Aemetis, Inc

Welcome to the AMETIS third 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, this 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, Inc. Mr. Waltz, you may begin.

Thank you, Melinda. Welcome to the AMETIS third quarter 2020 earnings review conference call. We suggest visiting our website at ametis.com to review today's earnings press release, updated corporate presentation, violence 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 disclosure statements. 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 plans. 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 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 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 non-GAAP measures to the most directly comparable Gap Measures is included in our earnings release for the quarter-ended September 30, 2020, which is 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, 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 2020. Revenues were $40.9 million for the third quarter of 2020, compared to $57.4 million for the third quarter of 2019, driven by reduction in the price of ethanol and delays in the India government oil marketing company's biodiesel bidding process. Gross profit for the third quarter of 2020 was $771,000 compared to a gross profit of $4 million during the third quarter 2019. Selling general and administrative expenses remain flat at $4.6 million during the third quarter 2020 compared to $4.5 million during the third quarter 2019. Operating loss increased to $3.8 million for the third quarter 2020 compared to an operating loss of $600,000 for the third quarter of 2019. Interest expense during the third quarter of 2020 was $6.5 million, excluding accretion in connection with the Series A preferred units in the Ametis Biogas LLC subsidiary, compared to $6.3 million during the third quarter of 2019. The Ametis Biogas LLC subsidiary recognized $1.8 million of accretion in connection with the preference payments on his preferred stock units compared to $600 million during the third quarter of 2019. Net loss was $12.2 million for the third quarter of 2020 compared to a net loss of $7.2 million for the third quarter of 2019. Adjusted EBITDA was negative $2.5 million for the three months ended September 30, 2020. Cash at the end of the third quarter of 2022 was $79,000 compared to $656,000 at the end of 2019. That completes our financial review for the third quarter of 2020. 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. AMETIS was founded in 2006. We have grown into four lines of business, which are focused on producing renewable fuels, including low carbon and below zero carbon intensity ethanol, BioDiesel, Wastewood Ethanol, and byproducts, including carbon dioxide and corn oil. Renewable natural gas, including below zero carbon intensity dairy biogas for transportation fuel. Health safety products, including high-grade alcohol, refined glycerin, blended hand sanitizer gel and liquid, sanitizer wipes, and other health safety products. 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 built, 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. I encourage you to consider viewing our updated video and slide presentation about Amedis, which can be found on the homepage of our website. During the third quarter of 2020, Amedis achieved important milestones toward revenue growth and sustained profitability in each of our four lines of business. Let's start with a review of our new Amedis Health Products business. In response to a national shortage of hand sanitizer, which is recommended by the Centers for Disease Control, to help slow the spread of the COVID-19 virus. In late March 2020, the FDA and the TTB issued temporary regulations allowing fuel ethanol plants to produce alcohol for hand sanitizers. Responding to this approval and the spike in demand for sanitizer products, Amedis delivered our first sanitizer alcohol within a few days after the announcement through a post-processing arrangement that was formed with a local wine and spirits producer. Then we installed equipment and process upgrades at our ethanol plant. to produce higher quality ethanol for health, safety, and personal care markets. We quickly discovered that Imetis has a sustainable advantage over Midwest ethanol producers. They have very high transportation costs, and the Imetis Keys facility is just a four-hour drive to Los Angeles, where most bottlers and co-packages are located on the West Coast. Most Midwest plants were transporting alcohol for sanitizer from the Midwest to California using fuel ethanol trailers and rail cars. fuel ethanol uses gasoline as a denaturant in the finished product. So producers who use fuel ethanol tankers in rail cars were tainting the product with benzene and other dangerous chemicals. We arranged a $2 million lease purchase of 15 new bulk tanker trailers to be used solely for the transport of Emetis high-grade alcohol, allowing us to deliver up to 20 loads per day of our high-grade alcohol to West Coast blenders and bottlers from our Central Valley plant. and eliminating the risk of transportation contamination. In addition to using new uncontaminated bulk alcohol trailers, our California high-grade alcohol plant location is about 2,000 miles closer to customers in the Western United States compared to Midwestern alcohol producers. Imedis has a permanent transportation cost advantage with Western U.S. sanitizer alcohol customers over Midwest ethanol producers due to our California production plant location. During Q2 2020, We began shipping large quantities of hand sanitizer alcohol from our plant in California into the rapidly growing