Aemetis, Inc Q2 FY2020 Earnings Call

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

Thank you, Melinda. Welcome to Aemetis second quarter 2020 earnings review conference call. We suggest visiting our website at aemetis.com to review today's earnings press release, updated corporate presentation, filings with the Securities and Exchange Commission, recent press releases and previous earnings conference calls. This presentation is available for review or download on the aemetis.com homepage. Before we begin our discussion today, I'd like to read the following disclosure statement. During today's call, we'll be making forward-looking statements, including, without limitation, statements with respect to our future stock performance, plans, opportunities and expectations with respect to financing activity and 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 Securities and Exchange Commission filings which are posted on our website and are available from the company without charge. Our discussion on this call will include a review of non-GAAP measures as a supplement to financial results based on GAAP. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the quarter ended June 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, tangible and other amortization expense, accretion expense, depreciation expense, loss contingency on litigation and share-based compensation expense. Now, I'd like to review the financial results for the second quarter 2020. Revenues were $47.8 million for the second quarter of 2020 compared to $50.6 million for the second quarter of 2019, driven by the entry into the high-grade alcohol market, but slightly offset by the delay in the India Government Oil Marketing Company biodiesel bidding process. Gross profit for the second quarter of 2020 rose to $14.1 million, compared to a gross profit of $3.3 million during the second quarter 2019. The North America segment accounted for $13.9 million of the reported consolidated gross profit. Selling, general and administrative expenses were $4 million during the second quarter of 2020, compared to $3.9 million during the second quarter 2019. Operating income increased to $10 million during the second quarter of 2020, compared to an operating loss of $762,000 for the second quarter 2019. Interest expense during the second quarter of 2020 was $6.2 million, excluding accretion in connection with the Series A preferred units in the Aemetis Biogas LLC subsidiary, compared to $6.6 million during the second quarter 2019. The Aemetis Biogas subsidiary recognized $1.4 million of accretion in connection with preference payments on its preferred stock. Net income was $2.2 million for the second quarter 2020 compared to a net loss of $13.9 million for the second quarter 2019. Adjusted EBITDA increased to $11.2 million for the three months ended June 30, 2020. Cash at the end of the second quarter 2020 increased to $3.4 million compared to $600,000 at the end of 2019. That completes our financial review for the second quarter 2020. Now, I'd like to introduce the Founder, Chairman and Chief Executive Officer of Aemetis, Eric McAfee for a business update. Eric?

