Q3 2019 Earnings Call
Thank you for holding the conference calls Burpee beginning shortly thank you for your patience.
So again, thank you for holding your conference call at the beginning shortly thank you for your patience.
Welcome to achieve all incorporated Q3, 2019 or any conference call.
My name is feature any and all the operator for today's call.
Hi.
It's kind of or no.
Later, we'll conduct a question answer session Kinda question answer session. If you have a question. Please press Star then one on your Touchtone phone.
Please note this cafritz system recorded and I'll turn the call Caffrey Elaine Junior Jeffrey she really changing you may begin.
Good afternoon, everyone and thank you for joining <unk> third quarter 2019 earnings conference call.
To start by introducing today's participants for the company.
What does today as Patrick rubber Gee, that's chief Executive Officer at Carlin Romero, Jugos, Vice President controller, and principal accounting officer.
Earlier today, we issued a press release that outlines the topics we plan to discuss.
Yeah. This press release is available on our website at Www Dot Dot com.
I would like to remind our listeners that this conference call is open to the media and that we are providing a simultaneous webcast of this call to the public.
A replay of todays call will be available and you know its website.
All lets call today and on this webcast you will hear discussions certain non-GAAP financial measures Nongaap financial measures should not be considered an isolation from or as a substitute for financial information presented in accordance with gap.
Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures that's contained and the press release distributed today, which is posted on our website.
We will also make certain forward looking statements about add some circumstances that have not yet occurred including but not limited to projections about your gross operated activities for the remainder of 2019 beyond. These forward looking statements are based on management's current beliefs expectations expectations and assumptions that are subject to significant.
Asks and uncertainties, including those disclosed a g. less Form 10-K , but the year ended December 31, 2018, which was filed with the U.S. Securities Exchange Commission edit subscale reports and other filings made where do you actually see BACE, though including Junos quarterly reports on Form 10-Q .
Investors are cautioned not to place undue reliance on any such forward looking statements.
Such forward looking statements speak only as of today's date, a g., though disclaims any obligation to update information contained in these forward looking statements whether as a result of new information future batch or otherwise.
On today's call Powell began with the discussion of she wrote business developments.
Caroline will then review Chief financial results for third quarter of 2019.
Following the presentation, we will open up the call for questions I'll now turn the call over to Pat Thanks, Jeff.
Already seen always important today in the press release and to take away, they're making a lot of progress rather than rehashing. The press release I'll talk about what it means and that is really the path to profitability and growth of this company.
Now, we believe that we could become profitable or close to it as a company by the end up 2021, if we're successful in approving the carbon footprint.
Arleigh Burke site and selling low carbon ethanol, the California market under the low carbon fuel standard program. We we'd also be deploying a 1 million gallon per year hydrocarbon plant that produces jet fuel isooctane and capturing some value from the RMG projects renewable natural gas projects by selling to RMG partners, California or using.
Guarantee for process fuel at our Lebron facility.
Now the cashless when these projects would be expected to have potential offset the cost inherent in developing mainstream low carbon jet fuel gasoline and diesel fuel businesses that have the potential to grow very very large takes a pretty good development.
Budget lot of people to continue to do the market development and commercialization ticket just be a really big business now what I like is that we're able to do these projects and identifiable but with the combination of the way in renewable natural gas low carbon ethanol generates a lot of cash flow the 1 million gallon hydrocarbons.
Plan would generate positive cash flow and help creased products that established the supply chain is not about.
Proving it technology developing a technology, it's all about making the market ready to accept volumes that are order of magnitude greater.
The timeline for that 1 billion gallon hydrocarbon plant would be about 12 months after its financing and it'd be expect to come on line. The first part of 2021.
Now we expect the renewable natural gas projects to come on line to be qualified for California, low carbon fuel standard by the end of 2020 early 2021.
And then expect we'd expect them to start generating meat meaningful cash flows through a combination im just trying to a pipeline are taking it to the plant and capturing value was low carbon ethanol in 2021 now it's worth reemphasizing that it's not our strategic intent to simply be low carbon ethanol supplier in the long run no. This instead is.
