Aemetis’ (AMTX) CEO Eric McAfee on Q2 2017 Results – Earnings Call Transcript

Aemetis Inc. (NASDAQ:AMTX)

Q2 2017 Earnings Conference Call

August 10, 2017 14:00 PM ET


Eric McAfee – Founder, Chairman and Chief Executive Officer

Todd Waltz – Executive Vice President and Chief Financial Officer


Carter Driscoll – FBR Capital

Tom Welch – Ameriprise

Scott Ozer – Sandlapper Security


Good day ladies and gentlemen and welcome to the Aemetis Second Quarter 2017 Earnings Review Conference Call. At this time, all lines have been placed on a listen-only mode. [Operator Instructions] There will be a short QA after the presentation.

At this time, it is my pleasure to turn the floor over to your host, Todd Waltz, Executive Vice President and Chief Financial Officer of Aemetis Inc. Sir, the floor is yours.

Todd Waltz

Thank you, Angelica. Welcome to the Second Quarter 2017 Earnings Review Conference Call. We suggest visiting our Web site at to review today’s earnings press release, updated corporate presentations, filings with the SEC, recent press releases, and previous earnings conference calls. This presentation is available for review or downloads on the homepage.

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 activities.

These statements must be considered in conjunction with disclosures and cautionary warnings that appear in our SEC filing. Investors are cautioned that all forward-looking statements made on this call involve risks and uncertainty, and that future events may differ materially from the statements made. For additional information, please refer to the company’s Security and Exchange Commission filings, which are posted on our Web site 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 on June 30, 2017, which is available on our Web site.

Adjusted EBITDA is defined as net income or loss plus to the extent deductible in calculating such net income, interest expense, loss on extinguishment, income tax expense, intangible and other amortization expense, depreciation expense, and share-based compensation expense.

Now, I’d like to review the financial results for the second quarter of 2017. Revenues were $40.8 million for the second quarter of 2017, compared to $33.1 million for the second quarter of 2016. The increase in revenue was primarily attributable to increased ethanol and distillers grain volumes, as well as increased sales to bulk fuel customers in India.

Gross margin for the second quarter of 2017 was $1.7 million compared to gross margin of $1.9 million during the second quarter of 2016. Ethanol and distiller grain price’s declines contributed to the lower gross margins offsetting higher volumes. Selling and administrative expenses were $3.3 million in the second quarter of 2017 compared to $2.9 million in the second quarter of 2016.

The largest component of the change in selling, general, administrative expenses were tax penalties, returned sublease space, and workmen’s comp rate increases related to North America operations and operational support charges related to the increase in revenue at the India operations.

Operating loss was $1.7 million for the second quarter of 2017 compared to an operating loss of $1.1 million for the second quarter of 2016. Net loss was $6 million for the second quarter of 2017 compared to a net loss of $5 million for the second quarter of 2016. Interest expense during the second quarter of 2017 was $4.3 million compared to $4.4 million during the second quarter of 2016. Cash at the end of the second quarter of 2017 was $700,000 compared to $1.5 million at the end of 2016.

The financial results for the six months ended June 30, 2017. Revenues were $72.3 million for the first half of 2017 compared to $66.4 million for the first half of 2016. An increase in production at the Keyes plant resulted in an increase in ethanol and wet distiller grain volumes during the first half of 2017 compared to the first half of 2016.

Gross profits for the first half of 2017 was $1.1 million compared to $4.0 million during the first half of 2016. During the first half of 2017, gross profit decreased due to the higher price of feedstock at the Keyes plant compared to the same period of 2017, combined with softening in the price of wet distiller’s grains.

Selling, general, and administrative expenses were $6.6 million during the first half of 2017 compared to $5.9 million during the first half of 2016. The increase in selling, general, and administrative expense was primarily attributable to salaries, non-cash stock compensation, and marketing expense that increased along with production volume expansion.

Operating loss was $5.6 million for the first half of 2017, compared to operating loss of $2.1 million for the first half of 2016. Net loss was $14.5 million for the first half of 2017 compared to a net loss of $10.1 million during the first half of 2016. Interest expense was $8.9 million during the first half of 2017 compared to interest expense of $8.5 million during the first half of 2016. That completes our financial review of the second quarter of 2017.

Now, I’d like to introduce the Founder, Chairman, and Chief Executive Officer of Aemetis, Eric McAfee for a business update. Erin?