Thanks, Todd. Aemetis was founded in 2006. We have grown into four lines of business, which are focused on supplying health products, including high-grade alcohol, refined glycerin, blended hand sanitizer gel and liquid, as well as packaged sanitizer products. Renewable fuels, including low carbon and below zero carbon ethanol, biodiesel, waste wood ethanol and byproducts, including carbon dioxide and corn oil, dairy biogas, including renewable natural gas for transportation fuel and technology development to maximize the value of our products and processes. We own and operate production facilities with more than 110 million gallons per year of capacity in the U.S. and India. Included in our production portfolio is a 65 million gallon per year high-grade alcohol, fuel ethanol, distillers grain and corn oil plant located in Keyes, 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 Kakinada. Aemetis made positive progress towards increasing revenues and sustained profitability in each of our four businesses during the second quarter of 2020. Let's review our new Aemetis Health Products business, which grew rapidly during the second quarter as well as our fuel ethanol business returned to strong profit margins during the end of the second quarter. In response to a national shortage of hand sanitizer used to slow the spread of the COVID-19 virus, in late March 2020, the FDA and the Treasury Department's TTB agency issued temporary regulations allowing fuel ethanol plants to produce alcohol for hand sanitizer. Responding to this approval and the spike in demand for sanitizer products, Aemetis delivered our first sanitizer alcohol within a few days thereafter. Through a post-processing arrangement it was formed with a local wine and spirits producer. Then installed upgrades at our California plant to produce higher quality ethanol for broader personal care in industrial markets. Very quickly, we realized that a major differentiator between our company and other ethanol producers is that they would have to transport alcohol for sanitizer from the Midwest to California, using fuel ethanol trailers and railcars, which are often contaminated with benzene and other dangerous chemicals from the gasoline that is used to denature in fuel ethanol. We quickly arranged a $2.1 million lease purchase of 15 new boat trailers with our trucking company to be used solely for the transport of Aemetis high-grade alcohol, allowing us to deliver up to 30 loads per day of alcohol to California blenders and bottlers from our Central Valley plant without using any trailers that carry fuel ethanol or gasoline. In addition to using new boat trailers, our California high-grade alcohol plant location is about 2,000 miles closer to customers in California. Aemetis has a permanent cost advantage over Midwest ethanol producers due to our close proximity to Western U.S. markets, especially when government agencies restrict the use of railcars and tanker trucks that previously carried petroleum products. As you may know, high quality alcohol and refined glycerin are the two key ingredients in hand sanitizer and other sanitizer products. During Q2, we began shipping large quantities of hand sanitizer alcohol from our plant in California, and refined glycerin from our plant in India into the rapidly growing sanitizer and personal care markets. To expand our product line and support a growing list of customers in the U.S. and Canada, we recently relaunched the Aemetis Health Products subsidiary to manage the development, production and marketing of our sanitizer products. After implementing a number of upgrades at the California ethanol plant, we believe that Aemetis now operates the largest production plant for high quality sanitizer alcohol in the Western U.S., while also owning and operating one of the largest pharmaceutical grade refined glycerin production plants in Asia. The global COVID-19 crisis began during Q1 2020 and caused operational shutdowns for many businesses during Q2 2020 also provided challenges to our business. Protecting the health of our employees while continuing to operate our California ethanol plant to supply animal feed to more than 100,000 dairy cows occurred during a time period in which the demand for biofuels decreased significantly due to the steep decline in gasoline consumption during shelter-in-place orders. However, Aemetis operates in three of the federal essential critical infrastructures, and continued during both Q1 and Q2 to operate our California ethanol plant in order to provide transportation fuel and alcohol for sanitizer products while continuing the construction of plant upgrades, and building our dairy renewable natural gas project without interruption. To a large extent, the ability to continue to operate our California plant while fuel ethanol demand and price declined significantly during Q1 was due to our rapid conversion of ethanol production to produce hand sanitizer alcohol, followed by a late Q2 strong recovery in the price of fuel ethanol. In April, Aemetis received a Distilled Spirits Producer, DSP permit from the TTB. With the DSP permit Aemetis can sell high-grade alcohol into other markets. In June, we began to produce Food Chemical Codex known as FCC food grade quality alcohol at our Modesto plant. We began shipments of FCC grade alcohol to Canada during Q2. And we continue to invest in the upgrading of our production facilities that we believe will allow us to achieve U.S. Pharmacopoeia grade alcohol in Q1 2021. Our total investment in upgrades for the production and storage of high-grade USP alcohol is expected to be approximately $15 million, of which more than $12 million has already been funded or will be reimbursed by grant funding. Our expanding production of high quality alcohol for the sanitizer market, used for hand sanitizer, alcohol wipes and alcohol sprays is expected to be a long-term growth market driven by the adoption of antiviral products by governments, schools, private industry, and consumers. To increase the value of our high-grade and fuel ethanol and to reduce the cost of the operation of our production plant, we are currently implementing several upgrade projects related to the California plant, including: Number one, building two new distillation columns and related systems to produce high purity U.S. Pharmacopoeia grade alcohol for sanitizers known as USP grade; Number two, installing five new segregated stainless steel tanks for USP high-grade alcohol storage and loadout, increasing our storage capacity by more than 250,000 gallons; Number three, completing the installation of the new $7 million zeolite membrane dehydration unit from Mitsubishi to reduce natural gas use at the alcohol plant by replacing our molecular sieve with electrically powered equipment, which will reduce the carbon intensity of our fuel ethanol and is partially funded by a $1.5 million energy efficiency grant; Number four, adding high efficiency heat exchangers to reduce natural gas use at the alcohol plant, reimbursed by a $1.3 million energy efficiency grant; Number five, installing a solar panel micro grid array with battery backup and an artificial intelligence energy management system to replace natural gas with solar electricity while optimizing energy use throughout the alcohol plant, primarily funded by an $8 million California Energy Commission grant; Number six, 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 seven, constructing a dairy biogas digester cluster and pipeline to deliver renewable natural gas to the alcohol plant from an initial two dairies this year with planned expansion to an additional 15 dairies next year, along with an interconnection to the utility gas pipeline. This project is planned to generate approximately $25 million per year of operating cash flow and is being primarily funded with $55 million of automatically redeemed preferred equity issued by the Aemetis Biogas subsidiary. When completed, these upgrades are designed to eliminate nearly 100% of the petroleum natural gas use at the alcohol plant, saving up to $7 million per year of natural gas pipeline costs, replaced by carbon-negative dairy biogas to provide the gas required to generate steam for use at the plant. The biorefinery will primarily operate using high efficiency electric motors and pumps powered by solar energy and renewable power sources, optimized by the AI system that provides insights into the energy use of each of the systems in the alcohol plant. As a review of the milestones achieved in Q2, in early May, we announced the completion of construction and commencement of commercial shipments of carbon dioxide to the newly constructed Messer CO2 gas plant that was built next to our ethanol plant to capture and reuse carbon dioxide. After three years of project development and contract negotiations, Messer reached about five acres owned by Aemetis adjacent to the Keyes ethanol plant to build a CO2 liquefaction plant. We are now converting approximately 150,000 tons per year of renewable CO2 produced by our ethanol plant into liquid CO2 for sale to local food and beverage producers and other CO2 industrial users. Ethanol plants produce about 40% of the CO2 in the U.S. and a significant national shortage of CO2 occurred due to the COVID related shutdown or idling of ethanol plants. About $1.5 million per year of cash is expected to be received from CO2 sales and the land lease for the CO2 plant. We also expect to qualify for a CO2 carbon capture and reuse federal tax credit that we calculate is initially worth about $4 million per year, and grows to $6 million per year over the next five years under the IRS 45(Q) rules. The construction of the $7 million membrane dehydration system financed by Mitsubishi Chemical of Japan and a $1.5 million energy efficiency grant is currently in the installation process but was significantly delayed by the COVID-19 crisis due to travel restrictions