Aemetis, Inc

Please stand by. Good day and welcome to the AMETIS First Quarter 2020 Earnings Review Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, today's call is being recorded. It is now my pleasure to introduce your host, Mr. Todd Waltz, Executive Vice President and Chief Financial Officer of AMETIS. Mr. Waltz, you may begin.

Thank you, Melinda. Welcome to the AMETIS first quarter 2020 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 discussions 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 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 March 31, 2020, 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 first quarter of 2020. Revenue during the first quarter of 2020 was $39.5 million compared to $41.9 million for the first quarter of 2019. North America volume of ethanol sold during the first quarter was 15.7 million gallons compared to 16.2 million gallons in the first quarter of 2019 at an average price of $1.56 per gallon compared to $1.68 per gallon. India's biodiesel price was $786 per metric ton compared to $3839 per metric ton. with tons sold decreasing to 3,554 metric ton compared to 5,182 ton. Gross loss for the first quarter of 2020 was $433,000 compared to a $351,000 loss during the first quarter of 2019. Selling, general and administrative expenses decreased from $4.2 million during the first quarter of 2019 to $3.9 million during the first quarter of 2020. Operating loss decreased to $4.5 million for the first quarter of 2020 compared to operating loss of $4.6 million for the same period in 2019. Interest expense excluding Accretion of Series A preferred units in the Amedis Biogas LLC subsidiary was $6.9 million during the first quarter of 2020 compared to $6.2 million during the first quarter of 2019. Additionally, our Amedis Biogas initiative recognized $960,000 of accretion of the preference payment on its preferred stock during the first quarter of 2020 compared to $449,000 during the first quarter of 2019. Net loss increased to $12.1 million for the first quarter of 2020 compared to a net loss of $10.7 million for the first quarter of 2019. Cash at the end of the first quarter of 2020 was $303,000 compared to $656,000 at the close of the fourth quarter of 2019. That completes our financial review. Now I'd like to introduce the founder, chairman, and chief executive officer of AMETIS, Eric McAfee, for business update.

