Aemetis, Inc

Ladies and gentlemen, welcome to the AMETIS third quarter 2019 earnings review conference call. At this time, all participants are in a listen-only mode, and 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, Jim.

Welcome to the AMETIS third quarter 2019 earnings review conference call. We suggest visiting our website at ametis.com to review today's earnings press release, updated corporate presentation, 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 discussion 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 risks and uncertainties. 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 September 30, 2019, 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, Accretion expense, depreciation expense, loss contingency on litigation, and share-based compensation expense. Now, I'd like to review the financial results for the third quarter of 2019. Revenues were $57.4 million for the third quarter of 2019, compared to $44.6 million for the third quarter of 2018, driven by a 222% increase in biodiesel sales volumes from 6,000 metric tons to 19.3 thousand metric tons. In addition, quarter over quarter volumes for biodiesel grew by 6.8 thousand metric tons or 54% from 12.5 thousand metric tons during the second quarter of 2019 and 5.3 thousand metric tons during the first quarter of 2019. Revenues from the India segment were $19.6 million and accounted for 34% of total revenue. North America segment revenue softened by 2% from $38.6 million during the third quarter of 2018 to $37.8 million during the third quarter of 2019. Gross profit for the third quarter of 2019 rose to $4 million. compared to a gross profit of $2.7 million during the third quarter of 2018. India's segment accounted for $4.2 million of the consolidated gross profit. Selling, general, and administrative expense were $4.5 million during the third quarter of 2019 compared to $3.9 million during the third quarter of 2018. Operating loss was $0.6 million for the third quarter of 2019 a reduction from the operating loss of $1.3 million during the third quarter of 2018. Interest expense during the third quarter of 2019 excluding accretion in connection with preferred payments on the Series A preferred units in the AMETIS biogas LLC subsidiary was $6.3 million compared to $5.4 million during the third quarter of 2018. Additionally, the AMETIS Biogas Initiative recognized $589,000 of accretion in connection with preference payments on its preferred stock. Net loss was $7.2 million for the third quarter of 2019 compared to a net loss of $6.6 million for the third quarter of 2018. Cash at the end of the third quarter of 2019 was $0.9 million compared to $1.2 million at the end of 2019. Now, I'd like to review the financial results for the nine months ended September 30, 2019. Revenues were $149.9 million for the first three quarters of 2019, an increase of $17.2 million compared to $132.7 million for the first three quarters of 2018. This increase in revenue was driven by strong demand for the biodiesel in India during the second and third quarter of 2019 as a result of supplying the India oil marketing companies as well as domestic retail, mining, and bulk customers with biodiesel product. North America's segment remained steady between the two periods. Selling general and administrative expenses were $12.7 million during the first three quarters of 2019 compared to $11.3 million during the first three quarters of 2018. Operating loss increased to $6.0 million for the first three quarters of 2019 compared to an operating loss of $4.2 million for the first three quarters of 2018. Interest expense, excluding accretion in connection with the preference payments on Series A preferred units in the AMETIS biogas LLC subsidiary, decreased to $19.1 million during the first three quarters of 2019 compared to interest expense of $19.8 million during the first three quarters of 2018. Additionally, the Amedis Biogas Initiative recognized $1.5 million of accretion in connection with preference payments on its preferred stock. Net loss was $31.8 million for the first three quarters of 2019 compared to a net loss of $24 million during the first three quarters of 2018 due to a second quarter one-time charge of $6.2 million for loss contingency on litigation. That completes our financial review. Now I'd like to introduce the founder, chairman, and chief executive officer of AMETIS, Eric McAfee, for a business update. Eric?