and local contractors stopping work under shelter-in-place orders. The ethanol dehydration unit is designed to significantly reduce petroleum natural gas usage and decrease the carbon intensity of our ethanol. And once implemented is expected to generate an estimated $3 million per year of increased cash flow. These projects at the Keyes plant are targeted to significantly reduce petroleum natural gas usage and costs by up to 80% while increasing the number of low carbon fuel standard credits generated each year. The potential combined impact of these projects is expected to be an approximately $30 million increase in operating cash flow each year at the Keyes plant, not including any improvement in profit margins that are expected from high-grade alcohol products. Let's briefly review our Aemetis biogas dairy digester and pipeline project. Methane, commonly known as natural gas, is a potent greenhouse gas that is up to 30 times more powerful than carbon dioxide at capturing earth’s heat. About 25% of California's methane emissions come from the waste ponds on dairy farms. To reduce damaging methane emissions, in late 2016 California passed the law known as Senate Bill 1383 that mandates a significant reduction in methane emitted by dairy lagoons. Biomethane sourced from dairies can be used to replace gasoline or diesel fuel in cars, trucks, and buses to significantly reduce carbon emissions and air pollution. Along with the State mandate, California has funded up to $75 million per year of matching grants to dairies to build biogas digesters and related systems. We believe that capturing biogas from dairies and converting it into renewable natural gas to generate negative carbon intensity transportation fuel is an excellent way to reduce climate change, create value for dairies and reduce costs for diesel truck fleets and potentially for electric vehicles by conversion of dairy renewable natural gas to electricity for transportation use. Based on our existing animal feed supply relationships with about 100 dairies and the ability to use biogas in our plant until our plant pipeline and connection completion in the first quarter of 2021, we believe that Aemetis is uniquely positioned as one of only two ethanol companies in California who are using existing infrastructure in this manner. After more than a year of project development and financing work, last year we announced $30 million of equity financing and a grant award from the California Department of Food and Agriculture for two matching grants for a total of $3 million to build biogas digesters at the first two dairies in our biogas project. Construction of the first two dairy digesters, the 4-mile pipeline and the boiler unit at the Keyes plant is nearly completed and will be commissioned in the next month. We expect to begin renewable natural gas revenues during September 2020. We also signed 17 total agreements with dairies and plan to complete construction of the next 15 lagoons digesters by the end of year 2021, subject to potential COVID-19 delays. Aemetis owns 100% of the common stock of the Aemetis Biogas subsidiary. The dairy biogas project has been funded by a preferred stock issuance by the Aemetis Biogas subsidiary to a fund advantaged 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 Aemetis parent company shareholders for the biogas project and Aemetis receives 25% of the cash generated by biogas project operations. The preferred stock is automatically repurchased at 3 times original issuance price using 75% of biogas operating cash flow. After the preferred stock is redeemed, Aemetis as the sole common shareholder will own 100% of the cash flow and assets of the biogas digester and pipeline system. Let's review our biodiesel business in India. After two years of investment in construction, we completed the upgrade of our India plant in 2019, including installation of a pretreatment unit to process lower costs and waste feedstock into oil. The biodiesel and refined glycerin plant is fully commissioned using the new feedstock pretreatment unit, the new boiler unit, and other upgrades that enabled expanded plant operations toward full plant capacity of 50 million gallons per year. The shelter-in-place order in India has restricted our production, but we continue to ship biodiesel and refined glycerin from inventory. In June, we began production at the India plant to meet expanding biodiesel and refined glycerin needs in India. Though the global price of diesel has declined along with the price of crude oil, the domestic price of diesel in India has remained largely unchanged due to the increased India government taxes that offset crude oil price declines. Since our biodiesel 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. In addition, refined glycerin prices have increased in response to the need for hand sanitizer and other consumer products. In May of last year, we announced that our Universal Biofuels India subsidiary was awarded a $23 million biodiesel supply contract with the three India government-owned oil marketing companies in a public tender process. The year 2020, India Oil Marketing Company purchase request for biodiesel were issued and the negotiation award of supply agreements should occur in the next month. We expect to continue to participate as a key supplier under these biodiesel contracts. Let's finish with an update on our below zero carbon cellulosic ethanol project in Riverbank, California. We were pleased that the Aemetis 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 Aemetis project earned its number one ranking as a result of our fixed price, low cost, almond and walnut wood waste contract. Planned production of high value cellulosic ethanol, as well as valuable fishmeal and other byproducts using the patented LanzaTech gas microbe ethanol production technology. The LanzaTech technology is now in full commercial operation at a plant opened in 2018 in Northern China that converts waste gases from a steel plant to produce ethanol. During 2019, we announced three significant financings related to the Riverbank project, a $5 million California Energy Commission grant to fund engineering equipment, a $12.5 million tax waiver that offsets equity funding required for the project, and the signing of a $125 million USDA conditional commitment letter for a 20-year debt financing under the 9003 Biorefinery program. We are working to update the USDA loan to match the current capital expenditure budget for the project. We're also focused on completing the engineering of the plant required for the negotiation of the EPC contract that will include a bonded maximum construction cost. The Riverbank cellulosic ethanol plant is expected to generate more than $80 million of revenue each year and more than $50 million each year of positive cash flow by producing cellulosic ethanol from low-cost waste, orchard, vineyard, forest and construction demolition wood as feedstock. The financial closing to begin construction of the Riverbank plant is dependent on completing the engineering and procurement work required for the signing of the construction contract. We're now in the final engineering and preparing for the procurement cycle prior to the completion of project financing, and commencement of construction of the plant. Let's wrap up with a quick review of the key milestones achieved by our technology development group. Our technology development team worked with the federally funded Joint BioEnergy Institute in Berkeley, California for three years in the development of processes to use low-cost waste, orchard and forest wood feedstocks to produce high-value cellulosic biofuels. A $3 million California Energy Commission grant was awarded to Jay Bay and Aemetis, which partially funded years of collaborative work and lab testing with Aemetis and Jay Bay that in Q2 2020 resulted in the production of the first carbon negative fuel ethanol from California orchard wood using ionic liquids. This patent-pending process allows the sugar component of low-cost waste wood to be used to produce both high-grade alcohol as well as cellulosic fuel ethanol that are each currently valued at more than $5 per gallon. Importantly, this innovation could be implemented at our existing California ethanol plant, decreasing the cost of corn feedstock and substantially increasing the value of our alcohol. We expect to move forward with the pilot plant to extract sugar from waste wood and thereby enable the production of high margin, high-grade alcohol and cellulosic ethanol at the Keyes plant by displacing corn feedstock. In summary, we believe that Aemetis holds a unique position with the production of both high-grade ethanol and refined glycerin from our India operation for the rapidly expanding sanitizer market. Aemetis has a geographic and strategic advantage in sanitizer alcohol production, with lower cost and higher quality delivery to customers, a diversified production of low carbon renewable fuels into attractive markets in California and India, the $6 million of positive cash flow and the 120% revenue growth at our India plant in 2019, which was achieved while repaying 100% of our long-term debt in the India subsidiary. While 2020 revenues from the government contracts have not even occurred yet due to the COVID-19 delays. The increased profit margins from plant upgrades related to the Keyes biorefinery began in Q2 2020. The Aemetis Biogas dairy digester and pipeline project is expected to begin first gas production in September 2020 and our planned deployment of the patented LanzaTech cellulosic ethanol technology at the Riverbank plant has positioned Aemetis to rapidly produce expanding positive cash flow from the production of high-grade sanitizer alcohol as well as low-carbon, clean burning high-performance renewable fuels from abundant low-cost waste biomass feedstocks. Now let's take a few questions from our call participants.

