Aemetis, Inc. (AMTX) Earnings Call Transcript

Welcome to the Aemetis Third Quarter 2020 Earnings Review Conference Call. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Mr. Todd Waltz, Executive Vice President and Chief Financial Officer of Aemetis, Inc. Mr. Waltz, you may begin.

Thank you, Melinda. Welcome to the Aemetis Third Quarter 2020 Earnings Review Conference Call. We suggest visiting our website at aemetis.com to review today's earnings press release, updated corporate presentation, filings with the Securities and Exchange Commission, recent press releases and previous earnings conference calls. This presentation is available for review or download on the aemetis.com homepage. Before we begin our discussion today, I'd like to read the following disclosure statements. 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 and the execution of our business plans. These statements must be considered in conjunction with the disclosures and cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements made on this call involve risks and uncertainties and that future events may differ materially from the statements made. For additional information, please refer to the company's Securities and Exchange Commission filings which are posted on our website and 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 non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the quarter ended September 30, 2020, which is available on our website. Adjusted EBITDA is defined as net income or loss plus to the extent deductible in calculating such net income, interest expense, loss on extinguishment, income tax expense, intangible and other amortization expense, accretion expense, depreciation expense, loss contingency on litigation and share-based compensation expense. Now I'd like to review the financial results for the third quarter 2020. Revenues were $40.9 million for the third quarter of 2020 compared to $57.4 million for the third quarter of 2019, driven by reduction in the price of ethanol and delays in the India government oil marketing companies biodiesel bidding process. Gross profit for the third quarter of 2020 was $771,000 compared to a gross profit of $4 million during the third quarter 2019. Selling, general and administrative expenses remained flat at $4.6 million during the third quarter 2020 compared to $4.5 million during the third quarter 2019. Operating loss increased to $3.8 million for the third quarter 2020 compared to an operating loss of $600,000 for the third quarter 2019. Interest expense during the third quarter of 2020 was $6.5 million, excluding accretion in connection with the Series A preferred units in the Aemetis Biogas LLC subsidiary compared to $6.3 million during the third quarter 2019. The Aemetis Biogas LLC subsidiary recognized $1.8 million of accretion in connection with the preference payments on its preferred stock units compared to $600 million (sic) [ $0.6 million ] during the third quarter of 2019. Net loss was $12.2 million for the third quarter of 2020 compared to a net loss of $7.2 million for the third quarter 2019. Adjusted EBITDA was negative $2.5 million for the 3 months ended September 30, 2020. Cash at the end of the third quarter of 2022 (sic) [ 2020 ] was $79,000 compared to $656,000 at the end of 2019. That completes our financial review for the third quarter of 2020. Now I'd like to introduce the Founder, Chairman and Chief Executive Officer of Aemetis, Eric McAfee, for a business update. Eric?

