Exhibit 10.3

GUARANTY AGREEMENT

THIS GUARANTY AGREEMENT is made as of December 10, 2009 by AE ADVANCED FUELS
KEYES, INC., a Delaware corporation (“Guarantor”), in favor of THIRD EYE CAPITAL
CORPORATION (“Agent”) for itself and the Purchasers a party to the Purchase
Agreement defined below.  

RECITALS

A.

AE Biofuels, Inc. (the “Company”), Agent and the Purchasers named therein
entered into a certain Note and Warrant Purchase Agreement, dated as of May 16,
2008, as amended by that certain Amendment No. 1 to Note and Warrant Purchase
Agreement dated as of May 28, 2008 between the Company and Third Eye, as further
amended by that certain Amendment No. 2 and Limited Waiver to Note and Warrant
Purchase Agreement dated as of July 23, 2008 between the Company and Third Eye
and as further amended by that certain Amendment No. 4 and Limited Waiver to
Note and Warrant Purchase Agreement dated as of December 10, 2009 between the
Company and Third Eye (collectively, the “Purchase Agreement” or the “Note”).  

B.

The Company and Third Eye signed an Amendment No. 3 and Limited Waiver to Note
and Warrant Purchase Agreement dated March 31, 2009; however, the Company failed
to satisfy the conditions precedent to the effectiveness of such amendment and
such amendment is hereby deemed null and void. As of the date of this Assignment
Agreement, the Note is currently in default.

C.

The Company is the parent company of the Guarantor.  AEB and the Guarantor have
entered into a project agreement and lease agreement with Cilion, Inc. in
connection with the 55 million gallon per year ethanol plant owned by Cilion,
Inc. located in Keyes, California.  The Company plans to receive royalties and
other payments and dividends from the Guarantor resulting from the net cash
flows provided from operating the leased ethanol plant (collectively with all
cash dividends, cash royalties and all other proceeds thereof received by AEB
from time to time from the Guarantor, including, without limitation, from
project financing raised through or by means of the Program into the Subsidiary
and/or the Guarantor, the “Proceeds”). These Proceeds will be used for ordinary
business expenses, including repayment of the Company’s outstanding debt and
operating expenses.

D.

The Company has agreed to assign to Third Eye, as agent for the Purchasers, and
grant to Third Eye a first priority security interest in, fifty percent (50%) of
all Proceeds (collectively, the “Assigned Proceeds”) to repay outstanding
principal and interest on the Note pursuant to an Assignment of Proceeds
Agreement, dated as of December 10, 2009 between the Company and the Agent (as
the same may be amended from time to time, the “Assignment Agreement”).

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E.

In further consideration for the assignment of the Assigned Proceeds pursuant to
the Assignment Agreement and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, it is hereby agreed
that:

ARTICLE I

DEFINITIONS

When used in this Guaranty, capitalized terms shall have the meanings specified
in the Purchase Agreement, in the foregoing Recitals and as follows:

Event of Default.  “Event of Default” shall have the meaning specified in the
Purchase Agreement.

Guaranty.  “Guaranty” shall mean this Guaranty, as the same shall be amended
from time to time in accordance with the terms hereof.

Law.  “Law” shall mean any federal, state, local or other law, rule, regulation
or governmental requirement of any kind, and the rules, regulations,
interpretations and orders promulgated thereunder.

Notes.  “Notes” shall have the meaning given to it in the Purchase Agreement.

Obligations.  “Obligations” shall mean the obligation and liability of the
Company to pay to Agent, for the benefit of the Purchasers, the Assigned
Proceeds in accordance with the Assignment Agreement, and to otherwise perform
its obligations under the Assignment Agreement.

Person.  “Person” shall mean and include an individual, partnership,
corporation, trust, unincorporated association and any unit, department or
agency of government.

Transaction Documents.  “Transaction Documents” shall have the meaning specified
in the Purchase Agreement.

ARTICLE II

THE GUARANTY

2.1

The Guaranty.  Guarantor, for itself, its successors and assigns, hereby
unconditionally and absolutely guarantees to Agent and Purchasers the full and
complete payment and performance when due (whether at stated maturity, by
acceleration or otherwise) of each of the Obligations.  This is a guaranty of
payment and performance and not of collection.

