Aemetis, Inc

Welcome to the AMETIS Third Quarter 2022 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, Paul. Welcome to the AMETIS third quarter 2022 earnings review conference call. Joining us for the call today is Eric McAfee, founder, chairman, and CEO of AMETIS, and Andy Foster, president of AMETIS Advanced Fuels and AMETIS Biogas. We suggest visiting our website at ametis.com to review today's earnings press release, the AMETIS corporate and investor presentations, filing with the Security and Exchange Commission, recent press releases, and previous earnings conference calls. 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, I'd like to read the following disclaimer statement. During today's call, we'll be making forward-looking statements, including, without limitation, statements with respect to our future stock performance plans, opportunities, and expectations with respect to financing activities and the execution of our business plan. These statements must be considered in conjunction with the disclosures and cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements made on this call involve risks and uncertainties and that future events may differ materially from the statements made. For additional information, please refer to the company's Security and Exchange Commission filings, which are posted on our website and available from the company without charge. Our discussion on this call will include a review of non-GAAP measures as a supplement to financial statements based on GAAP. Our reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the three and nine months ended September 30, 2022, 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 or gain on debt extinguishment, income tax expense, intangible and other amortization expense, accretion, and other expenses of Series A deferred units, loss on lease termination, gain on litigation, depreciation expense, and share-based compensation expense. Now I'd like to review the financial results for the third quarter of 2022. Revenue during the third quarter of 2022 increased 44% to $71.8 million, compared to $50 million for the third quarter of 2021. Our California ethanol business experienced steady sales pricing with an increase in the volume of ethanol produced and sold at 15.7 million gallons in the third quarter of 2022, up from 13.8 million gallons in the third quarter of 2021. Delivered corn price increased 15% from an average price of $7.99 per bushel during the third quarter of 2021 to $9.59 per bushel during the third quarter of 2022. Our India biodiesel segment began delivering product under a tender offer to governmental oil marketing companies in mid-September, delivering $11 million of biodiesel in about two weeks under this tender offer. Gross loss for the third quarter of 2022 was $1.1 million compared to $4.8 million gross loss during the third quarter of 2021. Our California ethanol segment accounted for $3.8 million of gross loss with offsetting gross profits of $2.8 million from our India biodiesel segment. Selling general and administrative expenses were $6.9 million during the third quarter of 2022 compared to $5.1 million during the third quarter of 2021 as a result of investments in our ultra-low carbon initiatives and non-cash charges for stock compensation. Operating loss was $7.6 million for the third quarter of 2022 compared to an operating loss of $9.9 million for the third quarter of 2021. Interest expense for the third quarter of 2022 was $7.1 million excluding accretion and other expenses in connection with Series A preferred units in our AMETIS biogas subsidiary compared to $5.5 million during the third quarter of 2021. Additionally, our AMETIS biogas subsidiary recognized $1.3 million of accretion and other expense in connection with preference payments on its Series A preferred units during the third quarter of 2022 compared to $2.2 million during the third quarter of 2021, along with a loss on extinguishment on Series A preferred units of $53.9 million during the third quarter of 2022 as a result of a charge related to the redemption of Series A preferred units as part of the amendment to the preferred unit purchase agreement. The redemption charge reflects the expected valuation premium for the redemption of Series A preferred units by AMETIS. Management engaged third parties to assist with the accounting and fair value calculation. Management is completing our final review of the accounting and related charges. At this time, we do not believe the amounts will materially change during the third quarter as a result of filing the Form 10-Q, which will be subsequently filed to this earnings release. Net loss was $69.8 million for the third quarter of 2022 compared to a net loss of $17.6 million for the third quarter of 2021 driven primarily by the one-time unit holder redemption charge of $53.9 million or $1.55 per share. Absent this one-time charge, the net loss was $16 million representing 46 cents per share. Cash at the end of the third quarter of 2022 was $251,000 compared to $7.8 million at the close of the fourth quarter of 2021. Investment in capital projects of $13.7 million were made during the third quarter of 2022, further highlighting our commitment to execution of multiple low-carbon projects. This completes our review of the third quarter of 2022. Now, I'd like to introduce the founder, chairman, and chief executive officer of Amedis, Eric McAfee, for a business update.

