Aemetis, Inc Q1 FY2021 Earnings Call

Welcome to the Aemetis First Quarter 2021 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 conference is being recorded. It is now 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 first quarter 2021 earnings review conference call. Joining us for the call today is Eric McAfee, Founder, Chairman and CEO of Aemetis, and Andy Foster, President of Aemetis Advanced Fuels. We suggest visiting our website at aemetis.com to review today's earnings press release, corporate presentations, filings with the Securities and Exchange Commission, recent press releases and previous earnings conference calls. The presentation for today's call is available for review or download in the Investors section of the aemetis.com website. Before we begin our discussion today, 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 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 the call today 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 measures is included in our earnings release for the quarter ended on March 31, 2021, which is available on our website. Adjusted EBITDA is defined as net income or loss plus to the extent deducted in calculating such net income, interest expense, income tax expense, intangible and other amortization expense, accretion expense, depreciation expense and share-based compensation expense. Now I'd like to review the first quarter results for 2021. Revenue during the first quarter of 2021 increased to $42.8 million, compared to $39.5 million for the first quarter 2020. Our North America operations in the first quarter of 2021 compared to the first quarter 2020 experienced steady ethanol sales volume, with an increase in the selling price from $1.56 per gallon to $1.91 per gallon, and an increase in the delivered corn price from an average of $5.20 per bushel during the first quarter of 2020 to $6.87 per bushel during Q1 2021. Gross loss for the first quarter 2021 was $3.6 million compared to a $400,000 loss during the first quarter 2020. Losses during the first quarter of 2021 resulted from a crush margin that was weaker than the same period of the previous year. Within the first quarter 2021, the crush margin improved during the quarter as ethanol rose from $1.40 per gallon in January 2021 to more than $2.90 per gallon today. Corn pricing and supply are ongoing supply chain issues for the ethanol industry. Selling, general and administrative expenses increased to $5.4 million during the first quarter 2021 from $3.9 million during the same period in 2020, driven primarily by compensation expense, insurance premium increases, as well as professional fees as we execute our five-year growth plan. Operating loss was $9 million for the first quarter 2021 compared to an operating loss of $4.5 million for the same period in 2020, much of which is from the effect of the difference in the ethanol crush spread between the periods. Interest expense, including accretion of Series A preferred units in the Aemetis Biogas LLC subsidiary increased to $7.2 million during the first quarter 2021 compared to $6.9 million during the first quarter 2020. Additionally, our Aemetis Biogas initiative recognized $1.9 million of accretion of preferred payments on its preferred stock during the first quarter 2021 compared to $960,000 during the first quarter 2020. Net loss increased to $18.1 million for the first quarter 2021, compared to a net loss of $12.1 million for the first quarter 2020. Cash at the end of the first quarter 2021 was $15.8 million compared to $592,000 at the close of the first quarter 2020. Cash strengthened from proceeds of $62.4 million of stock sales, which was used to repay $36.9 million of high-interest rate debt, invest in capital projects and fund working capital for operations. That completes our financial review for the first quarter 2021. Now, I'd like to introduce the Founder, Chairman, and Chief Executive Officer of Aemetis, Eric McAfee, for a business update. Eric?

