Gevo Inc (GEVO) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter, 2011 Gevo Incorporated Earnings Conference Call. My name is Karis and I will be your coordinator for today. At this time, all participants are in a listen-only mode, later, we will conduct a question and answer session.

(Operator Instructions)

As a reminded this call is being recorded for replay purposes. I would now like to hand the call over to your host for today, Mr. Mark Smith, CFO. Please proceed, sir.

Thank you. Good afternoon and thank you for joining Gevo's third quarter 2011 earnings call -- or conference call. I'm Mark Smith, Gevo's CFO. With me today are Pat Gruber our Chief Executive Officer, Brant DeMuth our EVP of Strategy and Corporate Development, and Chris Ryan, our President, Chief Operating Officer.

Earlier this afternoon, we issued a press release which we outlined some topics that we planned to discuss today. A copy of this release is available on our website at www.gevo.com. I'd like to remind our listeners, that this conference call is open to the media and we are providing a simultaneous webcast of this call to the public. A replay of our discussion will be available on our website later today.

We want to advice you that this discussion will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are like to a variety of methods, including without limitation, expressed or implied statements concerning the Company's anticipated isobutanol production cost and operating margins, the availability and cost of capital, the schedule of retrofits of existing ethanol production facilities, the timing associated with bringing commercial isobutanol production capacity online, the strength of the Company's intellectual property position and other statements that are not purely statements of historical fact.

Investors are cautioned not to place undue reliance of any forward-looking statements, as they are only predictions. The Company's actual results may differ materially from what maybe expressed or implied in these forward-looking statements.

All such forward-looking statements speak only as of November 1, 2011 and we undertake no obligation to update or revise these statements, whether as a result of new information, future events or otherwise. These forward-looking statements are made on the basis of current beliefs, expectations, and assumptions of the management of Gevo.

Although the Company believes that the beliefs, expectations, and assumptions reflected in these forward-looking statements are reasonable, these statements involve many risks and uncertainties that may cause actual results to differ materially, including without limitation, the risk of the production of isobutanol at our Luverne, Minnesota facility could be delayed, or we could experience significant cost difference in comparison to our current estimates.

The risk that additional funding may be available to us when needed on terms that are acceptable to us or at all, and the risk that we are unable to adequately protect our proprietary technologies or may lose some of our intellectual property rights through cost litigation.

For a discussion on these and other risks and uncertainties that could cause actual results to differ from these, expressed in these forward-looking statements, as well as risk relating to the business of Gevo in general, see the risk disclosures in the annual report on Form 10-K for the year end of December 31, 2010 and in subsequent reports on Form 10-Q and 8-K and other forms made with the SEC by Gevo.

This conference call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G including EBITDA adjusted to non-cash compensation contributed by our Gevo development segment. The Company believes this information is useful to investors because it provides the basis for measuring the operating performance of the Company's business and the Company's cash flow.

The Company's management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating our operating performance and cash flow. Non-GAAP financial measures should be considered and -- should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP and non-GAAP financial measures presented by the Company may not be comparable to similarly titled amounts reported by other companies.

As appropriate, the most directly comparable GAAP financial measures and information reconciled in these non-GAAP financial measures to the Company's financial results prepared in accordance with GAAP are included in the earnings release which is posted on our website.

In today's call, Pat will begin with a review of our recent accomplishments and update our progress toward commercialization of isobutanol. Following Pat's presentation, I will review our financial results for the third quarter. Following the presentation, we will open the call up for question. Chris and Brant will also be available for the question and answer session of today's call.

I will now turn the call over to Pat Gruber, Gevo's CEO.

And, Mark, thank you for that very length disclaimer. I guess there's some new court case or something that's going to impact all of us on how we read these disclaimers. So, everybody has to be more careful and we've been recommended to be more inclusive to these regulations. Anyway, thanks Mark.

Thank you all for joining us, and -- I had to take a breath after hearing all of that. So, we'll get into this call. I'm going to go over the highlights. I'll talk first about the production. And then, I'll talk about the commercial development which actually is really exciting, and then we'll talk about technology. Later, Mark will come back and he will talk about the financials.

So first off, Luverne, it's on track for both budget and timing. We expect it to start up in the first half of 2012. The construction's underway, the foundation poured -- steel is starting to get -- put up, all the equipment is ordered. So, things are looking really good there.

We also financed our debt financing. We expanded the triple point relationship so that half of that plant will be debt, half of it will be capital. And I'll remind you all in the future in our business model, we're always paying attention to how much debt we have. We -- in fact, we plan on doing half debt, half equity in the early days.

Now regarding Redfield, that's our second plant, we've begun preliminary engineering as we have planned. (Inaudible) give you the specific estimates, we will probably do that in the next quarterly call. Now, Redfield is a great plant, a great operation, it's slightly different than what we have at Lavern because it's a more modern plant than the Luverne plant. So we had to take all that into consideration. But our guys, and theirs are busy working on it.

I know some of you are wondering what about plant three where's that? And our plant four. Well, we have a large pool of plant that we're still talking to. Now we're focused, ongoing bigger sooner compared to our original plan. Bigger, sooner. Now this is a balancing act of development and a clear view of the market uptake against getting these plants in the right locations.

Now we also see opportunities for doing advance biofuels. Not all plants are equal, but advanced biofuel plant could bring additional value. I really want to get these things right. Now as we previously said, the next incremented capacity needs to be signed up by the end of the second quarter 2012. That has not changed.

