3/11/2021

speaker
Operator

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 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 kate welcome to the ametis third quarter

speaker
Kate

Fourth quarter 2020 earnings review call. We suggest visiting our website at ametis.com to review today's earnings press release, updated corporate presentation, filings with the Security and Exchange Commission, recent press releases, and previous earnings conference call. The presentation for today's call is available for review or download on the investor section of the ametis.com website. Before we begin our discussion today, I'd like to read the following disclaimer 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 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'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 non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the quarter ended December 31, 2020, which is available on our website. adjusted EBITDAs defined as net income or loss, plus to the extent deducted in calculating such net income, interest expense, loss and 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 fourth quarter and year-ended 2020. Revenues were $37.3 million for the fourth quarter of 2020 compared to $52.1 million for the fourth quarter of 2019. The decrease in revenue was primarily attributable to delays in the India government oil marketing company biodiesel tender process that delayed revenue in our India operation and temporarily lower ethanol production prices in North America. Gross loss for the fourth quarter was $3.4 million compared to a gross profit of $5.8 million during the same period in 2019. The gross profit change was attributable to the temporary ethanol production volume and price reductions during the fourth quarter of 2020, during which the price of ethanol decreased from $1.82 per gallon to $1.64 per gallon in a market where the cost of delivered corn rose from $5.02 to $5.61 per bushel. during the same respective periods. Selling general administrative expenses decreased to $4.3 million during the fourth quarter of 2020 compared to $4.7 million during the fourth quarter of 2019. Operating loss was $7.7 million for the fourth quarter of 2020 compared to operating income of $1 million during the fourth quarter of 2019. Net loss was $14.6 million for the fourth quarter of 2020 compared to a net loss of $7.7 million for the fourth quarter of 2019. Turning to our balance sheet, cash at the end of the fourth quarter of 2020 was $592,000 compared to $656,000 at the end of the fourth quarter of 2019. As an additional note, capital expenditures of $17.3 million were made for the construction of carbon intensity reduction projects and keys plant upgrades during 2020. That completes our financial review for the fourth quarter of year end Now, I'd like to introduce the founder, chairman, and chief executive officer of Amedis, Eric McAfee, for a business update.