Eric McAfee

Thank you, Todd. For those of you who may be new to our company, let me take a moment to provide some brief background information. Aemetis was founded in 2006 and we own and operate facilities with more than 110 million gallons per year renewable fuel capacity in the U.S. and India. Included in our production portfolio is the 60 million gallon per year capacity ethanol plant located in Keyes California near Modesto.

We also build, own and operate a 50 million gallon per year capacity, distilled biodiesel and refined glycerin biorefinery production plant on the East Coast of India near the port city of Kakinada. Before going into specifics, I would like to address the fundamental concern among many investors, which is debt.

We are actively working to pay off or reduce the high interest rate debt including the following action steps. Number one, raising the Phase-2 $50 million, 3% interest rate EB-5 subordinated debt funding, which can replace our high cost 14% plus debt. Number two, the three-year India plant supply contract with BP Singapore is expected to ramp up this year.

The India plant is debt free except for inventory financing. So, excess cash flow is available to pay down debt of the parent company Aemetis. Number three, the growth of the Indian business may create an opportunity for an IPO or sale of a portion of the Indian business due to the patent pending technology that BP Singapore supply agreement and the 5% growth in the India domestic fuel market.

Number four, cellulosic ethanol is expected to be a highly profitable strong cash flow business. We are working on the design in the construction of a 10 million gallon cellulosic ethanol plant that could be operational within 18 months. This project can have a very high EBITDA that can be used for parent company debt reduction.

Now, let us discuss our platform businesses in ethanol and biodiesel and important projects in advanced biofuels and then review our low cost financing initiatives. To begin, let’s review our ethanol business. During the second quarter of 2017, our ethanol business grew 11% revenues year-over-year, as we produced 16% more ethanol in the same quarter last year.

Ethanol pricing decreased by 2% year-over-year. Gross margins were about 4% lower compared to last year as pricing slightly decreased, while natural gas, electricity, and transportation costs increased. For the second half of this year, we expect revenues in margins to follow a positive trend due to stronger demand and lower prices for gasoline.

Increased demand for ethanol by enforcement of the federal renewal fuel standard, strong demand for low carbon biofuels in California and growing foreign markets. We’ve also seen improved demand in pricing for wet distillers grain over the first quarter of this year.

Let’s review our Indian biodiesel business. Aemetis is the leading US producer of biofuels in India, a country of 1.3 billion people that consumes about 25 billion gallons of petroleum and diesel each year. Aemetis biodiesel produced at our India plant reduces harmful emissions by up to 80% and sells as a less expensive fuel than diesel.

India biodiesel and refined glycerin revenues in the second quarter of 2017 increased on a year-over-year basis to $5.3 million from $1.0 million. The primary reason for the revenue increase is increased sales to both fuel customers in India. During the second quarter, two additional sales channels opened up for the India biodiesel business.

Supply contracts to the India oil marketing companies and a supply contract to BP Singapore. After years of market development work with the India government are India plant, one, $6 million supply contract from the three India oil marketing companies to supply approximately 95% of the fuel in India.

The contract is a six-month supply agreement for about 7,500 tons of biodiesel. We started shipments during the third quarter. Based on extensive research and development conducted by our India biodiesel plant engineering and operations team, in April we filed a patent on enzymatic biodiesel production technology that solves the key barrier to commercial scale operations of this technology.

Our proprietary technology allows the use of low cost, low carbon, waste feedstocks that other biodiesel plants usually cannot process into fuel. After negotiations and documentation that started last year, we signed a three-year biodiesel supply contract with BP Singapore on May 25, 2017.

To support BP Singapore and our domestic business in India, we recently completed the construction of the first phase of our pretreatment unit and began production of biodiesel using our patent pending enzymatic technology. We also received the first shipment of low carbon, low cost, waste feedstock supplied by BP Singapore to the India plant.

Now, let’s review our two important advanced biofuel projects, the LanzaTech cellulosic ethanol upgrade to our Keyes plant and the agreement to acquire Edeniq to convert corn fiber to cellulosic ethanol. Cellulosic ethanol is the main beneficiary of higher value renewable identification numbers under the renewable fuel standard.

Since cellulosic ethanol can reduce carbon emissions by up to 80% compared to gasoline, the California low carbon fuel standard incentivizes cellulosic ethanol production. In total, the value of a gallon of cellulosic ethanol today is about $4.50 per gallon, about $3 more per gallon than conventional biofuels by using waste wood and nutshells from the more than one million acres of almonds, walnuts, and other orchards in California Central Valley.