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. Amedis 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 signed $30 million of equity funding and launched a renewable natural gas project to build biogas digesters at about a dozen local dairies near our ethanol plant in California. Construct a pipeline connecting the digesters to our plant. and installed gas conditioning to produce carbon negative renewable natural gas to reduce the carbon content of our ethanol production and to displace diesel by fueling natural gas trucks. Earlier this year, we signed financing term sheets to fund a $175 million advanced ethanol production facility in California to convert waste orchard wood and other waste biomass into about 12 million gallons of cellulosic ethanol per year. We are now in the final engineering and procurement cycle prior to completion of project financing and commencement of construction of the plant. The combination of these growth and cost reduction initiatives are expected to increase our revenue run rate to more than $500 million per year and annual cash flow to more than $130 million per year. This projected growth in revenues reflects certain planned and completed upgrades of our existing plants, as well as planned completion of the new dairy, renewable natural gas, and cellulosic ethanol production facilities. Please see the AMETIS website homepage for an updated presentation that sets forth each of our four business units and a consolidated financial projection for the next five years of company growth. With the consistent support of California regulators and continued strong California low-carbon fuel standard credit prices, AMETIS made positive progress in each of our four core businesses during the third quarter of 2019. Let's first review our biodiesel business in India. The total diesel market in India is approximately 25 billion gallons per year, of which less than 250 million gallons per year, or about 1%, is biodiesel. The 2018 National Biofuels Policy increased the biodiesel blending target to 5% of the diesel market, equal to more than 1.2 billion gallons per year. The National Policy also outlawed the import or export of biodiesel into or out of India. thereby encouraging the expansion of domestic biodiesel and renewable diesel production capacity. After two years of investment in construction, we completed the upgrade of our India plant in early 2019, including installation of a pretreatment unit to process lower cost and waste feedstock into oil. The biodiesel and refined glycerin plant is now fully operational. Using the new feedstock pretreatment unit, the new boiler unit, and other upgrades, that enabled expanded plant operations toward full plant capacity of 50 million gallons per year. On May 6th, we announced that our Universal Biofuels India subsidiary was awarded a $23 million biodiesel supply contract with the three India government-owned oil marketing companies in a public tender process. Biodiesel shipments to the oil marketing companies began in May and have grown quickly to comprise about 70% of monthly revenues at the India plant. We are particularly pleased with this arrangement because these three government oil marketing companies supply about 70% of the diesel fuel consumed in India and as a group represent the largest single potential biodiesel customer in the country. Under this contract, our biodiesel is now fueling trucks, buses, and even trains throughout India with lower cost biofuel that generates up to 90% lower particulate emissions and extremely low sulfur emissions. During the third quarter, the 222% increase in biodiesel sales volumes from 6,000 metric tons to 19,000 metric tons compared to the prior year volumes reflects our progress in supplying biodiesel to the oil marketing companies while also adding new customers in mining, construction heavy equipment, truck fleets, retail stations, and even other government sectors. We achieved the capital expenditure upgrades and revenue ramp-up at the India plant while repaying 100% of the long-term debt at the India subsidiary and without any ownership dilution to our Imetis parent company shareholders. Imetis effectively owns 100% of the India subsidiary and as a result may use the cash created from earnings to repay Imetis senior debt and provide expansion funding for our other renewable fuels production projects. Additional oil marketing company purchase requests for biodiesel are expected for year 2020, and we expect to continue to participate as a key supplier under these biodiesel contracts. During the months of December and January, we expect our primary constraint on biodiesel revenue growth in India to be the seasonal colder weather from rain and lower winter temperatures that limits the use of biodiesel in India without special fuel additives or blending facilities. Once the existing production capacity becomes fully committed to supplying the expanding biodiesel markets, the India plant has a footprint to expand its capacity to 100 million gallons per year and to grow revenues to more than $300 million per year