speaker
Eric McAfee

Eric? Thank you, Todd. The earnings release that was sent out this morning has a link to the updated Amedis presentation that we will refer to today. As we discuss results from 2020, I encourage you to consider viewing our updated slide presentation, which can be found on the investor page of our website under this conference call. Amedis was founded in 2006. We have grown into four lines of business, which are focused on producing renewable natural gas, including below zero carbon intensity dairy biogas for transportation fuel, renewable fuels, including low carbon and below zero carbon intensity ethanol, high grade distilled biodiesel, renewable jet and diesel using cellulosic hydrogen from waste wood, and byproducts including carbon dioxide and corn oil. health safety products, including sanitizer alcohol, refined glycerin, blended hand sanitizer, 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 fuel ethanol, high-grade alcohol, wet distillers grains, and distillers 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. Before discussing our business, I'd like to comment about the social and environmental impact of our company and projects. The circular bioeconomy created by our California Dairy Renewable Natural Gas Project, our soon-to-be solar-powered ethanol plant, Our renewable jet and diesel plant under development to use cellulosic hydrogen from waste orchard wood and our synthesizer alcohol business provide benefits to the local environment and communities. For example, by providing an alternative use of waste wood and ultimately eliminating field burning of the 3 billion pounds per year of waste orchard wood in California's Central Valley, we plan to significantly reduce greenhouse gas emissions and air pollution by while displacing carbon-intensive feedstock with negative carbon-intensity feedstock for the production of renewable jet and diesel fuel. AMETIS projects result in a healthier planet and a better quality of life for our fellow Californians. From a social impact perspective, everyone living in the Central Valley is directly impacted by poor air quality, since the region has a dubious distinction of having the second worst air quality in the U.S., according to the EPA. The Amedis Production Facilities and Dairy Renewable Natural Gas Projects in California are located in or near disadvantaged communities. Our Dairy Renewable Natural Gas Project, Keys Plant Upgrades, and Renewable Jet and Diesel Projects are specifically designed to have a direct positive impact on these communities. Our projects directly benefit Central Valley disadvantaged communities and families by improving air quality while creating valuable energy and food products from dairy and orchard ag waste. and increasing the sustainability of farming and dairy operations that employ thousands of local workers. The AMETIS 2020 earnings report was a positive overall outcome, especially considering that more than 50 ethanol plants in the U.S. were shut down at various times during 2020 due to pandemic-related gasoline demand decreases and significant corn price increases caused by historic Midwestern weather conditions. Despite these challenges, The Ametis Keys ethanol plant operated continuously throughout the year by responding quickly to opportunities. In March 2020, we quickly upgraded production systems to supply high-grade alcohol into the sanitizer alcohol market, and the Keys plant became the largest sanitizer alcohol producer in the Western U.S. during a time of critical need for our country. Ametis operations were significantly impacted in 2020 by work constraints and market conditions. during the COVID-19 pandemic. In response, we focused on keeping our employees safe, and we also invested more than $17 million in building carbon intensity reduction projects and other upgrades that have generated a significant amount of shareholder value. Despite the difficult external conditions that began in Q1 of 2020, we completed phase one of the Dairy Renewable Natural Gas Project, began the installation of important Keys Plant energy efficiency systems upgrades to significantly reduce the carbon intensity of our ethanol, and they began operations of the Messer CO2 liquefaction facility that is now generating CO2 revenues and IRS 45Q credits from carbon reuse. Protecting the health of our employees while continuing to operate our California ethanol plant to supply animal feed to about 80 local dairies, occurred during a time period in which the demand for biofuels, starting in Q2 2020, decreased significantly due to the steep decline in gasoline consumption as a result of California shelter-in-place orders. However, as the economy began to reopen in mid-2020, fuel ethanol demand partially recovered during the second half of 2020, with the release of the COVID-19 vaccines in early 2021 and overall increased economic activity the Keys plant is now running at full capacity in order to meet increased demand for ethanol in California, partially driven by recent severe winter weather in the Midwest that caused disruption to the railroad supply chain used by Midwest ethanol producers. During the fourth quarter and full year of 2020, Amethyst achieved important milestones toward revenue growth and sustained profitability in each of our four lines of business. Let's review our EMETIS dairy renewable natural gas and pipeline project. At EMETIS, we are focused on producing below zero carbon intensity products, including the production of negative carbon intensity renewable natural gas and renewable fuels. Our projects maximize the value of carbon credits under the California Low Carbon Fuel Standard, the Federal Renewable Fuel Standard, and IRS 45Q tax credits, while reducing operating expenses by using waste materials as feedstocks. Using our byproducts from ethanol production or using readily available agricultural waste products from the local area, the sustainability and environmental benefits of our processes can benefit all of the parties in the value chain. An excellent example of this low-carbon, sustainable, circular bioeconomy is our dairy renewable natural gas project. which is designed to have many synergies with our Keys ethanol plant. Our Keys ethanol plant uses agricultural feedstock that absorbs CO2 from the atmosphere, then produces ethanol and animal feed. The plant delivers about 2 million pounds per day of wet distillers grain to about 80 local dairies to feed more than 100,000 dairy cows. The dairy cows provide waste to the dairy digesters we build at each dairy, thereby producing biogas that we clean up and pressurize in an amethyst processing unit at the dairy, then transport via the amethyst biogas pipeline back to the amethyst ethanol plant to use in the production of ethanol by displacing high carbon intensity petroleum natural gas. In addition, the dairy biogas can be upgraded and compressed to produce renewable natural gas to fuel RNG trucks at our fueling station at the Keys plant. to carry our wet distillers grains to the AD dairies. Trucks can also be fueled at any RNG station connected to a utility pipeline, since our RNG interconnection to the PG&E pipeline enables us to send renewable natural gas to other RNG fueling stations that we build or are owned by others. This fuel-full system is scheduled to be operating by the end of 2021. In September 2020, We completed construction of the first two out of 17 covered lagoon digesters in the Ametis Biogas Central Dairy Digester Project, including on-site dairy biogas cleanup and pressurization, a four-mile pipeline owned by Ametis, and a boiler unit to utilize the biogas to operate the Keys plant. We are now generating dairy biogas with an estimated carbon intensity of negative 416 that is being used at our ethanol plant, displacing petroleum natural gas with a carbon intensity of positive 100. Methane, commonly known as natural gas, is a potent greenhouse gas that is up to 80 times more destructive than carbon dioxide at warming our planet's atmosphere. Approximately 25% of California's methane emissions come from manure waste ponds on dairy farms. To reduce damaging methane emissions, California passed a law commonly known as Senate Bill 1383 that mandates a 40% reduction in methane emitted by large dairy lagoons by the year 2030. 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 through the California Department of Agriculture and other agencies matching grants to dairies to build biogas digesters and related systems. To date, AMETTS has applied for or been awarded about $23 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 produce renewable natural gas. 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. Ametis is uniquely positioned as one of only two ethanol plants in California that can maximize the value of biogas due to our proximity to dairies. we are able to use biogas in our plant until our planned utility pipeline interconnection and gas upgrading is completed. In addition, we were awarded a $1 million grant to install our own renewable natural gas dispensing system at our Keys plant for CNG trucks, supplying fuel for the approximately 75 truckloads per day of animal feed and ethanol at the Keys plant. In 2019, after more than a year of project development and financing work, we announced $30 million of equity financing to fund our biogas project. Our institutional investor is working with us to expand this funding with $25 million of additional equity funding to complete a total of 17 dairies by the end of Q2 2022. In addition to about $75 million of USDA guaranteed debt funding that is in process with one of the largest USDA lenders in the U.S., this 17-dairy project is scheduled to generate more than $40 million per year of operating cash flow under 25-year dairy supply contracts. Let's discuss progress at our California ethanol plant. Revenues from ethanol production were approximately flat in 2020 compared to $115 million for 2019. As higher ethanol prices offset our decision to respond to low margins by reducing production to 60.2 million gallons in 2020, instead of the 64.7 million gallons produced in 2019. Our decision to slightly reduce production by about 7% enabled us to operate the plant while managing finished goods inventory during the temporary decline in ethanol demand in 2020. Currently, the Imetys ethanol plant is operating at maximum sustainable production rates. Due to increased demand related to the winter weather in the Midwest, that reduced ethanol production at some plants and created a shortage in California, along with the loosening of many state and local COVID restrictions that increased demand for gasoline and ethanol. During 2020, gross profit percentage margins improved about 6%, from 6.2% to 6.6% of revenues, compared to 2019. SG&A expenses were actually reduced, and earnings per share were basically unchanged. while EBITDA decreased only slightly for