Transcript of Aemetis Second Quarter 2017 Earnings Review Conference Call August 10, 2017/2:00 p.m. EDT

Transcription

1 Transcript of Call Participants Todd Waltz Executive Vice President and Chief Financial Officer Analysts Carter Driscoll FBR Capital Tom Welch Ameriprise Scott Ozer Sandlapper Securities Presentation Operator Good day, ladies and gentlemen and welcome to the Call. At this time, all lines have been placed on a listen-only mode. [Operator instructions]. There will be a short Q&A 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, Inc. Sir, the floor is yours. Todd Waltz Executive Vice President and Chief Financial Officer Thank you, Angelica. Welcome to the Call. We suggest visiting our website at aemetis.com to review today s earnings press release, updated corporate presentation, filings with the SEC, recent press releases and previous earnings conference calls. This presentation is available for review or download on the aemetis.com home page. 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. The 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 risk 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 website and are available from the company without charge. Our discussion on this call will include a review of non-gaap measures as a supplement to financial results based on GAAP. A reconciliation of the non-gaap measures to the most directly comparable GAAP measures is included in our earnings release for the quarter ended on June 30, 2017, which is available on our website. Adjusted EBITDA is defined as net income or loss, plus to the extent deductible in calculating such net income, interest expense, loss on extinguishment, income tax expense, intangible and other amortization expense, depreciation expense and share-based compensation expense.

2 Now, I d like to review the financial results for the second quarter of Revenues were $40.8 million for the second quarter of 2017, compared to $33.1 million for the second quarter of The increase in revenue was primarily attributable to increased ethanol and distiller s 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 Ethanol and distiller grain price 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 The largest component of the change in selling, general and administrative expense were tax penalties, returned sublease space, and Workman 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 Net loss was $6 million for the second quarter of 2017, compared to a net loss of $5 million for the second quarter of Interest expense during the second quarter of 2017 was $4.3 million, compared to $4.4 million during the second quarter of Cash at the end of the second quarter of 2017 was $700,000, compared to $1.5 million at the end of The financial results for the six months ended June 30, Revenues were $72.3 million for the first half of 2017, compared to $66.4 million for the first half of 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 Gross profits for the first half of 2017 was $1.1 million, compared to $4.0 million during the first half of During the first half of 2017 gross profits decreased due to the higher price of feedstock at the Keyes plant compared to the same period of 2016, 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 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 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 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 That completes our financial review of the second quarter of Now, I d like to introduce the Founder, Chairman and Chief Executive Officer of, Eric McAfee, for a business update. Eric? 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. was founded in 2006, and we own and operate facilities with more than 110 million gallons per year of renewable fuel capacity in the US and India. Included in our production portfolio is a 60 million gallon per year capacity ethanol plant located in Keyes, California, near Modesto. We also built, 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. Page 2

3 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 at the parent company,. Number three. The growth of the India business may create an opportunity for an IPO or sale of a portion of the India business due to the patent-pending technology, the 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 and 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 s 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 than 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 and margins to follow a positive trend due to stronger demand and lower prices for gasoline, increased demand for ethanol by enforcement of the Federal Renewable Fuel Standard, strong demand for low carbon biofuels in California, and growing foreign markets. We ve also seen improved demand in pricing for wet distiller s grain over the first quarter of this year. Let s review our India biofuel business. is the leading US producer of biofuels in India, a country of 1.3 billion people that consumes about 25 billion gallons of petroleum diesel each year. 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 bulk fuel customers in India. During the second quarter two additional sales channels opened up to 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, our India plant won a $6 million supply contract from the three India oil marketing companies that 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, To support BP Singapore and our domestic business in India, we recently completed the construction of the first phase of our pre-treatment 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. Page 3

4 Now, let us 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 nut shells from the more than one million acres of almonds, walnuts and other orchards in California s Central Valley, feedstock costs can be reduced from current $1.50 per gallon to less than $0.40 per gallon. Decreasing feedstock costs to below $0.40 a gallon while increasing revenues to about $4.50 per gallon makes cellulosic ethanol one of the most profitable biofuels to produce, provided that the conversion yields are high and conversion costs are low. For the past ten years 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 syn gas from wood feedstock or failed to obtain high yields due to fouling of methyl catalysts, we determined that a high temperature gasification system and a biologist 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 syn 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 syn gas to ethanol using biological rather than metal catalysts. During the past several years we have worked with the team at LanzaTech to arrange exclusive license rights for 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. selected the InEnTec gasification unit due to the high levels of clean syn gas that is produced by the InEnTec system, significantly increasing potential cellulosic ethanol production rates compared to lower temperature gasifiers that produce higher levels of ash and lesser quality syn gas. During the second quarter of 2017, we licensed the exclusive and predominant worldwide rights to InEnTec s advanced gasification technology for use in 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, LanzaTech and InEnTec teams, yesterday we announced that the integrated demonstration unit is now producing cellulosic ethanol from waste orchard wood and nut shells 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 US, California s agricultural region known as the Central Valley. We are excited with the yields and 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 and other data from operation of the integrated demonstration unit will be provided to the US 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 the conversion of corn fiber that is already in the ethanol plant. In April of 2016, signed an agreement to acquire Edeniq, a biofuels technology company that converts corn kernel fiber into higher priced, lower carbon Page 4