Feedstock costs can be reduced from current $1.50 per gallon to less than $0.40 per gallon. Decrease in feedstock costs to low $0.40 a gallon, while increasing revenues to about $4.50 per gallon makes cellulosic ethanol one of the most profitable biofuels to produce, providing that the – provided that the conversion yields are high and conversion costs are low.

For the past 10 years, Aemetis conducted research and development and invested heavily in technology assessments to evaluate catalysts and other conversion processes for cellulosic ethanol. As many of the projects we reviewed did not produce clean syngas from wood feedstock or it failed to obtain high yields due to failing of metal catalysts.

We determined that a high temperature gasification system and a biological catalyst was the best approach to achieve stable high yields. Founded in New Zealand and now based in Skokie, Illinois, LanzaTech has invested more than 200 million in the development of a microbe that consumes food and gas for the production of cellulosic ethanol.

With six demonstration plants already built and more than 40,000 hours of operating time already completed, we believe that LanzaTech is the clear leader in the conversion of syngas to ethanol using biological rather than metal catalysts.

During the past several years, we have worked with a team of LanzaTech to arrange exclusive license rights for Aemetis in California for the conversion of biomass feedstocks to cellulosic ethanol using the patented LanzaTech microbe and reactor system. InEnTec of Richland, Washington has invested about $130 million in the development of advanced gasification technology and the construction of 13 units.

Aemetis selected the InEnTec gasification unit due to the high levels of clean syngas that is produced by the InEnTec system, significantly increasing potential cellulosic ethanol production rates compared to the lower temperature gas fires that produce higher levels of ash and lesser quality syngas.

During the second quarter of 2017, we licensed the exclusive and predominant worldwide rights to InEnTec’s advanced gasification technology for using cellulosic ethanol production. We have funded the construction of an integrated demonstration unit at the InEnTec technology center in Richland, Washington.

Due to the exceptional effort and technical capability of the Aemetis, LanzaTech, and InEnTec teams, yesterday we announced that the Aemetis integrated demonstration unit is now producing cellulosic ethanol from waste orchard woods and nutshells sourced near our California ethanol plant.

Using nearby orchard waste to produce cellulosic ethanol will reduce air pollution and carbon emissions in the third worst air quality region in the U.S., California’s agricultural region known as the Central Valley. We are excited with the yields in other key data generated by the integrated demonstration plant since last month and at this point the yields of cellulosic ethanol are exceeding our expectations.

In the coming months, we plan to provide investors with updates regarding this innovative and exciting project. Yields in other data from operation of the integrated demonstration units will be provided to the U.S. Department of Agriculture as part of completing the Phase-2 loan guarantee process under the USDA 9003 Biorefinery Assistance Program.

Our commitment to the upgrade of corn ethanol plants to produce high value cellulosic ethanol includes different version of corn fiber that is already in the ethanol plant. In April, 2016, Aemetis signed an agreement to acquire Edeniq, a biofuels technology company that converts corn kernel fiber into higher priced lower carbon cellulosic ethanol.

We are pleased with the progress of the litigation related to enforcement of the signed definitive agreement and we believe that documents disclosed to us in the discovery process support our demand to complete the transaction on the term set forth in the signed acquisition agreement.

Let us now review our key financing initiatives starting with EB-5. We received $35 million of subordinated debt from 70 foreign investors at a 3% interest rate from escrow. We had launched a Phase-2 $50 million EB-5 offering that is currently in process. These funds are scheduled to repay the existing Third Eye Capital loan and fund expansion of company revenues and earnings, including the construction of a 10 million gallon, Aemetis cellulosic ethanol plant near the existing Keyes plant.

The timing of the receipt of funds from the Phase-2 EB-5 offering has been impacted by immigration and other policy concerns arising since last November. However, we’ve now signed agreements with EB-5 brokers in China, Hong Kong, Vietnam, India, and Russia. I’ve personally completed five world tours in the past three quarters to meet with brokers and with foreign investors.

We believe that following our successful Phase-1 EB-5 offering with $50 million Phase-2 offering should benefit from a renewed focus on the world and high unemployment areas and in the enforcement of the EB-5 legislation. The EB-5 funding is subordinated debt at a low 3% interest rate with no principal payments for five years. Phase-1 is convertible into equity at $30 per share and Phase-2 is not convertible and it’s entirely non-diluted to Aemetis’ shareholders.

