Gevo Inc (GEVO) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2012 Gevo, Inc. Earnings Conference Call. My name is Julianne and I will be your operator today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. Now, I would to turn the call over to Mr. Mark Smith. Please proceed.

Thank you. Good afternoon, and thank you for joining Gevo's Second Quarter 2012 Conference Call. I am Mark Smith, Gevo's CFO and with me today are Pat Gruber, our Chief Executive Officer, Brant DeMuth, our EVP of Strategy and Corporate Development, and Brett Lund, our EVP and General Counsel.

Slides for today's presentation can be downloaded from the webcast and presentation section of our website at www.gevo.com. Earlier this afternoon, we issued a press release which outlines the topics that we plan to discuss today. A copy of this release is available at our website at www.gevo.com.

I would 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 advise you that this discussion will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that could be deemed forward-looking statements.

These forward-looking statements are made on the basis of current beliefs, expectations and assumptions of the management of Gevo and are subject to significant risks and uncertainty. Investors are cautioned to not place undue reliance on any such forward-looking statements.

All such forward-looking statements speak only as of August 7, 2012 and we undertake no obligation to update or revise these statements whether as a result of new information, future events or otherwise.

For a discussion of risks and uncertainties that could actual results to differ from those expressed in these forward-looking statements, as well as risk relating to the business of Gevo in general, see the risks disclosures in the Annual Report on Form 10-K of Gevo to the year ended December 31, 2011 as amended and in subsequent reports on Forms 10-Q and 8-K and other filings made with the SEC by Gevo.

The conference call will also include a discussion on non-GAAP financial measures as that term is defined in Reg G including EBITDA adjusted for non-cash compensation. The Company believes this information is useful to investors because it provides a 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 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 in information reconciling 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 Gruber, our CEO will begin with a review of our recent accomplishments and provide an update of our startup operations at Luverne. Following Pat's presentation, I will review our financial results for the second quarter of 2012. Following the presentation, we will open the call up for questions. Brant and Brett will be available for questions-and-answer section of today's call.

I would now send the call over to Pat Gruber, Gevo's CEO.

Thanks, Mark, appreciate that. Thanks for joining us everybody. Mark just went over the agenda. I will give the overview, talk about Luverne, that is the most important thing. Then we'll talk about the intellectual property bit, financial highlights and we'll summarize it and then go to Q&A. Look forward to your questions.

Now, this is a big quarter for us. We actually started up our plant. We are at the midst of startup, and I have got to tell you, we are in a startup learning curve. Startup is like a code word for steep, is what that means and our team has getting it done so far. We have actually been able to produce isobutanol and get it shipped in railcars and trucks and get it off on its way to customers for the chemical and non-automotive fuel market. We're pretty excited about that.

Now, whatever you do these startups -- you guys have heard me say this over -- anyone who has met me in person for sure has heard it, is that startups are always difficult. Lots to learn. We have mechanical issues to deal with. There's always a technology piece that comes with it, and what's really important is operating discipline.

Now, what is operating discipline? Operating discipline is the actual know-how to run this plant. It is not an ethanol plant, when we are running isobutanol. We different procedures that have to be followed. Ethanol plants don't run like a chemical plant. Isobutanol plants run like chemical plants. We are [instilling] that operating discipline -- how exactly do we follow each and every procedure.

What our goal has to be, and is, that we have to become a reliable supplier. The time to be -- learn how to deal with process upset, things that go wrong, contingencies is right now. You can't do it once we're engaged in supplying customers. You can't do it.

Why? Once you start supplying customers, you've got the supply chain full and if you short a customer, you've lost that customer forever. You don't do that. That's bad business. This is where companies blow it on the market introduction. We don't plan to blow in the market introduction.

We are going to master it running this plant. We have a lot of work to do still, but we are making good progress along the way and our team has done an outstanding job. And I am glad that they have the experience they have in the past.

So we are in good shape on that front. You will see the summary here on page four. There is a picture of our plant at Luverne, Minnesota. By the way, those big bins on the back are corn bins.