5 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 terms set forth in the signed acquisition agreement. Let us now review our key financing initiatives, starting with EB-5. We have received $35 million of subordinated debt from 70 foreign investors at a 3% interest rate from escrow. We have 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 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 have now signed agreements with EB-5 brokers in China, Hong Kong, Vietnam, India and Russia. I have 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 a $50 million Phase 2 offering should benefit from a renewed focus on rural and high unemployment areas and in the enforcement of the EB-5 legislation. The EB-5 lending 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 is entirely non-dilutive to shareholders. In summary, we believe that is well positioned for growth with the 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 costs by repayment of high interest rate 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? Operator Thank you. The floor is now open for questions. [Operator instructions]. Please hold while we poll for questions. Our first question comes from Carter Driscoll of FBR Capital. You may now state your question. Q: Good morning, Eric and Todd. Hello, Carter. Q: Can you break out your expectations of which of the buckets of opportunities where biodiesel increasing sales in the second half of year will be bulk, BP, just to get a sense of both by customer and then maybe a ramp in the first couple of quarters, whether by range of volumes. And as a follow up to that, is it take and pay contracts, or I think you communicated in the past they would take as much as you could produce and you re mainly limited by feedstock availability, or at least low cost feedstock availability. And then I have a couple follow ups. Thank you. 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, 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 supply 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. Page 5

6 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% is 10,000 tons per month, and that would drive their business expectations as it would also drive ours. Because of its effect on our supply of our domestic India government customers and bulk customers, and now that the retail market has also opened up in India, we would expect we d need to expand our production capacity in India to match the 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 re receiving from them and then our production turnaround time is roughly a month, so a month after we get a delivery we ll be able to put product back in a boat and ship it off. In terms of our domestic business, we have a $6 million order with the government-owned Oil Marketing Companies. Their demand is expanding, as the air pollution benefits of biodiesel are becoming more readily apparent and biodiesel 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. So, we expect to win further tenders with the OMCs. Our bulk customers continue to have a strong appetite for biodiesel, and we showed an increase in that business of course over the last quarter and expect to continue to see strong relationships 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 an 18% tax rate for biodiesel, and historically that had recently been at 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, overall expectations 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. The last point I want to make is that we have completed construction of our enzymatic pre-treatment Phase 1 and have commercial production capacity, and we ll be continuing to expand that pre-treatment 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. Q: What I m trying understand a little bit better is, so BP is essentially supplying you with that feedstock, which you re turning around and giving the finished biodiesel, but you wouldn t use that feedstock necessarily to supply to bulk customers. I guess I m trying to get a sense of how you prioritize. Given the demand is so strong from multiple parties, how do you prioritize who you re shipping to? Are you getting a better price because you re getting the feedstock direct from BP? I m just trying to get a sense of that, plus, just an idea of how it ramps from an actual volume perspective. Are you expecting to do 80% every month? Is it going to ramp over the next six months for that target? Just maybe a little bit more clarity. Thank you. Again, we re being constrained by the ramp up pace at which BP can deliver, and so the 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. And 80% of course is more than 50%, so I m hoping that we can get to our 80% number, but we re constrained by their supply chain, not ours, and we are helping them. But at this point in time we don t have commitments from their traders as to what the volumes are out six months. What we do have is commitments over the next 60 days and ramping this business up to full commercial. Page 6

7 There are very significant accounting, legal and logistics processes, not barriers but processes at BP Singapore that we have completed and 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 5,000 tons a month or 10,000, 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 it s primarily because we ve been talking to lawyers and accountants and logistics people and now we re talking mostly to traders. So, we ll see how fast the traders can obtain feedstock and get it to our shores. Q: Okay. Thank you for that. Just switching gears, as you hopefully begin to fill up the 10 million gallon cellulosic facility what do you think your cellulosic percentage of total ethanol production can reach, say, over 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. Our internal expectations is that cellulosic ethanol pre-treatment using our LanzaTech and InEnTec technologies is an expansion of production capacity, and for a variety of 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 and this would be 10 million gallons incremental to that, so call it 15%, 10 million gallons into 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 at $4.50 a gallon plus we have an animal feed byproduct, you re at over $5 a gallon of revenue with 10 million gallons, so you re adding 50 million of revenue at very, very high gross margins. Q: 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 moving above 10% blend wall and maybe the E15 adoption number of retail stations beginning to offer the RFS. Do you think that has largely been put to bed in terms of both point of obligation and the legal outcome of just a short while ago in terms of changing the way they constantly fiddle with the mandated supply of ethanol? And then maybe just your big take 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. Thank you. That s a very good question, and 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 that actual Congressional process included the deletion of including demand, by the way, a 10% blended cap is a demand function, and 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 adjudicating very clearly that Congress established minimum mandates, including the 15 billion gallon mandate for corn ethanol and the 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 would have to be canceled, these are the 2016 RINs that the EPA had erred and not appropriately Page 7