Thank you, Todd. Aemetis was founded in 2006. We have grown into 4 lines of business, which are focused on producing renewable fuels, including low carbon and below zero carbon intensity ethanol, biodiesel, waste wood ethanol and byproducts, including carbon dioxide and corn oil; renewable natural gas, including below zero carbon intensity dairy biogas for transportation fuel; health safety products, including high-grade alcohol, refined glycerin, blended hand sanitizer gel and liquid, sanitizer wipes and other health safety products; and technology development to maximize the value of our products and processes. We own and operate production facilities with more than 110 million gallons per year of capacity in the U.S. and India. Included in our production portfolio is a 65 million gallon per year high-grade alcohol, fuel ethanol, distillers grain and corn oil plant located in Keyes, California near Modesto. We also built, own and operate a 50 million gallon per year capacity refined glycerin and distilled biodiesel biorefinery on the East Coast of India, near the Port City of Kakinada. I encourage you to consider viewing our updated video and slide presentation about Aemetis, which can be found on the homepage of our website. During the third quarter of 2020, Aemetis achieved important milestones toward revenue growth and sustained profitability in each of our 4 lines of business. Let's start with a review of our new Aemetis Health Products business. In response to a national shortage of hand sanitizer, which is recommended by the Centers for Disease Control to help slow the spread of the COVID-19 virus, in late March 2020, the FDA and the TTB issued temporary regulations allowing fuel ethanol plants to produce alcohol for hand sanitizers. Responding to this approval and the spike in demand for sanitizer products, Aemetis delivered our first sanitizer alcohol within a few days after the announcement through a post-processing arrangement that was formed with a local wine and spirits producer. Then we installed equipment and process upgrades at our ethanol plant to produce higher quality ethanol for health safety and personal care markets. We quickly discovered that Aemetis has a sustainable advantage over Midwest ethanol producers. They have very high transportation costs. And the Aemetis Keyes facility is just a 4-hour drive to Los Angeles, where most bottlers and co-packers are located on the West Coast. Most Midwest plants were transporting alcohol for sanitizer from the Midwest to California using fuel ethanol trailers and railcars. Fuel ethanol uses gasoline as a denaturant in the finished product. So producers who use fuel ethanol tankers and railcars were tainting the product with benzene and other dangerous chemicals. We arranged a $2 million lease purchase of 15 new bulk tanker trailers to be used solely for the transport of Aemetis high-grade alcohol, allowing us to deliver up to 20 loads per day of our high-grade alcohol to West Coast blenders and bottlers from our Central Valley plant and eliminating the risk of transportation contamination. In addition to using new uncontaminated bulk alcohol trailers, our California high-grade alcohol plant location is about 2,000 miles closer to customers in the Western United States compared to Midwestern alcohol producers. Aemetis has a permanent transportation cost advantage with Western U.S. sanitizer alcohol customers over Midwest ethanol producers due to our California production plant location. During Q2 2020, we began shipping large quantities of hand sanitizer alcohol from our plant in California into the rapidly growing health safety and personal care markets. To expand our product line and support customers in the U.S. and Canada, we launched the Aemetis Health Products subsidiary to manage the development, production and marketing of our sanitizer products. Additionally, our India plant has supplied refined glycerin, a key ingredient in sanitizer products into the health products market. We believe that year-to-date, Aemetis has operated the largest production plant for high-quality sanitizer alcohol in the Western U.S., while also owning and operating one of the largest pharmacopeia grade refined glycerin production plants in Asia. To expand our market position and maximize margins, during the third quarter, Aemetis Health Products filed FDA registrations to obtain national drug codes for our own hand sanitizer product blends and began the production of Aemetis-branded gel hand sanitizer. Our 1 gallon hand sanitizer, sold under the Aemetis brand, has been approved by a leading online marketplace and should be shipping soon with additional sizes planned for production. We market the Aemetis brand to retailers and customers with, "Made in California," on the label, in contrast to imported products from Mexico and China, many of which were banned by the FDA due to toxic levels of methanol. We continue to invest in the upgrading of our production facilities that we believe will allow us to deliver U.S. pharmacopeia-grade alcohol starting in Q2 2021. Our total investment in upgrades for the production and storage of USP medical-grade alcohol is expected to be approximately $15 million, of which more than $12 million has already been funded or will be reimbursed by grant funding. Our expanding product line of high-quality and medical-grade alcohol used for hand sanitizer, alcohol wipes, alcohol sprays and other health safety products is expected to meet the demands of a long-term market, driven by the adoption of antiviral products by governments, schools, private industry and consumers. Even if the COVID-19 virus as an imminent health safety threat is resolved in the U.S. during the next year or 2 by a new vaccine, the health safety standards being widely adopted to reduce the transmission of viruses, including the common flu and colds, will expand the ongoing use of alcohol sanitizers as