year 2020 compared to 2019. New higher margin businesses largely offset the adverse impact of the COVID pandemic on ethanol and biodiesel revenues and margins for the year. Ametis operates in three of the federal essential critical infrastructures. We were able to continuously operate our California ethanol plant this past year in order to provide transportation fuel, alcohol for sanitizer products, CO2 for food production, and animal feed. By implementing stringent PPE and worker safety policies, we were able to continue to operate our ethanol facility, work on the construction of plant upgrades, and build our dairy renewable natural gas project without interruption. This work progress was achieved despite COVID shutdowns and operating restrictions that impacted many other companies in California and the Midwest. To increase the value of our ethanol and high-grade alcohol, and to reduce the cost of operation of our production plant. We are currently implementing several upgrade projects related to the California ethanol plant, including, number one, constructing the dairy biogas cluster and pipeline to deliver renewable natural gas to the Keys ethanol plant from an initial two dairies that became operational in September 2020, with planned expansion to an additional 15 dairies by the end of Q2 of next year. along with gas cleanup unit, an interconnection to the utility gas pipeline, and an RNG fueling station at the Keys plant. The dairy RNG will be used to eventually significantly reduce or potentially eliminate the use of petroleum natural gas at the Keys ethanol plant, as well as replace diesel use in trucks related to Keys plant operations. Number two, completing the installation of a new $8 million zeolite membrane dehydration unit from Mitsubishi that will reduce natural gas use at the ethanol plant by replacing our molecular sieves, which use a significant amount of petroleum natural gas to operate, with electrically powered equipment. This upgrade to an electric dehydration system will reduce the carbon intensity of our fuel ethanol and is partially funded by a $1.5 million energy efficiency grant. Number three, installing a solar panel microgrid array with battery backup to further reduce natural gas consumption by replacement with solar electricity while optimizing energy use throughout the ethanol plant, which is primarily funded by an $8 million California Energy Commission grant. Number four, designing and building a mechanical vapor recompression, or known as MVR, system to significantly reduce petroleum natural gas use, partially funded by a $6 million California Energy Commission grant. Number five, building new distillation columns and related systems to produce high-purity U.S. pharmacopoeia-grade alcohol for sanitizers known as USP-grade, expected to begin operation in Q1 2022. Number six, installing five new stainless steel tanks for USP and high-grade alcohol storage and loadout, increasing our storage capacity by more than 250,000 gallons and providing flexibility for operation of the new systems at the plant. When completed, these upgrades are designed to potentially eliminate petroleum natural gas use at the alcohol plant, saving up to $7 million per year of natural gas and utility pipeline transmission costs. The California biorefinery will primarily operate using high-efficiency electric motors and pumps powered by renewable power sources, including solar. 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 increase in operating cash flow at the Keys plant, not including the increased value of high-grade alcohol produced by the new distillation unit. Let's review our biodiesel business in India. Last quarter, our universal biofuel subsidiary in India bid on a portion of a newly issued $900 million biodiesel purchase order for about 225 million gallons by the three India government oil marketing companies. In the past, the OMC bidding process required a one-year fixed price for biodiesel. However, the OMC bidding process for biodiesel was not successful in 2020 due to a high level of volatility in crude oil and other markets. So, in response to requests by biodiesel producers, including Amedis, the OMC contracting process has been changed to a monthly bid instead of a one-year contract with a fixed price. We expect that the new monthly OMC bidding process will be successful during 2021, allowing large volumes of biodiesel to be blended into petroleum diesel to improve air quality and reduce carbon emissions in India. Our production capacity at the India plant is about 4 million gallons of biodiesel per month. The large oil marketing company's tender offer that was issued in late 2020 is an indication of the rapidly expanding government demand for biodiesel in India to reduce dependence on imported crude oil, improve air quality, and reduce carbon emissions. The entire production capacity of the approximately five India biodiesel production plants is is about one-third of the amount of biodiesel requested to be purchased by the government oil marketing companies last year, signaling to the market that additional biodiesel capacity is needed to meet India biofuels consumption needs. Importing biodiesel into India is not allowed under the National Biofuels Policy, so only domestic production can meet the approximately 1.25 billion gallons per year of biodiesel blending, which is a goal set by the government. Currently, there is about 250 million gallons of India domestic biodiesel production capacity, and we believe that Emetis produced and sold the largest amount of any operating biodiesel plant in India during 2020, while the industry waited for government OMC purchasing, which was delayed for nine months due to the COVID-19 shutdowns in India. Though the global price of diesel declined along with the price of crude oil, as crude fell below $30 per barrel, the domestic price of diesel in India remained largely unchanged due to increased India government taxes that offset crude oil price declines. As global crude oil prices increased to more than $64 per barrel today, the price of diesel has also increased in India as the government is maintaining the same level of taxes. Since our biodiesel is sold at a price linked to India domestic diesel prices, our biodiesel prices in India have increased as global crude oil prices have increased. The rising cost of feedstock relative to the price accepted by the government OMCs is the remaining 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 carbon zero renewable jet and diesel fuel project using negative carbon intensity hydrogen in Riverbank, California. We were pleased that the Imedis carbon zero biorefinery under development in Riverbank, California near Modesto continues to achieve major milestones, including an expected issuance of the initial authority to construct under our original air permit application. Though further amendments are planned, as a part of final construction engineering, the authority to construct air permit will allow us to move forward with final EPC agreements and financing. 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 is usually burned in large piles in the field, since there is no market for most of the waste material. The Ametis Riverbank project signed a 20-year fixed-priced, low-cost orchard wood waste contract to supply feedstock to the renewable jet and diesel plant for the production of negative carbon intensity cellulosic hydrogen to be used with distillers, corn oil, and other renewable oils to produce below zero carbon intensity renewable jet and diesel fuel. The Riverbank plant is designed to produce 45 million gallons per year of renewable jet and diesel fuel. generating more than $230 million of annual revenue and more than $65 million per year of positive cash flow. We plan to expand production to 90 million gallons per year at the Riverbank site by year 2025 in our five-year plan. The Riverbank plant is designed to use waste orchard wood and other waste biomass such as dead forest wood, which has become a major issue for California as the state has prioritized forest management to reduce damaging wildfires. Let's wrap up with a quick review of a newly issued exclusive patent and a milestone achieved by our technology development group in fueling an ethanol engine with cellulosic ethanol produced from sugar extracted from waste orchard wood. The Ametis Technology Development and Strategic Projects teams worked with the federally funded Joint Bioenergy Institute in Berkeley, California for three years in the development of a patented process to extract sugars from low-cost waste orchard and forest wood feedstocks. The process has been exclusively licensed to Emetis for wood and other biomass from non-commercial forests. The negative carbon intensity sugars can then be used to produce high-value cellulosic biofuels in the Emetis Keys ethanol plant, displacing expensive and carbon-intensive cornstarch as feedstock to produce ethanol. A $3 million California Energy Commission grant was awarded to J-Bay and Emetis 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 of 2020, our cellulosic ethanol was used to fuel the operation of an ethanol engine that generated the same performance and low emissions as a traditional ethanol used in testing. The ethanol engine technology was originally developed at Stanford University and is a modified diesel engine design. The engine takes advantage of the high octane content of ethanol to generate about 30% more torque or pulling power than an engine running on diesel, while creating almost no particulates and very low emissions, since ethanol contains a low level of contaminants compared to petroleum. The patented sugar extraction process allows the sugar component of low-cost waste wood to be used to replace cornstarch in an existing corn ethanol plant, such as the Keys plant, producing both high-grade alcohol as well as salosic ethanol that are each currently valued at more than $5 per gallon. Importantly, this process innovation to extract sugar from waste wood is scheduled to be implemented at our existing California ethanol plant in Keys, decreasing the cost of corn feedstock, and substantially increasing the value of our ethanol. We expect to move forward with a pilot project to extract sugars from locally sourced orchard and forest wood waste during 2021 with the expectation of commercial operations to pre-extract sugars from waste wood when the Riverbank Renewable Jet and Diesel Plant becomes operational. In summary, AMETIS is a leading diversified negative carbon intensity dairy RNG and low-carbon renewable fuels producer that is rapidly deploying new projects and adopting new technology to reduce carbon intensity and input costs, thereby significantly increasing the value of renewable natural gas and fuels by maximizing LCFS, RFS, and IRS 45Q credits. Now, let's take a few questions from our call participants.