Now, the next page, page 5, is a summary of our overall first relation strategy. We are looking several vertical segments. You've heard me talk about these before. The ones we're focused on in the early days here are specialty chemicals with customers such as Sasol -- here is the value proposition it is all about a drop in chemical substituting for petrochemical isobutanol.

Gasoline blendstocks for boats, small engines, will also be a focus, and then -- and using some of our volume to see these other markets and other applications. So, for instance, we will talk more about this in just a minute, but we need to get on with doing some of the work to make renewable PET real and get it on the -- full scale development. And we'll be working with Purina getting our animal feed of the marketplace.

Cleaner, greater, cheaper -- and one of the things that you will see with us is that we pay attention to partnering all across the supply chain. We try not to get held hostage. But we haven't been held hostage so far by any one downstream of us. This is the mistake that -- not a mistake, that's a wrong word. It is the problem that's inherent in the ethanol industry. They are held hostage by regional blenders. We are out to do customer partnerships and be a reliable supplier.

We have got some -- this last quarter was good and that we had some new partnerships and collaborations. One of these is important from a couple of points of view. This first one, Beta Renewables. Beta Renewables is Chemtex with TPG. Those guys, as Beta Renewables have and are very -- well, it looks to my technical team, who are very much expert in this field of cellulosic feedstock.

Looks like Beta Renewables has a some very well-developed cellulosic technology to produce low cost sugar. I like low cost sugars a lot. And we have got a JDA with these guys to develop with them, isobutanol production process based on the sugars that come out of their cellulosic process. And these guys are building -- they have a plant that starts up in August/September timeframe in Italy using wheat straw as a feedstock. And it will be very interesting to see the progress that they made. But from everything we can tell, they look like the real deal.

Now it plays to the next item which is we have done a deal and announced a collaboration with the Malaysian government. That includes the East Coast Economic Regional Development Council, Malaysian Biotech Corp, State Government of Terengganu.

And this is about putting together the business system to convert biomass in one of the most biomass-rich regions of the world, get a business built at a site making industrial chemical complex. And the Chemtex technology is a part of that potential. All these are things are further off in the future, but nonetheless they are important in the long run as that is where the future lies.

The next one is Toray Industries. Toray is Japanese company. They are a leader in the technology of polyesters and they are interested in renewable paraxylene to PET. They've already been a partner of us. They recently made an upfront capital investment to help fund the pilot plant to go ahead and make this, and they have also agreed to purchase the initial volumes of our paraxylene in that plant. We like the commitment of Toray. We appreciate that they are our partners. They're one of the best of the business.

One of the things that we did this year -- this last quarter that was pretty exciting, I think, was flying a jet. The Air Force has a program to do what's called the ATJ. ATJ is Alcohol-to-Jet. That's what it stands for. Here we made a jet fuel at our Silsbee, Texas demonstration plant. It is jet fuel, it's kerosene JP-8 and -- blended 50/50 and a successful flight. No big surprise of it is a successful flight. It was good jet fuel. It was fun to do it, though. It proved the point.

On the next page, page 8, you see marketing brochure that Sasol has used to introduce isobutanol ECO IBA. And on the front side is a picture with the name, and the backside is the specification. You can get a sense of how they are thinking about and what they'll do.

Now, one of the questions -- this is changing topics a little bit away from the market, but one of the questions that always comes up, particularly in a high corn price environment is, what's the impact to you, Gevo, when corn is at a higher price? Now, remember that we have our contracts are index to corn. So, we have some protection. But I want to take a moment and talk to you about how the corn industry works.

And this is the way that people from Cargill or an ADM would think about corn. We don't actually ferment the corn -- ferment the corn starch. We think of that as the carbohydrates and that carbohydrate we sell off the protein. So on page 9 here, is a slide that I hope you guys all have. It's got quite a lot of data on it, but basically it's showing how to figure out what things cost.