disinfectants, especially at schools, government buildings, offices, sports arenas, airports, stores and other locations with groups of people in close proximity. Let's review our Aemetis Biogas dairy digester and pipeline project. At Aemetis, we are focused on significantly reducing the carbon content of our products, thereby maximizing the value of carbon credits under the California Renewable Fuel Standard and the value under the federal Renewable Fuel Standard, while reducing operating costs by using waste materials. Using our own waste products or using waste products in the local area that are generated by the use of the products we sell to local customers, the sustainability of our process could benefit all the parties in the value chain. An excellent example of this circular bioeconomy is our dairy renewable natural gas business. In September 2020, we completed construction of the first 2 out of 18 dairy biogas digesters in the Aemetis Biogas Central Dairy project, including on-site dairy biogas cleanup and pressurization, a 4-mile pipeline owned by Aemetis and a boiler unit at the Keyes plant. We are now generating below zero carbon intensity renewable natural gas that is being used at our alcohol plant to displace petroleum natural gas. Methane, commonly known as natural gas, is a potent greenhouse gas that is up to 30x more powerful than carbon dioxide at capturing Earth's heat. About 25% of California's methane emissions come from the waste ponds on dairy farms. To reduce damaging methane emissions, in late 2016, California passed a law commonly known as Senate Bill 1383 that mandates a 40% reduction in methane emitted by large dairy lagoons. Biomethane sourced from dairies can be used directly in the form of renewable compressed natural gas to replace gasoline or diesel fuel in cars, trucks and buses to significantly reduce carbon emissions and air pollution. To support the state mandate, California has funded up to $75 million per year of matching grants to dairies to build biogas digesters and related systems. To date, Aemetis has applied for or been awarded about $22 million of grants for biogas and energy efficiency to support our conversion to low carbon and below zero carbon intensity power to operate our California biorefinery and related biogas operations. We believe that capturing biogas from dairies and converting it into renewable natural gas to generate negative carbon intensity transportation fuel is an excellent way to reduce climate change, great value for dairies and reduce costs for diesel truck fleets and potentially for electric vehicles by conversion of dairy renewable natural gas to electricity for transportation use. We are uniquely positioned as one of only 2 ethanol plants in California that can maximize the value of biogas. We are able to use biogas in our plant until our planned utility pipeline interconnection and gas upgrading is completed within the next 6 months. And we received a $1 million grant to install our own renewable natural gas fueling system at our Keyes plant for CNG trucks. After more than a year of project development and financing work, last year, we announced $30 million of equity financing to build biogas digesters at the first 2 dairies in our biogas project. Our institutional investor is working with us to expand this funding with $25 million of additional equity funding to complete the total of 18 dairies within the next 18 months. We initially signed 18 participation agreements with dairies, the majority of which have now been converted into 25-year land lease and manure supply agreements. We plan to complete construction of the remaining 16 lagoon digesters again during the next 18 months. Aemetis owns a 100% of the common stock of the Aemetis Biogas subsidiary. The dairy biogas project has been funded by a preferred stock issuance by the Aemetis Biogas subsidiary to a fund managed by Third Eye Capital, which we expect to expand to $55 million of funding, along with grants from state and federal programs. There's no dilution to Aemetis parent company shareholders for the biogas project. And Aemetis receive 25% of the cash generated by biogas project operations. The preferred stock is automatically repurchased at 3x original issuance price, using 75% of biogas operating cash flow. After the preferred stock is redeemed, Aemetis as the sole common shareholder will own 100% of the cash flow and assets of the biogas digester and pipeline system for the remaining balance of the 25-year contract with dairies. Let's discuss progress at our California ethanol plant. The global COVID-19 crisis that began during Q1 2020 and caused operational shutdowns for many businesses during Q2 and Q3 2020 has also provided challenges to our business. Protecting the health of our employees while continuing to operate our California ethanol plant to supply animal feed to more than 75 local dairies occurred during a time period in which the demand for biofuels in Q2 2020 decreased significantly due to the steep decline in gasoline consumption during California shelter-in-place orders. However, as the economy began to open up in June, fuel ethanol demand partially recovered during Q3 2020, resulting in an 11% increase in ethanol gallons delivered compared to Q2 2020 and an increase in Q3 distillers grain shipments for animal feed. Aemetis operates in 3 of the federal essential critical infrastructures. We have been able to continuously operate our California ethanol plant this year in order to provide transportation fuel, alcohol for sanitizer products and dairy feed. By implementing stringent PPE and worker safety policies, we were able to continue the construction of plant upgrades and building our dairy renewable natural gas project without interruption despite COVID shutdowns and operating restrictions that impacted many other companies in California. To increase the value of our high-grade and fuel ethanol and to