So, turning our attention to the commercial development. You know, we did deal with Mansfield and I'm really excited about working with them. To give you some background, Mansfield is a $4 billion company. They do fuel logistics, distribution, risk management, fuel system management, fleet cars, storage tanks. They operate in 50 states, have thousands of customers in over 900 supply points. They're a full service distributor company in the fuel space.

We've got a five-year off-take agreement with them, and the initial focus will be a gasoline blendstocks, specialty products for marine and other markets. Now it's interesting, Michael Mansfield is the CEO. He was recently at our Gevo booth at OPIS's Fleet Fueling conference talking about isobutanol. Presents a great opportunity for both of our companies, and we're excited.

Now on the Sasol front -- now remember who Sasol is, by the way. Sasol is a chemical company over $30 billion market cap, 30,000 employees. Anyway, they begun sampling our renewable isobutanol to their customers. That's good. That has to happen in order to have commercial sales occur in the right timeframe. So, that's on schedule.

Now here's what I like most. With Mansfield combined with Sasol, we've now sold out approximately two years -- the first two years of our production. That's a good accomplish, I got to get Chris Ryan and his team credit for that.

On the Lanxess front, the discussions are still continuing. I don't really have anything new to report. Now recall, that we already have a supply agreement with them. We need to pin down the timing of the off-take. I'm planning on attending the Rubber Days. Rubber Days is their big customer events, where they talk about the future world and what's happening and -- with both their suppliers and customers. This is going to be in Japan, Korea, and China. I'll be doing that for several weeks this month.

We have great relationship with them. We like them. Lanxess off-take is a matter for our third plant. So it's good relationship; it's a matter of pinning down the timing. We'll be able to report on that in our next call.

One of the other interesting things we did and significant couple of fronts is that the Defense Logistics Agency agreed to buy our jet fuel made from isobutanol. This is important because it's one of the more straight-forward -- converting alcohol into jet fuel is one of the more straight-forward ways of producing a renewable resource base jet fuel.

And this initial order while small, it does cover what we need to do engine testing, which is one of the very important things that has to be done in order to fully qualify to sell product. We also expect additional orders after successful testing is completed.

Now we've also started to see some results from our engine testing work. And, in fact, Briggs & Stratton, that's the world's largest small gasoline engine OEM -- I think everybody in the US has a Briggs & Stratton engine somewhere in their house. They, along with the outdoor power equipment institute did testing with isobutanol, and it's very exciting.

Isobutanol blend at 12.5% was tested in Briggs & Stratton small engines, they found that the engines ran great and performed at all aspects on a very excellent level, the horsepower torque was expected, no significant change of emissions.

Now we didn't do this testing, they did the testing. So, I'm reporting the third part of results really. But it's interesting, here's Chris Kaiser's quote in their press release, Chris Kaiser is the President and CEO of the Outdoor Power Equipment Institute.

Here's what he said, he said, "We are pleased with the results of isobutanol testing. It shows us that isobutanol could be a biofuel alternative that can be introduce into the existing supply chain without the potential disruption or harm to our outdoor power equipment engines, said Chris Kaiser, President and CEO of the Outdoor Power Equipment Institute.

In the economic interest of our members and the safety interest of consumers, we need to be open to a biofuel that can perform reliably in the millions of products in the market, lawn mowers, chainsaws, motorcycles, snowmobiles, ATVS, UTVs, boats and other cars.

That's a good result. I'm glad and I expect to see more of these results in the future as isobutanol testing becomes published. So, we're excited about that too. It addresses an issue that's real in the market place with biofuels. Isobutanol seems to work pretty well.

Now, turning a bit to applications development -- and this is about our hydrocarbon plant. It comes online next month. Recall that this is being built down at South Hampton Resources near Houston. It's going to produce up to 10,000 gallons per month.

The product slate could be any combination of jet - jet fuel, gasoline, diesel -- by the way when I say gas and diesel, I mean the hydrocarbon gasoline -- the hydrocarbon diesel, paraxylene, that's the raw material for making PET plastics, butanes -- several companies are interested in butanes straight away -- [alcolate] which is specially blend stock for gasoline, and lubricants.

Now we built this plant -- this demonstration plant to make sampling easier for our customers. Relatively straight-forward technology straight off the shelf, leveraging the assets already existing at South Hampton Resources. In fact, it provides another example of the ease at which isobutanol can be used.

Now turning more into the bio side of the -- the biotechnology side of things. Several of you have asked me to address a particular question, and it's this, what is metabolic engineering and synthetic biology? And the reason that this is important is that metabolic engineering is talked about by lots of companies and practiced by quite a few, but there isn't a great depth of understand across the board. So, let me take a shot at it.

First of all, metabolic engineering has only been defined as a scientific discipline since 1990. A guy names Jay Bailey wrote a paper in science in 1990 that basically said the definitions of metabolic engineering. It is a discipline of modifying pathways to increase whatever the product of interest is.

With modifying pathways being a reference to whatever organism, whether it be bacteria or yeast or whatever. Okay? Now a pathway is simply a series of chemical conversion steps, converting one chemical into another each one with a catalyst. Now those of you who have been around the chemical industry, you think about -- you take it for granted already. It's the equivalent of converting a chemical through a reactor to another chemical.

Well, in the case of biotechnology pathways, all of those chemical conversion steps are all together inside of one organism. So a pathway could be converting chemical A to chemical B, catalyzed by a catalyst. In our lingo, in metabolic engineering, that's an enzyme. So, A to B, and a pathway would be converting B to C.