So starting at the top of the page, there is a table called Net Carbohydrate Cost Sensitivity. Two columns there. One is where the animal feed product, we are saying it's 75% of the original value of the corn. And the column next to it is 110% the value of the corn. There you see various corn prices per bushel. The group partially grayed out is -- for instance, where it says $6 corn, the next line down it says, $0.11, that's taking the corn, dividing by the 56 pounds in a bushel to put corn on a pound basis. Okay?

Then the DD -- there is the animal feed credit -- right -- because we actually -- that's how we treat it. We think of these things as a credit. So we take the bushel price and then give it a credit for the animal feed. Okay? And that gets you a net carbohydrate cost per bushel, in this case, a $6 corn nets us out and gives us net carbohydrate cost of $4.63. Okay? And put that on a -- there's 36 pounds of carbohydrate in a bushel, so that will be a $0.13 a pound carbohydrate cost. All right? Now that was a using the protein value at 75% of the value of the corn in the first place.

If you go over to look at the next column where it is -- this is the 110% value of corn. Look at the $7. Step through this, we get an animal feed credit of $2.34. That nets us out $4.66 a bushel for a $0.13 net carbohydrate cost per pound. The point of this is that the animal feed product is incredibly important to capturing the value. It mitigates the rise of corn price. In fact, even though if the corn original at $7, in this case, because of the value of the protein was higher, the net cost of carbohydrate to us is the same in each case, $0.13.

Okay, that you may not believe me, so here is a real case. There's a real life example as of -- what? August 6. So the Chicago Board of Trade price of corn was $8.10. So this is the example on the lower-right. It was $8.10. The local basis -- and remember you have to look at this. This is important, the local basis, you can't just buy corn on the board. You have got to think about the local basis because some places they are short corn and some are long corn.

In this case, where our plants are, it's a discount to the Chicago board. So the local corn price is about $7.79. Okay? The DDG, the animal feed co-product is trading at 102%, 103% of the value of corn right now. Okay? What that means, is that that for each one of those bushels, we get $2.43 credit. So, you take the $7.79 for the local corn and credit back $2.43. That gives us a net carbohydrate of $5.36 otherwise known as $0.15 a pound.

To put that $0.15 a pound in perspective that's the same as the cost of goods sold out of Brazil's largest sugar producer -- the actual cost, cash cost of production. This is the process, the delivered price -- $0.15 for us from corn starch is our real raw material cost price. There's is a cash cost. And of course, well, sugar is at $0.23.

So this is why an ADM, a Cargill, a lot of the big corn miller types do well is because they are actually paying attention to this game of corn price versus animal feed price in local basis and the rest. Okay?

That's how that works. And so, we are not nearly as volatile as one with big budgets being -- just responding, oh my god, what happens? Well, yes, okay. Animal feed product prices go up as corn goes up. That's what happens.

With that, I am going to turn it over to Brett. And Brett can talk about a couple of the intellectual property areas.

Thanks, Pat. So as many of you are aware, we had a big win in the second quarter in our litigation. We were very successful in the preliminary injunction proceeding. The judge found in our favor, denying Butamax's request for a preliminary injunction.

There's a couple of reasons why this is important. Judge Robinson is not only the judge for this case, but for all of our cases in Delaware. And this decision gives a lot of insight into how she feels about the Butamax technology and the Gevo technology, and it is not only applicable for this case but to any other case involving the Donaldson patent.

So as I have mentioned before, you need to find two things in order to find patent infringement. You have to find that the holder has a valid patent and that the other party is infringing. All Judge Robinson had to do was find one of these. And in her opinion she has stated that Butamax, the defendant -- or the claimant does not hold a valid patent, nor would the defendant Gevo infringe it if it did. So she went above and beyond just finding in favor of us on one and found us in favor on both.

Now, going forward, now that we have this preliminary injunction decision behind us, now it's time for Gevo to move to the offensive side. So what we have done is we have filed a preliminary injunction against Butamax for infringement of our 715 patent. So this is what we call a TMA29 patent. This is a patent that is the deletion of a pathway that hijacks carbohydrate.

We believe that this technology is strictly needed in order to produce any kind of commercially relevant yield of isobutanol. If you don't utilize this, you end up producing a number of other products which are not valuable. And we have great authority for this lawsuit because we've seen Butamax's use of this technology in their own patent.