to meet increasing biodiesel demand in India, driven by the 2018 National Biofuels Policy. In addition to the significant progress in India, our three businesses in the U.S. have achieved major milestones toward increasing revenues and sustained profitability. Let's review our California traditional ethanol business. Similar to our strategy in India, where we added a technology to allow the use of a lower cost waste feedstock to produce biofuels, we have been upgrading our Keys California ethanol plant to lower input costs, reduce the carbon intensity of our biofuel, and significantly increase the value of the ethanol we supply to the 1.5 billion gallon California ethanol market. In May of this year, The Keyes plant successfully reduced carbon emissions under the California low carbon fuel standard by about three carbon intensity points. The credits were effective as of January 1, 2019 and generated about $250,000 per month of additional value from our corn ethanol sales without an increase in operating costs. The second upgrade to the Keyes plant is a CO2 capture and reuse project that we expect will be complete in the next couple of months. After three years of project development, Lindy Gas leased about five acres owned by Imetis adjacent to our Keys ethanol plant to build a CO2 liquefaction plant. Upon completion, the CO2 plant will convert the 175,000 tons per year of renewable CO2 produced by our ethanol plant into liquid CO2 for sale to local food processors, beverage producers, and other CO2 industrial users. The CO2 plant is scheduled for operation in Q1 2020. About $1.5 million per year of cash is expected to be received from CO2 sales and the land lease for the CO2 plant. We also expect to qualify for a CO2 carbon capture and reuse federal tax credit that we calculate is worth more than $4.5 million per year and grows to about $9 million per year as CO2 production ramps to full capacity. We are currently working on an arrangement to monetize the tax credits with a financial partner. The third upgrade to the Keys plant is the construction of a $7 million membrane dehydration system financed by Mitsubishi Chemical of Japan as a strategic implementation of their Zebrex technology for the first time at a corn ethanol plant. The Mitsubishi unit is currently in final equipment fabrication and is scheduled for installation at the Keys plant in Q1 2020. The ethanol dehydration unit is designed to significantly reduce petroleum natural gas usage and decrease the carbon intensity of our ethanol, and once implemented, is expected to generate an estimated $3 million per year of increased cash flow. Additional projects at the Keys plant are targeted to further reduce natural gas usage and costs, thereby increasing the number of low-carbon fuel standard credits generated by low-carbon biofuels each year. Now, let's discuss our advanced low-carbon renewable fuel strategy. 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 $208 this month, we plan to produce increasing amounts of valuable below zero carbon renewable fuels through the use of patented and proprietary technologies that convert dairy waste, Waste Wood, and other cellulosic feedstocks into low carbon and below zero carbon renewable fuels. Our below zero carbon projects were developed to capture the most profitable opportunities in the renewable fuels industry by maximizing the California low carbon fuel standard and the federal renewable fuel standard values. The California LCFS rewards reduction of carbon content in renewable fuels. We believe that some of the highest value LCFS biofuel projects are from renewable natural gas generated by dairy biogas that would otherwise be released into the atmosphere as methane and by cellulosic ethanol produced from orchard wood that would otherwise be burned or convert into methane. The federal D3 RIN price was set by Congress to provide investors with about $3.50 per gallon of value. D3 RINs are only generated by cellulosic ethanol and renewable natural gas, and not by other biofuels such as corn ethanol, which generate other types of RINs. D3 RINs are the only carbon credit that has a waiver price set by Congress. Though D3 RINs have traded this year below the cellulosic waiver credit price set by Congress, we expect that enforcement of the federal renewable fuel standard will re-establish the CWC credit price as the D3 RIN price. Observing the high value of D3REN and LCFS generation, Amedis is building two advanced biofuels businesses comprised of the Amedis biogas business to build California dairy, renewable natural gas production, and related pipeline collection projects, and the Amedis waste wood ethanol business to convert California waste orchard wood from 1.5 million acres of almond and walnut orchards into cellulosic ethanol. with about 1,200 dairies and more than 1.6 million tons per year of waste orchard wood within 150 miles of the Imetis plant in California. Upon the successful completion and operation of these projects, Imetis plans to grow to more than $500 million of annual revenues and $137 million of annual positive