health, safety, and personal care markets. To expand our product line and support customers in the US and Canada, we launched the Amedis Health Products subsidiary to manage the development, production, and marketing of our sanitizer products. Additionally, our India plant has supplied refined glycerin, a key ingredient in sanitizer products, into the health products market. would believe that, year to date, Amedis has operated 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. To expand our market position and maximize margins, during the third quarter, Amedis Health Products filed FDA registrations to obtain national drug codes for our own hand sanitizer product blends, and began the production of Amedis branded gel hand sanitizer. Our one gallon hand sanitizer sold under the Amedis brand has been approved by a leading online marketplace and should be shipping soon with additional sizes planned for production. We market the Amedis brand to retailers and customers with made in California on the label. In contrast to imported products from Mexico and China, many of which were banned by the FDA, due to toxic levels of methanol. We continue to invest in the upgrading of our production facilities that we believe will allow us to deliver U.S. pharmacopeia-grade alcohol starting in Q2 2021. Our total investment in upgrades for the production and storage of USP medical-grade 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 product line of high-quality and medical-grade alcohol used for hand sanitizer, alcohol wipes, alcohol sprays, and other health safety products is expected to meet the demands of a long-term market driven by the adoption of antiviral products by governments, schools, private industry, and consumers. Even if the COVID-19 virus is as an imminent health safety threat is resolved in the U.S. during the next year or two by a new vaccine, The health safety standards being widely adopted to reduce the transmission of viruses, including the common flu and colds, will expand the ongoing use of alcohol sanitizers as disinfectants, especially at schools, government buildings, offices, sports arenas, airports, stores, and other locations with groups of people in close proximity. Let's review this biogas dairy digester and pipeline project. At Amedis, we are focused on significantly reducing the carbon content of our products, thereby maximizing the value of carbon credits under the California Renewable Fuel Standard and the value under the Federal Renewable Fuel Standard while reducing operating costs by using waste materials. Using our own waste products or using waste products in the local area that are generated by the use of the products we sell to local customers, the sustainability of our process could benefit all the parties in the value chain. An excellent example of this circular bioeconomy is our dairy renewable natural gas business. In September 2020, we completed construction of the first two out of 18 dairy biogas digesters in the Imetis Biogas Central Dairy Project, including onsite dairy biogas cleanup and pressurization, a four-mile pipeline owned by Imetis, and a boiler unit at the Keys plant. We are now generating below zero carbon intensity renewable natural gas that is being used at our alcohol plant to displace petroleum natural gas. 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 commonly known as Senate Bill 1383 that mandates a 40% reduction in methane emitted by large dairy lagoons. Biomethane sourced from dairies can be used directly in the form of renewable compressed natural gas to replace gasoline or diesel fuel in cars, trucks, and buses to significantly reduce carbon emissions and air pollution. To support the state mandate, California has funded up to $75 million per year of matching grants to dairies to build biogas digesters and related systems. To date, AMETIS has applied for or been awarded about $22 million of grants for biogas and energy efficiency to support our conversion to low carbon and below zero carbon intensity power to operate our California biorefinery and related biogas operations. 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 trucks, fleets, and potential electric vehicles by conversion of dairy renewable natural gas to electricity for transportation use. We are uniquely positioned as one of only two ethanol plants in California that can maximize the value of biogas. We are able to use biogas in our plant until our planned utility pipeline interconnection and gas upgrading is completed within the next six months. And we received a $1 million grant to install our own renewable natural gas fueling system at our Keys plant for CNG trucks. After more than a year of project development and financing work, last year we announced $30 million of equity financing to build biogas digesters at the first two dairies in our biogas project. Our institutional investor is working with us to expand this funding with $25 million of additional equity funding to complete the total of 18 dairies within the next 18 months. We initially signed 18 participation agreements with dairies, the majority of which have now been converted into 25-year land lease and manure supply agreements. We plan to complete construction of the remaining 16 lagoon digesters again during the next 18 months. Emetis owns 100% of the common stock of the Emetis Biogas subsidiary. The dairy biogas project has been funded by a preferred stock issuance by the Emetis 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 Emetis parent company shareholders for the biogas project. and Amedis 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 for the remaining balance of the 25-year