinancing senior debt on terms more commensurate with the long-term financing of capital assets, (vi) securing higher volumes of sales from the Kakinada plant, (vii) continuing to expand the domestic India markets, (viii) using the availability on the existing working capital credit line, and (ix) sales of common stock under the ATM registration statement, we will be able to obtain the liquidity necessary to fund company operations for the foreseeable future. However, there is no assurance that our operations will generate significant positive cash flow, or that additional funds will be available to us, through borrowings or otherwise, on favorable terms when required, or at all.
 
As of September 30, 2016, the outstanding balance of principal, interest and fees, net of discounts, on all Third Eye Capital Notes equaled $68.6 million.  The current maturity date for all of the Third Eye Capital financing arrangements is April 1, 2017; provided, however, that pursuant to Amendment No. 12, dated March 21, 2016, we have the right to extend the maturity date of the Third Eye Capital Notes to April 1, 2018 upon notice and payment of a 5% extension fee.  We intend to pay the Third Eye Capital Notes through operational cash flow, EB-5 subordinated debt, a senior debt refinancing and/or equity financing. 
 
Our senior lender has provided a series of accommodating amendments to the existing and previous loan facilities in the past as described in further detail in Note 4. Debt of the Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.  However, there can be no assurance that our senior lender will continue to provide further amendments or accommodations or will fund additional amounts in the future.
 
29
 
 
 
We also rely on our working capital lines with J.D. Heiskell in California and Secunderabad Oils, in India to fund our commercial arrangements for the acquisition of feedstock.  J.D. Heiskell currently provides us with working capital for the Keyes plant and Secunderabad Oils currently provides us with working capital for the Kakinada plant.  The ability of both J.D. Heiskell and Secunderabad Oils to continue to provide us with working capital depends in part on both of their respective financial strength and banking relationships.
 
Change in Working Capital and Cash Flows
 
During the nine months ended September 30, 2016, current and long term debt increased $9.9 million, primarily due to (i) accrued interest of $8.4 million, (ii) $1.5 million waiver fee, (iii) $3.1 million maturity date extension fee, (iv) $0.3 million drawn on the promissory note for operations from our senior lender, (v) $1.8 million drawn on the promissory note from our senior lender for State Bank of India repayment and payment on property tax payment settlement agreement, (vi) $0.7 million in subordinated debt extension fees, (vii) $1.5 million received from EB-5 escrow, and (viii) $4.9 million drawn from the Secunderabad Oils working capital loan.  The increase in current and long term debt was partially offset by decreases due to:  (i) $4.9 million of principal and interest payments to our senior lender, (ii) $5.7 million of principal and interest payments to the State Bank of India loan and Secunderabad Oils working capital loan in India, and (iii) $1.6 million in discount issuance costs to be amortized.  Current assets decreased by $0.6 million, primarily due to a (i) $0.4 million increase in cash partially offset by a (ii) $0.8 million decrease in inventories and (iii) $0.2 million decrease in accounts receivable and other assets.
 
Net cash provided by operating activities during the nine months ended September 30, 2016 was $0.4 million, consisting of non-cash charges of $8.5 million, net changes in operating assets and liabilities of $6.1 million, and net loss of $14.2 million. The non-cash charges consisted of:  (i) $4.4 million in amortization of debt issuance costs and patents, (ii) $3.5 million in depreciation expenses and (iii) $0.6 million in stock-based compensation expense.  Net changes in operating assets and liabilities consisted primarily of a decrease in accounts payable of $1.3 million and an increase in other assets of $0.2 million, partially offset by:  (i) a $0.7 million increase in other liabilities, (ii) a $1.0 million decrease in prepaid expenses, accounts receivable and inventory, and (iii) a $5.9 million increase in accrued interest.
 
Cash used by investing activities consists of capital expenditures of $0.5 million mostly from UBPL operations.
 
Cash provided by financing activities was $0.4 million, primarily from proceeds from borrowings of $8.5 million, partially offset by payments in principal on long-term term loans of $8.1 million.
 
Critical Accounting Policies
 
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net sales and expenses for each period. We believe that of our most significant accounting policies, the following represents our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain: revenue recognition; recoverability of long-lived assets, convertible notes, and extinguishment accounting. These significant accounting principles are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2015.
 
30
 
 
 
Recently Issued Accounting Pronouncements
 
None reported beyond those disclosed in our 2015 annual report.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk.
 
Not applicable.
 
Item 4.   Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures.
 