speaker
Eric

Kate?

speaker
Operator

Thank you, Mr. McAfee. We will now be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that if you are listening on a speakerphone to please pick up your handset for optimum sound quality. Please hold a moment while we poll for questions. Our first question today is coming from Amit Gayal. at HC Wainwright. Your line is live.

speaker
McAfee

Thank you. Hi, Eric. Hi, Todd. On the renewable natural gas efforts, could you talk about contribution from the two completed dairy digesters in the fourth quarter, if any, and how should we think about deployments for the additional 15, 16 for the next year or so? Um, and any color on changes to expectations around capex requirements, et cetera, are related to this. Uh, just an update would be very helpful. Thank you.

speaker
Eric McAfee

Sure. Thank you, Ahmed. Uh, the process of recognizing revenue from our dairy renewable natural gas is there's a, uh, three months process of, of actually measuring the amount of biogas produced. then about a three to six month process of the California Area Resources Board doing their verification approval process. And then you get your actual approval, but you go back to an earlier quarter to begin revenue generation. So it's going to show up as an upside surprise when we currently expect in the second quarter of 2021 to reflect revenues starting October 1 of 2020. So literally six months after we started generating revenue, we then end up with low carbon fuel standard approval. It shows up in the computer as a number of credits that we've already earned, and it will, from a financial perspective, show up in Q2 2021. So there is a, we did not currently show any revenues of any material sort in the fourth quarter of 2020, or expected to show in the first quarter of 2021, unless there's some sort of an accrual we make or something. But practically speaking, there's a six-month delay before you show up. It doesn't mean you're not getting the revenues, but the way we're doing it and we're getting a lot of cooperation from CARB, within a few weeks of our startup in the middle of September, we would start generating credits as of October 1. And the California Resources Board has been tremendously helpful in working with us and understands the importance of not running these projects for a half a year or three-quarters of a year with no revenues at all. And so the ability to tack back to the original start-up date is extremely important to the rapid expansion of these projects, and the CARB team has been very helpful in doing that. We are expanding this, as you know, by an additional 15 dairies, which we're building in 2021 and will be online by the end of Q2 2022. Each one of these dairies will go through the same six-month process and then tack back to the original production date approximately. It's in the quarter. They think in quarters there. So if you're middle of the quarter, there might be a few weeks of startup revenue you're not picking up. But in general, we're strategizing this so that we can have revenue begin within a few weeks after startup and the markets will mostly just be six months behind. They won't actually see it show up in our financial statements, and it'll be mostly a mechanism of maybe some accrual as we get nearer to the actual approval. But by Q2 2022, we would expect to have all 17 of the dairies operational and expecting cash flow in excess of $40 million dollars. It does ramp up. We do have dairies coming online in the next 12 months or so. So we don't all wait until the middle of 2022 before we see the cash flow, but there is this six-month process of verification that is involved with the process. Understood.

speaker
McAfee

And I know you have previously sort of indicated that funding for the Phase I and II, probably you already have those. But for... Phase three, the 35 digesters in phase three, how are you thinking about funding those deployments?