In addition to that, we filed a number of other lawsuits for infringement of our patents, including our 089 patent which is our DHAD patent. And we expect to have a number of new patents issued in the next few months.

So, turning to the next page, I want to highlight three patents in particular. The first one is our 402 patent. This is what we call our Renewable Compositions patent. So this is chemistry patent that covers the conversion of isobutanol into hydrocarbon, and not only is it isobutanol but it is any C2 to C6 alcohol. So ethanol, pentanol, propanol, butanol, hexanol and then converting any of those alcohols into hydrocarbon products like renewable gasoline, jet fuel, diesel, aviation gasoline, any of those products from a biomass source.

The next patent is our 089 patent. This is our DHAD patent. So, this DHAD is the third enzyme in our pathway. So this is one that was just recently issued, and we filed suit against Butamax for infringement. And then, last, our 404 patents and 415 patent. Again, these cover these pathways that come off the main pathway that are involved in carbohydrate hijacking. And we believe you need to absolutely delete these pathways in order to get through relevant commercial yield.

And with that, I'll turn it over to Patrick.

And, you know what? We are ready to get down to the financial overview now. So, now this is back to Mark.

Thank you, Brett, and thank you, Pat. As planned, in May we suspended ethanol operations and commenced startup operations for isobutanol production at Luverne. With the transition to start up operations during the second quarter, we reported $7 million in revenue compared to $14.5 million in Q2 2011.

The lower ethanol revenue in the quarter combined with startup operations, resulted in a negative gross margin of $1.5 million. The prior quarter comparison of a positive gross margin of $0.9 million, reflected a full quarter of ethanol production and sales. As [with low] revenue following suspension of ethanol operations, as we transition to isobutanol production, this result was expected and planned for.

Our second quarter results did benefit from grants in research and development related revenue of $1.4 million, including revenue from the sale of jet fuel to the US Air Force and revenue under our agreement with Coca-Cola. Research and development expense decreased to $4.7 million in the second quarter of 2012, compared to $5.3 million in the same period of 2011.

The decrease is primarily the result of operating our demonstration plant in St. Joseph Missouri in the second quarter of 2011, as we prepared to begin retrofit activities on site at Luverne. In the second quarter of 2012, the focus of our development activities is wholly being directed to the startup of Luverne.

SG&A expense of the second quarter of 2012 increased to $9.5 million, compared to $7.2 million in the same period of 2011. Included in this increase is a one-time charge for severance for a former EVP totaling approximately $1 million.

This one-time severance amount includes the cash payment of $0.5 million plus a related non-cash expense of $0.5 million resulting from accelerated investing of stock options previously granted to the executive. Also included in SG&A for Q2 2012 were legal expenses related to our ongoing litigation with Butamax.

As we have previously described, litigation expense is driven by activities in the courts in anticipation of hearings and by the various US PTO actions. During this quarter, the litigation related expense was about 20% lower than Q1 when activities included the preliminary injunction hearing.

Within our operating expenses for the second quarter of 2012 was a total of $1.3 million to non-cash stock based compensation including the amount accrued as part of the one-time severance item noted above. After accounting for interest expense of $0.4 million, we reported a net loss of $16.2 million for the second quarter of 2012. We finished the quarter with $38.6 million of cash on hand.

Our public offerings closed in July, and the net proceeds are obviously not included in the quarter end cash balance. The offerings raised net proceeds of $98.8 million after accounting for underwriters discount and expenses. This amount includes exercise of the underwriters over allotment option of $5 million related to the convertible debt, bringing the gross convertible debt amount raised to $45 million.

Given recent trading conditions, the underwriters did not purchase additional shares as part of the equity offering. Hence, we issued an aggregate of $12.5 million new common shares as previously disclosed in our prospectus.

From these net proceeds, we paid down secured long term debt of $5.4 million which was a condition of closing the convertible debt. During July, we also paid approximately $8 million for Luverne retrofit related CapEx payables.