Thanks, Todd. As we discuss the results from Q1 2021, I encourage you to consider viewing the Aemetis corporate presentation, which can be found on the homepage of the aemetis.com website. Aemetis was founded in 2006. We have grown into four lines of business focused on producing renewable natural gas from dairy biogas, with a negative 426 carbon intensity for transportation fuel to replace high carbon intensity diesel and gasoline. Renewable fuels including low carbon and negative carbon intensity ethanol, high grade distilled biodiesel, renewable jet and diesel using cellulosic hydrogen for waste wood and byproducts including carbon dioxide and corn oil enhanced by carbon dioxide injection wells, we plan to sequester CO2 and significantly reduce the carbon intensity of our products, 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 the largest ethanol plant in California, a 65 million gallon per year fuel ethanol plant located in Keyes, California, near Modesto that we leased in 2009, retrofitted for 18 months, began operations in mid-2011 and have owned since 2012, when the original shareholders converted their ethanol plant ownership into about 10% of the common stock of Aemetis. 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 Kakinada. We have operated in India since 2007, we founded the India Biodiesel Manufacturers Association, and our Managing Director serves as Chairman of the Association on behalf of the five major biodiesel producers in the country. Before discussing our businesses, I'd like to comment about the values and the culture of our company, as well as the social and environmental impact of our production plants and development projects during a difficult time in the U.S. and India due to the COVID pandemic, and the lack of enforcement of federal renewable fuels laws by regulators. We are a company that spends their time working to improve our communities. Our investments create jobs, feed and house hundreds of families that depend on us to sustain and expand our business. The products we produce provide a positive and meaningful contribution to reversing global climate change. From truck drivers in India that move our feedstock and biofuels, to Midwest farmers that grow the crops and supply our California biofuel plants, to the workers that maintain and expand our $300 million of production plants worldwide, as well as the 160 Aemetis team members and the several hundred people that work to support our businesses, they rely upon us to operate every day, despite external events such as financial crises and policy changes that impact our business. Despite the extraordinary circumstances of the past year, we have maintained 100% employment at all of our facilities worldwide. We seek to build a strong sustainable company by supporting a resilient supportive corporate culture among our teams, who work together to create value during times of uncertainty. During the past 15 years, this company culture and value system has endured oil price crashes, stock market collapses, financial market downturns, political uncertainty, and the active undermining of federal and renewal fuel laws by multiple administrations from 2014 to the present time. Recent changes in federal leadership have been recognized by Wall Street as a significant positive trend for Aemetis and the renewable energy sector. But our company was founded in 2006 with the same goals and values as we are executing upon today. Though the stock market has only recently responded favorably to the unique below zero carbon intensity leadership position held by Aemetis in the California renewable biogas and biofuels market, our team has worked tirelessly for longer than a decade to build the fundamental foundation of our business. In that respect, we like to say that we are an overnight success that took 15 years of hard work to build, and are now simply accelerating our leadership position as we execute the five-year plan that was announced in Q1 2021. Financing this 15-year growth process to become about a $200 million revenue business without heavily diluting shareholders was not easy. It took hard work, sacrifice, and extreme commitment to our shareholders by our management team and our Board of Directors. Our entire top management team has more than 12 years of tenure at the company, with our President Andy Foster joining the company during the founding in 2006, and our Head of International Sanjeev Gupta joining in 2007. We have one Aemetis Board of Directors member who has served for 14 years, firmly serving as the Secretary of the U.S. Department of Agriculture. And two of our Board members were formerly long-term executives at Chevron Corporation. Our Audit Committee Chairman lead independent director has served as the Chief Financial Officer for five public companies, each of which had more than $1 billion in revenues, and the largest had $16 billion in revenues. We have a deeply committed and experienced team that has been working for many years to execute a long-term vision and build value for shareholders, regardless of the external challenges that have come our way. In the face of external challenges and the need for growth capital, many of our competitors decided to sacrifice shareholder value for management compensation or executive comfort, entering into highly diluted equity transactions or convertible debt financings to fund losses or projects. In the past 15 years, we have done neither, avoiding highly dilutive equity offering or convertible debt financing. To achieve the goal of protecting Aemetis shareholders from dilution, I've personally guaranteed more than $200 million in debt that has funded Aemetis since 2008. This personal guarantee benefited Aemetis shareholders by allowing shareholders to receive the benefit of funding with minimal dilution and has funded our growth through about $200 million in revenues. I've received no stock options since the inception of the company as compensation, making the decision every year to allocate my options to our employees to maximize their ownership in the company. However, like other shareholders, I have benefited from avoiding large equity dilution since my wife and I are the largest shareholders of the company through our holding company McAfee Capital. While we have great upside potential, my personal guarantee since 2008 has demonstrated commitment to the long-term value of Aemetis. This is consistent with the values I spoke of earlier. And I'm proud that our shareholders have had the opportunity to participate in a higher valuation of the company stock in recent months. The $200 million of senior bridge financing has now been significantly reduced by $62 million of new equity received at high valuations during Q1 2021 and our cash balance at the end of Q1 2021 was $15 million. I still have more than $100 million of personal guarantees in place related to the Aemetis senior bridge debt. But we're well on our way to achieving strong operating cash flow that will further reduce or refinance the high-interest bridge financing that funded our past growth. Fortunately, the positive macro trends for renewable fuels have opened up low-cost long-term, U.S. Department of Agriculture, Department of Energy and tax-free municipal private activity project financing opportunities for Aemetis. Less experienced investors and research analysts who may not fully understand this process of startup and rapid growth, utilizing short-term high-interest rate financing, which has been refinanced using long-term low-interest rate debt. Please note that this growth funding technique is not unique to Aemetis. It has been successfully utilized by other prominent companies, notably Tesla, to minimize shareholder dilution while funding $15 billion in debt for rapid growth, then repaying the debt with low-interest rate financing and equity offerings at a very high valuation. We're deploying similar well-established financing tools, just doing so with far fewer zeros. As of March 31, 2021, the balance sheet shows that we have already achieved significant progress in repaying our high-interest rate bridge financing. Yet, even after the $62 million of equity funding during Q1 ‘21, there were only approximately 29.8 million shares outstanding at Aemetis. We value shareholders as a top priority, including our own employees who are meaningful shareholders in the company. I would like to mention another aspect of our company culture at Aemetis, to serve our communities with our products and our leadership. Our 90 employees in India have been severely impacted by the COVID pandemic with the lockdowns in India last year and another wave of COVID infections this past month, which has affected almost every family related to our company. However, our India plant workers have been helping the local community serving food to migrant workers that are stranded away from their homes when the COVID lockdowns occurred. From setting up food stations to serve migrant workers who are homeless and lining the highway near our Indian plant, to caring for our own workers with strict and effective safety measures during the COVID crisis. The leaders in our company have shown courage, compassion, and a concern for others ahead of themselves. Our Keyes plant team has not stopped working for a single day during the year-long pandemic despite significant local surges in COVID infections. They quickly pivoted to producing hand sanitizer alcohol at the very moment California's economy was shutting down. Additionally, the renewable fuel products we produce go to the very heart of creating safer and healthier communities through cleaner air and reduced dependence on outside sources of energy. Though many investors may not fully understand or appreciate why so many of our employees have made the personal sacrifices and long-term decisions that built the company to this advanced stage, I hope it is clear that the resilience and persistence shown by our team is exactly why we have been able to execute and achieve key milestones in the midst of the global pandemic. Such as obtaining a California Environmental Quality Act permit for a 32-mile expansion of our dairy renewable natural gas project, or receiving 19 separate air permits for the jet fuel diesel project, and many other achievements realized in the past year. The circular bio-economy created by our California dairy renewable natural gas project, our soon-to-be solar powered ethanol plant, our biodiesel plant with glycerin byproduct, and our renewable jet diesel plant under development to use cellulosic hydrogen from waste orchard wood provide significant benefits to the environment and local communities. Each project provides large capital investments into local communities while creating thousands of new jobs in agricultural and rural areas. During the fourth quarter and full year of 2021, Aemetis achieved important milestones toward revenue growth and sustained profitability in each of our four lines of business. Now I'd like to ask Andy Foster, President of the Aemetis North America business to review highlights of our renewable natural gas and ethanol businesses. Andy?