Means to generate cash in the near term well, we build out our major liver and expansion now it's a part of our these initial efforts around decarbonizing our site low carbon ethanol and just wondering hydrocarbon plant here's a list of things that we've accomplished in July 2019, the companys entry into an agreement.
DBO, that's the anaerobic digestion technology company. This is can be detect those digesters will be stalled at dairy farms near the liver facility.
We sign.
End of agreements with one dairy.
And we will soon close with a couple others. This will be to develop anaerobic digesters at their sites.
This is all about getting dad menorah based renewable natural gas on a path to come to our plant.
And give us the optionality when a 12 pipeline as well.
Good business, we needed for the de carbonization of our site. It's the natural gas for petroleum that gives us some of our biggest footprint contributions from Wanna get rid of those.
We've already announced we've secured our wind project the wind towers are going up and bell supply our electricity needs.
But in essence take us off the grid and what that will still be connected to it.
You'll offset.
Our fossil based electricity and reduce our footprint.
And of course, all of this matters and that continues to reduce our carbon index now shouldn't be Boston anyone that we put a million and a half Buxton. This project how does put in the rest of the money more than $7 million.
Leaving our business.
Now these low carbon project just listed it give us some very good carbon score for use in California.
And.
That means that we could make good margin for ethanol by selling it to California.
Now.
That's different than the ethanol margins at the commodity levels that are dot broadly as you know this year they've been terrible.
That we objective be terrible in the future. So even if they remain terrible at that at the.
Broad ethanol market commodity pricing.
By Decarbonize again flooring Sci score that adds margin potential by so I'll get into California, even if the margins at the normal ethanol.
Business stick.
Now the other hand, just pause at the ethanol margins recovered to commodity level, what good that's an upside for us.
That will have potential.
Now regarding the 1 billion gallon hydrocarbon plant halt Carlos will be taking the isooctane through for the renewable gasoline.
Good pricing from them there, it's all about developing the market further making a good landing zone. We go to orders of magnitude Marcher quantities Apio Air total and now another airline we'll be taking the jet fuel that comes from that billion gas plant now that the revenue from this 1 million count plant is expected to be about $18 million per year.
Contribute several million dollars a positive EBITDA for our business.
Even planning for zero margin commodity ethanol between low Sai projects, which include biogas and wind power. The combined with the EBITDA 5 million gallon hydrocarbon plant I expect and can see a line of sight to about $20 million of EBITDA by the end of 2020, that's pretty good.
And would make is profitable and.
And it's all this course is based on today's assumption and what I can see what the values are.
2020, we still expect to be negative EBITDA, but it's a clear line of sight as to how we get to be profitable. It's all about the financing and execution of these projects have lots of players who want to participate with us.
But the low carbon ethanol in the small hydrocarbon plant that is just the first step.
Our strategic vision, while we intend is to make a sell renewable hydrocarbons.
Jet fuel and gasoline to get amount of growth track for many tens of millions of gallons in the relatively near term right now based on what comes to serve our chief commercial officer is done.
Right.
The offtake agreements are already in hand, and yellow wise now use things are looking pretty good and its change from where we've been before for for perspective, now and what we need to accomplish the minimum size of plant that we want to build is eight to 10 million gallons per year of hydrocarbons. This is really gives us on a place that's diesel.
In the economy of scale curve.
Broken spread our fixed costs bigger plan would be better and it's interesting that looks like we could be on track for that want to see what we closed and when and how we want to accomplish it.
And.
We intend to close on these additional contracts, resulting at offtake agreements the probably between we can see tend to 30 million gallons per year or more.
Here's a summary of where we are positive and Carlos App. Your air total the Cdis Seattle and other airline partners add up to about six to 7 million gallons per year, that's an increase of what I've reported before.
That accounts for more than 50% of the minimum of what we want our capacity to be.
These are all at attractive pricing good offtake agreements.
Based on the and we use NOI that we have in place it adds up to more than 50 million gallons per year and these are across people across the value chain major fuel suppliers and customers. We expect to close these contracts during the fourth quarter of 19, and the first quarter 2020, they've made progress. It's we're asked.
Customers to put up their balance sheets to back to take take or pay offtake does take some time, because it's a serious commitment that they're making.
It's not just.