8 required to be delivered by lenders. We currently have a 500 million short, that s 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 US 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, in 2014 and 2015 the oil industry was successful in 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 the EPA erred but we re going to let that error stay in place for 2014 and 2015, and we re going to fix it for 2016 and onward. The fix is that the actual physical demand for ethanol and the RINs available so you don t have to buy the gallons are both in our favor in very significant ways, 800 million gallons a year on an ongoing basis and 500 million RINs being canceled 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 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. That being said, it drives the overall global demand for biofuels, thereby driving up the margins for biofuels producers because of consistent enforcement in the US of our domestic law. The last little point I want to make is that California has its own Low Carbon Fuel Standard with the same dynamics, and the dynamic here 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 ten 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 the environment investors want to be investing in as we go into low carbon cellulosic ethanol and low carbon biodiesel. Q: Unless you re short RIMS [ph] as a refiner and If you re short RIMS as a refiner, you need to get into blending. You ll see more refiners getting into blending. Q: Understood. Thanks for that discussion. Maybe just two quick others from me before I pass along. What s your expectation, given the little bit of uncertainty with the ongoing debate in this country on immigration policy, what that could do the timing of your spaced JV financing? Obviously you ve done the groundwork, but depending if that pulled through it might be a 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? Very good question, let s take on the integration question first. There was a high level of uncertainty starting November of 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 have 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 favoring world markets. Page 8

9 We think we re on the rights side of the history with EB-5. We ve been very patient with the 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 an integration and EB-5 point of view, we re fine. Now, the second part of the 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 was the general economic crisis of 2008, they were the money that came in when all of the other fundings, specifically the State Bank of India, got delayed. And so in 2012, when Congress had canceled the blenders tax credit and we had excess ethanol and margins went negative, they were the ones that came in with $35 million to allow us to take full advantage of that and acquire a facility that cost a hundred million more than that. Our relationship with Third Eye Capital has expanded over the years, it has gotten less expensive over the years. I m embarrassed to remark about some of the early cost of capital we had, but we are down now to 12% interest rates on much of our debt. We actually have a part of our loan which is at 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 ten years have allowed us to stay in good stead, not having ongoing issues with our documentation. 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 the long relationship, bringing 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, etc. The US Dept. of Agriculture is a source of debt replacement, and it s of course very low cost capital because it s guaranteed by the US taxpayer. We received a phase 1 loan guarantee approval, and we re going through phase 2 right now with the USDA, which would be the bulk of the money for, I mean frankly the vast majority of the money, 80% of the money, for our cellulosic ethanol plant actually comes from the US taxpayer guaranteed USDA money [ph]. Q: Then just last question from me, you talked about, and I m sure you can t comment too directly, but Edeniq and the discovery process and I think there was some evidence that supports your claim that they did breach the agreement. Any update on the timing, or have you had any amicable discussions with them about resolving this without legal process? The legal process is in the discovery phase. There is some required mediation actually in October under the regular court process. 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, for a variety of different things, not disclose the vast majority of their documents, and they lost the court order two weeks ago in which they do have to deliver this month. 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 agreements. It s a pretty simple transaction, and we delivered all of the requirements under the agreement, and we re just waiting for them to take their shareholder vote of stock or cash that they want at closing and then go to closing. Q: There s not necessarily any recourse in the fact they didn t close the original date? The recourse is just specific performance, which is that they are required to close. They re avoiding that, and we re seeking to have the court affirm that they need to close. There s also damages as a result from that but Page 9