Thanks, Eric. At Aemetis, we're focused on producing below zero carbon intensity products, including the production of negative carbon intensity renewable natural gas and renewable fuels. Our products 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 costs by using waste materials as feedstock. An excellent example of a low carbon sustainable circular bio-economy that Eric spoke of is our dairy renewable natural gas project, which is designed to have many synergies with our Keyes ethanol plant. Our Keyes ethanol plant uses agricultural feedstock that absorbs CO2 from the atmosphere during plant growth, from which our production facility produces ethanol and animal feed. The Aemetis ethanol plant delivers 65 million gallons per year of renewable ethanol, but also produces about 2 million pounds per day of wet distillers grains that supply approximately 80 local dairies and feeds more than 100,000 cows. Methane, commonly known as natural gas, is a very potent greenhouse gas that is up to 80 times more destructive than carbon dioxide in warming our planet's atmosphere. Approximately 25% of California’s methane emissions come from the newer waste ponds on dairy farms. To reduce these 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. The dairy cows generate waste that is captured in the covered lagoon anaerobic dietary digesters that we're currently building at dairies, producing biogas that is cleaned up, pressurized and processed through a unit at the dairies to remove hydrogen sulfide. We then transport the biogas via an Aemetis owned pipeline to Aemetis ethanol plant, where it is used in ethanol production or we upgrade it and compress to produce renewable natural gas. This RNG can fuel RNG trucks at our fueling station at the Keyes plant to carry our wet distillers grains to the 80 dairies and biofuels to customers throughout Northern California. This process is a sustainable negative carbon intensity circular bio-economy that productively uses dairy waste as fuel and significantly reduces air pollutants in the community. Trucks can also be fueled by our RNG at any compressed natural gas station connected to a utility pipeline in California, as our RNG interconnection to the PG&E pipeline enables us to send RNG to other RNG fueling stations that we build or are owned by others. This end-to-end system is scheduled to begin operating by the end of 2021. In September 2020, we completed the construction of the first two of 17 covered lagoon digesters in the Aemetis biogas central dairy digester project, including on-site dairy biogas cleanup and pressurization, a 4-mile pipeline that is owned by Aemetis and a boiler unit to use the biogas' process energy at the Keyes plant in the production of ethanol. During Q1, the California Air Resources Board issued a reduced carbon intensity fuel pathway for the Keyes ethanol plant utilizing a negative 426 CI score for our biogas compared to a positive 100 carbon intensity for petroleum natural gas. Today, Aemetis has been awarded about $23 million of grants from the California Energy Commission, the California Department of Agriculture, and PG&E and other government agencies for the dairy biogas system and production of renewable natural gas. In 2019, after more than a year of project development and financing work, we announced the $30 million of equity financing to fund our biogas project. In addition, we are in the process of obtaining long-term debt funding under the USDA Renewable Energy for America program for more than $75 million of USDA guaranteed loans that will complete the build-out of the 17 dairies. This 17 dairy project is scheduled to generate more than $40 million per year of operating cash flow under 25-year dairy supply contracts when it is fully operational in mid-2022. The preferred equity investor in the biogas project is automatically redeemed by an allocation of 75% of operating free cash flow until the preferred receives $3 for every $1 of equity invested. Aemetis recovers operating costs and 25% of free cash flow from inception, subject to covenants. The redemption of the biogas preferred investment is expected to be completed by the year 2025, after which Aemetis receives 100% of cash flow from the project generated by 25-year loan agreements with dairies. Now let's take a moment to discuss progress at our California ethanol plant. Revenues from ethanol production increased to $42 million in Q1 of 2021 despite lingering COVID issues early in Q1 that caused lower ethanol demand, while corn costs increased significantly starting in the second half of 2020. However, by late in Q1 2021, the price of ethanol had accelerated rapidly and is now more than 100% higher than January of this year, as the new administration and EPA have shown a commitment to enforcing the Renewable Fuel Standard. As the economy began to reopen due to the availability of vaccinations in Q1 2021, fuel ethanol demand began to recover. Since mid Q2, the Keyes plant has been running at full capacity in order to meet the significant demand for ethanol in California, particularly driven by the severe winter weather in the Midwest that caused major disruption to the railroad system and supply chain used by Midwest ethanol producers, but mostly reflecting increased consumption of gasoline and ethanol as economic activity has increased and Californians began driving more as they start to return to work. The Aemetis ethanol plant has been operating at maximal sustainable production rates while building the following projects to increase cash flow by approximately $23 million per year once completed. First, completing the installation of a new $8 million zeolite membrane dehydration unit from Mitsubishi that will reduce natural gas use at the alcohol plant by replacing our molecular sieves, which use a significant amount of petroleum natural gas to operating with electrically powered equipment. This upgrade to an electric dehydration system will reduce the carbon intensity of our fuel and is partially funded by a $1.5 million energy efficiency grant. Second, installing five new stainless steel tanks for USP and beverage, high-grade alcohol storage, and load out which will increase our storage capacity by more than 250,000 gallons and provide flexibility for operation of the new electric ethanol dehydration system at the plant. Third, installing a $12 million solar panel and microgrid array with battery backup to further reduce natural gas consumption by replacing carbon-based natural gas with zero CI solar electricity, while optimizing energy used throughout the ethanol plant, primarily funded by an $8 million California Energy Commission grant. And fourth, designing and building an electrically driven Mechanical Vapor Recompression, also known as MVR system to significantly reduce petroleum natural gas use, which equates to reducing approximately 100,000 pounds of steam per hour, partially funded by a $6 million California Energy Commission grant. And also, we've applied for a PG&E energy efficiency grant as well. When completed, these upgrades are designed to potentially eliminate petroleum natural gas use at the alcohol plant, reduce our steam-driven cogen system and save up to $8 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. The combination of this new electric membrane dehydration system, zero CI solar power and the electric MVR system is expected to result in a double-digit reduction in the carbon intensity for the fuel process at our ethanol plant in Keyes.