In summary, we believe that Aemetis is well positioned for growth with improving fundamentals of the North American ethanol business, the potential for increased biodiesel business shipping to domestic and foreign customers from our facility in India, significantly reduced interest cost by repayment of high interest debt with low interest rate EB-5 funding and the positive cash flow opportunities from the growth of the India biodiesel business and the planned LanzaTech advanced ethanol plant.

Now, let’s take a few questions from our call participants. Angelica?

Question-and-Answer Session


Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Carter Driscoll of FBR Capital. You may now state your question.

Carter Driscoll

Good morning, Eric and Todd.

Eric McAfee

Hello, Carter.

Carter Driscoll

Good morning Eric, Todd. Question, could you talk about or could you break out your expectations of, which of the buckets of opportunities for biodiesel increasing sales in the second half of the year will be bulk, BP – just to kind of get a sense of both by customer and the ramp in the first couple of quarters whether by range of volumes and as a follow-up to that, I mean, are there specific – the take a pay contract or I think you communicated in the past they would take as much as you could produce are mainly limited by feedstock availability or at least low cost feedstock availability and then I have a couple of follow-ups. Thank you.

Eric McAfee

Okay. Thanks. Our India business is ramping up under the three-year BP Singapore supply agreement. Under the BP Singapore supply agreement, we are not limited by our working capital access or otherwise. The limitation – and by the way we’re also not limited by their appetite to bring in biodiesel. They need several multiples of the entire capacity of our plant to supply their European business demand.

But the constraint is just the ramp up of our feedstock supplies from BP Singapore. Under the agreement, they actually ship the feedstock to us and then we turn around and produce biodiesel, ship it back to them and we pay for the feedstock after they have paid for the biodiesel, so it’s effectively a positive cash flow activity for us and not impeded by feedstock purchases.

The scale up of their logistic supply chain is currently in process and they have several loads that are on the water we’ve actually received the first feedstock delivery from them and there are several others in process right now. We are dependent upon how fast their logistic supply chain scales up. Certainly they would expect to be at 80% of our capacity. It’s a 12,500 ton per month plant. So, 80,000 is – 80% is 10,000 tons per month and that would drive their business expectations as big as it would also drive ours.

Because of its effect on our supply of our domestic India government customers and bulk customers and now the retail market has also opened up in India, we would expect we need to expand our production capacity in India to match market growth. But it’s a ramping up of the BP Singapore relationship. And over the next literally every month we are expecting a rapid increase in the amount of feedstock we are receiving from them and then our production turnaround times roughly a month, so a month after you get delivery we will be able to put product back on a boat and ship it off.

In terms of our domestic business, we have the $6 million order with the government-owned marketing companies. Their demand is expanding as the air pollution benefits of biodiesel becoming more readily apparent and biodiesel is sold as a discount to diesel. So, over the past several years we’ve been working mostly with contractual issues regarding flat pricing and other things like that that are now coming into alignment with commercial reality.

And so, we expect to win further tenders with the OMCs. Our bulk customers continue to have a strong appetite for biodiesel and we showed increase in that business, of course, in the last quarter and expect to continue to see strong relationship with them. The barriers to our expansions in India in terms of foreign deliveries to BPS are not constrained by government tax initiatives. It’s a zero tax rate to bring in the feedstock and a zero tax rate to export the biodiesel to Europe under current law.

The domestic sales are impeded somewhat by the recent July goods and services tax that was passed in India and they established 18% tax rate for biodiesel. Historically that had recently been in the 11%. Despite that, we continue to have domestic sales and we expect continued growth in the business as the GST is expected to be lowered.

The ministers have stated their intention to lower it and correct what essentially was an oversight in having a higher GST for biodiesel. So, our overall expectation is that we will continue to focus on BP and be very prompt in our delivery of all the necessary approvals and requirements and expand production to do so.

Last one I will make it that we have completed the construction of our enzymatic pretreatment Phase-1 and have commercial production capacity and we’ll be continuing to expand that pretreatment capacity to meet the entire capacity of the plant and that that expansion is all being done in alignment with the feedstock commitment being provided by BP.

Carter Driscoll

I guess what I am trying to understand a little bit better is so BP is essentially fine with that feedstock that you are turning around and giving the finished biodiesel, but you wouldn’t use that feedstock as far as for customers. I guess I’m trying to get a sense of how you prioritize given the demand is so strong for multiple parties.

How do you prioritize who you’re shipping to, I mean, you are getting a better price, because you’re getting the feedstock directly from BP or I am just trying to get a senses of that. Just an idea of how it ramps from an actual volume perspective, I mean, are you expecting to do 80% every month, is it going to ramp over the next six months of that target is maybe a little bit more clarity. Thank you.

