Aemetis, Inc

Hello and welcome to the AMETIS fourth quarter in year 2018 earnings review conference call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Todd Waltz, Executive Vice President and Chief Financial Officer of AMETIS, Inc. Mr. Waltz, you may begin.

Thank you, Kevin. Welcome to the AMETIS fourth quarter and year 2018 earnings review conference call. We suggest visiting our website at ametis.com to review today's earnings press release, updated corporate presentations, filing with the Security and Exchange Commission, recent press releases, and previous earnings conference calls. This presentation is available for review or download on the ametis.com homepage. Before we begin our presentation today, I'd like to read the following disclaimer statement. During today's call, we'll be making forward-looking statements, including, without limitation, statements with respect to our future stock performance, plans, opportunities, and expectations with respect to financing activities and the execution of our business plan. These statements must be considered in conjunction with the disclosures and cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements made on this call involve risk and uncertainty and that future events may differ materially from the statements made. For additional information, please refer to the company's Security and Exchange Commission filings, which are posted on our website and are available from the company without charge. Our discussion on this call will include a review of non-GAAP measures as a supplement to financial results based on GAAP. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the quarter ended on December 30, 2018, which is available on our website. Adjusted EBITDA is defined as net income or loss plus, to the extent deducted in calculating such net income, interest expense, loss on extinguishment, income tax expense, intangible and other amortization expense, depreciation expense, and share-based compensation expense. Now, I'd like to review the financial results for the fourth quarter of 2018. Revenues were $38.8 million for the fourth quarter of 2018 compared to $38.9 million for the fourth quarter of 2017. Gross loss for the three months ended December 31, 2018 was $1.9 million compared to gross profit of $3 million during the same period in 2017. Gross profit decline was attributable to softening prices for ethanol from $1.65 per gallon during the three months ended December 31, 2017 to $1.57 per gallon during the three months ended December 31, 2018 in a market where the cost of delivered corn rose from $4.58 per ton to, I'm sorry, per bushel to $4.89 per bushel during the same respective periods. Selling general administrative expenses were $4.8 million during the fourth quarter of 2018 compared to $3.5 million during the fourth quarter of 2017, primarily attributable to non-recurring legal fees. Operating loss was $6.7 million for the fourth quarter of 2018 compared to operating loss of $3.4 million during the fourth quarter of 2017. Net loss attributable to Amedis was $11.4 million for the fourth quarter and others. Cash at the end of the fourth quarter of 2018 compared to $0.4 million at the end of the fourth quarter of 2017. Moving on to the results for the year ended December 31, 2018, revenue increased 14% to $171.5 million for the 12-month end of December 31, 2018 compared to $150.2 million for the same period in 2017. The increase in revenue was primarily attributable to increase in the production of ethanol and wet distillers grain, as well as price increase for our distillers grain in North America and overall volume growth in India. Gross profit for the 12-month end of December 31, 2018 was $5.4 million, compared to $3.4 million during the same period in 2017. Gross profit increase was attributable to an $11 per ton increase in the price of wet distillers grain for the year ended December 31, 2018 compared to 2017. Selling general and administrative expenses were $16.1 million during the 12 months ended December 31, 2018 compared to $13.2 million during the same period in 2017. The increase in selling general and administrative expenses was primarily attributable to professional fees related to closing the CO2 land purchase, financing the biogas project, and litigation. Operating loss was $10.9 million for the 12-month end of December 31, 2018, compared to an operating loss of $12.2 million for the same period in 2017. Net loss attributable to Ametis was $33 million. Thank you Todd. For those of you who may be new to our company, let me take a moment to provide some brief background information.