And you hear us talk about a whole pathway being the conversion of A into C, if that makes sense. Catalyzed by two different enzymes. So, metabolic engineering is the discipline of -- it's actually chemistry with process technology overlaid and then thinking about how that works in a bug. It's actually quite a simple concept. Difficult to execute at times because there's hundreds or even thousands of pathways in an organism, and you have to pay attention to those.

Now, our group at Gevo has been doing metabolic engineering since the beginning. So, we come with a slightly different perspective about how to approach these problems. We've done -- you name it. You name it, we've probably done it as a group. And so, we get -- and we got a jumpstart on yeast, which is one of the more complicated organisms to work on.

And we're been doing metabolic engineering on yeast specifically since 1994. That puts us in one of the early groups and, of course, we're one of the only groups -- I think we're the only group in the world who's actually commercialized genetically engineered yeast for industrial chemicals.

And I bring this up because we're making good progress on our cellulosic yeast to make isobutanol. So we've taken a bug that uses cellulosic sugars -- that's no small piece into itself because there's five and six carbon sugars that need to be utilized in high yield to make the product -- and we are installing our isobutanol pathways. By the way this is a cassette in the synthetic biology lingo.

So we're installing in our pathway into the yeast, and it's working -- we're making very good progress on that. And then on the side of the feedstocks for our cellulosic yeast, we have some very good discussions underway with cellulosic processes. And we'll be able to tell you more about that in the future, but pieces are starting to fall together. I like that. Cellulosic sugars are important for us because that increases the pool of formidable carbohydrates. That's good.

Now, we've also received a grant from USDA as part of the Northwest Advanced Renewables Alliance. This alliance includes people like Weyerhaeuser, Catchlight Energy, which is a joint venture between Chevron and Weyerhaeuser, Washington State University, Oregon State University, Penn State and University of Minnesota.

The purpose is to produce jet fuel from woody biomass. The role of Gevo is going to be converting cellulosic sugar to isobutanol and then to biojet. I like these companies a lot they all bring good capability together. We all work well together.

Now, on the intellectual property front, we had two important patents. The first one is a patent that we refer to as PDC patents. This is an interesting one because when we start with the yeast, it lives by producing ethanol. It eats the sugar and produces ethanol and generates its energy to live.

What we're doing, when we make isobutanol is we shut off its ability to make ethanol and produce isobutanol instead. That's no small feat. It's actually very hard to do because you're switching off the bug's ability to live by its normal means, instead redirecting its pathways to make isobutanol instead.

The bug has only one way to live, and that's by producing isobutanol. This is called making a primary pathway. This is fundamentally important and that it gets us to the very highest of yield. It's a fundamental way of thinking about biotechnology. And that's very different than most of the other technologies you'll see are secondary pathways, meaning the bug can make the product and do something else to live. We made these bugs so they can only live by producing isobutanol. That's what this patent covers.

We have another patent that covers a particular enzyme in our pathway. The reason that this is significant is that we've been saying that we have unique pathways. The patent office seems to agree that our enzymes are different and hadn't been reported before.

Now, across our portfolio, we have about 300 patents of patents applications. And we'll continue to develop in the pendings over the coming years. Now, our patent application coverage extends well beyond isobutanol. We've been very prolific over the years addressing metabolic engineering of yeast to make a variety of interesting industrial chemical products.

Now, right now we're laser focused on delivering isobutanol full scale. I mentioned this though because it will be wrong to think of us as an isobutanol-only company. That's not who we are. We're platform people around how to make these yeast work, and we're good at it.

We got the isobutanol remember, by looking at all of the different pathways and figuring out what it take -- what makes sense on a commercial basis. We know the pathways of the other products too, and we haven't been idle and several of them are subject to our patents. We'll talk more about that in the future, but didn't want to give you the heads up that some of you I know think about us as isobutanol-only, and that is incorrect.

Now, regarding the detail plan for 2012, we're going to give you the updated 2012 plan and guidance at our yearly call at February. Last thing that I have is that I like to personally welcome Gary Mize to our Board of Directors. Gary and I met years ago at Cargill, and he was a rising star then.

He went on a great career at ConAgra and Nobel. He is an expert in commodities and trading, as well as having build businesses and being a senior executive. I know he'll be able to make a great contribution for our Board and I'm glad to have him.

With that, I'll turn back over to Mark.

Thank you, Pat. For the third quarter of 2011, we reported revenues of $17.5 million, compared to $1.5 million in Q3 2010. Q3 2011 revenue included $17.3 million of ethanol-related revenue, reflecting our acquisition of Agri-Energy that was completed in September 2010.

Cost of goods sold of $16.2 million in Q3 2011 totally relate to Agri-Energy's operations. Overall, we generated a gross margin of $1.3 million for the quarter, of which $1.1 million was generated from Agri-Energy operations. This resulted in an almost two-fold increase in margin from the preceding second quarter, and reflects the improved operating environment observed in the latter part of the third quarter at Agri-Energy, led by a lower net corn feedstock costs.

During the third quarter of 2011, EBITDA from Gevo Development which includes the operations at Agri-Energy was $1.4 million. Our focus at Agri-Energy remains completing the retrofit isobutanol production in the first half of 2012. The improved operating results at Agri-Energy this quarter contribute operating capital and confirm the underlying strength of the operating team.

