Aemetis, Inc

for the 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 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, Melinda. Welcome to the ABETIS second 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 Securities 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 disclosure 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 activity 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 Security 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 June 30, 2020, which is also available on our website. Adjusted EBITDA is defined as net income or loss plus to the extent deductible in calculating such net income, interest expense, loss on extinguishment, income tax expense, tangible 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 second quarter of 2020. Revenues were $47.8 million for the second quarter of 2020 compared to $50.6 million for the second quarter of 2019, driven by the entry into the high-grade alcohol market, but slightly offset by the delay in the India government oil marketing company biodiesel bidding process. Gross profit for the second quarter of 2020 rose to $14.1 million compared to a gross profit of $3.3 million during the second quarter of 2019. The North America segment accounted for $13.9 million, the report consolidated gross profit. Selling general and administrative expenses were $4 million during the second quarter of 2020 compared to $3.9 million during the second quarter of 2019. Operating income increased to $10 million during the second quarter of 2020, compared to an operating loss of $762,000 for the second quarter of 2019. Interest expense during the second quarter of 2020 was $6.2 million, excluding accretion in connection with the Series A preferred units in the Ametis Biogas LLC subsidiary, compared to $6.6 million during the second quarter of 2019. The AMETIS biogas subsidiary recognized $1.4 million of accretion in connection with preference payments on its preferred stock. Net income was $2.2 million for the second quarter 2020 compared to a net loss of $13.9 million for the second quarter 2019. Adjusted EBITDA increased to $11.2 million for the three months ended June 30, 2020. Cash at the end of the second quarter of 2020 increased to $3.4 million compared to $600,000 at the end of 2019. That completes our financial review for the second quarter of 2020. Now, I'd like to introduce the founder, chairman, and chief executive officer of Amedis, Eric McAfee, for a business update.

Eric? Thanks, Todd. Amedis was founded in 2006. We have grown into four lines of business which are focused on supplying health products, including high-grade alcohol, refined glycerin, blended hand sanitizer gel and liquid, as well as packaged sanitizer products. Renewable fuels, including low carbon and below zero carbon ethanol, biodiesel, waste wood ethanol and byproducts, including carbon dioxide and corn oil. Dairy biogas, including renewable natural gas for transportation fuel. and Technology Development to maximize the value of our products and processes. We own and operate production facilities with more than 110 million gallons per year of capacity in the U.S. and India. Included in our production portfolio is a 65 million gallon per year high-grade alcohol, fuel ethanol, distillers grain and corn oil plant located in Keys, California near Modesto. We also build, own, and operate a 50 million gallon per year capacity refined glycerin and distilled biodiesel biorefinery on the east coast of India near the port city of Kakanata. Amedis made positive progress toward increasing revenues and sustained profitability in each of our four businesses during the second quarter of 2020. Let's review our new Amedis health products business, which grew rapidly during the second quarter, as well as our fuel ethanol business, which earned strong profit margins during the end of the second quarter. In response to a national shortage of hand sanitizer used to slow the spread of the COVID-19 virus, in late March 2020, the FDA and the Treasury Department's TTB agency issued temporary regulations allowing fuel ethanol plants to produce alcohol for hand sanitizer. Responding to this approval and the spike in demand for sanitizer products, AMETIS delivered our first sanitizer alcohol within a few days thereafter through a post-processing arrangement that was formed with a local wine and spirits producer. then installed upgrades at our California plant to produce higher quality ethanol for broader personal care and industrial markets. Very quickly, we realized that a major differentiator between our company and other ethanol producers is that they would have to transport alcohol for Sanfezer from the Midwest to California using fuel ethanol trailers and rail cars, which are often contaminated with benzene and other dangerous chemicals from the gasoline that is used as a denaturant in fuel ethanol. We quickly arranged a $2.1 million lease purchase of 15 new bulk trailers with our trucking company to be used solely for the transport of Amedis high-grade alcohol, allowing us to deliver up to 30 loads per day of alcohol to California blenders and bottlers from our Central Valley plant without using any trailers that had carried fuel ethanol or gasoline. In addition to using new bulk trailers, our California high-grade alcohol plant location is about 2,000 miles closer to customers in California. Amedis has a permanent cost advantage over Midwest ethanol producers due to our close proximity to Western US markets, especially when government agencies restrict the use of rail cars and tanker trucks that have previously carried petroleum products. As you may know, high quality alcohol and refined glycerin are the two key ingredients in hand sanitizer and other sanitizer products. During Q2, we began shipping large quantities of hand sanitizer alcohol from our plant in and refined glycerin from our plant in India into the rapidly growing sanitizer and personal care markets. To expand our product line and support a growing list of customers in the U.S. and Canada, we recently launched the Imetis Health Products subsidiary to manage the development, production and marketing of our sanitizer products. After implementing a number of upgrades at the California ethanol plant, We believe that Ametis now operates the largest production plant for high-quality sanitizer alcohol in the Western U.S., while also owning and operating one of the largest pharmacopoeia-grade refined glycerin production plants in Asia. The global COVID-19 crisis that began during Q1 2020 and caused operational shutdowns for many businesses during Q2 2020 also provided challenges to our business. 