2.2

Waivers and Consents.  (a) Guarantor acknowledges that the obligations
undertaken herein involve the guaranty of obligations of a Person other than
Guarantor and, in full recognition of that fact, Guarantor consents and agrees
that Agent and Purchasers may, at any time and from time to time, without notice
or demand, and without affecting the enforceability or continuing effectiveness
hereof:  (i) supplement, modify, amend, extend, renew, accelerate or otherwise
change the time for payment or the other terms of the Obligations or any part
thereof; (ii) supplement, modify, amend or waive, or enter into or give any
agreement, approval or consent with respect to, the Obligations or any part
thereof, or any of the Transaction

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Documents or any additional security or guaranties, or any condition, covenant,
default, remedy, right, representation or term thereof or thereunder; (iii)
accept new or additional instruments, documents or agreements in exchange for or
relative to any of the Transaction Documents or the Obligations or any part
thereof; (iv) accept partial payments on the Obligations; (v) receive and hold
additional security or guaranties for the Obligations or any part thereof; (vi)
release, reconvey, terminate, waive, abandon, fail to perfect, subordinate,
exchange, substitute, transfer and/or enforce any security or guaranties, and
apply any security and direct the order or manner of sale thereof as Agent and
Purchasers in their sole and absolute discretion may determine; (vii) release
any Person from any personal liability with respect to the Obligations or any
part thereof; (viii) settle, release on terms satisfactory to Agent and
Purchasers or by operation of applicable Law or otherwise, liquidate or enforce
any Obligations and any security or guaranty in any manner, consent to the
transfer of any security and bid and purchase at any sale; and/or (ix) consent
to the merger, change or any other restructuring or termination of the corporate
existence of Company or any other Person, and correspondingly restructure the
Obligations, and any such merger, change, restructuring or termination shall not
affect the liability of Guarantor or the continuing effectiveness hereof, or the
enforceability hereof with respect to all or any part of the Obligations.

(b)

Subject to the subordination provisions contained herein, upon the occurrence
and during the continuance of any Event of Default, Agent and/or any Purchaser
may enforce this Guaranty independently of any other remedy, guaranty or
security Agent or any Purchaser at any time may have or hold in connection with
the Obligations or under the Purchase Agreement, and it shall not be necessary
for Agent or any Purchaser to marshal assets in favor of Company or any
Subsidiary of Company, any other guarantor of the Obligations or any other
Person or to proceed upon or against and/or exhaust any security or remedy
before proceeding to enforce this Guaranty.  Guarantor expressly waives any
right to require Agent or any Purchaser to marshal assets in favor of Company or
any other Person or to proceed against Company or any other guarantor of the
Obligations or any collateral provided by any Person, and agrees that Agent or
any Purchaser may proceed against any obligor and/or the collateral in such
order as it shall determine in its sole and absolute discretion.  Agent or any
Purchaser may file a separate action or actions against Guarantor, whether
action is brought or prosecuted with respect to any security or against any
other Person, or whether any other Person is joined in any such action or
actions.  Guarantor agrees that Agent or any Purchaser and Company may deal with
each other in connection with the Obligations or otherwise, or alter any
contracts or agreements now or hereafter existing between them, in any manner
whatsoever, all without in any way altering or affecting the security of this
Guaranty.  NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, AGENT, FOR
ITSELF AND PURCHASERS, HEREBY ACKNOWLEDGES AND AGREES  THAT THE OBLIGATIONS AND
LIABILITIES OF GUARANTOR UNDER THIS GUARANTY TO AGENT AND PURCHASERS ARE
SUBORDINATED TO THE OBLIGATIONS AND LIABILITIES OF GUARANTOR TO ANY LENDER
PROVIDING FINANCING TO GUARANTOR, INCLUDING ANY SECURITY INTEREST OR LIEN HELD
BY SUCH LENDER.

(c)

Agent’s and each Purchaser’s rights hereunder shall be reinstated and revived,
and the enforceability of this Guaranty shall continue, with respect to any
amount at any time paid on account of the Obligations which thereafter shall be
required to be restored or returned by Agent and/or each Purchaser upon the
bankruptcy, insolvency or reorganization of any Person, all as though such
amount had not been paid.  The rights of Agent and Purchasers

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created or granted herein and the enforceability of this Guaranty shall remain
effective at all times to guarantee the full amount of all the Obligations even
though the Obligations, including any part thereof or any other security or
guaranty therefor, may be or hereafter may become invalid or otherwise
unenforceable as against Company or any other guarantor of the Obligations and
whether or not Company or any other guarantor of the Obligations shall have any
personal liability with respect thereto.