Thanks, Andy. Let's review our biodiesel business in India. Last quarter, our Universal Biofuels subsidiary in India bid on a portion of a newly issued $900 million biodiesel purchase tender offer for about 225 million gallons by the three Indian government oil marketing companies. In the past, the OMC bidding process required a one-year fixed price for biodiesel. However, the OMC bidding prices for biodiesel were 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 Aemetis, the oil marketing company 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 the air quality and reduce carbon emissions in India. The second wave of COVID-related shutdowns has delayed the ramp-up of production at the India plant, but we are well positioned for a rapid revenue increase as large government purchases of renewable biodiesel occur to meet climate change and air quality goals once the current COVID crisis facing India begins to subside, hopefully in the coming weeks and months. Let's discuss our carbon zero renewable jet and diesel fuel project using negative carbon intensity hydrogen in Riverbank, California. We're pleased that the Aemetis carbon zero biorefinery under development at Riverbank near Modesto continues to achieve major milestones including the significant development we just achieved through the issuance of 19 separate air permits for our Riverbank refinery, otherwise known as the ATC or Authority To Construct. Though further amendments are planned as a part of final construction engineering, the ATC air permit allows us to move forward with engineering, EPC contractor agreements and project financing. During Q1 2021, we signed an agreement to retain Koch Project Solutions as the project manager and EPC which has accelerated the pace of project development toward construction. The Riverbank plant is designed to produce 45 million gallons per year of renewable jet and diesel, generating more than $230 million in 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 as part of our five-year plan to generate approximately $460 million in revenue and $130 million of annual positive cash flow from renewable jet and diesel production. The Riverbank plant is designed to use waste orchard wood and other waste biomass such as dead forest wood to produce cellulosic hydrogen, which will hydro treat vegetable and other renewable oils to produce jet and diesel fuel. Waste wood has become a major challenge for California as the state is facing a severe drought and has prioritized forest management to reduce the impact of damaging wildfires. Let's finish with a brief review of our Technology Development Group. Headed by Dr. Gautam Vemuri as our VP Technology Development, the Aemetis Technology Development team 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. This important production process has been exclusively licensed to Aemetis 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 Aemetis Keyes ethanol plant, displacing expensive and carbon-intensive corn starch as feedstock to produce ethanol. The remaining lignin can be used to produce cellulosic hydrogen for the hydro treatment of vegetable and other oils to produce renewable jet and diesel fuels. A $3 million California Energy Commission grant was awarded to J Bay and Aemetis, which partially funded the years of collaborative work and lab testing that led to the granted patent. Last Friday, we were notified that Aemetis project proposal was selected by the U.S. Department of Energy to apply for a $1 million grant and a follow-up $15 million to $40 million grant to fund a production plant to extract sugars from locally sourced orchard and forest waste wood. We expect commercial operations to extract cellulosic sugars from waste wood when the Riverbank renewable jet and diesel plant becomes operational. These waste wood sugars are expected to generate more than $5 per gallon of revenue at low feedstock costs when used to replace corn starch in our Keyes ethanol plant. In summary, Aemetis is now implementing a diversified portfolio of negative carbon intensity projects from dairy renewable natural gas and low carbon renewable ethanol to renewable jet and diesel fuel. We are rapidly deploying new projects and adopting both proven as well as new technologies to reduce carbon intensity and input costs, thereby significantly increasing the value of RNG and renewable fuels by maximizing LCFS, RFS and IRS 45Q credit values. Our company's values remain unwavering, a long-term commitment to building value for shareholders, empowerment and respect for our employees, and making significant and positive contributions to the communities we serve. The foundation upon which we have been executing upon our five-year plan, despite the challenges of the COVID pandemic and other external factors, remain solid, and we believe will result in exciting growth opportunities for Aemetis. Now, let's take a few questions from our call participants. Operator?

Thank you, Mr. McAfee. We will now be conducting a question-and-answer session. And we'll go right to the line of Manav Gupta with Credit Suisse.