It's not just a simple as already out by if you make no. There's no really if we make it you will buy it and pass that's the kind of agreements that were shooting for here and that these people have agreed to lease in the ammo and what you otherwise stage now the revenue. If we did this the revenue from Buildout of Luverne would be something on the order of 100 200 million.
Dollars, depending upon how big we built once we had the volumes and pricing signed a definitive contracts, we expect to arrange financing for the build out of the major expansion of burn now regarding the question number all this money come from to build out the big plan to burn.
We are working.
To set our plant up our plant expansions up as projects and we will we appeal to project financings, we know that because bharti engage several players we have term sheets from them and these cut across people have our strategic type player to project finance Sears equity funds.
And they are anxiously looking over our shoulders as we complete these offtake agreements.
The key question has been what is that price and volume for tens of millions of gallons of offtake, that's been the and resolve question, but we're we're getting that answered and we see it reflected in where we are in the marketplace with fees potential customers and what the degree to in pricing in these fellow wise and then we'll use.
The project and answers have given us term sheets to provide the equity and our debt that we need to build out our large capacity.
We're sorting through these options working to make sure we have a strong cash flow that would come back to the parent chief awake.
Now as we get on the growth track, we recognize that our business ultimately is expected to take the farm up a market development and licensing business. This is beyond the burn so a parallel to what we're doing focused on the burn we will be moving forward on licensing and other parts of the world. We expect to continue in India first with price.
And then with other partners and we have been progressing and additional set a licensing agreements.
Focused on.
Hydrocarbons from molasses sugar and rice drought and we have other discussions that are now kicked off in various parts of the world.
And in fact, we've opened up discussion South America and this of course. In addition to he wants to have reported before but also Australia southeast Asia and locations in the U.S.
Everyone has the same question what price leads to large volume when does this business grow really really bag on I think we're about to answer that question over the next few months at least for the initial steps for growth and I think that with the volumes at tims talking about its can be quite interesting.
Now regarding.
Aspinall revenue and margin in the current state of affairs, it's extremely frustrating irritating.
We have been operating our plant so that when the margins go negative an ethanol we stopped grinding corn, so we have less.
Ethanol volume, hence less ethanol revenue, it's irritating for me as CEO that people focused on that in any way is not the right metric we're stall about what we accomplished in the marketplace regarding the growth of our company.
For commodity ethanol Katherine taste take the conservative approach, we're going to plan for zero contribution margins next year too.
Hopefully be analysts pickup on this I understand it and our crystal clear going forward and then it will definitely can work on the upside now our focus is to drive down that carbon scores at the plant. So we can capture margin from selling into California.
Our argon or one of the other low carbon regions.
We will stop grinding for next year too if.
The ethanol margins go negative so we likely will run at less than 20 million gallons per year of ethanol will have to see whats happens.
We can't predict the volumes or revenue accurately from that ethanol plant that does and what drives our business. It doesn't define our business. So.
Hopefully the macro environment changed the ethanol margins change, we'll have some upside here and there will be great.
But what that's not going to define US is now we're about we're going to do the hydrocarbon business case of butanol drive the carbon down.
On the ethanol and capture that margin.
Got change this game to very low carbon advanced Biofuels, that's the jet fuel the gasoline and ultimately diesel.
Now I'll turn this call over to Carolyn who is going to take us through the financials Carolyn.
Thank you Pat.
Chemo reported revenue in our third quarter at 29 came to $6.1 million as compared to the $8.6 million in the same period into Fyeighteen.
Okay. So this 9.9 million in the third quarter 2019 first of 10.6 million in the same period in 2018.
Cost of goods sold included approximately 8.3 million associated with the production of economic.
No and related products, and approximately 1.6 million and depreciation expense.
Gross loss was 3.8 million for the third quarter 2019 first of 2.1 million for the third quarter 2018.
Research and development expense decreased 5.1 million during the third quarter ended 2019 compared with the same period 2018, due primarily to a decrease in cost.
So stated with this out haircut facility, partially offset by an increase of personnel and consulting expenses.
Selling general and administrative expense.
Chris 5.2 million during the third quarter 2019, compared with the same period in 2018.
Primarily to an increase in personnel consulting and Investor relations.
Actually offset by decrease it professional fee.