(d)

Guarantor expressly waives any and all defenses now or hereafter arising or
asserted by reason of:  (i) any disability or other defense of Company or any
other guarantor for the Obligations with respect to the Obligations; (ii) the
unenforceability or invalidity of any security for or guaranty of the
Obligations or the lack of perfection or continuing perfection or failure of
priority of any security for the Obligations; (iii) the cessation for any cause
whatsoever of the liability of Company or any other guarantor of the Obligations
(other than by reason of the full payment and performance of all Obligations);
(iv) any failure of Agent or any Purchaser to marshal assets in favor of Company
or any other Person; (v) any failure of Agent or any Purchaser to give notice of
sale or other disposition of collateral to Company or any other Person or any
defect in any notice that may be given in connection with any sale or
disposition of collateral; (vi) any failure of Agent or any Purchaser to comply
with applicable Laws in connection with the sale or other disposition of any
collateral or other security for any Obligation, including, without limitation,
any failure of Agent or any Purchaser to conduct a commercially reasonable sale
or other disposition of any collateral or other security for any Obligation;
(vii) any act or omission of Agent or any Purchaser or others that directly or
indirectly results in or aids the discharge or release of Company or any other
guarantor of the Obligations, or of any security or guaranty therefor by
operation of Law or otherwise; (viii) any Law which provides that the obligation
of a surety or guarantor must neither be larger in amount nor in other respects
more burdensome than that of the principal or which reduces a surety’s or
guarantor’s obligation in proportion to the principal obligation; (ix) any
failure of Agent or any Purchaser to file or enforce a claim in any bankruptcy
or other proceeding with respect to any Person; (x) the election by Agent or any
Purchaser, in any bankruptcy proceeding of any Person, of the application or
non-application of Section 1111(b)(2) of the United States Bankruptcy Code; (xi)
any extension of credit or the grant of any lien under Section 364 of the United
States Bankruptcy Code; (xii) any use of collateral under Section 363 of the
United States Bankruptcy Code; (xiii) any agreement or stipulation with respect
to the provision of adequate protection in any bankruptcy proceeding of any
Person; (xiv) the avoidance of any lien or security interest in favor of Agent
or any Purchaser for any reason; (xv) any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, liquidation or dissolution
proceeding commenced by or against any Person, including without limitation any
discharge of, or bar or stay against collecting, all or any of the Obligations
(or any interest thereon) in or as a result of any such proceeding; or (xvi) any
action taken by Agent or any Purchaser that is authorized by this Section or any
other provision of any Transaction Document.  Guarantor expressly waives all
setoffs and counterclaims and all presentments, demands for payment or
performance, notices of nonpayment or nonperformance, protests, notices of
protest, notices of dishonor and all other notices or demands of any kind or
nature whatsoever with respect to the Obligations, and all notices of acceptance
of this Guaranty or of the existence, creation or incurrence of new or
additional Obligations.

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2.3

Condition of Company.  Guarantor represents and warrants to Agent and each
Purchaser that it has established adequate means of obtaining from Company, on a
continuing basis, financial and other information pertaining to the businesses,
operations and condition (financial and otherwise) of Company and its assets and
properties.  Guarantor hereby expressly waives and relinquishes any duty on the
part of Agent or any Purchaser (should any such duty exist) to disclose to
Guarantor any matter, fact or thing related to the business, operations or
condition (financial or otherwise) of Company or its assets or properties,
whether now known or hereafter known by Agent or any Purchaser during the life
of this Guaranty.  With respect to any of the Obligations, neither Agent nor any
Purchaser need inquire into the powers of Company or agents acting or purporting
to act on its behalf, and all Obligations made or created in good faith reliance
upon the professed exercise of such powers shall be guaranteed hereby.

2.4

Continuing  Guaranty.  This is a continuing guaranty and shall remain in full
force and effect as to all of the Obligations until all amounts owing by Company
to Agent and each Purchaser on the Obligations shall have been paid in full.

2.5

Subrogation; Subordination.  Guarantor expressly waives any claim for
reimbursement, contribution, indemnity or subrogation which Guarantor may have
against Company as a guarantor of the Obligations and any other legal or
equitable claim against Company arising out of the payment of the Obligations by
Guarantor or from the proceeds of any collateral for this Guaranty, until all
amounts owing to Agent and each Purchaser under or in connection with the
Obligations shall have been paid in full.  In furtherance, and not in
limitation, of the foregoing waiver, Guarantor hereby agrees that no payment by
Guarantor pursuant to this Guaranty shall constitute Guarantor a creditor of
Company.  Until all amounts owing to Agent and each Purchaser under or in
connection with the Obligations shall have been paid in full, Guarantor shall
not seek any reimbursement from Company in respect of payments made by Guarantor
in connection with this Guaranty, or in respect of amounts realized by Agent or
any Purchaser in connection with any collateral for the Obligations, and
Guarantor expressly waives any right to enforce any remedy that Agent or any
Purchaser now has or hereafter may have against any other Person and waives the
benefit of, or any right to participate in, any collateral now or hereafter held
by Agent or any Purchaser.  No claim which any Guarantor may have against any
other guarantor of any of the Obligations or against Company, to the extent not
waived pursuant to this Section, shall be enforced nor any payment accepted
until the Obligations are paid in full and all such payments are not subject to
any right of recovery.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF GUARANTOR