From an operations perspective, 2012 is all about the transitions to producing consistent volumes of renewable isobutanol at our Luverne facility. As Pat has described we have produced isobutanol at our Luverne facility and our first shipments were made in July. This is a huge step to Gevo and the bio-industrial group.

From a financial projection perspective, startup operations are difficult to project, as we scale out new production processes, make changes leading to improved operations and move through the initial revenue recognition process. This is all typical of startup operations.

Based on projected operations at the Luverne facility, we anticipate using $10 million in 2012 to support plant startup and working capital needs. This is consistent with the expectations communicated on our last quarter call.

At the last call we projected EBITDA loss for the full year, encompassing the Luverne startup and corporate activities of approximately $50 million. With 6 months behind, we maintain our projection within a range of 10%. As with any development stage company, there will be ebbs and flows in our quarter-to-quarter spend rate. Through the end of Q2, we have reported an aggregate EBITDA loss of approximately $27 million, including accounting for initial startup activities at Luverne and significant litigation related activity.

I will now turn the call back to Pat Gruber.

Thank you, Mark. So, the summary is this. Overall we have had a pretty good quarter. Getting this plant turned up is a big deal. To put this in perspective, these fermenters are 250,000 fermenters. They are absolutely immense.

10 years ago, that would have been near the size of the world's largest fermenters. Right? So it's quite something that we are able to get isobutanol through that plant. And remember, it's a non-sterile plant. That means that you can't do all farmer tricks and all the other little things that people do. You've got to actually tough it out and have your organism win against the top competitors.

Now, the fact that we have got isobutanol shipped is outstanding. It was -- we did ship a couple of railcars, took us a few weeks longer than we anticipated. And we did ship some other stuff that we haven't been too specific about as to where it goes or what we are doing with it, but -- it is nice isobutanol.

What's coming down the pipe for us? We have to learn how to run this plant. This is about getting operational reliability up. Before we can be considered to be a good supplier, we have to show customers that, in fact, we can deliver and be reliable. They depend on us at that point. That's our focus.

So this game, for us, is completely about getting that plant reliably operating. To that end, w have a goal of -- my guys, their milestone actually, the actual milestone is 1 million gallon per month demonstrated run rate buy the end of the year. The range that we need to be in, in fact, is between about 500,000 gallons to 1.2 million. The actual range to where I would expect us to be something like that. That's where I want to be, but their bonus is set up at 1 million gallons.

Why the 500,000 gallon threshold? That's about where we need to be able to run the systems having to have start and stop. That's why that one is an important one.

Now, the rest -- everything else is somewhat secondary to (inaudible) the plan in how to run. There will be things we need progress on Malaysian collaboration. We'll do - there will be other business deals I would expect. But our whole focus in life -- now priority number one, two and three, is get that plant working. Get to become a reliable supplier. Earn our stripes.

I am looking around the room at my guys, do want me to hit any other points?

No, I think that covers it. Operator, why don't we open this up for Q&A, please?

(Operator Instructions)

Your first question comes from the line of Ben Kallo, Robert W. Baird. Please proceed.

Hi, guys, thanks for the update. As it relates to corn prices -- thanks for the info on the IDGs -- now when do you actually anticipate you'll sell them and how should we think about the sale of the IDGs as it relates to ramp up? I'll start there. And then maybe you can loop in the Sasol off take agreement and how that provides a buffer on the corn price.

All right, so the first part is, in the animal feed product is that we want to get the consistency level right and so we know what it is on a consistent basis. It's the same thing and we have an off-taker in Land O'Lakes Purina. So we are in good shape there and if it becomes important once we're operating in normalness mode, not during startup mode. So, there will be opportunities for us to sell animal feed here in this year, I'd expect but it is not going to be something that I am going to hand my hat on. I don't count until we are running a consistent normal mode.

Does that answer your question on that part, Ben?

Sure.

Okay, the next part was related to Sasol agreement. Without going into detail with Sasol, it is a contract that does take into account the corn price, does take into account operating cost, et cetera. And so, it's not quite as sensitive as one would expect. We are not in ethanol business by any way, shape or form. This is not ethanol. It's not a spot market. This is a multi-year contract, indexed to corn kind of pricing. So, we are shielded on that front as well.