Ametis was founded in 2006 and we own and operate production facilities with more than 110 million gallons per year of renewable fuel capacity in the U.S. and India. Included in our production portfolio is a 60 million gallon per year capacity ethanol, distilled grain, and corn oil plant located in Keys, California near Modesto. We also built, own, and operate a 50 million gallon per year capacity distilled biodiesel and refined glycerin biorefinery on the east coast of India near the port city of Kakanata. Last year, we funded and launched a $30 million dairy digester pipeline and gas conditioning project in central California. And we are in the late stages of developing a $175 million advanced ethanol production facility to convert waste orchard wood and other waste biomass into cellulosic ethanol. AMETIS made excellent progress on each of our four core businesses during 2018 and early 2019. Let's first review our biodiesel business in India. During the past few years, the tax and regulatory structure for biofuels in India has been developed and we believe it is now being implemented to support the biodiesel industry. In 2017, India adopted a goods and services tax for biodiesel at 18%, which has subsequently been reduced to 12% in early 2018. In mid-2018, the India government updated the national biofuels policy, to set a target of a 5% blend of biodiesel with diesel and instituted a high tariff to block the importation of biodiesel into India in order to support the expansion of domestic biodiesel production. The national biofuels blending target requires more than 1 billion gallons of new biodiesel production in India. As one of only about five large India biodiesel producers, we believe that the expansion of the India domestic market will directly benefit our company. After two years of investment in construction, in early 2019, we completed the upgrade of our India plant to about 50 million gallons per year of biodiesel capacity. The plant is now fully operating the new feedstock free treatment unit, the new boiler unit, and other upgrades that now enable plant operations at full plant capacity. During the 2018 construction period, the India biodiesel plant increased revenues 60% to $21.5 million. Thank you for joining us. Thank you for joining us. opened the retail channel, and we developed a branded franchising model for retail distribution. Our retail sales strategy in India includes franchising the Universal Biofuels name to local operators to sell our premium biodiesel branded biodiesel, similar to retail gas stations franchised by large oil companies in the U.S. High-volume potential new biodiesel customers in India include late-stage testing with mining companies for use in very large dump trucks at mines. Thank you for joining us. Since biodiesel is not a subsidized product in India, we sell at a discount to petroleum diesel. The environmental benefits of biodiesel and the economic benefits of domestic production are provided for free to our customers and without funding from the government. We expect crude oil prices will be in the $55 to $70 per barrel range, driving an expected price of diesel in India that we believe will support significantly expanded revenues and consistent annual positive cash flow. Thank you for joining us. In addition to the excellent progress in India, our three businesses in California are doing very well in the factors that we control, achieving major milestones in the riverbank below-zero carbon cellulosic ethanol project, the Ametis biogas varied digester and pipeline project, and new production records at the Keys ethanol plant. Now let's review our California traditional ethanol business. In mid-2018, EPA issued about 2.25 billion gallons of hardship waivers to 48 oil refineries, allowing these refineries to avoid purchasing biofuels credits. The Renewable Fuel Standard mandates 15 billion gallons per year of ethanol, but the waivers have had a serious impact on both volumes and positive cash flow by allowing billions of gallons of biofuels blending to be avoided by oil refiners. As a direct result of these hardship waivers, Thank you for joining us. The Keys Plant operations team continues to achieve high ethanol yields and plant uptime. To increase our profit margins in the traditional ethanol business despite the hardship waivers issued by the EPA, we are designing and constructing upgrades to the Keys Plant to decrease natural gas usage and thereby decrease the carbon intensity of our ethanol, resulting in a reduction of our petroleum natural gas costs while increasing the price of our ethanol by creating more credits under the California low-carbon fuel standard. Such projects at the Keys plant include the $5 million Mitsubishi membrane dehydration unit upgrade to replace the energy-intensive molecular sieves. This upgrade is expected to reduce our carbon intensity score and improve profitability at the Keys plant, with full operation expected to occur in Q4 2019. We have fully financed, acquired five acres of industrial land, and now we're in the construction of a carbon dioxide compression plant adjacent to the Keys plant to convert the highly purified renewable CO2 produced by our Keys plant into food quality liquid CO2. This project is being funded with $3 million of non-dilutive debt financing for the land purchase and the Keys plant upgrades, as well as more than $20 million of non-dilutive funding by the CO2 producer to build their plant. The recent federal tax changes include a tax credit for the reuse of CO2 in new projects. We are working on the process of monetizing this tax credit, which could be worth several million dollars per year, in addition to the $1.5 million per year we expect to receive from the CO2 sales revenues. Next, let's discuss the Amedis Biogas Dairy Digester and Pipeline Project, and then the Below Zero Carbon Cellulose Scathamol Project. with the extension of the low carbon fuel standard in California to year 2030 and the resulting increase in the price of California low carbon fuel standard credits from $62 in mid-2017 to more than $190 per credit today. We have targeted our biofuels expansion projects to the production of valuable below zero carbon biofuels through the use of technologies that convert waste feedstocks into biofuels to create sustainable competitive advantages. Thank you for joining us. California has funded about $75 million of annual matching grants to dairies to build biogas digesters and related systems. Biogas is a blend of methane along with CO2 and other impurities that can be captured from dairies, landfills, and other sources. After a gas cleanup and compression process, biogas becomes biomethane, which is a direct replacement of petroleum natural gas and can be transported in existing natural gas pipelines. can be used to replace gasoline or diesel