But then total operating expenses for the third quarter 2019, we've reported approximately $8.6 million non cash stock based compensation.
For the third quarter 2019, we reported a loss from operations at eight point Onemillion compared to 6.1 variant for the same period in 2018.
In the third quarter 2019, our cash EBITDA.
non-GAAP measure with which is calculated by adding back depreciation and non cash stock based compensation to GAAP loss from operations.
5.8 million.
Look at four point tendering and at the same quarter of 2018.
Interest expense for the third quarter 2019.
0.6 area.
Decrease compared to the same period at 28 team.
The third quarter 2019, we've reported a net loss of 8.6 million or a loss of six.
Per share.
At 66 cents per share.
Based on weighted average shares outstanding at 12 million 968255 share.
This compares to the loss of 9 million in the third quarter 2018, or a loss of eight cents per share.
And then third quarter of 2019, Tivo recognized in that noncash loss of $2000 due to changes in fair value Novak financial instruments, such it warrants.
That is distributed.
Adding back the noncash gains resulted in a non-GAAP adjusted net loss of 8.6 million in the third quarter 2019.
non-GAAP adjusted net loss per share 66 cents.
This compares to a non-GAAP adjusted net loss of 6.9 million in the third quarter 2018, or a non-GAAP adjusted net loss per share and 85.
Having a stronger balance sheet is important into their business forward.
Our pain and growing our business.
With that I'd like to thank our shareholders for their continued interest.
Reported tivo.
The call for questions operator.
Thank you. So now begin question answer session.
If you have a question. Please press Star then one and you touched on phone.
If you wish to be moved from the Q. Please press the pound sign or the ASCII.
If you use the speaker phone.
I need to pick up the handset first pressing the numbers when scan is having on your question. Please press Star then one and you touched on some.
Your first question comes from Amit Dayal from HC Wainwright Your line is open.
Good afternoon. Thank you for taking my question.
So just to begin with this hydrocarbons right on the story, yes, Hello second.
My focus sent me an email and the message that said that.
In our projections.
You should be 2021, where we have we expect to see something on the order of that $20 million kind of in numbers. That's what's got potential I misspoke and said 2020, the second time I mentioned that might call.
On the sorry.
Yes, yes, so and with respect to the hydrocarbon.
End of the story.
How long before you secure the remainder I know you pointed out you have roughly six to 7 million of the 10 million lower end of the range you're targeting so just wondering how long before you potentially secure.
So the minimum you need to move onto the next steps.
And then once you get the you know what can we expect to take place.
In terms of.
You know just moving on to the build out et cetera.
Some color on what the milestones.
That really how the milestones would play out if you will.
With that some of our story.
Sure. So what we have as Ela wise enamel use that are near that added them all up they do a 50 million gallons and they're all pretty decent pricing for the most part so what to do is figure out how big were going to build our planned and it's getting to be of an interesting side now the importance of this.
In the Big question, that's been out there is what is that pricing really.
And it has to be something that people can see for long run it haskett path.
While the chief executives financial officers downstream of us.
And it looks like we've got those parts worked out we're down to the final details of contracts I expect to have those done.
This quarter and next.
And we.
The sizable burned plant could be anywhere from 10 million gallons to 30 million gallons now.
Tim has been busy securing these contracts CB turns up with 40 and 50 million gallons in many be that we had to do a second sight I don't know yet we'll see.
It's pretty interesting I think.
I think thats the bellwether for me Im pretty happy is that our pricing seems to work now.
When we have a smaller plants like a 10 million gallon plan, obviously, our cost of production would be higher than would be if I had a 20 million gallon plan or 3 billion gallon plan because.
At the same number of people that run that plan. So my fixed costs would be spread out a bit more so key for us.
The gallons how big a plant.
We have project finance people, who have already under secrecy agreements have already have term sheets, we already have people who want to play with both the equity in the debt.
In remember these think this as project setting this liver and site build up build out as the project and then.
I think that that point.
Is having those contracts done so everyone can see.
What that pricing looks like.
Then it's a matter of arranging the financing in that'd be the second milestone is getting those people signed up on definitive deals.
Some of these quite large because of the build outs were talking about.