speaker
Eric McAfee

Certainly. Phase three is, in the aggregate, 35 dairies. Whether we decide to break that into two parts or not, we'll make a decision on later on this year. But to simplify, what we will be generating is over $40 million of cash flow from phase one and phase two. And we are expecting $75 million of USDA debt funding, which enables us actually to not only fund fully phase one and phase two, but also prepare ourselves well for phase three because of the infrastructure we're putting in place. You don't have to rebuild the pipeline that will be at the time 35 miles of pipeline to So adding additional dairies to that pipeline, in some cases, might be only a matter of running a quarter mile of pipeline. You don't have to put 35 miles of pipeline in place. And centralized dairy hub, gas cleanup, interconnection with the utility, all those are already in place. The renewable natural gas dispensing station is already in place. So our capital expenditure for the phase three is somewhat less than and is driven by the cash flow we're getting from phase one and phase two, which enables us to use basically debt instruments. Currently, the USDA Renewable Energy for America program is ideally suited for the $75 million of build-out that we're doing over the next 18 months, but our existing institutional investor is strongly supportive of the project, has already funded $30 million, and is already working with us to extend us an additional $25 million on the same terms. This is equity. And we have an expectation that that would certainly be available to us at any time. They've been extraordinarily supportive of the project and continue to be very bullish about how important it is, frankly, that we execute on time. And so I would say that in addition to the $75 million, to have their $25 million in place gives us over $100 million of capital. And if you look at our budget, we only need about half that. we're substantially overfunded by probably $50 million more than what we actually need to deploy to do Phase 1 and Phase 2, which positions us very well to make strides on Phase 3 in the next five quarters.

speaker
McAfee

Understood. And, Eric, how should investors think about offtake agreements or supply agreements with customers who will potentially be buying this renewable natural gas from you?

speaker
Eric McAfee

Currently, our strategy is to capture all of the $137 to $142 of revenue per MMBTU, million British thermal units, by putting it into our own renewable natural gas trucks or our own dispensing fueling station on site. We, of course, can sell into the utility pipeline and market anybody in California But the economics of that are less attractive. The margins are excellent. It's certainly a fine situation to find yourself in. But we think that there's easily another, probably at full project scale, $15 million per year of revenue that we don't have to give to other parties in order to dispense R&G. And so we're working on a business model that would allow us to use as much of it as possible internally and then have one or two outside parties who would be able to use whatever's left over. We're looking at this as 52 dairies over 60 months. And when we're done with 52 dairies, we're looking to optimize the return on investment, which potentially would mean that we consume all the renewable natural gas with our internal requirements for truck fueling and even potentially some in the ethanol plant, because we will need a small amount in the ethanol plant. So our model is to optimize the return on investment and to minimize dependence on third parties.

speaker
McAfee

With respect to sort of the debt side of the story, I know you've previously highlighted efforts to convert a large portion of the existing debt to low interest debt. Is that something that could play out in 2021? Any updates on that front would be helpful.

speaker
Eric McAfee

There are two primary paths that we're taking for our existing bridge loan debt, which is what we've been using to build these projects. Number one is we have an ongoing program. We've already raised about $39.5 million under, which is approximately 1% interest rate program under EB-5. And we have an additional $172 million approved under the exemplar under that program. And yes, it's true. We could make tremendous strides on that. Anywhere from $25 million to $172 million of that could be funded this year. It's all really dependent mostly on how immigration policy is going. And under the previous administration, there were some significant concerns related to immigration policy, and so investors were reluctant to put themselves in a situation of having invested but then couldn't get their paperwork processed. I think that tone has changed significantly, and so there is an upside opportunity where some amount of that $172 million is funded this year, and it all goes for senior debt conversion into 1% interest rate subordinated debt. Now, why is that valuable? Because we can put senior debt in place. It's just that senior debt would have $172 million of additional equity underneath it, from the perspective of lenders. And so that's a process that's ongoing. Again, we have almost $40 million of that capital. We've already received it, approximately 1% interest rate. The second is that we have an expected restructuring arrangement with a potential new refinancing. Could be easily tax-free bonds over 20-year amortization. Certainly, there's an expectation the Department of Energy is actually serious about carbon reduction. And with Jennifer Granholm and Jigar Shah now in control of $40 billion of federal money, I am looking for them to demonstrate with cash that they're actually serious about their proposals about carbon intensity reduction in the United States. And as you know from our company, we are one of the few diversified below-zero carbon companies in the market today. And a half-a-billion-dollar DOE funding, similar to Tesla's $475 million funding, would be the appropriate indication by the current administration that they're actually serious about carbon reduction. So we're giving them that opportunity, and we'll see whether they have the foresight and appetite to respond to that opportunity. A debt restructuring with expansion capital stretched out over a very long period of time at low interest rates would be certainly the goal of what we're going to do there.

speaker
McAfee

Just going back to the renewable natural gas daily digester deployments, Eric, have you had any issues, et cetera, with those deployments, the two deployments you've completed? Has everything been running smoothly, relatively?

speaker
Eric McAfee

Everything's been running very smoothly. The nice thing about the dairy renewable natural gas business is that there's functionally no operations. It's basically electric motors running, pushing gas around and through filters and that sort of thing. So we've had really no significant operational activities to tell you about because compared to running an ethanol plant where you're actually physically moving mash around 4.5 million gallons of fermentation, This is a very, very simple business. So we already have a full maintenance team, a full operations management team and everything, and so nothing here has been very difficult for us.

speaker
McAfee

I'll take my other questions offline. Thank you so much.

speaker
Eric McAfee

Thank you, Ahmed. Appreciate it.

speaker
Operator

Thank you. Our next question is coming from Derek Whitfield at Stiefel. Your line is live.

speaker
Derek Whitfield

Thanks, and good afternoon, all.

speaker
Eric

Good afternoon. Thanks, Derek.

speaker
Derek Whitfield

Eric, perhaps at a high level with my first question, as you think about your five-year outlook on page 11, what are the greatest execution and regulatory risks embedded in this plan in your view? And I ask this because the market is seemingly over-risking this plan in light of your evaluation versus market peers.