reduce the cost of operation of our production plant, we are currently implementing several upgrade projects related to the California plant, including: one, building 2 new distillation columns and related systems to produce high-purity U.S. pharmacopeia-grade alcohol for sanitizers, known as USP grade to begin operation in Q2 2021. Two, installing 5 new stainless steel tanks for USP and beverage high-grade alcohol storage and load out, increasing our storage capacity by more than 250,000 gallons. Three, completing the installation of a new $7 million zeolite membrane dehydration unit from Mitsubishi to reduce natural gas use at the alcohol plant by replacing our molecular sieves with electrically powered equipment, which will reduce the carbon intensity of our fuel ethanol and is partially funded by a $1.5 million energy efficiency grant. Four, adding high-efficiency heat exchangers to reduce natural gas use at the alcohol plant, reimbursed by a $1.3 million energy efficiency grant. Five, installing a solar panel microgrid array with battery backup to replace natural gas with solar electricity while optimizing energy use throughout the alcohol plant, primarily funded by an $8 million California Energy Commission grant. Six, designing and building a mechanical vapor compression or MVR system to significantly reduce petroleum natural gas use, partially funded by a $6 million California Energy Commission grant. Seven, constructing the dairy biogas digester cluster and pipeline to deliver renewable natural gas to the alcohol plant from the initial 2 dairies this year with plant expansion to an additional 16 dairies next year, along with an interconnection to the utility gas pipeline. This biogas project is scheduled to generate approximately $40 million per year of operating cash flow under 25-year dairy supply contracts and is being primarily funded with $55 million of expected automatically redeemed preferred equity being issued by the Aemetis Biogas subsidiary. When completed, these upgrades are designed to eliminate nearly 85% of the petroleum natural gas use at the alcohol plant, saving up to $7 million per year of natural gas and pipeline costs. The California biorefinery will primarily operate using high-efficiency electric motors and pumps powered by renewable power sources. The construction of the $7 million membrane dehydration system financed by Mitsubishi Chemical, Japan, and a $1.5 million energy efficiency grant is currently in the installation process, but was delayed by the COVID-19 crisis due to international travel restrictions and local contractors stopping work under shelter-in-place orders. The ethanol dehydration unit is designed to significantly reduce petroleum natural gas usage and decrease the carbon intensity of our ethanol. And once implemented, it's expected to generate an estimated $3 million per year of increased cash flow. These projects at the Keyes plant are targeted to significantly reduce carbon intensity by reducing petroleum natural gas usage and cost, while increasing the number of California Low Carbon Fuel Standard credits generated each year. The potential combined impact of these projects is expected to be more than $20 million per year of increased operating cash flow at the Keyes plant, not including any expanded cash flow from the Aemetis Health Products, sanitizer and health safety products. Let's review our biodiesel business in India. This week, our Universal Biofuels subsidiary in India bid on a portion of a newly issued the $900 million biodiesel purchase order tender offer, I'm sorry, for about 200 million gallons by the 3 India government oil marketing companies to be delivered over the next 6 months. Our production capacity at the India plant is about 4 million gallons of biodiesel per month. This large oil marketing companies tender offer is an indication of the rapidly expanding government demand for biodiesel in India to reduce dependence on imported crude oil. The entire production capacity of the approximately 5 India biodiesel production plants is only about 1/3 of the amount of biodiesel requested to be purchased by the government oil marketing companies, signaling to the market that additional biodiesel capacity is needed to make India biofuels consumption goals. However, importing biodiesel into India is not allowed under the National Biofuels Policy. So only domestic production can meet the approximately 1.25 billion gallons per year of biodiesel blending in the goal set by the government. Currently, there's about 250 million gallons of India domestic biodiesel production capacity. And we believe that Aemetis produced and sold the largest amount of any operating biodiesel plant in India during 2020, while the industry waited for government oil marketing company purchasing, which was delayed for 9 months due to the COVID-19 shutdowns in India. Though the global price of diesel has declined along with the price of crude oil, the domestic price of diesel in India has remained largely unchanged due to increased India government taxes that offset crude oil price declines. Since our biodiesel is sold at a price linked to India domestic diesel prices, our biodiesel prices in India have remained steady despite the significant decrease in the price of crude oil. The rising cost of feedstock relative to the price accepted by the government oil marketing companies is the primary barrier to operation of our India biodiesel plant at full capacity, which would generate more than $150 million of annual revenues. Due to the COVID-related increase in demand, the refined glycerin prices received by our India plant have increased in response to the need for hand sanitizer and other consumer products. Let's discuss our low zero carbon intensity cellulosic ethanol project in Riverbank, California. We were pleased that the Aemetis advanced biorefinery under development in Riverbank California near Modesto, was named