And first we go to Ed Woo with Ascendiant Capital. Please go ahead, sir.

Congratulations on the quarter. It was a notable quarter due to the strong demand for various protection devices, including hand sanitizers. How sustainable do you think this demand will be as we move into the latter half of this year and possibly into next year?

As we introduced our health products, we strategically decided to increase our presence in the sanitizer alcohol market by not just selling bulk alcohol but also offering blended liquid and gel products, which have higher margins due to their added value. We also launched a package primarily consisting of bottled products under various brand names, including our own. We expect the latter half of this year to present a more stable operating environment compared to the surge in demand we saw in Q2. We are also observing a notable decrease in competitor offerings due to over 100% of products being recalled or removed from the market by FDA and Health Canada regulations. Much of this involves products from Mexico that contained methanol and others with high acetaldehyde levels, a cancer-causing substance commonly associated with fuel ethanol. Additionally, restrictions on transporting high-grade ethanol, which cannot be stored in fuel ethanol tanks, pose a significant limitation. As these regulations are increasingly enforced, we anticipate a decline in the number of suppliers in the market, leading to a rationalization phase in the latter half of 2020. Demand remains strong, bolstered by our direct relationships with large customers and retailers, as there is ongoing demand for high-grade alcohol. We are also seeing other suppliers announce long-term contracts, many of which have already sold out for the current year. This situation presents a substantial opportunity for us to enhance our processes and finalize the construction of our USP-grade facility, positioning us as a supplier of approximately 5 million gallons per month. We will be significantly larger than any other supplier in the Western United States. We expect to solidify this strategic position over the next six months, and launching these higher-margin products will be an expansion we will witness in Q3 and Q4.