contracts with dairies. Let's discuss progress at our California ethanol plant. The global COVID-19 crisis that began during Q1 2020 and caused operational shutdowns for many businesses during Q2 and Q3 2020 has 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 75 local dairies occurred during a time period in which the demand for biofuels in Q2 2020 decreased significantly due to the steep decline in gasoline consumption during California shelter in place orders. However, as the economy began to open up in June, fuel ethanol demand partially recovered during Q3 2020, resulting in an 11% increase in ethanol gallons delivered compared to Q2 2020. and an increase in Q3 distillers grain shipments for animal feed. AMETIS operates in three of the federal essential critical infrastructures. We have been able to continuously operate our California ethanol plant this year in order to provide transportation fuel, alcohol for sanitizer products and dairy feed. By implementing stringent PPE and worker safety policies, we were able to continue construction of plant upgrades and building our dairy renewable natural gas project without interruption, despite COVID shutdowns and operating restrictions that impacted many other companies in California. 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, one, building two new distillation columns and related systems to produce high-purity U.S. pharmacopeia-grade alcohol for sanitizers, known as USP-grade, to begin operation in Q2 2021. Two, installing five new stainless steel tanks for USP and beverage high-grade alcohol storage and loadout, increasing our storage capacity by more than 250,000 gallons. Three, 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. Four, adding high efficiency heat exchangers to reduce natural gas use at the alcohol plant, reimbursed by a $1.3 million energy efficiency grant. Five, installing a solar panel microgrid array with battery backup 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. Six, designing and building a mechanical vapor compression or MVR system to significantly reduce petroleum natural gas use partially funded by a $6 million California Energy Commission grant. Seven, constructing the dairy biogas digester cluster and pipeline to deliver renewable natural gas to the alcohol plant from the initial two dairies this year with planned expansion to an additional 16 dairies next year, along with an interconnection to the utility gas pipeline. This biogas project is scheduled to generate approximately $40 million per year of operating cash flow under 25-year dairy supply contracts. It's being primarily funded with $55 million of expected automatically redeemed preferred equity being issued by the Amedis Biogas subsidiary. When completed, these upgrades are designed to eliminate nearly 85% of the petroleum natural gas use at the alcohol plant, saving up to $7 million per year of natural gas and pipeline costs. The California biorefinery will primarily operate using high-efficiency electric motors and pumps powered by renewable power sources. 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 delayed by the COVID-19 crisis due to international 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, it's expected to generate an estimated $3 million per year of increased cash flow. These projects at the Keys plant are targeted to significantly reduce carbon intensity by reducing petroleum natural gas usage and costs while increasing the number of California low-carbon fuel standard credits generated each year. The potential combined impact of these projects is expected to be more than $20 million per year of increased operating cash flow at the Keys plant, not including any expanded cash flow from Amedis Health Products, Sanchez, and Health Safety Products. Let's review our biodiesel business in India. This week, our universal biofuel subsidiary in India bid on a portion of a newly issued $900 million biodiesel purchase order, tender offer, I'm sorry, for about 200 million gallons by the three India government oil marketing companies to be delivered over the next six months. Our production capacity at the India plant is about 4 million gallons of biodiesel per month. This large oil marketing company's tender offer is an indication of the rapidly expanding government demand for biodiesel in India to reduce dependence on imported crude oil. The entire production capacity of the approximately five India biodiesel production plants is only about one-third of the amount of biodiesel requested to be purchased by the government oil marketing companies, signaling to the market that additional biodiesel capacity is needed to make India biofuels consumption goals. However, importing biodiesel into India is not allowed under the National Biodiesel Policy, so only domestic production can meet the approximately 1.25 billion gallons per year of biodiesel blending in the goal set by the government. Currently, there is about 250 million gallons of India domestic biodiesel production capacity, and we believe that it met its produced and sold largest amount of any operating biodiesel plant in India during 2020. while the industry waited for government oil marketing company purchasing, which was delayed for nine months due to the COVID-19 shutdowns 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 increased India government taxes that offset crude oil price declines. Since our biodiesel is 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. The rising cost of feedstock relative to the price accepted by the government oil marketing companies is the primary barrier to operation of our India biodiesel plant at full capacity, which would