Eric McAfee

Again, we’re being constrained by the ramp up pace in which BP can deliver. And so, that expectation is that we should be able to get up to 50% of our plant capacity allocated to BP over the course of the next two quarters. So, the 80%, of course, is more than 50%, so I’m hoping we can get to our 80% number, but we’re constrained by their supply chain, not ours, and we’re helping them. But at this point in time we don’t have excellent – we don’t have commitments from their traders as to what the volumes are out six months where you have commitments over the next 60 days and ramping this business up to full commercial.

There are very significant accounting legal logistics processes, not barriers, but processes at BP Singapore that we have completed in order to receive just the first shipment of any size. There are enormous processes that they have accomplished internally. We are now closer to just pushing the button and whether the volumes are 5000 tons a month or 10,000 if they just push buttons and they don’t have to repeat these internal processes.

So, it’s been a year since we started our first meeting with BP and it is now at the transactional phase of just focusing on supply chain. So, it could ramp up extremely quickly. I do not expect that, but primarily because we’ve been talking to lawyers and accountants and logistics people, now we’re talking mostly to traders. So, we’ll see how fast the traders can obtain the feedstock and get it to our source.

Carter Driscoll

Okay. Thank you for that. And then just switching gears, as you hopefully begin to go to 10 million gallon cellulosic facility, where do you think your cellulosic percentage of total ethanol production can reach, say, over – no, say, the next one to two years and what types of yields do you expect maybe initially and then as the new facility begins to ramp, what are the internal expectations? Thank you.

A – Eric McAfee

Our internal expectation is cellulosic ethanol pretreatment using our LanzaTech and InEnTec technologies is an expansion of production capacity and for a variety of the process reasons it does not decrease the amount of grinding capacity we have at our corn ethanol plant. So, we currently are roughly a 60 million gallon plus corn ethanol plant, this would be 10 million gallons incremental to that.

So, call it, 15%, 10 million gallons and the 70, total million gallons would be our blend, but it’s really just incremental. We’re not decreasing our corn ethanol production to do this. We’re just incrementing. And if you do the math that $4.50 a gallon plus we have a feed – animal feed byproduct, you’re at over $5 a gallon of revenue at 10 million gallons. So, you’re having $50 million of revenue at very, very high gross margins.

Carter Driscoll

And then maybe just taking a step back at a larger picture given your deep expertise in the space, talk about the composition of the light-duty passenger vehicle fleet and movement of both [indiscernible], maybe the E15 adoption, a number of retail stations beginning to offer the RFS. Do you think that has largely been put the bad in terms of both point obligation and then the legal outcome of just a short while ago in terms of changing the way they constantly fiddle with – they mandated those files of ethanol and then maybe just you’re a big cake on supply and demand export and import markets and how that would play into your expectation for ethanol prices in the latter half of the year or beyond? Thank you.

Eric McAfee

Thank you. It was a very good question, I think, very relevant to equity investors. One of the most important events in the past decade in the biofuels industry occurred last week and that was the determination by the judicial branch by the court system that Congress’ original intent in 2005 with the first renewable fuel standard was very clear that if the oil industry was able to determine the demand for biofuels, then biofuels would not be able to replace petroleum-based fuels in the United States.

And the court stated in its 85-page legal opinion, which I read very clearly the actual congressional process included the deletion of including demand by the way a 10% blend cap is a demand function and the Congress specifically stated we are not going to include a lack of demand in the mandates of biofuels in the United States.

Literally a week ago or so is when for the first time in the history of the renewable fuel standard, we now have the third branch of government, not just the White House and not just Congress, but the court system indicating very clearly that Congress has established minimum mandates including the 15 billion gallon mandate for corn ethanol and be up to 16 billion gallon mandate for cellulosic ethanol, which must by law equal to or exceed actual production capacity is the clear language that must be enforced by the EPA.

Now, for the traders in the audience, this put the EPA into a short position of 500 million RINs, which the court requires that have to be canceled, these are the 2016 RINs that the EPA had erred and not appropriately required to be delivered by blunders. We currently have a 500 million short that 500 million gallons of ethanol, 500 million RINs in the RIN marketplace.