What percentage of your ethanol output is for the hand sanitizer market today?

It is a volatile business. So it is expanding and we're anticipating that, as we supply into our own Aemetis Health Products subsidiary, we will see better visibility in terms of what the total volumes are over time, especially since some of the contracts we're bidding on federal government kind of contracts tend to be longer and more stable. And so, at the turn time, we're seeing an opportunity to expand our commitment there, but we are continuing to ship fuel ethanol until we get our own packaged products in the marketplace, at which time it's very possible that our fuel ethanol production capacity is going to be curtailed significantly. I could anticipate a time when we would not have any fuel ethanol production capacity at all. Now whether that occurs in the next six months or occurs in the next 18 months, I'm not quite sure, but we'll certainly be positioned for that from a technology perspective because our upgrades are being estimated to convert all 5 million gallons per month to this USP high-grade alcohol.

Just to clarify my understanding. So once you start converting it to these high-quality ethanol for other uses, can you still produce fuel ethanol or once you make this shift you cannot do it anymore?

We will still be able to produce fuel ethanol.

Next we go to the line of Marco Rodriguez with Stonegate Capital. Please go ahead.

Good afternoon. Thank you for taking my questions. I was wondering if you could maybe talk a little bit about the margin profile of the high-grade alcohol. It kind of looks like just looking at your numbers that it might be somewhere in the 60% plus range. Can you give us a sense of that if that's correct, then also if whether or not that's kind of a normalized run rate for the margin?

We have several different entry points in the market. We operate a bulk alcohol business, a blended gel and liquid alcohol business, and a packaged alcohol business. In the bulk alcohol sector, you'll generally find margins ranging from 20% to 50%, which fluctuates based on volume. The gel and liquid alcohol business is similar, with margins likely falling within the same 20% to 50% range. For packaged products, particularly in liquid hand sanitizer, about 98% of the costs are incurred at our plant, leading to margins typically exceeding 50%. These margins are mainly influenced by volume, with smaller volume customers usually yielding higher margins and larger volume customers typically resulting in lower margins.

Great. You mentioned that you have a competitive advantage over many other high-grade alcohol producers due to your location and shipping capabilities. Can you provide some information on who your competitors were in the market supplying this before COVID?

In general, the Pacific Ethanol plant in Pekin, Illinois was a significant producer. The MGP facility in the Midwest has also played an important role. There are additional participants in the market that haven’t revealed their involvement, but ADM and a few other traditional ethanol producers are engaged in some USP production. I anticipate that during 2020, around six ethanol producers will make substantial financial and time investments to upgrade their USP capabilities. Initially, we estimated about six players in the market in January, but we expect to close the year with nine or ten, and likely have around twelve by early next year. Among those twelve, one will be west of Iowa, while the remaining ten or eleven will be located in the Upper Midwest, covering areas from Minnesota down to Kansas. There are minimal ethanol plants in Texas and limited activity in the Southeast. In the Western U.S., we are essentially the only announced hand sanitizer producer. Therefore, the primary activity will be concentrated in the Upper Midwest, particularly in Iowa, Minnesota, and Illinois, which are around 2,000 miles away from the Western United States.

Our next question or comment comes from the line of private investor, Tom Welch. Please go ahead.

Wondering if you can provide some color on your time horizon for finishing some of the targets you mentioned? The distillation columns, Zevex membrane, heat exchangers, solar, kind of micro grids, vapor recompression systems?

We would categorize those in two categories. One is the systems required for USP production and those are all structured to be completed by Q1 of 2021. So we would be able to ship the higher grade alcohols into these markets in that time frame. The solar array power system and the MVR, which is essentially changing the use of steam, so we reuse it, therefore don't have to produce as much. Those projects are stretched out over the next year into the third and fourth quarter of next year for solar. It seems like with some of the changes in the market, the solar guys might be able to work a lot quicker because of the lack of other projects that used to be delaying the thing. So we'll probably see the solar project relatively quickly. And then the MVR project would be taking us into probably 2022 for completion. It is a change in using our renewable natural gas. That is remarkable and is a very strong financial impact on the company. But the design and engineering phase is going to take most of the rest of this year. So 2021 will be a construction year and I currently would expect to be 2022 we’d get the MVR installed. So that might be accelerated again, because some of the other construction contracts have slowed down and us moving forward has gotten a lot more attention from the contractors and engineers than we otherwise were getting.