as the #1 waste-to-value project in the world by Biofuels Digest, the world's largest daily biofuels publication. The California Central Valley has about 1.5 million acres of almond and walnut orchards. Almond orchards have about a 20-year life and then must be removed, creating about 3 billion pounds per year of waste wood that are usually burned in large piles in the field since there is no market for most of the waste material. The Aemetis Riverbank project earned its #1 project ranking as a result of our 20-year fixed price low-cost orchard wood waste contract, planned production of high-value renewable fuel and high-grade alcohol from wood waste feedstock as well as valuable fishmeal and other byproducts and using the patented LanzaTech gas microbe ethanol production technology. The LanzaTech technology has been in full commercial operations since 2018 at a plant in Asia and additional plants using LanzaTech technology are being built in China, India and Europe. In order to close the financing for the Riverbank plant construction, we're completing the final permitting and engineering of the plant required for the negotiation of the EPC contract that will include a bonded maximum construction cost. The Riverbank cellulosic ethanol plant is expected to generate more than $80 million of revenue and more than $50 million per year of positive cash flow by producing cellulosic ethanol from low-cost waste orchard vineyard and forest wood as feedstock. The circular bioeconomy created by the Aemetis Riverbank waste wood renewable fuels and high-grade alcohol plant will provide benefits to the local environment and community by eliminating field burning of the 3 billion pounds per year of waste orchard wood in the California Central Valley and will reduce air pollution and improve the health of residents while displacing carbon-intensive feedstock with below zero carbon intensity waste orchard wood feedstock. We can easily use forest waste wood in the Riverbank plant, which has become a major issue for California as we create forest waste wood for managing our forests to reduce damaging wildfires. Let's wrap up with a quick review of the key milestone achieved by our technology development group in fueling an ethanol engine with waste wood ethanol. Our technology development team worked with the federally funded Joint BioEnergy Institute in Berkeley, California for 3 years in the development of a process to extract sugars from low-cost waste orchard and forest wood feedstocks to produce high-value cellulosic biofuels in our corn ethanol plant by displacing expensive and carbon-intensive cornstarch as feedstock. A $3 million California Energy Commission grant was awarded to JBEI and Aemetis, which partially funded the years of collaborative work and lab testing that in Q2 2020 resulted in the production of the first carbon-negative fuel ethanol from California orchard wood using ionic liquids. During the third quarter, our waste wood ethanol was used to fuel the operation of an ethanol engine that generated the same performance and low emissions as traditional ethanol used in the test. The engine technology was originally developed at Stanford University and is a modified diesel engine design that uses ethanol. The engine takes advantage of the high-octane content of ethanol to generate about 30% more torque than an engine running on diesel while creating almost no particulate emissions and very low emissions since ethanol contains a low level of contaminants compared to petroleum. With high cost emissions equipment such as diesel exhaust fluid required to meet increasing air pollution standards, the ethanol engine could more than double the size of the ethanol market in the U.S. to 30 billion gallons per year, with only a 20% share for the diesel engine market. Our patent-pending alcohol production process innovation allows the sugar component of low-cost waste wood to be used to replace cornstarch in an existing corn ethanol plant to produce both high-grade alcohol as well as cellulosic fuel alcohol that are each currently valued at more than $5 per gallon. Importantly, this process innovation to use sugar from waste wood could be implemented at our existing California ethanol plant, decreasing the cost of corn feedstock and substantially increasing the value of our alcohol. We expect to move forward with a plant to extract sugars from locally sourced orchard and forest waste wood, thereby enabling the production of high-margin, high-grade alcohol and cellulosic ethanol at the Keyes plant by displacing corn feedstock. In summary, Aemetis has the technology advantage as well as geographic advantages in sanitizer alcohol production, is expanding the production of a diversified range of low-carbon renewable fuels in 2 attractive markets in California and India, generated $6 million of positive cash flow and 120% revenue growth at our India plant during 2019 and is now moving past the government's COVID-19 delays in 2020 to be awarded bids and begin shipping on the large government contracts for biodiesel. Aemetis has begun the increased profit margins from plant upgrades related to the Keyes biorefinery that began in Q2 2020, has completed the first 2 Aemetis biogas dairy digesters and 4-mile pipeline and are now powering our biorefinery with waste dairy biogas. And our planned deployment of patented renewable fuels process technology at the Riverbank plant has positioned Aemetis to rapidly produce expanding positive cash flow from the production of high-grade sanitizer alcohol as well as low carbon, clean burning, high-performance renewable fuel from abundant low-cost waste biomass feedstocks. Aemetis is building below zero carbon intensity products that create a sustainable circular bioeconomy, utilizing waste feedstocks to create valuable products by implementing innovative processes. Now let's take a few questions from our call participants. Melinda?