speaker
Eric McAfee

The risk of execution here is really just frankly built around whether the U.S. federal government employs the renewable fuel standard the way Congress intended. The last time that the federal renewable fuel standard was enforced was in 2013. And in the last four quarters in which the RFS was enforced, our existing ethanol plant bought corn from the same suppliers, sold ethanol to the same customers, and made $40 million of positive cash flow. Over four quarters, about $10 million per quarter. And that is the structure under which further investment in the expansion of low-carbon and below-zero-carbon renewable fuels was designed to occur. For a combination of political reasons, the renewable fuel standard was just not enforced at all for three years. They just didn't announce the renewable volume obligations. And then under the last administration, they actively... issued waivers to oil companies that were deemed to eventually be illegal, just as not issuing volume obligations was deemed to be illegal. So there's two federal court cases that said the EPA violated the law not one way, but twice, and a total of 7.2 billion gallons of ethanol demand disappeared as a result. So the current administration has an opportunity, and that opportunity is just simply don't violate federal law for renewable fuels, and you will have a very strong cycle of investment in the over 1 billion tons of waste biomass available in the U.S. under $40 per ton. And that's the cycle we're in. And our company, we believe, is a leader in that cycle.

speaker
Derek Whitfield

Great. And as my follow-up, regarding the cellulosic sugar extraction process from orchid waste wood, Could you speak to the event path for the commercialization of this development and also speak to the downstream constraints, if any, and the utilization of sugar, of this sugar, in place of cornstarch at your keys plant?

speaker
Eric McAfee

First of all, the economics of this are not reflected in our five-year plan. So we are just disclosing paths along the way to additional profitability of our keys plant. And if you look at our Keys plant over the next five years, we're not expecting a rapid March expansion in that business. So this is all upside to the five-year plan. The first, or I should say the next step of scaling this up is a pilot plant. And we already have two different grants pending in the application process with the U.S. Forest Service, a division of the U.S. Department of Agriculture, to fund the pilot plant. and we would be looking to get that construction going this year, be up and operating next year. And then after the pilot plant, the next scale-up would be the commercial production. This is a pre-extraction of sugar from waste wood. So think about it as coming in from the field, and the first thing you do is you put it through a pre-extraction process, extract sugars. And then the reason why this isn't used widely in industry is is that up to 75% of your waste wood is still remaining. It's a waste product from the sugar extraction. And unless you have something to do with just tons of waste wood, you never can do the sugar extraction economically. Well, we happen to have it, and it's called a jet diesel plant. And we use that waste wood to make the renewable hydrogen that is used in hydrotreating edible oils and animal oils to make renewable jet diesels. We have an enormous use for enormously valuable use, which is to make renewable cellulosic hydrogen from the remaining waste wood. So it's not a waste for us. It actually becomes a very valuable feedstock for a jet and diesel plant. So our commercial operations would be scaled to occur at the same time as our jet and diesel plant operations start up.

speaker
Derek Whitfield

Eric, and just to clarify, I think with every 10% increase in utilization of cellulosic sugar, which, again, is not your numbers, there would be a $30 million EBITDA increase. Are there any limitations around how much of this sugar can be used at the Keys plant?

speaker
Eric McAfee

Yes. Our Keys plant is basically a facility to feed sugar to yeast. That's basically what we're doing. It happens to be today we're getting the sugar from starch that comes from corn. But if that sugar came from the six-carbon sugar or the five-carbon sugar that's in wood, which comprises about 55% of the biomass in wood is C5 and C6 sugars. The yeast actually would not care whether it's six carbon sugar from corn or six carbon sugar from wood. It's biomass that originally was carbon dioxide from the atmosphere absorbed by either a tree material or a corn material, and then those sugars are used by the yeast. So the answer to your question is it's linear. In other words, there's no tapering off, whereas we passed you know, 20%, suddenly the yield goes down or something. We're physically just not using corn starch-based sugars. We take starch, we treat it with enzymes, it breaks them down into sugars. We're just not using that for our six-carbon sugar. We're actually using wood to produce the six-carbon sugar and then the five-carbon sugars as well. So there is some modification of the yeast. If we were going to use, for example, 50% of wood material be a higher percentage of five carbon sugars. And so we would be using an upgraded yeast, but those are currently in the marketplace as well. It is directly linear. And what I think most people don't appreciate is that we spend almost $15 million per month buying corn. That's a variable price, so it goes around. But when you can displace 10% of something that's costing you $15 million a month That's $18 million per year just in corn savings. And then you have carbon intensity reduction, which means that our ethanol is worth more. So we're selling our ethanol, including a $1 per gallon tax credit, at over $6.50 a gallon. So instead of selling ethanol at $1.80 or $2 a gallon, you're selling it $6 plus a gallon. Same molecule, but it just came from a different feedstock with lower carbon intensity. And then the last point is that you're getting a D3 cellulosic renewable identification number, which as of yesterday was worth $2.90 a gallon, versus a D6 corn ethanol, which as of yesterday was worth $1.30. So you have $1.60 of additional value in the D3 RIN that is a driver of this. So low-carbon fuel standard D3 RINs. are driving a $6.50 plus molecule instead of a $1.80, a $2 molecule.

speaker
Derek Whitfield

Extremely impactful. That's very helpful. Thanks for your time.

speaker
Eric McAfee

But I want to just repeat for everybody, that is not in our five-year projection. It is all upside, and as we get closer over the course of the year and into next year, we'll update people about timing. All of that $30 million per 10% is going to be – an upgrade to our five-year plan.

speaker
Operator

Thank you. Our next question today is coming from Ed Wu at Ascendant Capital. Your line is live.

speaker
Ed Wu

Great. Congratulations on all the progress that you made on all the various projects you're working on. Recently, you announced that you made an investment in an EV company. Are we going to expect you guys to do more in that area?