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 occurred during a time period in which the demand for biofuels decreased significantly due to the steep decline in gasoline consumption during shelter-in-place orders. However, Inetis operates in three of the federal essential critical infrastructures – and continued during both Q1 and Q2 to operate our California ethanol plant in order to provide transportation fuel and alcohol for sanitizer products while continuing the construction of plant upgrades and building our dairy 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 was due to our rapid conversion of ethanol production to produce hand sanitizer alcohol, followed by a late Q2 strong recovery in the price of fuel ethanol. In April, Imetis received a distilled spirits producer DSP permit from the TTB. With the DSP permit, Imetis can sell high grade alcohol into other markets. In June, we began to produce food chemical codex, known as FCC, food-grade quality alcohol at our Modesto plant. We began shipments of FCC-grade alcohol to Canada during Q2, and we continue to invest in the upgrading of our production facilities that we believe will allow us to achieve U.S. pharmacopeia-grade alcohol in Q1 2021. Our total investment in upgrades for the production and storage of high-grade USB alcohol is expected to be approximately $15 million, of which more than $12 million has already been funded or will be reimbursed by grant funding. 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 products by governments, schools, private industry, and consumers. To increase the value of our high-grade and fuel ethanol and to reduce the cost of operation of our production plant, we are currently implementing several upgrade projects related to the California plant, including 1. Building two new distillation columns and related systems to produce high-purity U.S. pharmacophia-grade alcohol for sanitizers known as USP-grade 2. Installing five new segregated stainless steel tanks for USP high-grade alcohol storage and loadout, increasing our storage capacity by more than 250,000 gallons 3. Completing the installation of a new $7 million zeolite membrane dehydration unit from Mitsubishi to reduce natural gas use at the alcohol plant by replacing our molecular sieves with electrically powered equipment, which will reduce the carbon intensity of our fuel ethanol and is partially funded by a $1.5 million energy efficiency grant. Number four. adding high-efficiency heat exchangers to reduce natural gas use at the alcohol plant, reimbursed by a $1.3 million energy efficiency grant. Number five, installing a solar panel microgrid array with battery backup and an artificial intelligence energy management system to replace natural gas with solar electricity while optimizing energy use throughout the alcohol plant, primarily funded by an $8 million California Energy Commission grant. 6. Designing and building a mechanical vapor recompression system to significantly reduce petroleum natural gas use, partially funded by a $6 million California Energy Commission grant. 7. Constructing a dairy biogas digester cluster and pipeline to deliver renewable natural gas to the alcohol plant from an initial two dairies this year, with planned expansion to an additional 15 dairies next year. along with an interconnection to the utility gas pipeline. This project is planned to generate approximately $25 million per year of operating cash flow and is being primarily funded with $55 million of automatically redeemed preferred equity issued by the Amedis biogas subsidiary. When completed, these upgrades are designed to eliminate nearly 100% of the petroleum natural gas used at the alcohol plant, saving up to $7 million per year of natural gas and pipeline costs replaced by carbon-negative dairy biogas to provide the gas required to generate steam for use at the plant. The biorefinery will primarily operate using high-efficiency electric motors and pumps powered by solar energy and renewable power sources. Optimized by the AI system provides insights to the energy use of each of the systems in the alcohol plant. As a review of the milestones achieved in Q2, in early May we announced the completion of construction and commencement of commercial shipments of carbon dioxide to the newly constructed Messer CO2 gas plant that was built next to our ethanol plant to capture and reuse carbon dioxide. After three years of project development and contract negotiations, Messler leased about five acres owned by Amedis adjacent to the Keys ethanol plant to build a CO2 liquidification plant. We are now converting approximately 150,000 tons per year of renewable CO2 produced by our ethanol plant into liquid CO2 for sale to local food and beverage producers and other CO2 industrial users. Ethanol plants produce about 40% of the CO2 in the US and a significant national shortage of CO2 occurred due to the COVID related 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 calculate 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. The construction of the $7 million membrane dehydration system financed by Mitsubishi Chemical Japan and a $1.5 million energy efficiency grant is currently in the installation process, but was significantly delayed by the COVID-19 crisis due to travel restrictions and local contractors stopping work under shelter-in-place orders. 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. These projects at the Keys plant are targeted to significantly 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 potential combined impact of these projects is expected to be an approximately $30 million increase in operating cash flow each year at the Keese plant, not including any improvement in profit margins that are expected from high-grade alcohol products. Let's briefly review our Amedis Biogas Dairy Digestor 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 come 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 a significant reduction in methane emitted by dairy lagoons. Biomethane sourced from dairies can be used to replace gasoline or diesel fuel in cars, trucks, and buses to significantly reduce carbon emissions and air pollution. Along the state mandate, California has funded up to $75 million per year of 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 transportation fuel is an excellent way to reduce climate change create value for dairies and reduce costs for diesel truck fleets and potentially