10 that s largely just a part of the court process as damages occur when people don t do the things they re supposed to do. Q: Understood. Thanks for taking all my questions. Good. Thank you. Operator Thank you. Our next question comes from Tom Welch of Ameriprise. You may now state your question. Q: Hi, Eric. Thanks for taking my call. Dialing it back to the whole buyer diesel arena, just some of the nuts and bolts if you could clarify some things. My first question is when BP ships raw material, can you give us a rough idea of how big that is on a per shipment basis? Are we talking It s scaling up to 5,000 tons per shipment. That happens to be roughly the amount that s most economical to put into the ships that come in to our ports, so about 5,000 tons per shipment. Q: Okay. And you said they have a couple shipments basically heading in your direction on the water right now, so I m guessing maybe they have, what, maybe ten tons raw material heading your direction right now? The initial shipments are being done through a smaller size per shipment so that we can get initial production done and they can come and review additional logistics requirements, etc. over the next few weeks, and then we ll be scaling up to the 4,000 and 5,000 ton per shipment phase. Our expectation is that that would happen in September. Q: Okay. Another nuts and bolts question here on biodiesel, you are developing enzymatic capacity in phases. You said we ve just finished phase 1. What s our current enzymatic biodiesel capacity under phase 1? We are at roughly a little less than half of our entire plants production to be done with enzymatic biodiesel. We don t have any real time constraint on expanding that production capacity, so we ll be going to two-thirds and then 100% over the next few months actually. We re just matching the BP process. It s a pre-treatment unit, so we re building tanks and process equipment that are in front of our biodiesel plants. The biodiesel plants are already at 100%. It s this ability to take some of the feedstock and run it through pre-treatment that is really a BP-focused transaction opportunity that we re scaling up production vastly to match. 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. Q: 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 some kind of a rough time horizon? 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 accelerated. I wouldn t be surprised to see it accelerated as BP is looking at a very, very nice business here and the faster that they move the better it is for them, but current expectations is it would be early fourth quarter. Page 10

11 Q: Okay, very good. Another nuts and bolts question, are we, is going to be allowed to use a portion of the raw materials from BP for domestic supply of biodiesel, or is this contract for literally just for 100% export? 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 re one of the largest importers of crude glycerin form Argentina and Europe and elsewhere into India, and that business is going very nicely for us. So we use that credit line for the purchase of other feedstocks we bring into India that supply our bulk customers, the oil marketing company, government customers, and expanding retail sales. Q: Would that be, I read through the Q2, would that be Gemini Edibles? Gemini, yes that s correct. Q: I was encouraged in that it looked like our raw material costs, and I m guessing, maybe you can put some color on this because it s Gemini Edibles, our raw material costs for biodiesel have literally just dropped and cut in half from what I m looking at. A year ago we were looking at almost $1,000 a ton, and now we re looking at around $500 a ton on raw materials. Can we attribute that to Gemini Edibles, is that their No, and if you look at the last page of our earnings release, we disclose not the cost of goods sold, that has other costs in it, labor and other things, chemicals, but the actual number of tons purchased and the average cost per ton for glycerin and biodiesel combined together. 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 ll get biodiesel prices also to increase very significantly. We re in a rising price environment so costs increased as well as revenue increased. Q: Okay. I must have misread that. Final question, obviously there s still a big question in the air as far as the EB-5 financing, whether it s the reality or whether it s just perception doesn t really matter it s just the simple fact that foreign investors are not jumping all over the opportunity for 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 we have contracts in hand for more than 100% of capacity, we have the India stock market hitting all-time record highs. It just seems like it would be a fantastic alternative to be able to have $300 million or $400 million worth of liquidable [ph] assets sitting in the bank as far as publicly traded stock and still being able to whack down $50 million worth of our long-term debt and eliminate it with an equity offering on India. You are correct, and you re seeing actually the same thing that we re seeing. What we re getting is a, well 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 days from now or less. Just signing the agreement itself is very exciting and 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 accelerating next quarter that we ll have some very serious discussions with the existing investment bank, which 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 it is here in the US, and the process is really driven by the investment banking firm and as a result is very quick, and so we re talking about 90 to 180 days for an IPO effort in India. We are looking to take full advantage of our leadership position there, our patented technology, our low cost feedstock we can use because of the patented technology, which is Page 11

12 a sustainable additional 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 a number of years, of course, going back two years, and we re just executing on the plan that we said we were going to do. Q: I guess that answers my questions. Thank you, Eric. Good. Thank you very much. Operator Thank you. Our next question comes from Scott Ozer of Sandlapper Securities. You many now state your question. Q: Hi, Eric. The previous gentlemen just hit all the areas that I wanted to touch on. My question was about the IPO and an update on Edeniq that was handled earlier, so congratulations. Thank you, and we re working hard to just follow up on the strategy we ve already laid out, so I appreciate your support. Operator Thank you. I ll turn it back over to you, Todd, to end the call. Well, I ll tell you what, Angelica, I ll take care of this. Thank you to the administer [ph] holders, analysts, and others for joining us today. We look forward to meeting with you and continuing our dialogue about pursuing growth opportunities at. Todd Waltz Executive Vice President and Chief Financial Officer Thank you for attending today s Earnings Conference Call. Please visit the Investor Section of the website where we ll post a written version and an audio version of this Earnings Review and Business Update. Page 12