These are factors that will be important as we complete the transition of isobutanol production.

Research and develop expense increased to $5.2 million in the third quarter of 2011, compared to $3.6 million in the same period of 2010. The increase primarily reflects deployment of resources as we prepared to implement our isobutanol technology to Agri-Energy in Redfield, as well as work at our demonstration plants and St. Joe, Missouri and near Houston, Texas.

As Pat described, we are establishing a hydrocarbon demonstration plant at South Hampton Resources site in Texas to produce hydrocarbon samples, including alcohol to jet samples under our supply agreement with the US Air Force.

Selling general administrative expense to the third quarter of 2011 increased to $7.6 million -- sorry, decreased to $7.6 million, compared to $11.6 million in the same period of 2010. The decrease is primarily due to recording charges of $7.8 million in Q3 2010 to acquire the minority interest in Gevo Development that was completed in September 2010. This amount -- of this amount approximately $7 million related to revaluation of previously issued warrants and was a non-cash charge.

Partially, offsetting these amounts were increase personnel cost at $900,000 due to increased headcount in support of commercialization objectives and compliance activities as a public company, and $1.1 million have increased legal accounting and outside services related to initial commercial compliance and litigation related activities. These cost included cost for our ongoing litigation with Butamax.

SG&A expense also includes the administrative costs at Agri-Energy. Included in our operating expenses to the third quarter of 2011 was $1.8 million to non-cash stock-based compensation. This amount was allocated among SG&A research and development and Agri-Energy operations.

Other expense in the third quarter of 2011 of $781,000 includes interest expense of $798,000 mainly related to debt incurred to the acquisition of Agri-Energy in September 2010. Interest expense in Q3 2010 of $779,000 included acceleration of debt discounts resulting from the early payment of certain pre-IPO debt.

Other expense in the third quarter of 2010 also included $2.1 million from the change in fair value of preferred stock warrants. This non-cash charge related warrants for preferred stock issued prior to our IPO. Since the warrants converted to common stock warrants upon the IPO, they are no longer revalued for accounting purposes.

For the third quarter of 2011, we reported a net loss before deemed dividend of $12.3 million, compared to $17.3 million for the third quarter of 2010. The deemed dividend is $989,000 reported in Q3 2010 was a non-cash accounting charge related to the issuance of series D1 preferred stock when we're a private company that contained a beneficial conversion feature.

All outstanding preferred stock including series D1 was converted to common stock upon the IPO, and no further announced reported as a deemed dividend.

We finished this third quarter with $97.6 million of cash on hand. Based on the operation -- based on the results of operations year-to-date, combined with our predictions for the balance of 2011, we maintain our projection of a negative EBITDA in the range of $30 million to $34 million for fiscal year 2011.

This projection maintains the operations updates we provided in the second quarter regarding use of our demonstration plan in St. Joe, Missouri, and the hydrocarbon demonstration plant in South Hampton Resources during the fourth quarter of 2011.

On October 20, 2011, we amended our debt agreement with TriplePoint Capital that allows for total borrowings up to $20 million. We drew down $10 million at the closing. The key terms of the debt are a coupon rate of 11% final termination payment, and warrant coverage. These terms are consistent with debt terms for a first of its kind facility, which is also a consistent with the expectations we have described to this debt.

We believe that agreement such as our off-take agreement with Sasol containing defined pricing and contract terms will be fundamentally important for accessing debt or more standard commercial terms, once we have commercial scale plants in operation. We fully expect our cost of capital will come down, as we begin commercial production.

I'll now turn the call back to Pat.

All right. So, one of the things I just summarize when I hear all those long numbers in that -- it's that are OpEx is in line with what we have previously told you. Our margins are slightly better than what we have projected. Our net loss is overall is within a $100,000 of what we have previously projected. So I think, overall, that kind of sums it up.

And with that, I think, we are finished with the formal part of the presentation and we can entertain questions.

Karis, could you open it up please?

Absolutely.

(Operator Instructions)

And your first question comes from the line of Mike Ritzenthaler of Piper Jaffray. Please proceed.

Good afternoon, guys.

Hey, Ritz. How are you?

Good. My first question is around the capital plan as you build the capacity. You mentioned in your prepared remarks that you're going to going a little bit faster than you maybe you had projected before. Our model assumes that you take on project-related debt to finance the CapEx. And I know you stated before that you would pursue the cheapest capital you can find to build our capacity whether it's debts or happens to be equity at the time.

My question is within the current strategy framework, is there a way to hitting your 2015 goals using debt? Or is there -- or do you expect partner capital to play a significant role or perhaps growing maybe a little bit slower or maybe more in line with what you have laid out before?

Well, I think that there's -- you had several questions there. So one, could partner capital come into play? Yes, it's possible we could do that. People have mentioned it and but it's one of those things that that take some time to develop and people do want to see what happens at Luverne.

So, those goals are legitimate conversations. I think the overall question is how much money do you need to raise? I think even during the IPO roadshow, we talked that we would in fact need to raise money in the year 2012 in order to hit 350 million gallons of capacity by 2015.

What you see us doing is being pretty prudent in how we're measuring Luverne, how we're taking the steps towards Redfield and pending things down. We know that managing the -- dilution is always a concern when you're in equity markets. We know that that would be a concern, and we're going to do what's valuable for all of us.

The more prudent our business model is, more options become available, all the way from project financing to -- we've already showed them that case that we can take-or-pay contracts, we're missing the technology side being known locked down item.