In regards to the engineering on the cellulosic ethanol plant, I know you've been working hard on that engineering for more than two years now, I'm sure you're looking for that Indian site moment. Do you have a target date for finishing the engineering plan and submitting them to the U.S. Department of Agriculture?

Yes, most of our engineering is around permitting. So in order to close our project financing, we need what is known as an authority to construct permit, it’s from the air board. And so much of our engineering is simply responding to the air board's let's call it process of reviewing emissions, etc. And in California, we have what's called CEQA, the California Environmental Quality Act, which has to be completed before they issue the authority to construct. So we are working through the last steps of that CEQA and air permitting process. And so when I say engineering, it's not necessarily just a bunch of guys sitting around saying, here's what we're going to design. It's more stringent matter, it's really a very active process with a group of consultants, these permitting issues, which you've probably heard California is pretty strict about these things, we're essentially building an oil refinery. And so to get to the point which we're almost getting approval for the authority construct, literally in the next quarter, I would expect to get that approved is quite a remarkable achievement. As soon as that's achieved, we can then close up our EPC agreement and complete the project financing. So we're currently anticipating project financing in Q1 of next year. And all these plants can be impacted by new orders for shutdown or stay-at-home orders or something like that. But in general, our current process would enable financing close in Q1 of 2021.

Can you provide more details about your financing plan for the cellulosic ethanol plant? I know you've mentioned the U.S. Department of Agriculture possibly being involved and also talked about a municipal bond during the Q1 conference call.

Thank you for listening to Q1 actually. I was wondering whether everybody actually heard that. There are two venues for us to receive 20-year of bond financing. One is our commitment letters already signed with the U.S. Department of Agriculture. That provides 80% of project financing. Aemetis has largely funded the other 20% or received grants for the balance. So we're well-positioned to move forward and close that, that the amount of that USDA financing will be adjusted depending on the final EPC contract, the one that has the maximum price construction. We'll go back to one more cycle USDA. Parallel to that though, there have been a couple of projects that have been funded by municipal bond tax-free financing that have successfully raised substantial amounts of funding in several hundred million dollars per project. And so we are working with investment bankers, have engaged counsel and are well along the process of closing a municipal bond financing that is attractive because of the lower cost obtained through a tax refinancing and it’s a fixed interest rate. So, if the municipal bond market is available to us, it kind of runs hot and cold. And as you can imagine with the current confusion in the market, it’s going through a bit of a transition, but if it is open, we would expect to move forward with municipal bond financing, which is a substantial decrease in interest costs over the life of the project. So we are proceeding with both of them having essentially already a commitment from the U.S. Department of Agriculture. It gives us an opportunity to focus on municipal bond market and if it doesn’t work, then we can just close with USDA.

Thank you. One final question. I’m seeing a record number of companies that are using alternate means of being able to do consulting. Typically like using smart glasses where you don a pair of smart glasses in California, the engineers don a pair of smart glasses and they don’t even have to travel to California. They have got a handful of five years in hand, basically virtual reality link. And we see it going on a lot around the world now with all the restrictions on flights and travel. Have you guys explored that at all?

The smart glasses we use is called iPhone FaceTime so yes, I do think though you are correct in that remote distance communication and collaboration is definitely a rapidly growing segment and running a production plant in which people can’t communicate face-to-face as you can imagine is a bit of a transition for even our company. I think we have adopted well because we were already a global company and already had the discipline in place for how we collaborate across time zones, etc., but certainly tools that can allow people to essentially participate as if they were there. We will see a growing application and industry.

I have been watching a company that makes virtual reality smart glasses for business, called media and their business has literally gone through the roof in the last six months as you can imagine -.

I think it is normal. I appreciate your questions. Thank you very much.

Yes, thank you.

Next we go to the line of Massimo Theorala, private investor. Please go ahead.

Hello, first of all I want to give my compliments for your results. I was really impressed from the fact that you run 100% nameplate capacity and like your competitor you are more or less 50%, 60%, so I’m very glad to see that after all the procedures operationally you are doing very well and as it was pointed out before you are like the only player in all West of United States. It is like the richest part of the world with 100 million that are using their i.e., I will call it handsome ideas. so I’m really glad about the future of the company. I have some questions that I want to portray, I want to ask is it possible to know f you provide like a projection from the second half of 2020 about EBITDA and debt reduction.

We do anticipate that our production rates, which you correctly pointed out are very high especially being in the Western United States were probably the highest production rate of any plant by large margin. I do not have a EBITDA projections for the third and fourth quarters. I know that specific ethanol announced a range of EBITDA that was very strong for the second half of 2020. And they are obviously in a similar business client as us which is expanding production of high-grade alcohol. They are already a USP producer. We are producing a high-grade alcohol, but will not be as USP grade until early next year. But we see this as a transition period in which us obtaining higher margins through value-added products, such as blended gel, which is a very, very high demand right now. And branded frankly packaged products enable us to obtain much the margin otherwise might be obtained by USP. The next couple quarters, we will see these as transition growth quarters for us. And then I wouldn’t be surprised at all to see long-term contracts be announced as we get into the first quarter and end up basically in a similar position as specific ethanol.