generate more than $150 million of annual revenues. Due to the COVID-related increase in demand, The refined glycerin prices received by our India plant have increased in response to the need for hand sanitizer and other consumer products. Let's discuss our low zero carbon intensity cellulosic ethanol project in Riverbank, California. We were pleased that the Amedis 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 California Central Valley has about 1.5 million acres of almond and walnut orchards. Almond orchards have about a 20-year life and then must be removed, creating about 3 billion pounds per year of waste wood that are usually burned in large piles in the field since there is no market for most of the waste material. The Ametis Riverbank project earned its number one project ranking as a result of our 20-year fixed-price low-cost orchard wood waste contract, planned production of high-value renewable fuel and high-grade alcohol from wood waste feedstock, as well as valuable fish meal and other byproducts, and using the patented Lansetec gas microbe ethanol production technology. The Lansetec technology has been in full commercial operation since 2018 at a plant in Asia, and additional plants using the Lansetec technology are being built in China, India, and Europe. In order to close the financing for the Riverbank plant construction, we're completing the final permitting and 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, and forest wood as feedstock. The circular bioeconomy created by the Imetis Riverbank Waste Wood Renewable Fuels and High Grade Alcohol Plant will provide benefits to the local environment and community by eliminating field burning of the 3 billion pounds per year of waste orchard wood in the California Central Valley and will reduce air pollution and improve the health of residents while displacing carbon intensive feedstock with below zero carbon intensity waste orchard wood feedstock. We can easily use forest waste wood in the riverbank plant, which has become a major issue for California as we create forest waste wood for managing our forests to reduce damaging wildfires. Let's wrap up with a quick review of a key milestone achieved by our technology development group in fueling an ethanol engine with waste wood ethanol. Our technology development team worked with the federally funded Joint Bioenergy Institute in Berkeley, California for three years. in the development of a process to extract sugars from low-cost waste orchard and forest wood feedstocks to produce high-value cellulosic biofuels in our corn ethanol plant by displacing expensive and carbon-intensive cornstarch as feedstock. A $3 million California Energy Commission grant was awarded to J. Bay and Amedis, which partially funded the years of collaborative work and lab testing that in Q2 2020 resulted in the production of the first carbon negative fuel ethanol from California orchard wood using ionic liquids. During the third quarter, our waste wood ethanol was used to fuel the operation of an ethanol engine that generated the same performance and low emissions as traditional ethanol used in the test. The ethanol, the engine technology was originally developed at Stanford University and is a modified diesel engine design that uses ethanol. The engine takes advantage of the high octane content of ethanol to generate about 30% more torque than an engine running on diesel while creating almost no particulate emissions and very low emissions since ethanol contains a low level of contaminants compared to petroleum. With high cost emissions equipment such as diesel exhaust fluid required to meet increasing air pollution standards, The ethanol engine could be more than double the size of the ethanol market in the U.S. to 30 billion gallons per year, with only a 20% share of the diesel engine market. Our patent-pending alcohol production process innovation allows the sugar component of low-cost waste wood to be used to replace cornstarch in an existing corn ethanol plant. to produce both high-grade alcohol as well as cellulosic fuel alcohol that are each currently valued at more than $5 per gallon. Importantly, this process innovation to use sugar from waste wood 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 pipeline to extract sugars from locally sourced orchard and forest waste wood, thereby enabling the production of high-margin, high-grade alcohol and salicylic ethanol at the Keys plant by displacing corn feedstock. In summary, Amedis has a technology advantage as well as geographic advantages in sanitizer alcohol production. It's expanding the production of a diversified range of low-carbon renewable fuels in two attractive markets in California and India, generated $6 million of positive cash flow and 120% revenue growth at our India plant during 2019 and is now moving past the government's COVID-19 delays in 2020 to be awarded bids and begin shipping under large government contracts for biodiesel. AMETIS has begun the increased profit margins from plant upgrades related to the Keys Biorefinery that began in Q2 2020, has completed the first two AMETIS biogas and dairy digesters and four-mile pipeline and are now powering our biorefinery with waste dairy biogas. And our planned deployment of patented renewable fuels process technology at the Riverbank plant has positioned Amedis 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. Amedis is building below-zero carbon intensity products that create a sustainable circular bioeconomy utilizing waste feed stocks to create valuable products by implementing innovative processes. Now, let's take a few questions from our call participants. Melinda.