So my first question here is that when I look at your business growth plan, and in the near term, the biggest growth is coming from dairy RNG. Is there any reason why I should be worried that Aemetis will not be able to hit those dairy RNG growth numbers? I think our EBITDA guidance is $45 million 2022, going up to $110 million 2024. So is there any reason, wins, LCFS, competitors, why you think there could be an issue with you hitting that guidance?

At this point, we have addressed some significant obstacles, including the approval of the California Environmental Quality Act permit for our pipeline, which we announced was granted recently. We have already secured essential contracts with the dairies, covering up to 17 dairies that pose challenges over the next year. Therefore, I would say the major project challenges are behind us. We are moving forward with the Renewable Energy for America program and have a USDA loan, for which we secured a $125 million financing commitment letter. We have invested approximately $30 million of equity in the dairy biogas process, and there is no debt in the subsidiary. The next step involves obtaining funding for the USDA refunding, which is a standard program that typically takes three to six months from application to completion, and we are well into that timeline. If this progress continues as expected, I foresee no interruptions in our execution over the next 18 months, with ongoing funding thereafter. We are not likely to need additional equity or similar contributions, as refinancing is the way forward. This project is very appealing as it represents the lowest carbon renewable fuel available, with a rating of negative 426. There are other agencies and tax-free municipal markets that are very enthusiastic about this project. I anticipate we will continue working with USDA financing for the next year or so, and there may be opportunities for tax-free long-term financing afterward. Currently, we are in the financing execution phase, and I believe we have the project milestones well under control.

And then Eric, what is not in the guidance is the carbon capture and sequestration, which came out a little bit after the guidance. So if you could talk about that opportunity, from your perspective, how much you can capture and sequester. But as I understand the size of the facility is much bigger than what you can utilize. So is there an opportunity to get third-party carbon capture opportunity? I mean, what kind of opportunity is there to capture third-party carbon and put it in the ground?

You were correct. The Stanford University Center for Carbon Capture Study reviewed 61 of the largest carbon emission sources in California and found that our sites could inject about 1 million metric tons of CO2 per year at our Keyes plant. Combined with the biogas carbon we produce at 52 dairies, which is around 200,000 metric tons of CO2 annually, this leaves us with approximately 800,000 metric tons per year that could be captured from third parties, specifically oil refineries identified in the Stanford study as strong candidates for sequestration. We have already met with major oil refiners in California, and there is significant interest in collaborating with us and leveraging the extensive EPA process we are navigating. Our CO2 pipelines will be relatively short, typically just a few hundred yards to a couple of miles, particularly when compared to the large pipelines being proposed, such as the $2 billion pipeline from Iowa to North Dakota. In our case, our pipeline costs could be minimal, possibly just a couple of million dollars if we needed to extend just 1 or 2 miles. This positions us uniquely to execute quickly without delays for permitting. Third parties represent an opportunity for us to utilize existing wells while we transport the CO2 via rail or truck; our biogas can also fuel our trucks. Given the favorable economics of biogas, it remains a low-cost fuel option. Our plan is to establish partnerships with oil refiners, focusing initially on those in the Bay Area, though the economics also favor Los Angeles refiners. We expect to provide updates on these partnerships in the coming quarter.

Next, we go to the line of Derrick Whitfield with Stifel.

Thanks and good afternoon, all. And also thanks Eric for your prepared remarks on your Board and your company's culture and values. Perhaps beginning with that, there's been a lot of undue attention recently focused on your history in relationship with Nevo Motors. For the benefit of investors listening in today's call, could you speak to that history and put it in perspective? And then also speak to the opportunities you see in your low-cost investment in Nevo Motors?

Sure, Aemetis produces renewable fuels that have a lower carbon footprint. To effectively monetize the biogas and ethanol we generate, it’s advantageous to focus on trucks since they provide greater value by displacing diesel rather than gasoline. Currently, no truck manufacturers utilize ethanol as a range extender for electric trucks. This is largely due to ethanol engines lacking the necessary torque and power compared to diesel engines, which is why most large trucks on the road are diesel. Additionally, Aemetis does not have the infrastructure to develop trucks. Therefore, we are committed to generating carbon negative fuels and have presented a solid strategy to leverage our strong position as an ethanol supplier to dairies and our capacity to produce biogas. With my background in venture capital and founding multiple companies, I recognized the need to invest in technology for electric trucks with ethanol range extenders, creating a new market for ethanol in the U.S. We decided that Aemetis should not directly pursue this, so we encouraged one of my portfolio companies to get involved, and they were excited about the opportunity. Our partnership matured to the point where Aemetis can add significant value without having to invest cash in their equity. We have a significant facility in Riverbank, which has the capacity and infrastructure that a truck manufacturer might need. We also have office space available, and we can supply carbon-negative renewable natural gas, which is a valuable asset for any renewable natural gas truck company. Our shareholding is below 20% to protect our balance sheet and income statement from consolidating risks, while still maximizing our equity upside. If investors look at similar companies like TuSimple and Plus.ai, they see substantial valuations. Nevo Motors has potential in the electric trucking market, especially with the emphasis on carbon-negative range extender fuels. Essentially, we're working towards overcoming the blending limits of conventional fuels, allowing trucks to be filled solely with ethanol or renewable natural gas. Does that address your question, Derrick?

It did. Thanks, Eric. And then as my follow-up. I wanted to focus on your carbon zero project. Could you speak to market offtake interest in that project and comment on when you simply be in a position to announce offtake commitments?