Okay, thanks a lot. I want to know another question. So you forecast like the first dollar of revenue of your gas in September 2020, is this correct?

Yes, it is correct. Yes our biogas project is being commissioned and it will start generating revenue next month.

Perfect. And what about Mitsubishi about this project.

We would anticipate that would start to impact Q4 revenues. We are currently being restricted by some of the international travel restrictions are frankly impacting our ability to condition the project. And so over the next couple of months we expect to get that.

Perfect. Then my biggest worries about the company, like three months ago, the last quarter was not representative of company, because you are getting some because you are a 15% interest rate. So I would like to know what are the action that you are going to do about the decreasing of these expenses If you think ever in the next, cash flow. So if you have high cash flow you can pay back debt, what do you think to do about that?

We have already raised $39 million of EB-5 funding, which is approximately 1% interest rate. And we, I believe announced that we received the national interest expedite which is unusual identification that our project is strategic to the government of the United States. And that national interest expedite allows our EB-5 investors to have their applications reviewed and adjudicated in a three to six-month time period rather than an approximately three to five-year time period for all other projects. And so we have seen substantial increase in the number of interested investors and are proceeding forward and expect cash deposits to occur this quarter. And the total number of investors that our job studies shows that we could have is a total of 200 investors. The average amount per investor is $900,000 per investor. So, as we proceed forward we have a substantial fundraising opportunity with 200 investors at $900,000 per investor. We have already closed eight investors that occurred in 2019 and we anticipate to close gross margin from more as we continue forward for the process.

Okay. The last two question. The question, one of the reasons because I am basically and maybe the same like investment manager is because alcohol I believe in you and on the management team and I’m very glad about these amazing results. The second one is will take you into that like what is happening in the electric car market, there are some companies in the electric car market that are like huge valuations because like the U.S. government supporting like electric cars. So if there is one thing that the U.S. government has to support those ethanol facility care goes to the owner. I don’t live in the state and probably there is also some people from California say, so I want you to know, last interview about these possible incentives that maybe or will be given to their sector?

That is a very good question, actually. And if you have the answer, please email me after the call. The reality is that no one really knows yet. What the incentives are going to be for ethanol in the United States. There is a proposal for a $0.45 per gallon funding that the company in the United States Department of Agriculture. It has not passed through Congress yet, but would probably be an item that would be included in this current COVID-19 economic recovery package. But I wouldn’t say with a high degree of confidence that it is going to occur. Since our plant produces approximately five million gallons per month throughout this entire cycle, $0.45 per gallon for, let’s say a three-month period could be a significant amount of money; we would be talking about $7 million or $8 million in so funding program such as that. Separately, probably more relevant to our underlying business is in terms of the fuel standard, and not granting waivers to oil companies, especially highly profitable companies that do not comply with partial funding and that is pending right now at the EPA. And I would expect between now and the end of the year, we will see some developments concurrent with the U.S. federal government imposes a stable fuel standard. By enforcing renewable fuel standards we end up with a fundamental market access that we don’t have. Though refineries are allowed to just continue using gasoline and not blending modules. And essentially, in California, for example, we have a 90% mandate for petroleum, which in the inverse means a 10% ethanol blend. And on a national basis, E-15 approved if we can see an enforcement of renewable fuel standards we will see a growing market of which we have not seen literally for five years due to these theories to enforce. So I see it as constantly cash funding with the ethanol industry deserves. I think we just deserve market access. We need sort of blender pumps that allow consumers to decide whether they want lower cost domestically produced renewable low carbon fuel or whether they want to use imported high cost high carbon polluting material from some foreign entity and that choices currently made by government by blocking the use of fossil fuels in the United States.

I have a question about India. As mentioned earlier, California has a population of about 40 million. With such a large market, I’m curious why you aren’t applying the same strategy in India, which has over 1 billion people. Why not expand in the Indian market as you do in the United States, considering its immense potential?

The Indian market is an export market opportunity for us and because we are probably the largest biodiesel producer in the country, and certainly, easily one of the largest refined glycerin producers we have very good market access to India. Currently, the next batch to our plants from exporting India are not as attractive as selling our high-grade ethanol right here in California. But certainly, I agree with you, there are multiple markets that have high margins for a USP grade sanitizer alcohol and the export markets are very attractive, but we have to be in probably the most attractive sanitizer market of the world right here in California and we will be feeding supply focusing our efforts.