[Operator Instructions] And first, we go to Ed Woo with Ascendiant Capital.

Can you give us any updates on when the Riverbank project may begin construction and actually when it may become operational?

Currently, we're planning to do the project financing in 2021 and the construction cycle should be about 24 months.

Great. And then also on the -- congratulations on getting the biogas project up and running. When do you think we're going to see more, I guess, dairies being connected? And when will we start seeing a greater impact on your financials from this project?

The second quarter of next year should see some additional dairies come online. It's a ramp-up over the next 18 months, but we're doing in roughly 5 dairies, 5 to 6 dairies per group. So we have 2 done now, another 5 to 6, another 5 or 6, another 5 or 6 to get the 18. And so we'll see every couple of quarters, you'll see another cluster of dairies that get added. We're building a pipeline as well as dairy digesters. So we extend the pipeline and then we gather up the dairies in that area that have already signed the 25-year agreement to connect to the pipeline.

Great. And my last question is, what's your overall outlook for oil and ethanol prices? I know, obviously, it looks like we're going to have a new president. What's your view on his take in terms of renewable fuel standards and ethanol standards?

Ethanol is a 10% blend currently. Under the Trump administration, it was largely approved to become a 15% blend. That's an increase of about 50%, which represents about 7 billion gallons a year of additional demand at a 15% blend. And at the fuel pump, even 15% of what you would see at the pump is a very small amount when you subtract the taxes paid at the pump, then multiply the remaining balance by $0.15, you're only talking about maybe $0.25 or $0.30 of the entire cost of fuel is all of the ethanol. So if ethanol goes up by only 10%, you're talking about $0.02 or $0.03 difference at the pump, really the rounding error between choosing between which gas station you're going to pull into is the actual ethanol margin that is anywhere from $0.50 to $1 of profit for an ethanol plant. So the function of the fuel ethanol business is solely about supply/demand, and there's been 7.2 billion gallons of waivers by the federal government of the Renewable Fuel Standard since 2013. And I think it's informative, especially for people that might be newer investors in our company, to note that in the last 12 months of enforcement of the federal law, our company made $10 million per quarter, a total of $40 million of positive cash flow from operating our corn ethanol plant, and that was when federal law was simply enforced. And so the Biden administration and 2 federal court decisions support the idea that we would begin, again, to enforce federal law that would represent $40 million per year, by the way, it would represent for us about $0.60 per gallon of margin. And so at the pump, it would convert into roughly a $0.06 difference at the pump for us to make $40 million per year. So it's not difficult to see a scenario in which either Trump or Biden, certainly looking like Biden, simply just doesn't violate federal law. And in so doing, we're well positioned to do quite well in the fuel ethanol business.

Next, we go to Craig Irwin with ROTH Capital Partners.

So Eric, congratulations on the momentum in your biogas business. This looks like it could become something really interesting. $40 million a year over 25 years is $1 billion in profit off this business, and that's nothing to sneeze at, right? So I wanted to ask about some of the underpinning assumptions that you're using to get to the $40 million a year. Obviously, that's all 18 plants up and running. There's the cost of debt on the $55 million from Third Eye. But there's some basic fundamental assumptions, including the carbon intensity of these plants, some of the pig slurry facilities out there have CIs of negative 350. The dairy guys typically range in the 200 to 250 range. I mean, are you assuming you'll sort of be in that range? And then LCFS credit values, I mean, are you using a full $200 or do you have a discounted value in there? And then like green gas for landfill gas, right? Very often, the developer has to give away some of the economics to the landfill owner to facilitate the permitting process. Is there much of an economic sharing agreement with the dairies that are adopting this exciting technology?