We're trying to do the financing in the way that's most most minimizing for dilution as we possibly can that's how we're thinking about it obviously.
And hence the project approach.
We see that as key for going for us.
So what I would see is that this quarter, maybe maybe goes into the next year.
First quarter I think we'll get it done sooner than later I think based on what I'm seeing.
And then it'll be all about the financing given a couple of months. So I'd expect that sometime early next year. We can late fourth the plan. Since you are exactly how the build out it's going to work who exactly is financing it what it looks like.
But in perspective, the build out for a luverne plant.
10 million gallons you'd be somewhere around $150 million. If we include the additional infrastructure for our reducing our carbon score.
If it is 33 million plant, it's going to be double that at least.
But interestingly enough that's more attractive some of these project finance people.
So.
Got the pieces it is about putting them together.
Thats your question.
Yes, so just wanted to dig in a little bit more on the pricing cyber these agreements.
Just a question I guess is going to rest of duration of these offtake agreements is this like a one year contract to your contract that you have.
Entered into with people you already have signed up.
And on the pricing front.
Are you.
Okay.
In working at sort of.
Similar price range for these different.
Customers, who have signed these agreements.
So regarding that youre going to asking the first one again to listen to you on the second I got bulk phenomenon you got to remind me when I'm going into the second part first chotia regarding to pricing and customers is that there's some differentiation octane is more valuable than diesel fuel is just simply is.
And so that isn't lost on us at all and is in part of our calculation as to what we should be doing and how we think about what product mix and unplanned.
Butanol is a valuable product as well, although that one as we've talked in the past its.
You know it takes work more work to develop the marketplace.
Because of all the different regulations and stuff locally.
But we'll get that that to jet fuel I would say is kind of converging in that theres certain pricing mechanisms that are acceptable in the marketplace you might have different details, but I think the results are generally the same so for isooctane discrete price.
Most valuable jet fuel.
It has converged different mechanism is how to do the pricing Isobutanol, we havent changed.
Changed much still we can make it and sell it keeping you could from petroleum once we build out our big plant.
Now the first part your question was what again remind me.
The first part was like what's the duration of these offtake agreements is at one year two usually how does that.
Well so don't.
Project financing they have to be long term agreements so they're typically.
Seven years after the start up of the plant.
And that's what makes it hard for people because they have to have a crystal clear view or at least the conviction that deep conviction as to what oil price would be carbon value looks like now we've got 7 million gallon six to 7 million gallons under contracts like this already some of the contracts run longer one of them runs a little bit shorter.
But they're all of that long term duration.
These are people.
Who are signing up by product from us already.
That's a big.
Big chunk from our point of view in that it's pinning down that price.
Now the next 50 million gallons.
Tim.
Under LOI and then we'll use.
That's also in that same pricing region. So I think we're now.
In conclusion soon very soon.
As to pinning down these long term prices and what people are willing to bet on.
That's interesting so we don't have the.
You know.
Spot agreements, we haven't done that.
We're going for the long term.
Back it up with your letter of credit or your balance sheet in some way we make it you buy it kind of thing.
Right understood.
And then with regards to sort of.
Pulling the trigger.
10 million gallons or 20 million gallons.
And then sort of any work on what the impact to the profitability would be.
Taking into account the cost of capital et cetera.
And how that will maybe.
In fact, our decision to either.
Moving to the construction and deployment fees. Once you have the 10 million gallons secured or maybe we need.
To see if you can maybe being on more volume.
Just any color on that.
Yes, so the way that we we plan is to make sure.
Whatever pricing, we do it gives us returns so that the pace of the cash costs clearly piece for depreciation pays for return on capital.
So we usually it's a minimum of 15% is how we think about it and sometimes it's higher.
That's how we think about it.
And so with the capital number at.
Gross capital numbers of what we're doing volumes that can give you an indication of what it might look like at a minimum.
The other thing here that I mentioned is that 1 million gallon hydrocarbon plant.
It's interesting to because that generates cash in the near term and that'll help us I think a lot because I want that.
That million gallons, we'll use that to create a landing spot for the tens or 20 months of millions of gallons make sure that everyone. In the supply chain is trained on how to absorb the product at the right time.