Eric? Thank you, Todd. Amedis is focused on producing below zero carbon intensity products, including negative carbon intensity renewable natural gas and renewable aviation and diesel fuel with renewable hydrogen and carbon sequestration. Our projects generate sustainable and innovative renewable fuels that benefit our communities and restore our environment while generating tax and other credits from federal and state carbon reduction programs. We seek to reduce feedstock and operating costs by using waste materials and zero carbon intensity energy for the production of renewable fuels. Let's start by talking about the estimated $55 million unit holder redemption charge in the third quarter related to our Amedis biogas business. The unit holder redemption charge is related to the repurchase of preferred units from the preferred investor in the Amedis biogas subsidiary. Before counting the redemption charge, Amedis had a loss of 46 cents per share in the third quarter, which is within the range of expectations. The unit holder redemption charge is a non-cash accounting entry that was taken in Q3 2022 related to an agreement that was reached between Ametis and the biogas preferred equity investor to repurchase 100% of the outstanding preferred equity in Ametis Biogas. The motivation for the expected redemption of the preferred equity by Ametis includes several factors, including biogas industry transactions at high valuations that increased the value of the Metis Biogas preferred units, as well as discussion of whether a spin-out of the subsidiary into a SPAC, IPO, or sale should be considered. As most of you know, Opal went public at a pre-money valuation of about $1.2 billion last year. And recently, Archaea was sold for $4.1 billion to BP, which included $800 million of Archaea debt. We believe these transactions are interesting comparables to Amedis Biogas, especially considering the dairy renewable natural gas generates an estimated 10 times more California low carbon fuel standard credits compared to the landfill renewable gas primarily produced by both Opal and Archaea. Amedis Biogas with a carbon intensity score of negative 426 is expected to generate about 500 LCFS credits compared to landfill gas at a positive 30 carbon intensity, which generates only about 50 LCFS credits. After considering the future value of over 60 digesters planned by Metis Biogas to generate an expected 1.65 million MMBTUs per year, compared to the approximately 2 million MMBTUs of landfill RNG currently produced by Archaea, at one-tenth the number of LCFS credits. Amedis made a strategic decision to acquire the preferred equity in Amedis Biogas from our investor, who was seeking a liquidity event without waiting for the completion of project development. In the third quarter of 2022, Amedis negotiated a redemption of all of the preferred equity of the Amedis Biogas subsidiary and booked an estimated $55 million non-cash Series A preferred unit holder redemption expense in Q3. This $55 million charge was not paid in cash, but represents an expected future transaction in which Amedis has a right to redeem 100% of the Amedis Biogas preferred equity. Usually, the redemption of preferred equity is shown as a dividend. not as a non-operating charge on the income statement that reduces earnings per share. In this case, the accounting guidance determined that the certainty of the redemption and other known features of the buyout of the preferred unit holder supported recognizing the $55 million as debt that was redeemed at a premium rather than as a dividend to the preferred equity owners that would have been shown on the balance sheet, not on the income statement, and would not have reduced earnings per share. Let's discuss our financing plan and the progress we're making in funding the growth of Amedis. In early 2022, we announced an updated five-year plan, which projected revenues to grow to about $1.5 billion and projected annual EBITDA to increase to more than $460 million per year by year 2026. In 2021 and 2022, Amedis repaid more than $80 million to ThirdEye Capital. to reduce higher interest rate bridge loans, which has now expanded our access to lower interest rate funding. Our plan is to fund growth by using positive cash flow from our ethanol, biogas, and India biodiesel and glycerin production facilities, enhanced by a new up to $100 million working capital and project development financing credit facility that was signed with Third Eye Capital in March of this year. After completing preliminary engineering, permitting, and site control for each project. We then plan to obtain project financing at the project level using low interest rate, U.S. government-guaranteed, long-term 20-year loans to fund project construction and operations. This financing model minimizes or eliminates shareholder dilution while enabling rapid growth in revenues and earnings as projects are built. And this financing model is working. even with rising interest rates creating difficult debt market conditions and currently low LCFS credit prices. In the past two quarters, we have received funding of about $50 million from the two credit facilities provided by Third Eye Capital at interest rates of only 8% and 10% per year. This new $50 million of growth funding has supported the construction of a solar energy system and many other carbon reduction projects at the Keys ethanol plant, the financing of land purchases, the engineering permitting and related equipment for the renewable aviation and diesel fuel plant, and the pre-project engineering and drilling pad construction for CO2 characterization and sequestration wells. As an example of our long-term financing strategy, AMETIS recently closed a $25 million project financing supported by the U.S. Department of Agriculture Renewable Energy for America, known as REAP, program. to fund dairy biogas digesters and biogas pipelines to produce renewable natural gas. The financing this month was completed at a 6.2% interest rate that is fixed for five years and has a highly favorable 20-year repayment principle. Let me clarify that that was the month of October. Regarding regulatory credit price trends, In August of this year, California Governor Newsom issued a letter to the Chairman of the California Air Resources Board specifically requesting a significant increase in the pace of decarbonization in California. The letter stated a 100 million metric tons of total CO2 sequestration as a specific goal. The release of the draft California Resources Board LCFS scoping plan