Now, would I say that we're going to raise money in 2012. I don't know exactly the timing yet, I don't know the size of the bite. Okay? But I could say this, we aren't going to go crazy and raise a whole bunch of excess equity. That wouldn't be good for any of us. Right? We know that we're going to have debt options available to us. We've already had offers from ethanol plant owners wanting to put in money into the plant.

However, when we do stuff like that, that cuts back your overall cash return, it doesn't really solve our overall problem of generating cash.

So these are the kind of things that are in front of us why we're thinking about it pretty carefully. We'll have more options in the future that I know. But I could tell you how we'll think about it we're going to be looking at debt, we look at strategics, we'll look at the equity. And we'll do the balancing act knowing that in the end, we're going to decide what creates the most value for all of us and be careful about the dilution.

Okay, yes. That's really helpful. Thanks.

Okay.

Next question on paraxylene. We've talked about before another relationship that you've been kind of cultivating in addition to Toray. Is there anything to update us on that front and how things are progressing with this new partner? Or is that something that's going to become more apparent after the Houston facility is up and running?

I can't comment on that. It's probably the safest answer at this point.

Okay, fair enough. And then last question on Mansfield, the analyst state, you announced the agreements and some of the things are progressing very positively there from your prepared comments.

Obviously, volumes weren't disclosed then are -- or anything -- is there anything like that becoming more focused in your discussion, things around volumes and potentially market placements and things like that?

No, we're working through that with them right now about the target markets and total volumes and how to specifically get it to certain regions where there's a nice value price of butanol. So that stuff we would report down in the future.

Sure, okay. Perfect. Thanks, guys.

Okay.

And your next question comes from the line of Ben Kallo from R.W. Baird. Please proceed.

Hi, guys. Thanks for taking my question. In the current market for ethanol right now, we're here in about, you know, exports to Brazil. Has that affected any of your negotiations? That's my first question.

Then my second question on the capital raise front that you've talked about, would you expect timing to be after Luverne was up and running? We could see some output there, kind of being the catalyst?

Okay, regarding the exports to Brazil, no that doesn't impact us, even I think some of our -- some of our shipments have --

In Canada.

In Canada, okay, it should be in the next quarter. But it's a -- it has occurred in the discussions and negotiations at all. I think there's enough uncertainty in the ethanol industry. I think there's like 10 or 12 plants for sale right now. Things are -- people are really nervous.

RFS is up for discussion and, you know, it's a -- nobody knows what will happen there. Thank goodness that our business model is not dependent on RFS. So the uncertainty in the ethanol market creates more discussion opportunities for us for potential partners. It would be -- they're in fact the same.

Now, regarding the timing, the truth is I don't know the answer to that. It depends on the overall markets and how they're performing, the overall -- where our stock is, how each are doing. And, you know, the timing, I would rather do it after Luverne starts up. That's the truth.

But we have to weigh up everything in together and make a wise decision, you know, a few months from now as to the timing.

Okay, great. Thanks.

And your next question comes from the line of Brian Gamble with Simmons and Company. Please proceed.

I don't know why you guys don't want to try run equity in this market.

Yes, exactly.

The market is great, Pat.

Yes.

Question on the plans. You mentioned obviously and I think this is part of the original plan about wanting to work on bigger plants as soon as possible. Have you passed up opportunities on smaller plants and focus on those larger plants?

No. We're keeping them at mild though. So we keep them -- we keep the discussions alive because this is part -- we have this chicken and egg we're trying to hatch, right? We need to have better visibility into which markets are going to be able to take on more products.

We already know that the specialty markets are going pretty well so that we can see pretty clearly and we could -- we could pull a trigger out a smaller plant. But I think that we should -- we want the ultimate growth, we should be thinking about the bigger plants.

And so we should do this decision in its appropriate time. Make sure that we have the right amount of information rather than just pulling the trigger.

Okay, great. And then maybe can you give us anymore color on the lawsuits outstanding, where they stand? Just any additional updates to what you already said?

Yes, basically I think everything is out there in the -- in the press already. But in the -- regarding the lawsuit -- I mean, the trial date is scheduled for April 1, 2013, we're in the midst of working through the details of lawsuit and nothing really has changed. We don't practice that technology. They think we do -- so it's an ongoing dispute.

So we continue to roll in about $1 million a quarter for legal, or is that more upfront because of the, just the beginning or everything and now it kind of flatttens out a little bit?

It'll be a bit of an ebb and flow. It can be - we've commented to a couple of million a year, but I wouldn't tell you -- it's not steady through each -- through the year. And it's sort of ebbs and flows with due diligence -- that's a little hard to project. It was a little heavier this quarter than last quarter.

But, I think, in general - and this is true not just of our company, but all of the company in the space right now, but I think everybody should be budgeting for electrical property stuff because this field of metabolic engineering is kind of interesting. And there's going to be a lot of disputes.

I appreciate it guys.

And your next question comes from the line of Timothy Arcuri with Citi. Please proceed.

Hi, guys. A couple of things, I'm just trying to tie down our model. Can you give us the gallons of ethanol sold and what price that it was sold at?

Hang on, he's looking.

Do you have a follow-up?

Yes. So I just wanted to, you know, the model as you cut over from ethanol to isobutanol sales, I just want to get your outlook, you know, any changes in how, you know, in the isobutanol price spread either relative to corn or relative to ethanol, you know. How that changed in the last couple of months?