Management (with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act).  Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures along with the related internal controls over financial reporting were effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Inherent Limitations on Effectiveness of Controls
 
Our management, including our CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  Our controls and procedures are designed to provide reasonable assurance that our control system’s objective will be met and our CEO and CFO have concluded that our disclosure controls and procedures are effective at the reasonable assurance level.  The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Projections of any evaluation of the effectiveness of controls in future periods are subject to risks.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in our internal controls over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
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PART II -- OTHER INFORMATION
 
Item 1.   Legal Proceedings
 
On August 31, 2016, the Company filed a lawsuit in Santa Clara County Superior Court against defendants EdenIQ, Inc. (EdenIQ) and its CEO, Brian D. Thome, and Trinity Capital Investments (Trinity).  The lawsuit is based on EdenIQ’s wrongful termination of a merger agreement that would have effectuated the merger of the Company and EdenIQ.  The lawsuit also asserts that EdenIQ and Mr. Thome fraudulently induced the Company into assisting EdenIQ to obtain EPA approval for a new technology which the Company would not have done but for the merger agreement. The relief sought includes EdenIQ’s specific performance of the merger agreement and monetary damages, as well as punitive damages, attorneys’ fees, and costs.
 
On March 10, 2011, UBPL, our India operating subsidiary, 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 informed UBPL that an event of default had occurred for failure to make an installment payment on the loan commencing June 2009 and demanded 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.  On August 22, 2015, UBPL received a One Time Settlement Sanction Letter from the State Bank of India allowing for, among other things, four payments over a 360 day period amounting to $4.3 million, an interest rate holiday for 15 days after which the interest rate is payable at a rate of 2% above the base rate of Reserve Bank of India and certain releases by both parties.  On October 20, 2016, UBPL paid the final stipulated amount and received relief for prior accrued interest in the amount of approximately $2.1 million.
 
On August 4, 2013, GS Cleantech Corporation, a subsidiary of Greenshift Corporation (“Greenshift”), filed a complaint in the United States District Court for the Eastern District of California – Fresno Division against us and our subsidiary, AAFK.  The case was transferred to the Southern District of Indiana and joined to a pending Multidistrict Litigation.  The complaint alleges infringement of patent rights assigned to Greenshift and pertaining to corn oil extraction processes we employ, and seeks royalties, treble damages, attorney’s fees, and injunctions precluding us from further infringement.  The corn oil extraction process we use is licensed to us by Valicor Separation Technologies LLC.  Valicor has no obligations to indemnify us.  On October 23, 2014, the Court ruled that all the claims of all the patents at issue in the case are invalid and, therefore, not infringed and adopted this finding in our case on January 16, 2015.  GS Cleantech has said it will appeal this decision when the remaining claim in the suit has been decided.  We believe the likelihood of Greenshift succeeding on appeal of the invalidity findings is small since the Court’s findings included several grounds for invalidity of each allegedly infringed patent.  If Greenshift successfully appeals the findings of invalidity, damages may be $1 million or more.  The only remaining claim in the suit alleges that GS Cleantech obtained the patents at issue by inequitably conducting itself before the United States Patent Office.  A trial in the District Court for the Southern District of Indiana on that issue was concluded and the Court found the patents unenforceable because of inequitable conduct by GS Cleantech before the Patent and Trademark Office.  GS Cleantech has asked the Court to reconsider its decision, citing the existence of a recently issued patent which the patent examiner allowed despite the Court’s findings and the allowance of which the Court did not consider when making its decision of inequitable conduct.  GS Cleantech has indicated it will appeal the current ruling on inequitable conduct if the Court’s reconsideration does not result in a change in its findings.
 
Item 1A.  Risk Factors.
 
No change in risk factors since the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 28, 2016.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
 
On July 1, 2016, we issued 113 thousand shares of our common stock to two subordinated promissory note holders pursuant to the note holders’ warrant exercise at an exercise price of $0.01 per share.
 
The above issuance was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as sales of securities not involving any public offering.
 
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Item 3.   Defaults Upon Senior Securities.
 
No unresolved defaults on senior securities occurred during the three months ended September 30, 2016
 
Item 4.    Mine Safety Disclosures.
 
None
 
Item 5.    Other Information.
 
None
 
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Item 6.                      Exhibits.
 
 
 
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
AEMETIS, INC.
 
 
 
 
 
 
 
By:
/s/ Eric A. McAfee
 
 
Eric A. McAfee
Chief Executive Officer
(Principal Executive Officer)
 
 
Date: November 14, 2016
 
 
AEMETIS, INC.
 
 
 
 
 
 
 
By:
/s/ Todd Waltz
 
 
Todd Waltz
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
Date: November 14, 2016
 
 
 
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