cash flow by converting waste dairy gas and waste orchard wood in the Central Valley of California into valuable low-carbon renewable fuels. Let's briefly review our Imetis Biogas Dairy Digester and Pipeline project. Methane, commonly known as natural gas, is a potent greenhouse gas that is up to 30 times more powerful than carbon dioxide at capturing Earth's heat. About 25% of California's methane emissions are from the waste ponds on dairy farms. To reduce damaging methane emissions, in late 2016, California passed a law known as Senate Bill 1383. that mandates the capture of biogas from dairies. Biomethane sourced from dairies can be used to replace gasoline or diesel fuel in trucks and buses to significantly reduce carbon emissions and air pollution. Along with the state mandate, California has funded about $75 million of annual matching grants to dairies to build biogas digesters and related systems. We believe that capturing biogas from dairies and converting it into renewable natural gas to generate negative carbon intensity biofuels is an excellent way to reduce climate change and create value for dairies and lower costs for diesel truck fleets. Based on our existing animal feed supply relationships with about 100 dairies and the ability to use biogas in our ethanol plant until utility pipeline approvals are obtained and pipeline injection is completed, we believe that Ametis is uniquely positioned as one of only three ethanol companies in California who can use existing infrastructure in this manner. After more than a year of project development and financing work, earlier this year we announced $30 million of equity financing and a grant award from the California Department of Food and Agriculture of two matching grants for a total of $3 million to build the first two dairies in our biogas project. Construction of the first two dairy digesters and related pipeline system is expected to be completed in Q1 2020. followed by the construction of an additional nine digesters pipeline and gas conditioning systems during the full year of 2020. We expect the Imetis Biogas business to scale up to generating more than two dollars per share of recurring annual positive cash flow after completing the expanded planned project of more than three dozen dairies and redeeming the preferred stock issued to finance this project. Let's listen with an update, I'm sorry, let's finish with an update on our below-zero-carbon cellulose ethanol project in Riverbank, California. We were pleased to announce last year that the Imetis Advanced Bio Refinery, under development in Riverbank, California, near Modesto, was named as the number one waste-to-value project in the world by Biofuels Digest, the world's largest daily biofuels publisher. The Imetis 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 cost of about $20 per ton for the first half of the contract period. Planned production of high-value cellulosic ethanol, expected to be worth more than $5 per gallon, as well as valuable fish meal and other byproducts, and our use of the patented LensTech gas microbe ethanol production technology. The LensTech technology is now in full commercial operation at a plant that opened last year in northern China and converts waste gases from a steel plant to produce ethanol. This year, we 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 U.S. Department of Agriculture conditional commitment letter for a 20-year debt financing under the 9003 biorefinery program. We are focused on completing engineering of the plant required for the negotiation of the EPC contract that will include a bonded maximum construction cost as required by the USDA conditional commitment letter. The Riverbank cellulosic ethanol plant is expected to generate more than $80 million of revenue and more than $50 million per year of positive cash flow by producing cellulosic ethanol from low-cost waste, orchard, vineyard, forest, and construction demolition wood as feedstock. Financial closing is to begin construction of the Riverbank plant is expected in Q2 2020, primarily depending on the engineering and procurement work required for the signing of the construction contract. In summary, we believe that AMETIS holds a unique position with diversified production of low-carbon renewable fuels in two attractive markets in California and India. The continued strong volume and revenue growth occurring at our India plant has been achieved while repaying 100% of our long-term debt in India. The increased profit margins from plant upgrades related to the Keys Biorefinery is expected to begin to be realized in Q1 2020. The Ametis Biogas Dairy Digester and Pipeline Project is expected to begin first gas production in Q1 2020. And our planned deployment of the patented Lanzatec Cellulose Ethanol Technology at the Riverbank Plant has positioned Ametis to rapidly produce, expanding positive cash flow. from the production of low-carbon, clean-burning, high-performance, renewable fuels from abundant, low-cost waste biomass feedstocks. Now, let's take a few questions from our call participants. Jim?