in early 2023 is expected to increase the number of credits required under the low carbon fuel standard program. We expect that LCFS credit prices will rebound as traders learn more about the number of LCFS credits that will be required to meet the expanded decarbonization goals set forth by CARB. In addition, the Federal Inflation Reduction Act was passed recently and is expected to have a significant positive impact on renewable energy in general and our businesses specifically. We are completing a review process of the IRA with our tax advisors and expect to release a revised five-year plan in Q1 2023 that will include the impact of legislation on our business. We are investing a significant amount of tax lawyer and tax accounting resources into the IRA review process to develop and implement specific business structures that should maximize the value of the tax credits available under the Inflation Reduction Act. As a reminder of the provisions of the Inflation Reduction Act related to EMETIS. First, a 30% investment tax credit for renewable natural gas capital investments. The ITC for renewable natural gas projects is expected to result in up to $180 million of cash received by EMETIS at the rate of approximately $30 million per year for the next five years from Inflation Reduction Act investment tax credits. Next, a $1.25 to $1.75 tax credit for sustainable aviation fuel and a $1 tax credit for renewable diesel. The IRA sustainable aviation and renewable diesel fuel tax credit is expected to result in up to $112 million per year to support the construction and operation of the 90 million gallon per year Ametis Carbon Zero plant in Riverbank, California. If extended over the 10-year period of our contracts with certain airlines and monetized efficiently, the SAF and RD tax credits in the Clean Fuel Program of the Inflation Reduction Act could provide more than $1 billion of cash to repay an estimated $400 million of project funding. This potential $1 billion from IRA tax credits over 10 years is in addition to the revenues from California low carbon fuel standard credits, federal renewable fuel standard D5 RINs, and the sale of the aviation diesel fuel. Next, an increase in the carbon sequestration tax credit from $50 to $85 per metric ton of CO2. But paying the credit in cash as an IRS tax refund to companies in a process called direct pay for the first five years, followed by seven years of additional tax credits. We are developing two injection wells located at the two Amendus Biofuels plant sites in California to sequester a planned 2 million metric tons per year of CO2 into a saline formation approximately 7,000 feet underground. A planned 2 million tons times $85 per ton equals $170 million per year of cash that could potentially be paid to Emetis by the IRS each year for the first five years of the project, providing approximately $850 million of IRS funding in the aggregate to repay the capital costs and operating costs of the two projects. With another seven years thereafter, the same yearly rate generating an expected aggregate amount of tax credits valued by management at an additional $1.2 billion, The total value of the eighty-five dollar per metric ton tax credit would be two billion dollars in the first twelve years of operation of the two Imetys carbon wells. And lastly, several provisions in the IRA legislation are valuable to the Imetys ethanol business, including a tax credit for low carbon intensity ethanol, five hundred million dollars for biofuels fueling infrastructure to support fifteen percent to eighty-five percent ethanol plants, and adopting the Argonne Labs GREET model to correctly calculate the carbon intensity of ethanol and other renewable fuels. These regulations are driven by initiatives to decarbonize transportation, the need to reduce the cost of fuels as petroleum prices increase, a renewed interest in energy security, and greenhouse gas reductions. Let's review our biodiesel business in India. The National Biofuels Policy in India was updated in 2022. is now being implemented to achieve a 5% blend of biodiesel that's equal to about 1.25 billion gallons of biodiesel per year. This summer, the three government oil marketing companies issued a tender offer to purchase up to 180 million gallons per month of biodiesel. For the past 15 years, the pricing formulas have largely been driven by petroleum diesel prices. For the first time, A feedstock plus pricing formula was used for the OMC tender, reflecting the actual cost for feedstock to produce biodiesel in India. The pricing formula and timing of the two-month tender by the oil marketing companies is expected to be the ongoing format for sales to the oil marketing companies. We expect the formula to be a successful mechanism for the rapid growth of biodiesel production in India due to the predictability of the pricing formula. After a 45-day delay from August 1 to September 15, due to a requirement by the India oil marketing companies for two rounds of laboratory testing and documentation, we began deliveries of biodiesel from our India biodiesel plant in mid-September and shipped biodiesel for the last two weeks of the quarter. Despite the delay in testing approvals to September 15, We delivered 11 million dollars of biodiesel in 15 days by the end of September. Production and deliveries have continued to the end of October after the OMC's extended the delivery period for the biodiesel purchase orders. We believe the revised OMC purchasing process based on the cost plus calculation will allow us to maintain ongoing production, though the OMC's continued to generate uncertainty by slow and burdensome procurement processes. The glycerin unit is operational now, converting about 10% of the product from the biodiesel plant into high-grade glycerin for sale in India. The feedstock pretreatment unit is expected to be utilized for the refining of crude tallow for export to the U.S. and Europe to produce renewable diesel and sustainable aviation fuel. Negotiations of refined tallow offtake agreements have been underway since early Q3 of this year, and refined tallow production is expected to begin in early 2023 with exports, shipments soon thereafter. Since our India subsidiary has no debt and the 50 million gallon per year biodiesel plant, the glycerin plant, and the tallow refining facility are fully constructed, we are well positioned for continued operation at high yields. Now, Andy Foster, the president of the Ametis Biogas and Ametis Advanced Fuels businesses, will review highlights.