We are currently working on agreements with two major oil refining companies that have a strong marketing presence in California. They are among the largest suppliers of diesel and renewable diesel in the state. I anticipate that the necessary documentation, which is progressing at the speed typical for major oil companies, should be concluded within the next several months. While we don't have control over the lawyers at these companies, we have received a strong indication of interest with no one expressing disinterest. We have formed various strategic partnerships with multiple points of contact that align well with our business goals, and we are eager to move forward with these plans.

Our next question or comment comes from the line of Amit Dayal with H.C. Wainwright.

With respect to the dairy digester deployments, can you give us an update on how many are deployed now? And I know you have provided some color on how the revenue recognition for this looks. But if you could remind investors listening in, that would be very helpful?

Sure. We've completed two dairy digesters, a 4-mile pipeline. And Andy, why don’t you give, how we're doing over there?

Yes, we currently have two operational digesters supplying gas to the ethanol plant for processing energy. Additionally, we have five more that are mostly through the permitting stage and are set to begin construction in the next 30 to 60 days. By the end of this year, we expect to have 10 digester projects under construction. We are also starting construction on Monday for our gas cleanup hub at the Keyes facility, which will treat gas from the dairies using an Air Liquide membrane system before connecting to the PG&E pipeline or our CNG station at the ethanol plant. All necessary permits have been secured, and we will begin pouring the foundation next week, expecting completion by late second quarter or early third quarter. Overall, progress is on track, although the counties are experiencing delays in processing permits due to the increased workload from various projects, especially post-COVID. Fortunately, we have established good relationships with them, which is facilitating the process. To summarize, we anticipate having 10 projects underway by the end of this year, with five of those nearing completion by year-end or the start of Q1 next year.

And with respect to biodiesel sales in India, it doesn't look like there were any sales in 1Q. Is this because of the change in the bid process or is it because of other reasons?

It’s primarily driven by COVID. The bid process has actually improved to benefit us. But there are some really strict measures that had to be done to protect our employees and vendors in India.

Understood. And your presentation, Eric has around $52 million coming from India biodiesel sales for '21? Is that still something that you think is achievable or should we sort of adjust our expectations for biodiesel revenues this year?

I believe COVID will affect this year. When fully operational for 12 months, it's a $168 million operation. To be honest, it all depends on how the COVID situation and the OMC tender process unfold in the second half of this year; we could definitely meet this year's expectations. This is only a small portion of our total operating potential. The uncertainty really lies in how the COVID situation impacts India. As you may know, the second phase has been quite severe for them. However, their recovery could also be significant once the vaccine distribution begins. At this point, I wouldn't make any changes. We may reassess in the third quarter when we have more clarity. But we are prepared to start the plant and operate at full capacity right from the start, contingent on these external factors.

And with respect to sort of managing the crush spread, etc., for that business right now, is there anything you're doing unique or are there opportunities to manage some of these things better? Or are we just sort of dependent on volatility in the commodity space right now or the ethanol margins?

Andy, you want to take that?

Yes, I'd say unfortunately, I wish there was more we could do. I think hedging in this kind of a market right now is a pretty dangerous strategy because we're not located near the corn. I think if we were in the Midwest, some of the Midwest producers are able to do that because of their unique situation with local corn bases. But we're just not in that position. I think I'd say, on the upside for us when we've been through a similar experience, and I would say it was in 2016 or...?

2013, half of...

Due to the drought and other events causing a shortage, we collaborated with J.D. Heiskell, our corn merchandiser based in Omaha, which is a reputable company with a century of experience. They can source grain from elevators across the Midwest, and that year, we obtained grain from approximately 25 different locations. This gives us a significant advantage in the market. Midwest plants are primarily reliant on locally sourced trucks for their grain; once they deplete their local supplies, they have no alternatives. Recently, I have spoken to several Midwest producers who expressed their desire to be destination plants like us because we can locate and import corn from the Eastern Corn Belt if necessary, even though it can be costly. This adaptability is a critical advantage for us during what is anticipated to be a highly volatile and challenging year in terms of corn supply. We will do our utmost, but trying to hedge as a destination plant in this fluctuating market could lead to difficulties. Unfortunately, we are somewhat limited by our current circumstances.

And I’d like to say we don't sell corn; we have to sell ethanol. So the demand for ethanol that’s actually going to determine our cash flow. We're seeing very, very strong demand for ethanol right now and shortages in the Western PADD area.

Yes, PADD 5, which as you know is the Western United States, for the past three months has shown record lows from an inventory perspective. Part of that is attributable to the giant storm that hit Texas and the Southwest, still actually having impacts, as you all probably know, across the economy, that is starting to work itself out. But California sort of went from zero to 60 miles per hour in the last couple of months in terms of gasoline demand. And so we're seeing, I think, at least through the third quarter, which is about all the visibility you're going to get in a market like this right now. I think we're seeing that we're going to continue to see strong demand in California, in our local truck market, which is really what we serve within a 100-mile radius of our plant. We continue to see strong ethanol demand. So it's one of those deals where if ethanol can keep pace with corn, we can continue to have an operating positive contribution margin. If we see a retreat in ethanol pricing and the corn situation stays where it is, it's where it gets a little challenging.