for electric vehicles by conversion of dairy renewable natural gas to electricity for transportation use. Based on our existing animal feed supply relationships with about 100 dairies and the ability to use biogas in our plant until our plant pipeline interconnection completion in the first quarter of 2021, we believe that Ametis is uniquely positioned as one of only two ethanol companies in California who are using 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 for two matching grants for a total of $3 million to build biogas digesters at the first two dairies in our biogas project. Construction of the first two dairy digesters, the four-mile pipeline and the boiler unit at the Keys plant is nearly completed and will be commissioned in the next month. We expect to begin renewable natural gas revenues during September 2020. We also signed 17 total agreements with dairies and plan to complete construction of the next 15 lagoon digesters by the end of year 2021, subject to potential COVID-19 delays. Ametis owns 100% of the common stock of the Ametis Biogas subsidiary. The Dairy Biogas Project has been funded by a preferred stock issuance by the Imetis Biogas subsidiary to a fund managed by Third Eye Capital, which we expect to expand to $55 million of funding, along with grants from state and federal programs. There is no dilution to Imetis parent company shareholders for the biogas project, and Imetis receives 25% of the cash generated by biogas project operations. The preferred stock is automatically repurchased at three times the original issuance price. using 75% of biogas operating cash flow. After the preferred stock is redeemed, Amedis, as the sole common shareholder, will own 100% of the cash flow and assets of the biogas digester and pipeline system. Let's review our proud diesel business in India. After two years of investment and 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 fully commissioned using the new feedstock pre-treatment unit, the new boiler unit, and other upgrades that enabled expanded plant operations toward full plant capacity of 50 million gallons per year. The shelter-in-place order in India has restricted our production, but we continue to ship biodiesel and refined glycerin from inventory. In June, we began 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 biofield India subsidiary was awarded a $23 million biodiesel supply contract with the three India government-owned oil marketing companies in a public tender process. The year 2020 India Oil Marketing Company purchased requests for biodiesel were issued and the negotiation of word of supply agreements should occur in the next month. We expect to continue to participate as a key supplier under these biodiesel contracts. Let's finish with an update on our below zero carbon cellulosic ethanol project in Riverbank, California. We were pleased that the Ametis Advanced Biorefinery 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 publication. The EMETIS project earned its number one ranking as a result of our fixed-price, low-cost almond and walnut wood waste contract, planned production of high-value cellulosic ethanol, as well as valuable fish meal and other byproducts. Using the patented Lantatec gas microbe ethanol production technology, The Lanzatec technology is now in full commercial operation at a plant 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 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. We are working to update the USDA loan to match the current capital expenditure budget for the project. We are also focused on completing the 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 each year and more than $50 million each 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 the construction of the Riverbank plant is dependent on completing the engineering and procurement work required for the signing of the construction contract. We are now in the final engineering and preparing for the procurement cycle prior to the completion of project financing and commencement of construction of the plant. Let's wrap up with a quick review of a key milestone achieved by our technology development group. Our technology development team worked with the federally funded Joint Bioenergy Institute in Berkeley, California. for three years in the development of processes to use low-cost waste orchard and forest wood feedstocks to produce high-value cellulosic biofuels. A $3 million California Energy Commission grant was awarded to J-Bay and Amedis, which partially funded years of collaborative work and lab testing with Amedis and J-Bay. that in Q2 2020 resulted in the production of the first carbon negative fuel ethanol from California Orchard Wood using ionic liquids. This patent-pending process allows the sugar component of low-cost waste wood to be used to produce both high-grade alcohol as well as cellulosic fuel ethanol that are each currently valued at more than $5 per gallon. Importantly, this innovation could be implemented at our existing California ethanol plant, decreasing the cost of corn feedstock and substantially increasing the value of our alcohol. We expect to move forward with a pilot plant to extract sugars from waste wood and thereby enable the production of high-margin, high-grade alcohol and salicylic ethanol at the Keys plant by displacing corn feedstock. We believe that Ametis holds a unique position with the production of both high-grade ethanol and refined glycerin from our India operation for the rapidly expanding sanitizer market. Ametis has a geographic and strategic advantage in sanitizer alcohol production. With lower cost and higher quality of delivery to customers, a diversified production of low-carbon renewable fuels in two attractive markets in California and India, The $6 million of positive cash flow and 120% revenue growth at our India plant during 2019, which was achieved while repaying 100% of our long-term debt in the India subsidiary. Well, 2020 revenues from the government contract had not even occurred yet due to COVID-19 delays. The increased profit margins from plant upgrades related to the Keys biorefinery began in Q2 2020. The Ametis Biogas Dairy Digester and Pipeline Project is expected to begin first gas production in September 2020. And our planned deployment of the patented LensTech cellulosic ethanol technology at the Riverbank plant has positioned Ametis to rapidly produce expanding positive cash flow from the production of high-grade sanitizer alcohol, as well as 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.