The effect of that has been RIN prices going up and as you see the EPA actually take the action to cancel those, the physical reality is that we will have 15 billion physical gallons demanded by the U.S. market. Currently we only have about 14.2 billion physical gallons that’s an 800 million gallon increase in demand domestically equal to about 70% of all of the exports in the United States.

So, from a supply demand curve, this is very, very simple. It’s extremely simple, 2014-2015 oil industry was successful by getting the Obama administration to cancel about 3 billion gallons of demand completely screwing up the industry’s growth that was mandated by law. The court system stepped in a week or two ago and said EPA erred, but we’re going to let that error stay in place for 2014 and ’15. We’re going to fix it for 2016 and onward.

The fix is the actual physical demand for ethanol and the RINs available, so you don’t have to buy the gallons, are both in our favor and very significant ways, 800 million gallons a year on an ongoing basis and 500 million RINs being cancelled is a tremendous increase in demand for our biofuels, which was what investors were told by Congress when we started this enterprise as a renewable fuel standard back in 2005.

So, we’re now on, I think, a very narrow road pointed straight toward enforcement of the RFS without any lack of clarity, which has unfortunately confused both government regulators, as well as investors for the last number of years. And that being said, it drives the overall global demand for biofuels thereby driving up the margins for biofuels producers, because of consistent enforcement in US of our domestic law.

Last one point I want to make is this. California has its own low carbon fuel standard with the same dynamics. The dynamic here was it was set to sunset in 2020, roughly three years from now. I was fortunate enough to be invited by the governor to attend his Jerry Brown and Governor Schwarzenegger signing roughly two weeks ago and that extended the California law by 10 years.

Last week the price of California credits went up over 20% and on high volume. So, both the federal and the California laws have now been firmed up and clarified for decades to come, which is exactly environment that investors want to be investing in as we go into low carbon cellulosic ethanol and low carbon biodiesel.

Carter Driscoll

And last year short RINs as a refiner and maybe –

Eric McAfee

If you’re shuttling to the refiner, you need to get into blending. You’ll see more of refiners get into blending.

Carter Driscoll

Understood, thanks for that discussion. Maybe just two quick others before I pass along. Just expectation given the – little bit of uncertainty with the ongoing debate in this country on immigration policy, what that could do to timing of your space to EB financing, obviously, you’ve done the groundwork, but running that pull-through might be little challenging. Is there any other alternatives to the EB-5, if the uncertainty extends beyond your internal timeframe for paying down Third Eye? Are there other alternatives that you can do to help refinance that portion of the debt position?

Eric McAfee

Very good question. Let’s stick on the immigration question first. There was a high level of uncertainty starting November last year. To a large extent that has now been resolved. The EB-5 law was extended without changes in April and there are certain people in the current administration that actually are raising money under EB-5.

So, what had initially been a concern about the program is now resolving into – is it going to be a situation in which rural markets and high unemployment areas, which is what our project is in, get increased requirements under the law, because certain leaders in Congress signed a letter saying we want to change this to emphasize non-urban skyscrapers in downtown New York. We want this money to flow as it was intended to, to job creation in high unemployment areas and specifically favor in world markets.

So, we think we’re on the right side of history with EB-5. We’ve been very patient with a program. We are the most successful biofuels company in the program and we expect that we will continue to receive a lot of attention especially with our low carbon non-food projects that we’re doing that is something that is very, very attractive in renewable energy.

So, from immigration and EB-5 point of view, we’re fine. Now, the second part of question was timing with Third Eye Capital. Third Eye Capital has been funding us since May of 2008 and they have funded us through two crises, first, with the general economic crisis of 2008. They were the money that came in when all of the other funding, specifically the State Bank of India got delayed.

And so, in 2012 when Congress have canceled the lenders tax credit, nearly excess ethanol margins went negative, they were the ones that came in with $35 million to allow us take full advantage of that and acquire a facility that cost $100 million more than that. So, our relationship with Third Eye Capital has expanded over the years. It has gotten less expensive over the years.

I’m embarrassed to remarks about some of the early cost of capital we had, but we are down now to 12% interest rates and much for debt. We actually have a part of our loan, which is a 5% interest rate. And so, our cost of capital has been decreasing with Third Eye and our repayments to them over this time period, which is almost 10 years have allowed us to stay in good speed, not having ongoing issues with our documentation.

And so, we have become a very good customer and I would argue that we’re actually the largest customer of Third Eye Capital. So, being the largest customer, having a long relationship, being consistently good returns to their investors, has created a very stable relationship with Third Eye Capital that they benefit from as we pay down their loans with EB-5 and operating income, et cetera.