And that's pretty darn interesting in of itself of course, then the other thing we have going on is renewable natural gas.
The dairies.
Agent.
It's interesting as well in what I liked about that is it gives us some optionality input the gas to the plant.
To make a lower carbon.
More.
Paul.
And then that.
Actually is quite valuable in of itself, maybe more valuable than putting into a pipeline, but again, we can put to a pipeline as well in so thats turns into a business unto itself with some pretty good growth I think we'll be defining that more and as soon as we get these dairies pin down.
And we announced.
Getting first financing.
Approach, then I'll be able to give that a little bit more color, but you take into that all that into account you see us becoming.
Often running for renewable hydrocarbons and we're going to have.
Side business is not side business and other business of our in GI supplying our plans and our plant site as we go for us.
Got it and then just moving on to maybe the ethanol side of things.
When do you see potentially shipping some of this low carbon ethanol is the plan now already.
Okay.
The connection from though in that sense are now potentially having been deployed.
What else remains in terms of.
Referring to production as locally.
The new base getting the benefit of that.
I think.
Wind tower should be up and running the end of the first quarter begin to the second quarter.
Next year, and then you have to be qualified in California, yet to get the CIA score of a certain level and has to be certified.
Got to be below 70.
Theres several projects that were doing.
That could get us there along with the win because now we have.
Renewable electricity, so, yes, but through the exercise of starting on how best use Mike that renewable electricity come or your carbon score. So instead of using natural gas somewhere we're going to use electrical energy somewhere.
And then that's part of it and then.
Well have the newer biogas projects.
Come online.
In the second half of the year, but by the time, it's all qualified it's probably near the end of the year. So I think if I'd be conservative I'd say that we don't see the benefit from low carbon ethanol in a meaningful way.
When meaningful I mean.
Very me what's in the it's in the many many millions.
EBITDA, but that would only happen near the end of next year I think.
Yes, the thing can be on track like they are.
We'll see incremental value along the way that has potential I just don't know what the timeframe is until we do.
See the wind power measure the planned look at the other projects evaluate the CIA score as it stands.
And I'd expect some improvement.
And that will be as soon as we can get done I just don't want it is call it mid year.
And then it will be it gets you read that biogas in in that should be.
Hopefully third quarter. It might go up early fourth quarter, we got to get qualified so thats why we plan and some extra time.
Understood.
Just maybe just last one for me on your announcement regarding this block Gen initiative.
How much.
So the newest men putting into this you know how do you have to maybe monetizes. It just flow so tracking your own production.
When you sort of rolling it out to the wider market.
Some you know how we should expect this too.
Yes.
Yes, so for US we have to track the sustainability of our products from how something a secured at the farming level, although in the marketplace and measured CIA score and sustainability attributes we want to since we have to do that the idea is.
The use of modern technology like block chain to track things just attach the attributes of the farm. So someone buys 10000 gallons something hopefully we'll be able to be at a point and say well, here's where those 10000 gallons originated by.
Somebody's farm.
Specifically or farms.
And that helps them get the quality assurance or product assurance around sustainability attributes I think it's a natural logical tool to use the company that we're working with.
Block size capital is that there will create a good guys and they have.
We're going to work on this and collaborate together on it so if the collaboration.
And we will turn it outward.
So it's a small relatively small investment on our side, they're put investment in on their side.
With.
They're going to do some work and then we're going to turn it outward.
Additionally to working for us.
Were either ourself, yes, but we do fully anticipate turning an outward because it's a very relevant tool.
Thing that puts us in a position.
To be success like this where maybe others aren't quite there yet is we know what the requirements are for sustainability, we've been working on it during the certifications are ready we have a plant assembly instrument that we can track the things we have the data that's up in the cloud. So we can easily tie it into the block chain software.
And we can see out.
What attributes are necessary to show people, what works and what doesn't out in the market side of things so that puts us in a position to see the whole supply chain, clearly and Thats, what you need if you're going to block chain system together.
And software together.
Do you expect that ultimately we do license with other people Thats, what I expect to have happened I just don't have a clear enough plan yet how to do it. The first step is going to get to be.
The set up the block chain software working so we like it and then revised shopping.
Got it that's what I have found appreciate your time thinking zones.
Yes.