Guarantor hereby represents and warrants to Agent and each Purchaser as follows:

3.1

Authorization.  Each Guarantor is a corporation duly and validly organized and
existing under the laws of the State of Delaware, has the corporate power to own
its owned assets and properties and to carry on its business, and is duly
licensed or qualified to do business in all jurisdictions in which failure to do
so would have a material adverse effect on its business or financial condition.
 The making, execution, delivery and performance of this Guaranty, and
compliance with its terms, have been duly authorized by all necessary limited
liability company action of Guarantor.

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3.2

Enforceability.  This Guaranty is the legal, valid and binding obligation of
Guarantor, enforceable against Guarantor in accordance with its terms.

3.3

Absence of Conflicting Obligations.  The making, execution, delivery and
performance of this Guaranty, and compliance with its terms, do not violate any
existing provision of Law; the certificate of formation or operating agreement
of Guarantor; or any agreement or instrument to which Guarantor is a party or by
which it or any of its assets is bound.

3.4

Consideration for Guaranty.  The Guarantor acknowledges and agrees with Agent
and each Purchaser that but for the execution and delivery of this Guaranty by
Guarantor, neither Agent nor any Purchaser would have entered into the Purchase
Agreement.  The Guarantor acknowledges and agrees that the Purchase Agreement
and the transactions contemplated thereby will result in significant benefit to
the Guarantor.

ARTICLE IV

COVENANTS OF THE GUARANTOR

4.1

Actions by Guarantor.  Guarantor shall not take or permit any act, or omit to
take any act, that would:  (a) cause Company to breach any of the Obligations;
(b) impair the ability of Company to perform any of the Obligations; or (c)
cause an Event of Default under the Purchase Agreement.

ARTICLE V

MISCELLANEOUS

5.1

Expenses and Attorneys’ Fees.  Guarantor shall pay all reasonable fees and
expenses incurred by Agent or any Purchaser, including the reasonable fees of
counsel, in connection with the protection or enforcement of Agent’s or any
Purchaser’s rights under this Guaranty, including without limitation the
protection and enforcement of such rights in any bankruptcy, reorganization or
insolvency proceeding involving Company or Guarantor, both before and after
judgment.

5.2

Revocation.  This is a continuing guaranty and shall remain in full force and
effect until Agent receives written notice of revocation signed by Guarantor.
 Upon revocation by written notice, this Guaranty shall continue in full force
and effect as to all Obligations contracted for or incurred before revocation,
and as to them Agent and each Purchaser shall have the rights provided by this
Guaranty as if no revocation had occurred.  Any renewal, extension, or increase
in the interest rate(s) of any such Obligation, whether made before or after
revocation, shall constitute an Obligation contracted for or incurred before
revocation.  Obligations contracted for or incurred before revocation shall also
include credit extended after revocation pursuant to commitments made before
revocation.

5.3

Assignability; Successors.  The Guarantor’s rights and liabilities under this
Guaranty are not assignable or delegable, in whole or in part, without the prior
written consent of Agent.  The provisions of this Guaranty shall be binding upon
Guarantor, its successors and permitted assigns and shall inure to the benefit
of Agent and Purchasers, and their respective successors and assigns.

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5.4

Survival.  All agreements, representations and warranties made herein or in any
document delivered pursuant to this Guaranty shall survive the execution and
delivery of this Guaranty and the delivery of any such document.

5.5

Governing Law.  This Guaranty and the documents issued pursuant to this Guaranty
shall be governed by, and construed and interpreted in accordance with, the Laws
of the State of New York, including Section 5-1401 and Section 5-1402 of the New
York General Obligations Law, but excluding to the maximum extent permitted by
applicable Law, all other conflict of laws principles and choice of law rules of
the State of New York.  

5.6

Counterparts; Headings.  This Guaranty may be executed in several counterparts,
each of which shall be deemed an original, but such counterparts shall together
constitute but one and the same agreement.  The article and section headings in
this Guaranty are inserted for convenience of reference only and shall not
constitute a part of this Guaranty.