The US Department of Ag is a source of debt replacement and it’s, of course, very low cost capital, because it’s guaranteed by the U.S. taxpayer and we received a Phase-1 loan guarantee approval. We’re going through Phase-2 right now with the USDA, which would be the bulk of the money for, I mean, frankly vast majority of the money, 80% of the money, for our cellulosic ethanol plant actually comes from the U.S. taxpayer guaranteed USDA loan.

Carter Driscoll

Okay. And then just last question for me. You talked about – and I’m sure you can’t comment too directly, but with Edeniq discovery process, do you think there is some evidence that supports your claim that they have breached the agreement? Any update on the timing or have you had any discussions, amicable discussions with them about resolving the legal process?

Eric McAfee

The legal process is in the discovery phase. There is some required mediation actually in October under the regular court process. And so, as we – there was a court order issued approximately two weeks ago in which Edeniq was ordered to deliver their documents under discovery. They had been avoiding trying to do a variety of different things, not disclose the vast majority of their documents and they lost a court order two weeks ago in which they do have to deliver this month.

So, we expect the discovery process will wrap up and we’ll get into a mediation process in October and we’re certainly prepared to just go to court and enforce the agreement. It’s a pretty simple transaction and we’ve delivered all of the requirements under the agreement. We are just waiting for them to take their shareholder vote of stock or cash that they want to close in and then go to closing.

Carter Driscoll

There is not – there is no really any recourse and the fact they didn’t close the original date.

Eric McAfee

The recourse is just specific performance, which is that they are required to close. They are avoiding that and the court – we’re seeking to have the court affirming that they need to close. There is also damages resulting from that, but that’s largely just a part of the court processes and damages occur when people don’t do the things they’re supposed to do.

Carter Driscoll

Understood. I will get back in queue. Thanks for taking all my questions.

Eric McAfee

Good. Thank you, Carter.


Thank you. Our next question comes from Tom Welch of Ameriprise. You may now state your question.

Tom Welch

Hey, Eric. Thanks for taking my call.

Eric McAfee

Hello, Tom.

Tom Welch

Dialing it back to the whole biodiesel arena to some of the nuts and bolts to clarify some things, first question is when BP ships raw materials, can you give us a rough idea of how big that is on a per shipment basis?

Eric McAfee

It’s scaling up. It’s scaling up to 5000 tons per shipment that happens to be roughly the – the amount is most economic to put into the ships that come in to our port. So, that’s 5000 tons per shipment.

Tom Welch

Okay. And you said they’ve got a couple of shipments, basically heading your directions on the radar right now [indiscernible], maybe they have, maybe 10 tons of raw materials heading your direction right now?

Eric McAfee

The initial shipments are being done through a smaller size for shipment, so that we can get initial production done and they can come and review additional logistics requirements et cetera over the next few weeks and then we’ll be scaling up to the 4000 and 5000 ton per shipment phase. Our expectation to that is that would happen in September.

Tom Welch

Okay. Another nuts and bolts question here on biodiesel. You are developing the enzymatic capacity in phases, you said you’ve just finished Phase-1. What’s our current enzymatic biodiesel capacity under Phase-1?

Eric McAfee

We are at roughly a little less than half of our entire plant production to be done within enzymatic biodiesel. We don’t have any real tight constraint on expanding that production capacity. So, we’ll be going to two-thirds and then 100% over the next few months actually. So, we’re just matching the BP process. It’s a pretreatment unit, so we’re building tanks and process equipment that are in front of our biodiesel plants.

The biodiesel plants already get 100%. It’s this ability to take some of the feedstock and run it through pretreatment that is really a BP-focused transaction opportunity that we’re scaling up our production capacity to match. But the key technology milestone is your first commercial production. You can always just put up more tanks and expand it and that’s already been completed.

Tom Welch

Got it. So, no way to know for sure, but looking at that first commercial finished product getting shipped back to BP, can you give sort of some kind of a rough time horizon?

Eric McAfee

A rough time horizon is that we expect that’s going to be in early fourth quarter just with the logistics processes that we’re going through right now. It could be tolerated. I wouldn’t be surprised to see that accelerate as BP is looking at a very, very nice business here and the faster they move the better it is for them. But current expectation is that would be early fourth quarter.

Tom Welch

Okay, very good. Another nuts and bolts question, are we – is Aemetis going to be allowed to use a portion of the raw material from BP for domestic supply of biodiesel or is this a contract for literally just for 100% export?