Eric? Thank you, Todd. AMETIS was founded in 2006 and we've grown into four lines of business focusing on supplying low carbon and below zero carbon renewable fuels, biochemicals, and byproducts to markets including transportation, renewable natural gas, and carbon dioxide. Recently, we began shipping hand sanitizer alcohol and refined glycerin into the rapidly expanding antiviral sanitizer market. We own and operate production facilities with more than 110 million gallons per year of capacity in the US and India. Included in our production portfolio is a 60 million gallon per year capacity ethanol, distillers 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 Kakanada. As you may know, high quality alcohol and refined glycerin are the two key ingredients in hand sanitizer. Amedis operates the largest production plant for high quality alcohol in California and is one of the largest refined glycerin producers in India. The global COVID-19 crisis that began during Q1 2020 provided challenges to our business, including protecting the health of our employees while continuing to operate our California ethanol plant to supply animal feed to more than 100,000 dairy cows during a time period in which the demand for biofuels decreased significantly. AMETIS operates in three of the federal essential critical infrastructures and has continued to operate our California ethanol plant and the construction of a renewable natural gas project without interruption. to a large extent, the ability to continue to operate our California plant while fuel ethanol demand and price declined significantly during Q1 and then recovered recently in Q2 has been due to our rapid conversion of our alcohol production to produce hand sanitizer alcohol. In response to a severe lack of hand sanitizer, In late March 2020, the FDA and the Treasury Department issued an approval to alcohol fuel producers to allow ethanol plants to produce alcohol for hand sanitizers. We delivered our first sanitizer alcohol within a few days thereafter and installed upgrades to our California plant to produce higher quality ethanol for broader personal care and industrial markets. To our knowledge, Ametis is now the largest producer of alcohol for hand sanitizer in the Western U.S. In April, Amedis received a distilled spirits producer certification, and we continue to invest in the upgrading of our production facilities to achieve U.S. pharmacopoeia and food-grade quality for our ethanol within a few months. Our expanding production of high-quality alcohol for the sanitizer market used for hand sanitizer, alcohol wipes, and alcohol sprays is expected to be a long-term growth market driven by the adoption of antiviral markets and products by governments, schools, private industry and consumers. About a year ago, we signed a $30 million 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 install 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. We now have signed participation agreements with 17 dairies, built and tested two dairy lagoon digesters at a cost of about $5 million, and have designed and permitted a four-mile pipeline that is now under construction to connect the dairy digesters to our ethanol plant. In 2019, We signed financing term sheets to fund an 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 to more than $500 million per year and annual cash flow to more than $130 million per year. This projected growth in revenues and cash flow reflects certain planned and completed upgrades of our existing plants, as well as planned completion of the new dairy renewable natural gas and waste wood ethanol production facilities. With the consistent support of California regulators and continued strong California low carbon fuel standard credit prices, AMETIS has made positive progress in each of our four businesses during the first quarter of 2020. Let's first review our biodiesel business in India. After two years of investment in construction, we completed the upgrade of our India plant in 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 commissioned 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. The stay-at-home order in India has restricted our production, but we continue to ship biodiesel and refined glycerin from inventory. This month, we expect to begin production at the India plant to meet expanding biodiesel and refined glycerin needs in India. Though the global price of diesel has declined along with the price of crude oil, the domestic price of diesel in India has remained largely unchanged due to the increased India government taxes that offset crude oil price declines. Since our biodiesel sold at a price linked to India domestic diesel prices, our biodiesel prices in India have remained steady despite the significant decrease in the price of crude oil. In addition, refined glycerin prices have increased in response to the need for hand sanitizer and other consumer products. In May of last year, 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. Additional oil marketing company purchase requests for biodiesel have been issued for year 2020, and the award of supply agreements should occur in the next month. We expect to continue to participate as a key supplier under these biodiesel contracts. During the months of December and January, the primary constraint on biodiesel revenues growth in India is a seasonal colder weather from lower winter temperatures, and the high cost of feedstock in late 2019 has now decreased significantly. Our three businesses in the U.S. have achieved major milestones toward increasing revenues and sustained profitability. Let's review our California ethanol business. Similar to our strategy in India, where we added a technology that allowed the use of a lower cost waste feedstock to produce biofuels, we've 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, and now the sanitizer alcohol market. To produce higher quality ethanol for the sanitizer market, We installed carbon-filtered units and now are doubling the amount of carbon filter systems this week. We are also engineering and planning to install upgrades to our distillation system in order to produce high-quality alcohol that exceeds U.S. pharmacopoeia and food-grade standards in the third quarter of 2020. A second upgrade to the Keys plant has now been completed. In early May, we announced the completion of construction and commencement of commercial shipments of CO2 to the newly constructed Messer gas plant next to our ethanol plant to capture and reuse carbon dioxide. After three years of project development, Messer leased about five acres owned by Imetis adjacent to the Keys ethanol plant to build a CO2 liquefaction plant. We are now converting more than 150,000 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. Ethanol plants produce about 40% of the CO2 in the US, so a significant national shortage of CO2 has occurred due to the shutdown or idling of ethanol plants. 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 calculated is initially worth about $4 million per year and grows to $6 million per year over the next five years under the IRS 45Q rules. 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 an $8 million membrane dehydration system financed by Mitsubishi Chemical of Japan and a $1.5 million PG&E grant as a strategic implementation of the Mitsubishi Zebrax technology for the first time at a corn ethanol plant. The Mitsubishi unit was delivered to the Keys plant in late February 2020 and is in the installation process. 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. A fourth upgrade to the Keys plant is a solar microarray and artificial intelligence energy management system that received an $8 million grant from the California Energy Commission. This solar system will decrease the carbon intensity of our biofuel through the use of solar energy to displace higher carbon energy sources. A fifth upgrade to the Keys plant is a high-efficiency heat exchanger project that was awarded a $1.3 million specific gas and electric grant. And the sixth upgrade to the Keys plant is a mechanical vapor recompression system that was awarded a $6 million grant from the California Energy Commission that is expected to reduce natural gas use significantly. These projects at the Keys plant are targeted to reduce petroleum natural gas usage and costs by up to 80%. while increasing the number of low-carbon fuel standard credits generated each year. The combined impact of these projects is expected to be a $30 million per year increase in operating cash flow at the Keys plant, not including any improvement in profit margins that are expected to occur if the EPA decides to enforce existing federal biofuels laws. Let's briefly review our Ametis 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 in 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 while lowering costs for diesel truck fleets and electric vehicles. Based on our existing animal feed supply relationships with about 100 dairies and the ability to use biogas in our 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, last 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 is now completed, and we are now building the four-mile pipeline to connect the digesters with the Ametis ethanol plant with an expectation of beginning renewable natural gas revenues during late Q2 2020. We have signed 17 participation agreements with dairies and plan to complete construction of the next 15 lagoon digesters by approximately the end of the year 2021. Let's finish with an update on our below zero carbon cellulosic ethanol project in Riverbank, California. We were pleased that the Amedis 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 Amedis project earned its number one ranking as a result of our fixed-price, low-cost almond and walnut wood waste contracts 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 is expected to be worth more than $5 per gallon. as well as valuable fish meal and other byproducts, and our use of the patented Lensatec gas microbe ethanol production technology. The Lensatec technology is now in full commercial operation at a plant that opened in 2018 in northern China that converts waste gases from a steel plant to produce ethanol. During 2019, 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 working to update the USDA loan to match the current capital expenditure budget for the project. 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. 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. The financial closing to begin construction of the Riverbank plant is dependent on completing the engineering and procurement work required for the signing of the construction contract. In summary, we believe that Amedis holds a unique position with the production of both higher quality ethanol and refined glycerin for the rapidly expanding sanitizer market. We also have diversified production of low-carbon renewable fuels in two attractive markets in California and India. The profitability and 120% revenue growth at our India plant during 2019 was achieved while repaying 100% of our long-term debt in the India subsidiary. The increased margins from plant upgrades related to the Keys biorefinery are expected to begin to be realized in Q2 2020. The Amedis Biogas Dairy Digestor and Pipeline project is expected to begin first gas production in late Q2 2020. And, our planned deployment of the patented Lancetec cellulosic ethanol technology at the Riverbank plant has positioned Amedis 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. Melinda?