5.7

Notices.  All notices, demands or other communica­tions to be given or delivered
under or by reason of the provisions of this Guaranty shall be in writing and
shall be deemed to have been given when delivered personally to the recipient,
sent to the recipient by reputable overnight courier service (charges prepaid)
or mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid.  Such notices, demands and other communications
shall be sent to Agent and to Guarantor at the address indicated below:

 

To Guarantor:

c/o AE Biofuels, Inc.

 

 

20400 Stevens Creek Blvd. Suite 700

 

 

Cupertino, CA 95014

 

 

Attention:  Scott Janssen, Chief Financial Officer

 

 

 

 

To Agent:

Third Eye Capital Corporation

 

 

Brookfield Place, TD Canada Trust Tower

 

 

161 Bay Street, Suite 3820

 

 

Toronto, Ontario ON M5J 2S1

 

 

Canada

 

 

Attention:  Vice President - Credit

 

 

 

 

With a copy to:

DLA Piper US LLP

 

 

203 North LaSalle Street

 

 

Suite 1800

 

 

Chicago, Illinois 60601

 

 

Attention:  Jennifer Homer

5.8

Amendment.  No amendment of this Guaranty shall be effective unless in writing
and signed by the Guarantor and Agent.

5.9

Severability.  Any provision of this Guaranty which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Guaranty in such jurisdiction or affecting the
validity or enforceability of any provision in any other jurisdiction.

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5.10

Taxes.  If any transfer or documentary taxes, assessments or charges levied by
any governmental authority shall be payable by reason of the execution, delivery
or recording of this Guaranty, Guarantor shall pay all such taxes, assessments
and charges, including interest and penalties, and hereby indemnifies Agent and
each Purchaser against any liability therefor.

5.11

Jurisdiction and Venue.  Guarantor submits to the jurisdiction of any state or
Federal court sitting in New York, New York in any legal suit, action or
proceeding arising out of or relating to this Guaranty, (ii) agrees that all
claims in respect of the action or proceeding may be heard or determined in any
such court and (iii) agrees not to bring any action or proceeding arising out of
or relating to this Guaranty in any other court.  Each of the parties waives any
defense of inconvenient forum to the maintenance of any action or proceeding so
brought and waives any bond, surety or other security that might be required of
any other party with respect thereto.  Any party may make service on any other
party by sending or delivering a copy of the process to the party to be served
at the address and in the manner provided for the giving of notices in
Section 5.7.  Each party agrees that a final judgment in any action or
proceeding so brought shall be conclusive and may be enforced by suit on the
judgment or in any other manner provided by law.  Nothing herein shall affect
the right to serve process in any other manner permitted by law or shall limit
the right of Agent or any Purchaser to bring proceedings against Guarantor in
the courts of any other jurisdiction.  To the extent provided by law, should
Guarantor, after being so served, fail to appear or answer to any summons,
complaint, process or papers so served within the number of days prescribed by
law after the mailing thereof, Guarantor shall be deemed in default and an order
and/or judgment may be entered by the court against Guarantor as demanded or
prayed for in such summons, complaint, process or papers.  The exclusive choice
of forum for Guarantor set forth in this Section 5.11 shall not be deemed to
preclude the enforcement by Agent or any Purchaser of any judgment obtained in
any other forum or the taking by Agent or any Purchaser of any action to enforce
the same in any other appropriate jurisdiction, and Guarantor hereby waive the
right to collaterally attack any such judgment or action.

5.12

Waiver of Right to Jury Trial.  GUARANTOR HEREBY WAIVES, TO THE EXTENT PERMITTED
BY APPLICABLE LAW, TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO,
IN CONNECTION WITH, OR ARISING OUT OF THIS GUARANTY OR THE VALIDITY, PROTECTION,
INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF.  GUARANTOR AGREES THAT THIS
SECTION 5.12 IS A SPECIFIC AND MATERIAL ASPECT OF THIS AGREEMENT AND
ACKNOWLEDGES THAT AGENT AND EACH PURCHASER WOULD NOT ENTER INTO THE PURCHASE
AGREEMENT IF THIS SECTION 5.12 WERE NOT PART OF THIS AGREEMENT.

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IN WITNESS WHEREOF the undersigned has executed this Guaranty as of the day and
year first above written.

 

AE ADVANCED FUELS KEYES, INC.,

 

a Delaware corporation

 

 

  

 

 

 

 

By:  

/s/ Eric A. McAfee

 

Its:

Eric A. McAfee

Chief Executive Officer

SIGNATURE PAGE TO GUARANTY