Excellent insights, Craig. Thank you very much. We're assuming current market price in LCFS. As you know, that's been a generally rising curve and under California state law increases every year by essentially a fixed amount. So we're assuming it does not increase and it frankly is not at its maximum. This year's maximum is $217 in our model. We're assuming approximately $195. So CI score flat, $195 over 25 years, ignoring cost of living index increases allowed by the State of California. Second is, we have the good fortune of being our own consumer. So we generate LCFS credits by putting biogas into our corn ethanol plant. We also generate it by putting it into our owned CNG fueling station. So your question about discount, we obviously capture the entire value chain by putting it in our own trucks and putting it into our own plant. If we went into the utility pipeline, the discounts we're seeing today are relatively small. And there's a proposal that they would capture more market value that offset much of that discount. It used to be the discount was pretty large. It was one of the reasons we drove to sort of building a model where we didn't actually have to use any outside trucks or parties. And so we have about 75 truckloads a day that go in and out of our plants. And just fueling our own trucks could really be a built-in customer base. And then lastly, the 18 that we have on the schedule right now are what is already, let's call it, part of our relationship with Third Eye Capital. We do anticipate we will be 30 or more dairies. We're just going to continue to grow the opportunity. It's just that this first 2 phases, Phase 1 is completed, second phase is to be completed over the next 18 months does lay out a full year picture, which should be in excess of $40 million per year using the numbers I described to you.

Excellent. Excellent. So then when we talk to some of the larger green gas developers in the market, right, there's a short list of names. They all describe the cow slurry or pig slurry opportunity, I guess, dairy gas opportunity as difficult to address. I know there's something like 280 projects that are in development in California, but the big boys all downplay the dairy gas market saying that it's actually very hard to serve given the proportionate size of the plants. It seems like you don't find these issues. That you found farmers that will be able to give you half dozen plants and make the commitment on one piece of paper. That kind of puts things back in the range or sort of proportionate size closer to that of a landfill gas facility, but can you maybe speak from your experience in the dairy industry how Aemetis is doing things different and what's allowing you to find success here versus some of the other larger project developers that have actually chosen to de-emphasize this right now?

Right. Craig, you've obviously spent some time talking to large developers. California is the largest dairy shed in the world. We have over 1 million dairy cows in a very small area, really within about 100 to 150 miles of our plant is about 1,200 dairies. And we feed dairy cows at about 75 of those dairies already. They're existing customers. What most of the developers, even the 2 other major developers in California, have trouble with is they have no pre-existing relationship, credibility or confidence, frankly, to enter into a 25-year relationship with some guy who shows up with a pickup truck and a cell phone and says he's a biogas developer. Whereas we have $150 million of cash invested in the ground. We're feeding their cows every day and have a very, very long term, well-established relationships, not only through us but also through our grain supplier that markets distillers grain to them. That goes back decades. And so we have a very simple relationship with dairies. They have a liability coming under Senate Bill 1383, in which, they're going to have to start acting like little oil refiners that are emitting methane. They're going to have to be buyers of carbon credits, unless they can find a way to spend literally tens of millions of dollars to build the system we're building, clean it up and sell it to somebody. And what we offer is, they don't have to invest anything. We actually are paying cash bonuses when they sign. And then they get positive cash flow for a 25-year span. And it ends up being a very synergistic, sustainable circular bioeconomy where we're selling them the animal feed that creates the manure. We're then turning that into biogas at our cost, cleaning it up, pipelining it, cleaning it up again, selling it and then giving them participation in that cash. So that's accelerated our ability to attract dairies. And once we've put a pipeline in the ground, as you probably know, if you bypass a dairy, they're the disadvantaged one because their neighbor can sell milk frankly at a lower cost than they can because they don't have the revenue from biogas. So we're sort of picking the winners, making the big bigger is really what's happening to tell you the truth. And so when we put a pipeline in the ground, we just tend to talk to the neighbors and say, we're going right by your place, do you want us to add you in? And it doesn't take long for people to say, well, if you don't add me in, then I don't get the cash every month, do I? And then eventually going to have to start buying carbon credits. So it's a monopoly business. I would say that directly to dairies is that there's only one gas pipeline. There's only one owner of the gas pipeline. And if you're the guy who put the gas pipeline in the ground and you do that by signing up the biggest dairies in an area, all the other dairies will end up interconnecting at very low cost. So that's our strategy. It's worked very well. And it takes only a couple, not a couple of years, but maybe a decade to build relationships that can execute as quickly as we have.