And then so, maybe Mark can jump in here. On the gross margin front, as we look out for the next couple of quarters as you are starting up, how should we think about gross margins?

No, you think about what cash burn is how you should be thinking about this.

Sure.

I tried to address that directly, Ben, with the -- think about using $10 million in 2012 to run Luverne and that's really -- it's really about perfecting operations as Pat described. It's not about revenue projections or gross margins but we do expected an EBITDA burn of around $10 million from our operations at Luverne in 2012. We've been very consistent about that through the year.

Great. And then, Pat, when do you expect that you can start delivering some news on how product is tested by your customers that are receiving it right now?

Probably -- well, some of it is already good. I already know that. So, I would think that we will be able to see something definitive -- [ here is] some background though. We will see some definitive here in the next few months.

Here is one of the things we have to manage very carefully. Everybody is super sensitive to who gets isobutanol first -- renewable isobutanol first. So, if I say it is company X, company Y, then it gets all bent out of shape because they didn't get it first. It is going to appear to you that we are being coy; we aren't. We are sensitive to not upsetting the market development and our downstream customers.

And so, there will be places that we place product and we'll do it very, very quietly and not tell anybody until we get enough experience under our belt that they want to announce it and have their thunder as they announce their products.

That's the kind of game that we have to play. We're a basic ingredient supplier to others, and so we have to be respectful of their market development wishes as well. Does that help?

Yes. And my final one and I'll jump back in queue is Redfield, where do we stand there? I'm sorry if I missed it. And then, when do you guys expect to break ground there?

What I'll do is -- we think of this as -- you've heard me say over and over that I am going to capture every bit of learning I can out our Luverne plant, and I want to do that first. You wouldn't believe -- sometime I want to write my book I'll be able to explain all the things that we've learned here, and it will be interesting that's for sure. And it does impact the way we think about things at Redfield.

Nothing fundamental or material or major -- these are little details, but they're important to make sure that we have a full grasp of them. And I am not going to build a dang thing at Redfield until I have that done. Now what I expect is that we would -- the earliest that I see -- and you've heard me say this before -- that we would deploy large capital is in the first quarter of next year.

All right. Thanks, guys.

So that's basically I have a change when I think on that front, but I want to make sure that I am not going to build any mistakes into Redfield. I am not doing it.

Next, operator?

Thank you. Your next question comes from the line of John Quealy from Canaccord. Please proceed.

Hi, thanks, it's Jim Miller for John. I was wondering maybe if you could give us a little more color on the steep learning curve at Luverne, just some of the visibility on the initial milestones, the puts and takes there and then, once you get comfortable, how do you see it ramping after that?

Whenever you startup a new technology like this, one, it's hard to -- unless you've been there, and I encourage -- we'll arrange tours for people at the right time, but it is a huge plant with a ton of piping. Like I am talking about unbelievable (inaudible).

Hey, John, could you mute your phone?

There's 12 years of bugs that are happy. They're now the indigenous bugs who live there and they're very happy living there. So, this is quite the trick to get those bugs out of that plant, get our own colony established. And so, that's part of game.

Now the detail of it would be other things; things like, when you're doing a startup, it's not smooth. You run the pumps full forward, you stop while you have to check some things, measure parameters -- but did anyone notice that there was -- we're seeing a strange bacteria from this particular pipe that shouldn't have any bacteria?

You send the robot down there, and what do you find? A pigeon nest. These are the kind of things that you run into. What's the consequence? Well, guess what? We have a little bacteria. Now this is not the first time we knew where to look. We've seen this problem before.

So these are the rally practical things that you run into, or it's how the pipes are put together or how a valve is done or -- and what you have to do is root out all the bugs, all the bio-crap -- that is the game -- and get our bugs to work.