I think -- no. There's no change of guidance there. It's about a one-month shutdown to switch over. And, the way we actually -- in our own plans, we did plan that it will come up and run optimally rate out of the blocks because hat would be an absolutely unrealistic expectation.

We'll run into some kind of a problem that will have to fix like maybe a pumps [run] on our wirings [run] or who knows. But we did make provisions so we can sell that product of isobutanol anyway. So, I think there's no new guidance on that front.

Okay. And, Pat, just no -- no new thoughts on the isobutanol price either?

Well, the isobutanol price from Sasol was higher than we expected than we had given in the previous guidance. So we -- that hasn't changed, if that makes sense.

Yes.

Okay.

We have reached about 270 per gallon throughout the quarter. And we sold 5.5 million gallons, which is right on track with what you would expect for our plant of that size.

Got it. And then here's the last question on the financing options next year. Have you guys -- certainly the stock hasn't come in so much. Have you gone back and talk to some of the existing shareholders who purchased the deal and sort oftried to take their temperature in terms of assessing the appetite of this price? Have you actually done that yet?

We have a good relationship with the shareholders. So the feedback we have is pretty good. And we do keep in contact with them. This is an -- this is a topic of interest for all of us. We have to kind of work together at it.

Brant, were you going to add something?

No, I was just going to say we're very pleased to have the shareholder base we have. I mean, we've got some very strong, very well educated holders. And, you know, we're in constant communication with them as far as our business plan going forward.

Of course, it wouldn't be appropriate to comment on specific equity offerings.

Right, but the idea of what you're suggesting I think is most on us.

Yes, all right. Thanks, guys.

And your next question comes from the line of Jim Medvedeff with Cowen & Company. Please proceed.

Hey, Jim. Are you there?

I think I had you on mute. Can you hear me now?

Yes, we can hear you. Thank you.

Good. Good evening. Congratulations. You did such a good job in the formal remarks that I -- you already answered most of my questions. But one of the things that came up was pursuing or the ability to produce not just isobutanol, but you have pathways to some additional chemicals.

Can you flush that out?

Well, I can't be specific, but I can be general, and that is this. We have been doing these pathways in yeast for our -- me and well, for a bunch of us here almost 20 years. We are familiar with how to make most things and of course we have with -- because we've been so long, we definitely have opinions of what make sense commercially or not.

We picked isobutanol specifically for a set of attributes in that it has a commercially viable market directly as a fermentation product as isobutanol, but yet can pat chemistry done to it because it matched directly to butylene -- butylenes you can get everywhere.

And we believe it has very nice properties what being able to be done in a primary pathway in high yield. There are other products that are like that, that are related pathways that's what we think about.

So, yes, there are several ideas we have. We have to work out them before we can talk about in a more detail. But these are fundamental questions about how these primary pathways work, how one gets the very high yields in the yeast and the fermentation process and then leverages that in the chemistry.

Are we thinking -- are we sticking with C4s?

I didn't say that. Nope.

Great. Now the -- you said that the cost of -- the timing and cost on Luverne are on track. Is that the $22 million upgraded cost from the -- from the additional [C train]?

Well, there's probably -- the way we present it was this. There's $24 million for the gift process, right, $10 million for the C train, and then we're upsizing the gift system because over the next couple of years, we can see that our bugs -- we can improve the throughput of these plants.

And so, we're making the gift system bigger for several million more dollars.

I see, okay. I guess I had that a little bit wrong.

Yes.

And then you say the red -- the timing for Redfield is on track and is that the fourth quarter of '12 or the sort of first quarter of '11 -- of '13?

It's probably after the first of the year. This is a practical matter because before, you know, what we're doing is putting these numbers together, we said it was on January 1st. That's not out realistic date. January 1st is not a realistic date from the standpoint of there's nobody around.

Yes, exactly.

Yes. So the way we said it, Jim is that we still anticipate the plan, retro fit to be completed by the year end of 2013 with startup early in -- I'm sorry, by the year end '12. And then we'll startup at an early of '13.

That's what I would expect is that mechanically complete about that timeframe or we'll be down to the last details. We can get that thing started up and running in the -- in the first quarter. So -- but that's -- I can tell you also, just so you know, we're doing preliminary engineering right now.

All that kind of stuff becomes more clear once we've got engineering detail in front of us as to what is the practical sense because we don't know all the details of what bottom mix that might be. Okay?

And just one final one here, on the Briggs & Stratton tests, congratulations on that, that's a huge potential market and just another proof of concept, right?

Right.

Were they only testing 12.5% blends or did they -- did they test higher blends as well?

They did do limited testing of higher blends as well.

And they performed well too.

How high?

16% is the other typical levels of testing.

Okay. Thanks a lot.

Yes, those are interesting results. We like them a lot. And I just wanted to add, one of the things that I want to be clear about is those weren't our tests. They weren't Gevo tests. Those are third-party tests. That's Briggs & Stratton and the Engine Manufacture Associations.

Yes, fantastic. Thank you.

Okay.

And your next question comes from the line of Stephen Share with Morgan Joseph. Please proceed.

Good afternoon.

Hi, there.

Hey, Steve.

See, I had a question on Luverne. I want to go back to the CapEx or just the spending on the plant. You're going to spend kind of $34 million plus. How much of that money has been spent already?

Oh, go ahead, Mark.

Approximately $3 million. But the -- we're looking at the heavy equipment deliveries and construction coming in the next couple of quarters.