fuel in modified cars, trucks, and buses to significantly reduce carbon emissions and air pollution. After more than a year of project development and financing work, we recently announced a fully financed $30 million project to capture biogas from dairies and on-site digesters, deliver the biogas to our ethanol plant via a new pipeline, then either use the biogas in our existing boilers or convert the biogas into biomethane, commonly known as renewable natural gas or RNG. The biomethane can either be sold directly to trucks at the Keys plant or injected into the utility pipeline for delivery anywhere in California to be used in trucks to displace petroleum diesel. On a scale of the carbon intensity of different fuels, the carbon intensity of biomethane captured from dairies is approximately negative 275. Thank you for joining us. With the need for conversion to a transportation fuel to maximize the value of biogas, we believe that Ametis is uniquely positioned as one of only three ethanol companies in California. Recently, another ethanol company in California, Calgary Renewable Fuels, completed the launch of a $40 million project to build biogas digesters at approximately 15 dairies near their ethanol plant south of Fresno, construct a biogas pipeline to bring the biogas to the ethanol plant. and then clean up and compress the gas for use by the ethanol plant to replace petroleum natural gas to power the production of renewable biofuels, or, since they recently completed this, inject biomethane into the common carrier pipeline. The success of this CalGren project provided a successful template for AMETIS to aggressively pursue our own biogas digesters, pipeline, gas cleanup and compression systems from dairies located in the area near the Keys plant. During 2018, Emetis launched a biogas education and marketing program to local dairies, many of whom are already customers of the distilled grain produced by the Emetis ethanol plant. As a result of this effort, exclusive participation agreements have now been signed with about 15 dairies, exceeding our original goal of a cluster of 11 dairies. We expect to continue to sign participation agreements with dairies in order to obtain state grant funding in a timely manner. Thank you for joining us. We are very pleased that the funding was accomplished with no dilution to the shareholders of the Amedis parent company and the equity is structured to automatically repurchase the preferred stock from biomethane operational cash flow. Prior to the full redemption of the preferred stock, Amedis receives 25% of free cash flow with the remaining 75% of free cash flow used to redeem preferred stock. After redemption of the preferred stock, Amedis will receive 100% of ownership and ongoing cash flow. The full renumption of preferred equity is currently expected to occur within less than 60 months after commissioning of the full biomethane project. Construction of the first two dairy digesters and related pipeline system is expected to be completed this year, followed by the completion of the remaining digesters and systems in the first phase within the next year. We plan to continue to sign biogas supply agreements with additional dairies in order to file permits and begin engineering for the expansion of the Imedis biogas project from about a dozen dairies to potentially more Thank you for joining us. to scale up to generating more than $2 per share of recurring annual positive cash flow after completing the expanded planned project of three dozen dairies and redeeming the preferred stock. As Imetis is fully funding the installation and operation of the dairy digesters, the pipeline system, the biogas cleanup and gas compression systems, we have a significant first mover advantage compared to other potential biogas developers. Our most significant advantage, however, is the physical capability of our 60 million gallon keys plant to immediately utilize biomethane as a replacement of petroleum natural gas in our production process, thereby generating LCFS and RFS credits on day one of biogas production. Without an ethanol plant, other biogas developers elect to develop access to markets for sales to CNG truck fleets or to seek utility pipeline injection approvals. Utility pipeline injection approvals have been extremely long and costly process in California. with only a small handful of approvals having been granted by utilities and regulators in the past. Let's finish with an update on our below zero carbon cellulosic ethanol project in Riverbank, California. A key factor in our plant upgrade and expansion decisions has been the strong market for California low carbon fuel standard credits and the high price of D3 renewable identification numbers for both cellulosic biofuels and biogas that is set by law We believe that the production of lower-carbon corn ethanol, below-zero-carbon cellulosic ethanol from waste wood, and other low-carbon products that generate LCFS credits and D3 RINs are direct opportunities to meet the goals of regulations that seek to create a lower-carbon economy. We were pleased to announce this summer that the Imedis Advanced BioRefinery, under development at Riverbank, California, near Modesto, was named as the number one waste-to-value project in the world Biofuels Digest, the world's largest daily biofuels publisher. The Amedis project earned its number one ranking as a result of our fixed price, low cost almond and walnut wood waste contract for 20 years with a fixed price of about $20 per ton for the first half of the contract period. Planned production of high value cellulosic ethanol worth more than $5 per gallon, including valuable fish meal and other bioproducts, and our use of the heavily patented Landsat Gas Consuming Microbe, Ethanol Production Technology, which is in full commercial operation at a 16 million gallon per year capacity plant in northern China using waste gases from a steel plant to produce ethanol. Recently, we have announced three significant financings related to the Riverbank project. A $5 million California Energy Commission grant to fund engineering and equipment, a $12.5 million tax waiver that offsets equity funding required for the project, and the signing of a $125 million USDA conditional commitment letter for a 20-year debt financing under the 9003 biorefinery program. The USDA is providing $100 million of loan guarantee to a syndicate of banks to support the funding of the $125 million loan to the Riverbank project. Now that the USDA loan guarantee has been signed, Thank you for joining us. Thank you for joining us. positioned Ametis to rapidly expand our positive cash flow from the production of low-carbon, clean-burning, high-performance renewable fuels from abundant, low-cost waste feedstocks. Now let's take a few questions from our call participants. Kevin?