I know there was discussion previously about maybe allocating some capacity to high-grade industrial quality alcohol. Is that still in play? Or should we not really assume any contribution from those efforts?

We have ongoing discussions. I'll let Eric speak to the sanitizer business, but from a potable alcohol perspective, we have ongoing relationships with a couple of very large producers in our area, in fact, have discussions scheduled for later this month. So I think we're going to continue to see as now we have a DSP permit from the TTB, we're allowed to do that. I think we're going to continue to try to grow our potable alcohol, grain neutral spirits business, that's a nice piece of business. I won't say it's huge volumes, but it's a good solid business that allows us some diversification. And I think the same is probably true on the sanitizer side where we see opportunities to do that. We'll take advantage of those opportunities.

Right. And we're waiting for the FDA to actually enforce the pharmacopoeia standard again. That'll shut down a lot of the cheap imports of low-quality products. Now over 200 of them have been warned by the FDA for not meeting FDA specs. So we're waiting for the market to kind of clean up, as we see this.

The market was quite congested last year, leading to limited demand from non-traditional sources for hand sanitizer. Supermarkets are still stocked with plenty of sanitizer products. We believe the market will need some time to stabilize, and after that, we see ongoing opportunities ahead.

Next, we go to the line of Jordan Levy with Truist Securities.

Two quick questions. First, just wanted to touch on the Department of Energy grant, you all mentioned that in relation to the cellulose extraction from the orchard wood. To my understanding that you guys haven't put a lot of weight into this in your five-year plan, but just wanted to take your thoughts high level on the potential that sort of project and what the economics of that could look like and what percent in that sort of time?

Sure. Thanks, Jordan. The first step in our jet and diesel hydrogen production process is to extract sugars from the waste wood, because we have an existing 65 million gallon plant that can process those sugars with very minimal additional capital expenditures that of course, being our corn ethanol plant. So our overall strategy is to wean ourselves gradually off of being 100% dependent on corn. So as we increase the volumes of wood, we're using a jet fuel, we're increasing the amount of sugar we can get from that wood. And every 10% of the corn starch that we decrease at our corn ethanol plant saves us purchasing costs of corn and generates a lower carbon intensity score for the ethanol being produced and generates a different renewable identification number. So we estimate about $30 million per year of additional positive cash flow from our corn ethanol plant, probably 10% of the feedstock that is displaced. We've done these numbers a number of times, and they always come out around $30 million; sometimes it's $28 million, sometimes it's $35 million. But about $30 million. This is per 10%. This is linear, so it doesn't decrease. If we go 20%, then it's $60 million, etc. The scale of our sugar extraction technology, which is patented, the patent was granted in January of this year, is exclusively licensed to us for non-commercial forests. We're using it for orchards, which is 1.5 million acres and 1.6 million tons each year in California. That technology now needs to go to the pilot scale. And so the Department of Energy grant program is specifically to fund pilot projects. And it's a two-phase program. It's a $1 million grant award for engineering and some other things and then a $15 million to $40 million grant award for actual construction of the plant. The size of our plant would be a small commercial size because of how it’s integrated; whether other facilities actually would be projected to be positive cash flow upon its construction. So we're calling it the pilot plant, but it's a pilot commercial facility. And then we would just expand it at that point on. So it's a gradual technology development we've been working on for probably four years. Now we have a patented technology, and the Department of Energy has recognized its unique opportunity to have a broad impact on the corn ethanol business. And not just our plant, but frankly, every plant could benefit from this technology.

Thanks, Eric. And just as a follow-up just pivoting back to the RNG business. Just wanted to get your updated thoughts as it relates to kind of the long-term trajectory of that business and the ability to scale it beyond the 17 and even potentially beyond the five-year plan, just noting kind of the increased competition we've seen just in general in the RNG space, and you're kind of in unique positioning geographically, just wanted to get your thoughts on how you think you can continue to scale that business?

We are actively interacting with the dairies in the region, the counties that we operate, and we, of course, supply about 80 dairies with feedstock. Putting 36 miles of pipeline in the ground obviously makes us the obvious choice for any dairies within a few miles of our gas pipeline. And that's all occurring over the next 12 months. So we continue to expand those relationships. Through approximately 1,200 dairies in California we are regionally the leader in our market just because of our obvious connection to the local dairy market through the animal feed business. I would say that over the next year, our job is to dominate the region that we're in. And then a year from now, expand our footprint to other regions of California. If you look at the market in California, there's really only a couple of developers, and one of which is in the South part of the valley. And one is sort of in the Central part of the valley. And we're sort of the North part of the valley. And we have good relationships with the dairies in our area. And I think we're showing we can very, very quickly ramp up those dairies into being customers. So out of the 1,200 dairies, our goal is to have a substantial portion of them.

This is Andy. I want to add that we are having in-depth discussions with various well-known offtake partners. Our focus is on developing a strategy that addresses the crucial question of whether California might become saturated. This is a common concern, especially with out-of-state developers entering the market, making it quite unpredictable. Eric highlighted two key advantages for us: our established relationships within the dairy sector, as we've been supplying feed to dairies for the past decade, which has fostered strong connections. This relationship is essential, as shown by the increasing number of dairies we have partnered with. It’s vital to secure a gas source. Additionally, we aim to diversify our offtake agreements to mitigate risks associated with market volatility over the next five to ten years. We are also considering how electricity might influence the market, and while I won’t go into specifics, I can assure you that we are closely monitoring all potential markets for renewable natural gas. Having previously operated as a destination ethanol plant for a decade, we understand the risks of having limited options. Therefore, we are working to create a variety of options to reduce our overall business risk.