Okay. So it's still, you still have $3 million right now of that $34?

We'll have $3 million at the end of September. We spent some more in October.

Yes, yes.

Okay. Okay, good.

We're going to get -- the heavy month here are going to be -- yes, well about -- the way that we've done this is your typical engineering build each month. So month is plotted out. So everything is tracking so far.

The heavy months are what, Mark?

Heavy months will be at the November, December, January time frame based on our schedule.

And then billing lags a little bit sometimes. So that's what it will look like.

I see. Okay, good. And as far as -- I just want to talk a little bit more about the patent issue. You know, you had the US for Butamax's 188 patent to be, you know, to be reexamined and invalidated which wasn't done, which was denied.

I'm curious if you're not using that patent, what -- why are you going after it? I mean, why -- you're not using 188, why did you kind of spend the money and time to, you know, do this legal maneuver? Is it just that you're hoping if you get the patent thrown out obviously the lawsuit gets thrown out?

Basically, it's a way -- what that -- there's a couple of things. On a really fundamental level they didn't disclosed the prior art. They didn't do that. Reference with this pathway has been known in literature since 1965 -- the actually pathway, how you produce isobutanol. And all the (inaudible) genetically engineered.

They didn't disclose that. And so, we're having a dispute about what it is that needs to be a proper disclosure for a patent. You're right, we don't practice it. We don't use those enzymes that they disclose. Those are the details of the particular ones that they claim in their patent.

So this is a case where they sued us over a patent. The way to think of this is that they, -- we lobbed a ball, it got bounced back, we'll lob it right back again because this is one of these cases where we've got nothing to lose at it and everything to gain. It doesn't impact the lawsuit; it's a separate thing.

I see. And so -- and also as far as -- you said the trial is set for April 1, 2013, is that also your lawsuit that they're violating PDC and AFT patent?

Correct. We rolled everything together.

Okay. So that's going -- the whole lawsuit is set to go April 1, 2013?

Yes. Yes.

Okay. And then just the last one from me, back to numbers for a second, what was the CapEx in the quarter?

For Q3?

Yes, for Q3?

$3.5 million -- oh sorry that's nine months.

He's looking. Do you have another question for us?

Is it almost -- it must be tiny, right?

It is -- it's quite small, it's like $1 million.

Okay. Okay, great. That's all for me. Thanks, guys.

Thank you.

And your next question comes from the line of Gregg Goodnight with UBS. Please proceed.

Good afternoon, guys.

Hi, Gregg. How are you?

Doing well, doing well. A question -- Texas Petrochemical was starting up this isobutylene by hydrogenating isobutene. And I was wondering just qualitatively where you guys think, you stand on an economic basis versus that process since isobutene is tied to oil.

It would seem like you would had advantage with corn at $5 to $7 and maybe even a bigger advantage with cellulosic. But have you done that analysis? I mean what's your conclusion on that?

Well -- the way that I always of this is because we're a new product, there's always extra cost that come with it. So the way to think of this is that we would be butenes kind of in a midpoint of a cost. So if someone is a big buyer, they're going to have -- and do a great big contract they'll be -- that would find the lowest cost purchase of isobutene.

We're not going to be there. We're going to be in the middle of the pact kind of a thing. Now, the way to -- I think our analysts, Ron Commander from Lanxess, I think he answered this question quite well. And he said, great, we could use Texas Petrochemicals at Gevo's. [We need] both. Bring them on.

And I think that kind of sums up the answer best. And for Texas Petrochemical, there's probably a increment that they can do that's relatively low cost, but then they have to build the capital. And that's expensive as heck. So, that always comes down to timing as well.

So I think that, you know, it's a case of -- are we -- if oil goes down at a price really low, it -- does isobutylene - is our isobutylene more disadvantage? The way to think of it is always that spread between oil and the fundamental pool of carbohydrate cost. That's the right way to think of it.

Now what's going to happen overtime and we're firm believers of this. In fact, no one ever got from the space, they didn't believe the spread was going to increase between oil and the pool of carbohydrate cost. You've never invest in the space ever.

So what will happen on the carbohydrate side is that you have companies like M&G, you know, that Chemtex, they are making great progress. They are showing what, $0.10 a pound of sugar cellulose.

That's interesting. That's great. We love those guys. We will have bugs that can eat that stuff. That puts us in a great position. And, of course, there's other companies, like HTL Cleantech. So what I'm saying is there are a whole bunch of other technologies that are common to the forefront. And you'll have people like us with a business system where we can actually take the value of things like that and transfer it into the marketplace.

Outstanding. When would be first of the earliest time that you might have a process based on cellulosic sugars?

When would be the earliest?

Yes.

Gregg, I don't think we've defined that yet. We're obviously analyzing that. We're in control of our technology development at the east level, but certainly not in control of the technology development on the bio mask conversion to the C5, C6 sugars. So, I think it would be inappropriate for us to guess on that.

Okay.

That's other peoples. But I'll tell you what, there are a whole bunch of companies making great progress at it. Remember the challenge of cellulosics has been that no one company knows how to do chemical processing plus the enzymatic technology maybe plus the biotechnology.

Well we take some of those props straight off the table, right -- because we know how to do the bug part really well.

Okay, okay. Thanks for that help.

And your next question comes from the line of Pavel Molchanov with Raymond James. Please proceed.

Thanks, guys. Most of my stuff has been answered. But on the air force contract 11,000 gallons, any sense of the price point on that?