Last one. So another thing that I was really impressed that you like it sold $2.6 per gallon if you are selling in this period. Just to understand in the July and August, do you project to sell a more or less the same quantity that you are using seem to be stable. Do you think that July your orders will increase also because you have new products of the company in order to sell the product? Do you mean to sell the base user, what is like different for July or August compared to May and June, because as you mentioned before, you didn’t provide the answer, instead of other companies but just to understand if more or less the number of gallons sold at this stage so I can do some math on my own.

The spring of 2020 had a very large spike in demand. April, May, which were two of the three months of 2020, allowed our company participated as you know, in March, we were not allowed to participate in making hand sanitizer until the 27th of March at which point the rules changed. So we really had only about two months out of the second quarter - sorry, in that, in the spring only had a two months, really April and May in which the rules were very lax. Starting June 1, the FDA set out standards for high-grade ethanol alcohol, which substantially reduced the number of suppliers that can supply into the industry. And we mentioned that we started food grade alcohol in the month of June to Canada, as well as to customers in the U.S. And so, we see a transition happening in which we will be producing more value-added products such as blended gels and liquids, shipped in totes rather than bulk alcohol. And we see longer-term contracts. One is a very large contract we are participating in, that is a government agency. So this is a transition period in which we see as longer-term commitments. And certainly a lot of competitors have had to leave the industry. Basically, all the Mexican competitors have left the industry and that to participate in this big run up in the second quarter. So like Pacific Ethanol, we see longer-term arrangements being sort of more common and fewer suppliers that can meet the needs.

Yes. Thank you for taking up my follow-up questions, going back to the economics of hand sanitizer ethanol versus fuel ethanol. What is the price differential that you could get per gallon?

Fuel ethanol versus sanitizer alcohol price differential. Is that what you asked?

Yes. Yes.

Price differential between the two ranges from $3 to $8 per gallon. Yes, probably $9 per gallon, actually $3 to $9.

Great. And then going back to you know you mentioned that biogas, I guess the plant will be starting up in September. Do you think it will be a major contributor to 2020 results?

I wouldn’t say a major contributor. No, it will definitely I think for institutional investors provide good visibility into what 2021 and future years looks like. It is a pipeline business where you are clipping coupons. There is really no cost of goods. Right. The gas comes for free out of the goon. And there is a little bit of electricity involved with processing, but largely the cost of operation are nominal and the cost of labor is virtually nothing. Because there is no real manual labor involved with it, it is a little bit of a maintenance support. And so it is a very, very high margin business. It is an 80% plus percent margin business and a recurring cash stream that goes on for 20-years. These are 20-year contracts. So I think the discussions we are going to have with investors will be around the amount of visibility they have on these 20-year contract relationships with very low cost and very low uncertainty around operating components. So, I think we will get an evaluation from that project that will I think be very, very substantial. So, we signed 17 dairies, but I mentioned we supply a hundred of them. So I wouldn’t be surprised at all to see an expansion of that beyond 17 dairies. And, as you do the math around 30 dairies or even 50 dairies it becomes a very, very substantial cash flow stream and a significant amount of equity value to us.

Again you said you have two dairy by the end of this year and an additional 15 next year.

Yes. Actually, two dairies by the end of next month and then we are adding another 15 dairies against subject to COVID-19 timing over the next 18-months to build 15 dairy digesters would certainly be a goal we would have and we will see how our contractors can perform against that goal. Our equity funding relationship with that capital has been a strategic advantage for the project, the third eyes a $3 billion plus investment firm who funded our company for more than 12-years. And so we have a well established relationship. We think very, very highly of the relationship and worked diligently to have that as a strategic capability that we can bring to the table that other biogas producers cannot. And so our initial relationship was $30 million in signed equity funding. We are expecting to increase that to $55 million. And so we are able to move very, very quickly on these projects, save a lot of money to take advantage of price declines that occurred in the raw materials, for example, that had substantial cost reductions this past quarter. And, hopefully, by the end of next year, exited with this first phase one and phase two completed and be working on phase three at the time.

Great and then on my last question is if you do close the rural project financing in the first quarter of 2021, when do you think you would be able to have the plant completed and operational?

It depends on the EPC final contractor view of things, but our strategy would be to try to pull it in an 18-month timeframe. And what we have seen is it is largely around how much other activities going on. So if we have long lead times on certain components, because there is a lot of activity in the marketplace, that extends our project. Because of the COVID-19 crisis we have seen some of these branches potentially shorten and obviously the impact in our project.

Great. Thank you for answering my questions and I wish you guys good luck again.

Okay. Thank you. Operator.

There are no further questions at this time, I would like to turn the floor back over to management for closing comments.

Thank you to another shareholders and analysts and others for joining us today. We look forward to talking with you to continue our dialogue about the growth opportunities in Aemetis.

Thank you for attending today’s Aemetis earnings conference call. Please visit the investors section of the Aemetis website where we will post a written version and audio version of this Aemetis earnings review and business update.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.