Eric McAfee

It’s 100% export with the BP inventory. Separately we have a feedstock credit line with a very, very large company that is funding our acquisition of both, biodiesel feedstock and glycerin, crude glycerin. We are one of the largest importers of crude glycerin from Argentina and Europe and elsewhere into India and that business is doing very nicely for us. So, we use that credit line for the purchase of other feedstocks we bring into India, the supplier on both customers, the oil marketing company, government customers, and expanding retail sales.

Tom Welch

Would that be – I know I read through the Q2. Would that be Gemini edibles?

Eric McAfee

Gemini, yes. That’s correct.

Tom Welch

I was encouraged in that it looked like our raw material costs in our India thing, maybe you could put some color on this because the Gemini Edibles or raw materials cost, the biodiesel, have literally dropped – it’s been cut in half from what I’m looking at or almost a year ago we were looking at almost $1000 a ton. Now, we are looking at around $500,000 a ton on raw materials. Is that – can we attribute that to Gemini Edibles? Is that there?

Eric McAfee

No. And I would – if you look at the last page of our earnings release, we disclosed the – not the cost of goods sold, because that has other cost of net labor and other things, chemicals, but the actual number of tons purchased and the average cost per ton for glycerin and biodiesel combined together and the actual cost from 2016 to 2017 increased in both of those categories, but the prices related to those businesses are also disclosed. So, you will get biodiesel prices also increase very significantly. So, we’re in a rising price environment. So, cost increased, as well as revenue increased.

Tom Welch

Okay, okay. That’s [indiscernible] and you said that. Final question, obviously, there is still a big question in the area as far as you can clarify I think, whether it’s the reality or whether it’s just perception, it doesn’t really matter. It’s just the fact that the foreign investors are not jumping all over the opportunity to the EB-5 financing right now. So, what’s the possibility of dusting off the public sale of a portion of our biodiesel business to the investors in India? I would point out that you have contract in hand or more than 100% of capacity. We have the India stock marketing all-time record highs. It just seems like it would be a fantastic alternative to be able to have $300 million, $400 million worth of liquidable assets in the – sitting in the bank as far as other traders stock and being able to whack down $50 million worth of long-term debt and eliminate it with an equity offering on India.

Eric McAfee

You are correct and you’re seeing actually the same thing that we’re seeing. What we’re getting as a – what we have gotten as feedback is that we need to start our commercial shipments, which, as we described in this call, we’re only talking about 60 to 80 or less and just signing the agreement itself was very exciting, very interesting, but the actual delivery of products under that agreement is a component that’s needed in order to be able to do something in India.

We do expect in this quarter and next quarter, really it’s already next quarter, that we’ll have some very serious discussions with the existing investment bank. We’ve already signed up in India and see if there’s an opportunity that we can execute on. The India IPO process is not the one-year process as it is here in the U.S. and the process is really driven by the investment banking firm. And as a result, it’s very quick.

And so, we’re talking about 90 to 180 days for an IPO efforts in India. And we are looking to take a full advantage of our leadership position there, our patented technology, our low cost feedstock we can use because of the patented technology, which is sustainable, if there’s no profit that other people in the industry don’t have and the BP relationship. So, I think we have all the factors. We’ve been talking about this over the number of years, of course, going back two years and we’re just executing on the plan we said we were going to do.

Tom Welch

Very good. And that ends my questions. Thank you, Eric.

Eric McAfee

Good. Thank you very much.


Thank you. And our next question comes from Scott Ozer of Sandlapper Security. You may now state your question.

Scott Ozer

Hey, Eric. The previous gentleman just hit all the areas that I wanted to touch on. So, my question was about the IPO and an update on Edeniq that was handled earlier. So, congratulations.

Eric McAfee

Thank you and we’re working hard to just follow up on the strategy we’ve already laid out. So, I appreciate your support.


Thank you. I’ll turn it back over to you, Todd, to end the call.

Todd Waltz

Well, I tell you, what, Angelica, I’ll take care of this. Thank you to the Aemetis shareholders, analysts, and others for joining us today. We look forward to meeting with you and continuing our dialog about pursuing growth opportunities at Aemetis.

Thank you for joining today’s Aemetis earnings conference call. Please visit the Investor section of the Aemetis Web site where we’ll post a written version and an audio version of this Aemetis earnings review and business update. Angelica?


Thank you. This does conclude today’s conference call. We thank you for your participation. You may now disconnect your lines at this time and have a great day.

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