speaker
Eric McAfee

We're in the business of electric vehicles. The market just doesn't understand it yet, and here's why. When you make electricity, it doesn't just magically show up. it actually is a molecule that's converted to electron. What are the molecules we currently use? We use carbon-intensive coal, and worldwide that is the most rapidly growing source of our electricity is actually coal, which produces a tremendous amount of carbon that goes in the atmosphere, and I think everybody recognizes that's not a great idea. We use petroleum natural gas, which again was carbon in the ground in the form of petroleum, and once it's combusted, it ends up in the atmosphere. I think most people would agree that a positive 100 carbon intensity, which is higher than gasoline and higher than diesel, is probably not a great way to make electricity either. But over 50% of electricity in the United States is made by coal or petroleum natural gas. So our dairy renewable natural gas, which is negative 416 carbon intensity, is an offset to the greenhouse gases going up in the atmosphere from coal and from petroleum natural gas. So the more electricity we make from natural gas, but that comes from CO2 that was absorbed from the atmosphere into a plant, eaten by an animal, in this case a dairy cow, captured as biogas from the waste, and then converted into electron, the more of that we do, the greener that Tesla motor cars and Lucid cars and electric trucks are going to be, because that's actually how you actually help carbon emissions increase. you don't help carbon emissions by running your Tesla motor car on coal or petroleum natural gas, which is actually worse than gasoline or diesel. So we believe that we're in the middle of the electric car revolution because you don't actually get any environmental benefit in running a Tesla on coal. And our expectation is the market will increasingly understand that those carbon-negative biogas molecules are tremendously aligned with the electric car revolution. I'd almost say their necessity in order to expand electric car adoption and truck. Now, let me give you the second and more important and more direct and more immediate application. And that is batteries are heavy. Batteries are expensive. Batteries take up space. Batteries take a long time to charge. So if you solve one or two of them, let's say quick charging, well, they're still expensive. They still take up space and they're still heavy. You've got to solve all four of those before you really have long-haul trucking, like Class A trucks out on the highway, or even delivery trucks that are carrying a substantial amount of cargo that are going to be willing to displace that cargo for batteries that are heavy, expensive, and difficult to charge. So what is your solution? Well, the solution is have an electric drivetrain, very efficient, high-torque, powerful drivetrain, Have batteries that carry the energy to power the drivetrain. But instead of having to park that truck for hours and hours and hours every day, finding some charging station that doesn't exist, have a dense, 100% renewable, carbon low or negative, cheap molecule that you can fuel that vehicle within a few minutes. So what is that molecule? In the United States, there's only really three fuels. There's gasoline and diesel made from crude oil, which we all know is positive 93 and positive 95 carbon intensity. And then there's ethanol, which we all know is 40 to 60 percent lower carbon intensity than gasoline, according to current studies, even from corn. And with the amethyst ethanol, we're actually going to be probably the lowest carbon intensity corn ethanol in the world, and then carbon negative ethanol from our cellulosic ethanol. So, If you know there's three fuels, two of them are non-renewable and heavy carbon, and the other one's cheap, readily available, and it's called ethanol, what should be the range extender engine on your truck or other vehicle that really needs to go farther than 100 or 200 miles? It's pretty easy to understand. It's going to be ethanol. Because ethanol is only one molecule, it has no sulfur. There's no sulfur dioxide. Unlike gasoline, which has over 400 molecules in it, When it combusts, it has a tremendous number of issues. So if you're going to run an ethanol truck, what's the range extender going to be? It's going to be renewable natural gas, carbon negative, very low emission, or it's going to be ethanol. Low carbon, very low emission. Actually, with what we announced this morning, this engine could meet the zero emission vehicle standards, even though it's an internal combustion engine, because the fuel ethanol is one molecule and does not create all of these different emissions. So our relationship to the electric vehicle industry includes a strategic holding in NEVO Motors, which stands for New Electric Vehicle Optimization. The optimization part is that the range extender needs to be a renewable natural gas engine, if you're going 1,000 miles or so, or an ethanol engine where you could go up to 2,000 miles on one tank of fuel running very low cost, renewable, low emission. And the last little point for everybody to kind of just appreciate is if you have the ability to run 100 miles on batteries, that means when you go to urban areas, you come in from Texas, you're hauling something into LA, and they have restricted air requirements, just turn off your range extender and you're a 100% zero emission vehicle. I call it zero emission urban. Why? Because if you can drive around the L.A. basin and have zero emissions, you're a battery-operated vehicle. You can go to the port, pick up your load, and then head all the way to Louisiana and take it to your destination by just lighting up your range extender, which is fueled by ethanol or renewable natural gas. So we think that what we're producing is required in order to have an electrified future, not an option, not a temporary bridge. It is the future. of how you can have electrified infrastructure between the electrons we make as well as the range extenders we make.

speaker
Ed Wu

Great. Thank you for that explanation. Wish you guys good luck. Thank you.

speaker
Operator

Thank you. Our final question today is coming from Marco Rodriguez at StoneGate Capital Partners. Your line is live.

speaker
Marco Rodriguez

Good afternoon. Thank you for taking my questions. Sure. Nice to talk to you. Yeah, likewise. Eric, I was wondering if maybe you could spend a little bit more time just on kind of the five-year plan that you guys have sketched out in your presentation. Just kind of wondering if you can maybe help frame the total CapEx that would be necessary for you guys to ramp that particular plan, and if you can maybe talk a little bit about the timing of that CapEx would be kind of helpful. Thanks.