It was good, way good.

$16 muffin good.

No, no, no, hang on a second. Mark Smith is telling me something here.

We previously disclosed we get $600,000 for the field. It's --

You have to realize that that's a contract who take very small, in their terms, quantities for testing purposes.

So what this is, is they pay a very -- okay, they paid -- they paid like $59 a gallon. And, do I expect some $59 a gallon for now and the future? No way. That's what these guys are protecting me of saying stuff like that.

So -- but no, it's $59 of gallons what they paid. It should be down into the normal range for the time it's fully commercial. And normal being whatever that is at the right time a couple of years from now.

Okay. And are you still targeting getting your jet fuel fully registered and certified in 2013?

Yes, we're on track for that.

Okay, great.

Yes. This obviously what will help us in that endeavor.

Right, plus, you know, the air force has been a different set of criteria than does, say the air line industry in general different motivations as well. It's totally interesting to see what happens.

Awesome. And on the -- on the united off take, clearly the volumes envisioned by that off take, you know ramp up quite a bit faster than the volumes that you'll actually, you know, have to sell up.

I'm curious if they're looking to do, you know, a demo or something along these lines with a smaller, you know, gallon number?

Chris Ryan has a comment.

Yes. We're still in discussions along those lines. We haven't pinned down the plan yet. It's a little bit too early for that.

Yes. And clearly we have to get ASP and certification before that discussion got more detail.

So remember the plant that we just -- that comes online next month at South Hampton, that one's going to make jet fuel. And its specific purpose -- one of its specific purposes is to make jet fuel for engine testing. It's for the air force and for other companies.

Understood, perfect. Thanks, again.

All right.

Operator, I think we got time for one more question.

And that question will come from the line of Harvey Stober with Axiom. Please proceed.

Thank you. A couple of questions, one, what would your cost of production be assuming an average -- you're converting an average ethanol plant and current core prices? What would be your cost to making butanol be these days?

So what's the cost of production at what -- 650 corn? Is that where corn is at today?

Yes.

Corn it's about 270.

About 270 a gallon.

Okay, next question. When you're choosing a partner, I would think that you'd want a top quartile ethanol facility with higher margins. You have more to split after the fact. But I would think it's the ones that on the lower quartile, the ones who want to do a deal because you're desperate to get their profitability up, how do you find your way? Where are your clients in those different quartiles and how do you weight through that type of an equation?

Sure. So the first thing we look at is how well the -- how well the ethanol plant runs and what kind of technologies used and if it's a [Delta T] it hasn't been fixed. And that's the large part of the economic equation. The next thing we look at is the corn basis because not all plants are equal in terms of their fundamental position and access to corn. We look at those two things.

Then we -- what's interesting about it is whether a plant is profitable or not, it depends upon -- I've seen plants that run really, really well, but still don't make money. The reason they don't make money is because the ethanol market that they have access to isn't very good.

I like those kind of plants a lot because we can solve their problem dramatically because our stuff is not an ethanol business model. It is a model where our product can solve under contract it's going to go to Houston or up to Sarnia or some other dedicated place.

Under a long-term basis, we've got fix margins indexed to corn. So it's a very, very different model than ethanol. So we can solve the problem for those guys.

The ones who are the people who are just for whatever reason they're in the right location to serve an ethanol market have good corn basis good operating plant, those guys are the ones who are a little more difficult to bring to the table. Although we've been successful in doing it in Redfield.

But Harvey to your point, our business model really isn't based on buying distress assets that don't operate well because that introduces a risk that we really don't want to take.

I don't want that risk in the early days. Later, that's a fair, you know, if there are more assets available few years from now, that could be a very, very good thing for us.

But on the other side of the equation in terms of not what you'd like to do, but the partners coming to you, who are the people who come to you and say, "We like you value proposition," is it the ones who are struggling with air profitability or is it the ones who look at it from a totally different equation the way you do?

Yes. It's actually both. So -- and in fact we -- the ones who actually lift up the phone and -- well, it's actually both. I can think of ones of who are on the edge of bankruptcy who call us, but I can also think of some of the very best.

Okay.

So it's mix. And so what it is, is we're an interesting opportunity for folks. It's the question of what -- in the broad sense, what will happen in the market side is the question. We have lots of interest from people. So, we just need to sort it all out.

And is your assumption on capital employee for these conversions a two-year pay back?

Two to three.

Two to three.

It depends on the exact economics of constructing a single plant.

You know what? I'm conservative guys. So, say it's like three. Use that number instead of two.

And the reason I'm thinking that because if your cost would be 270 today and you can get an ethanol -- a butanol realization today in the marketplace would be -- would you get 375 or it is --? But it would have to be something less for your payback to be some as much as three years.

Selling price in the marketplace, you get a three-year payback and a 270 cash cost. You know, you've got depreciation over 10 years. It's an incremental piece of capital. So that's minor. And then, you have our --

It's a blend of markets. We have -- we talked about our margin with $0.80 to $1.00 or an $0.80 plus range in the chemical and solvents markets, and a lower towards the $0.50 range per gallon to the fuels market.

Right, and they're indexed to corn. So a way to think of it is that it's a -- $0.50 to $0.80 margin on top of it and can get actually the pay back.

Okay, very good. Thanks, guys.

Thank you.

And at this time, there are no further questions in queue.

Thank you, everybody, for joining us. I appreciate your attention. Have a good afternoon and evening.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.