So then last question, if I may. I mean knowing the weight of some of these regulations in California, economically, what they mean and how they change behavior. Is it feasible for us to take the 18 that you've announced in hand and maybe extrapolate, there's an opportunity for that to get much bigger over the next single-digit number of years?

I'll give you, the answer is yes. I'll give you the next follow-up question as a response as well. We are physically close to 75 dairies because we truck to them every day with water and animal feed. That's what distillers grain is. So they need to be kind of relatively close to our plant. And so our pipeline systems are intended to maximize a number of large dairies we can connect up directly to our plant. We do have an ability to expand beyond just the ones connected to our plant to put up smaller pipeline clusters that are farther away from our plant. And with approximately 1,250 dairies in California, I'm going to estimate about 300 of them are extremely attractive biogas customers. We expect to be the largest actual dairy biogas producer in the United States. I mean, it's pretty easy because California is the biggest. And so if you're big and California is the biggest in the U.S. And that would entail 30-plus dairies, perhaps many more than that. So the scalability is really based upon our partnership with our capital partners. The $3 billion company has been funding us for 12 years. And I think they have a very strong appetite for us to execute well and execute steadily, but just keep on growing. And I wouldn't be surprised at all to end up with more than 50 or even 100 dairies over time because of our ability to execute while other competitors are still struggling to find credibility with the dairies.

Next, we go to the line of Marco Rodriguez with Stonegate Capital Partners.

I was wondering if maybe you could talk a little bit more on the health care products side of the business. It kind of sounded like in your press release that maybe you guys saw a little bit of pressure for some competitive environment. Maybe you can kind of provide a little color there and just kind of how we should be thinking about the competitive environment there as the year unfolds and into next?

I kind of expect that there would be some questions about it. We had a tremendous second quarter in a booming market. And what we saw as an industry is unregulated product coming in from Mexico, approximately 200 hand sanitizer brands got FDA warnings for violating methanol content. And when you drink hand sanitizer, which you shouldn't do, by the way. If it's ethyl alcohol, it makes you drunk. If it's methanol, it actually causes paralysis, blindness or death. So not a good thing and over 200 brands came in from Mexico. And then China, again, largely not tested product coming in from China. So as retailers and the customers scrambled for product, they bought product that didn't meet specification, the FDA then stepped in and started writing warnings and bans and recalls. And that cleaning up the market is what we're seeing now. The final cleanup is going to be when the temporary waiver ceases. Then the product has to meet the traditional good manufacturing practices, facility, plus the U.S. pharmacopeia medical-grade alcohol, which will significantly curtail the number of producers. And largely, that's what we're investing in is that in second quarter next year that there's really only one large-scale sanitizer alcohol producer in the Western United States. Now what we've decided is not to sit here and sell a bulk alcohol product at commodity prices, but rather to take advantage of the geographical advantage that does not ever go away. That is up to $1 a gallon of cost to produce alcohol in the Midwest, ship it 2,000 miles to California and put it on the store shelf at Costco, right next to ours, it literally costs an extra $1 and that never goes away. So by going to branded products and even private label products, you could go into Costco and see our Aemetis brand as well as you could see the Kirkland brand, which is Costco, both of which would be made by us. And so we have moved forward with a full integrated process to take full advantage of what we believe to be an ongoing slightly growing market, but a larger market than what it was certainly before COVID. And our customers are the full gamut of consumers, government and corporate and academic customers that will need an ongoing supply of not just hand sanitizers, but sanitizer wipes and sprays and aerosols, all the stuff that Lysol is 58% alcohol. That's what kills germs with Lysol. So we have taken a long-term view, and we're upgrading our plant to be able to be 100% medical-grade by the second quarter of next year. And we've spent over $12 million of the $15 million required. We just have some additional equipment to arrive and installed to be completed with it. And I think it will be a sustainable competitive advantage we have. I think we're all kind of wondering how long COVID is going to last, but we certainly have seen people are much more attentive to the protocols of sanitization, and that's requiring alcohol supply to be increased.