speaker
Eric McAfee

Certainly. We haven't put out a balance sheet to line up with the five-year plan. We will be working on doing that just to provide some guidance for everybody. We did include all those in our financial projection in terms of interest calculations and everything else. So the numbers are there derivatively through the income statement. But we think about it on a business unit basis. Dairy renewable natural gas, as we've described, is basically just using USDA funding to which is about 10-year funding and is very low interest rate. And the Renewable Energy for America program is limited to $25 million blocks. So you put, let's say, five dairies in a given project, they get a senior loan against it, and then you amortize it out over 10 years. But because the cash flow is so strong, you easily are just building up a lot of cash from that entity. So what do we do with that cash? We use it to fund... the next five dairies and the next five dairies. So essentially we're fully funded for the entire project just on the first $75 million from the USDA and can go back and get another $25 or $50 as needed. But it's a self-funding mechanism using debt. So the CapEx is kind of an interesting factor, but what's more interesting to me is is there dilution to shareholders involved? And the answer is no. There's no dilution to our parent company shareholders at all. Even in our preferred stock structure, it is automatically redeemable by cash flow, and there's no interest rate or dividend that's substantial that's related to our preferred stock. So it's a self-financing entity without any dilution of parent company, and the numbers that you see in our five-year projection take into consideration the interest costs, et cetera. The renewable jet and diesel plant, similarly structured, We've invested about $15 million of actual cash. We have some additional assets, for example, a 142-acre site. A portion of that site is where the ethanol plant would go. And that site has 710,000 square feet of buildings on it. So we'll contribute additional assets to that project. And our goal is simply to use either a tax-free bond, a 20-year device, or a USDA or DOE funding. to complete that financing without any additional equity because we have sufficient equity to meet the requirements based on our analysis. So the renewable jet diesel plant phase one would be fully equity funded already and just use that. Phase two would be to take cash flow, which we've described as being in excess of $65 million a year, and use that as the extra equity if any is required. to do the expansion. So it's an operating plant that's going to build a second unit, just use cash flow from the first unit plus additional debt to do the second unit. So again, no dilution to the parent company. And really, our net contribution to this is all the development funding, which in that case was $15 million in almost five years. We funded that. And we'll have some additional development funding that we'll put in place. But The overall plan is to build our business without having to dilute parent company shareholders. And by achieving that, using intelligent debt instruments, we think we're going to maximize shareholder value. India, by the way, is debt-free, fully built out for 50 million gallons. There's no capital expenditures required there at all.

speaker
Marco Rodriguez

Understood. Very helpful. Thank you very much. I appreciate your time, Eric. Thank you. Appreciate it.

speaker
Operator

Thank you. We do have a question coming from Jordan Levy at Truist Securities. Your line is live.

speaker
Jordan Levy

Afternoon, Eric. Just wanted to quickly get your thoughts on the potential for the renewable hydrogen outside of feeding into the renewable diesel, renewable jet plant and how you see that kind of structure and technology fitting into a lot of the new flow we see on the hydrogen side of things.

speaker
Eric McAfee

We seriously considered whether we should just produce renewable hydrogen from orchard waste wood and have carbon negative renewable hydrogen as a product that we would sell to the market. We have some industry leaders that are on our board of directors and in our shareholder base. And after analyzing it, we determined there were less than 10,000 hydrogen vehicles in California and less than 50 fueling stations. We met with several of the large automotive companies that have hydrogen vehicles and got a good sense of the timing of their fueling stations and their vehicle rollouts and determined that the amount of renewable hydrogen we could produce would significantly exceed what the market actually physically needs. And we would have to be betting that in some time in the future, one, two, three, four years, whatever it is, that the market dramatically grows. So our decision was to instead use a waste product, a byproduct I guess would be more proper to say, from our Keys ethanol plant, which is a very low-carbon, non-edible distiller's corn oil, and use very standard technology used by every single oil company in the world at their oil refining complex, called hydrotreating, to take that hydrogen and inject it into corn oil, as you guys are familiar down there. And so we just made a business decision that we should spend the extra time, energy, and money to end up with a low-carbon slash negative-carbon jet and diesel with no blend wall. There's approximately 12 billion gallons of diesel used by trucks in the U.S., and you could displace every single gallon and get LCFS credits for any of those that are in California and federal renewable standard RINs for the rest of it. California alone is a 4 billion gallon market with no blend wall. It's a diesel molecule that just happens to be a new carbon rather than old carbon. And so we made the determination we'd rather go after that market The global jet fuel market is approximately 79 billion gallons. And over time, I think we'll see very supportive policies for aviation fuel. So we decided to add a unit that would enable us to make jet fuel, SAF specifically, up to sustainable aviation fuel, up to 50% of our total capacity. This is positioning us in what I believe to be a very, very low-risk scenario because we'll probably have the lowest carbon content renewable diesel in the world, and probably the same with our SAF. And we certainly have had a lot of airlines express high levels of interest in how our SAF is so low carbon, because most SAF is made with petroleum hydrogen, which is positive 170 carbon intensity. And our petroleum hydrogen is carbon negative. So we just... we have a lot of value to bring to the market. We decided to make the extra investment of time, energy, and money to be in that large growing market rather than exposing our shareholders to what could be a slow-growing market with a lack of vehicles and a lack of dispensing stations as hydrogen kind of finds its way in the market.

speaker
Jordan Levy

Great. Thanks so much for putting my question in. Sure. Thank you.

speaker
Operator

Thank you. That's all the time we have for questions today. I would like to turn the floor back over to management for closing comments.

speaker
Eric McAfee

Thank you, Kate. I appreciate it. Thanks, everybody, for listening today. And we will be posting on our website the audio as well as the transcript. And I do invite you to our industrial segment of the website. We do have an earnings-focused presentation for you there. that has slide five and slide six that talk specifically to 2020, but also has a number of slides that describe our five-year plan. And I would like our shareholders to be well-informed about what the plans of the company are over the next five years. I think it will make you much more effective as a shareholder in the company. And I also would look forward to talking to you. Feel free to send me an email, and if possible, we find time to get on the phone and have discussions.

speaker
Kate

Thank you for attending today's Amedis Earnings Conference call. Please visit the Investor section of the Amedis website where we'll post a written version and an auto version of this Amedis Earnings Review and Business Update. Kate?

speaker
Operator

Thank you. This concludes today's teleconference event. You may disconnect your lines at this time, and thank you for your participation.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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