Next, we go to the line of Ed Woo with Ascendiant Capital.

As we just passed 100 days with the new President in the office, what do you see either in the green bill that he's proposing, as well as the stance that EPA has in terms of the ethanol waivers? How do you see that playing out in the next six months?

I would say that there's some very promising legislation of increasing the value of carbon credits from $50 under the 45Q, a provision to, in one case it’s $80, and another one I read was $125 per ton, very significant increase in the revenues that we could potentially get from carbon sequestration. The EPA has not only just thought but they've actually taken very significant action in favor of the biofuels industry. They filed an opposition to their own grant of three waivers. This is strange, but they went to the Supreme Court and they actually opposed their own grant of hardship waivers to three oil companies, and filed also a petition in support of the biofuels industry on something that went to Supreme Court just a couple of weeks ago. So the EPA has actually hit the ground running, the new secretary has promised that the renewable volume obligations which are sort of the blending rules, which had been delayed without getting published in the next few months. And so I think they're playing catch up a little bit, but they so far have been not only saying things but doing things that are very much in support of renewable fuels. The price of D3 RINs, which is cellulosic RINs generated by our biogas was about $0.80 in the third quarter of last year, and today it’s $3.20 per D3 RIN. So that's a very significant almost quadrupling of the Federal revenue reflecting that the offtakers, the obligated parties expect to actually have to blend the actual physical molecule or buy a RIN from somebody who is physically blending the molecule. This is what the Renewable Fuel Standard was designed to do, was to encourage some of the blend and other ones who didn't want to blend to be able to buy RINs. And that mechanism is now working. The price this morning for the D6 RIN, which was about $0.30 or so last year, is $1.80. The D6 RIN is a corn ethanol RIN, again, supporting the value of blending ethanol. Because if you blend ethanol, you don't have to buy any RINs; you get the RIN for free. We give away RINs, 65 million of them every year to anybody that buys ethanol and blends it. So we're very well equipped to meet the market demand. But frankly, the EPA doesn't enforce any rules; there's not the market demand. I think the positive thing that the stock market has seen is that renewable fuels companies now are operating under a set of rules that are being enforced, and that's providing a balance in the market we haven’t had for a number of years.

And we take our last question or comments from the line of Marco Rodriguez with Stonegate Capital.

Could you provide some insight on the capital structure for Aemetis? Your earlier comments were helpful, but I'm interested in your thoughts regarding the market offering, especially given the stock price volatility. It seems some of the more expensive debt has had its maturity date extended to April 2022. Could you update us on how you are approaching this situation?

Sure. In response to really long, long discussions with various Wall Street players, we recognize the concern about the high-interest rate bridge that we have. And we took steps in early 2021 to not completely replace that debt. I don't think it's necessary. We have about $300 million cost of our assets. So we reduced that debt down to a meaningful opportunity to refinance it at lower interest rates. So we are saving a substantial amount of money now by not having interest that's due, but frankly, the remaining higher interest bridge financing can now be refinanced with other tools. And I think that in the first quarter this year, we were above that refinance threshold. Now we're clearly within that refinance threshold. So we are, I think, executing on a moderate plan of debt reduction of high-interest rate debt that I think over the next couple of months, you'll see matures very nicely with what we would call low-interest rate debt, something in this 8% to 10% range we would consider to be low-interest rate debt. I think, though, that most people are not clear that our projects do not require a parent company debt financing. Our projects are standalone and when we put, for example, the $30 million of equity funding into biogas, that allows us to do debt funding at the project company level. The USDA Renewable Energy for America program, for example, has nothing to do with the parent company debt. We could have $1 billion of debt; the parent company would have no impact at all on our project company debt because our subsidiary has no debt at all. The Aemetis Biogas subsidiary literally is a debt-free entity, with $30 million of equity invested. So the same goes with our jet diesel plant; we have about $32 million of equity in grants in that subsidiary, and so functionally, it's well set up to do a USDA or DoE or tax-free muni financing. And I think most investors, if they want to spend the extra time just a one layer down from looking at the consolidated balance sheet, they’d very quickly figure out that our India plant has no debt at all either. We have no long-term debt at all. It is completely debt-free 50 million gallon biodiesel plant set up to be able to do over $160 million a year of revenue. All upside, no downside. Biogas, of course, I mentioned is debt-free. So we structured the company deliberately with no convertible debt. So we're not worried about the conversions that dilute shareholders and a very, very cooperative, supportive relationship with our senior lender. They're the ones that put in the $30 million of equity in our subsidiary. So they're also an owner of equity in the publicly traded stock of the company. So we have a very solid relationship with them. They've done very well and their senior debt. And because of that relationship, we've been able to grow the company well. But by paying them down significantly, in the first part of this year, I think it probably provided some comfort to those investors who might be a little more concerned about the debt load we're hearing as we came out of the fourth quarter last year.

There are no further questions at this time. I'd like to turn the floor back over to management for closing remarks.

Thank you very much to the analysts who’ve joined us today as well as Aemetis shareholders and others. Please review the Aemetis corporate presentation that’s posted on the homepage of the Aemetis website. We look forward to talking with you about participating in the growth opportunities at 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. Melinda?

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