One of the key things to this that I mentioned earlier is the operating discipline. When we're switching over from an ethanol plant to the isobutanol plant, detail matters here. Making sure that we've cleaned the things that we need to clean, making sure that we've opened the valves in the right sequence, that we've drained the valves when they're supposed to have a drain rather than letting some other bio-crap build up. That's the kind of stuff that we have to do.

It's an attention to detail that's not inherent in ethanol plants. Our team has done a great job of learning so far and gaining operating discipline. And they're -- I expect them to continue to do so.

We also have mechanical things that we've had to fix. These are things we'll never publish because they're competitive advantage, but they're outstanding achievements that our guys did when they saw a problem that you just cannot do in a [demo plant] until you solve it.

So -- and it was regarded -- took equipment to do it and they designed it and built them from scratch in just a couple of weeks' time. It's those kinds of things that we've done.

Going forward, it's a combination of learning how to continue to prove the operating discipline, running the plant, getting the sequence of events properly. One of the issues that we have to still continue to learn about is how to integrate all the recycles properly, and make sure that we understand them because they have their holdups as well and that's a common place because that changes the impurity profiles of what comes back into the plant. And then we will always be on the mission of improving our organism. Always, always, always.

And so, those combination of events of having some mechanical works, good operating discipline, good bug behavior, that's how you get to be successful.

That's helpful. I appreciate the color. And maybe if we look longer term as you've seen some of these other markets, the Toray partnership, in terms of the bio-plant, the expectations there from those guys?

Well, that will be done as a part of our Coca-Cola deal too. I think they will wind up to get involved and collaborate and then announce it.

Fair enough. Thanks, guys.

Thank you. Your next question comes from the line of Brian Gamble, Simmons & Company. Please proceed.

How's it going, guys?

Hi, Brian.

Patty, you were cracking up with the pigeon discussion. This was hilarious.

Right, man. Good. Well, I would tell you story after story of stuff like this. Not from this plant but from other plants.

We always appreciate the color. It helps to break things up a little bit. If Luverne gets to that range that 500,000 to 1.2 million -- and maybe this is a tough question to answer, but the cash burn for 2012 turns into a cash profit in 2013?

Mark, why don't you take this?

We've commented that once the Luverne plant is up and running above a million gallons per month range, that plant level is EBITDA, but we need more volume in Luverne to generate a positive EBITDA for the whole company. We've projected as recently as the offering that if we have Luverne and Redfield up at full scale operations that we could project a company positive EBITDA from those two operations but that's the scale it takes to EBITDA positive.

But I think your question was directed to the plant. And somewhere in that 750 million gallon range is where we expect the plant. By the way, our yields are good right now. So I feel good about yields. It's all about discipline around the throughput of the plant. That's actually that matters.

Okay, yes, that was point to consider but I was just wondering, you mentioned that 500,000 range. That seemed a little low for plant possibility but that 750,000 to million ton sounds with more consistent with what you guys have said in the past.

Yes. So, you know what? If I wasn't public I wouldn't tell you guys any of this, right? I would just be concerned internally about getting to 500,000 gallons because that's where I know I can run my plant without having to start and stop it. I just need to make sure that I sell it. So that's actually the reality of life. That's actually the number I care about, personally.

Now, the fact that we have got to drive it as fast as we can, whether we did it within 3 months or 6 months got to the other, that will depend upon market conditions and all the rest. Because, remember, we have got to get our stuff into the supply chain and let people adapt it and all the rest, too. So this is a learning curve across the board. But, yes, for where we're at right now, we're doing pretty darn good.

And, Pat, I kind of want to get your comments on just the financing deal. I know it is a little bit backward looking. I mean it's been done for a while, but why the size that it was? Why the discounts of the sub products went to closed? I mean, just kind of walk me through that and just give me some clarity on what you were thinking at that time and why it ended up being the way it was.

You know what? That will be an area of great speculation and I think as --I don't want to speculate on this call. It's like in the hindsight thing, if we can second guess things all day long, and we'll find a lots of different reasons for it.

Brett, you want to comment?

Yes, sure. Clearly, Brian, the objective on the size was to bridge the gap between now and when we feel we could be EBITDA positive at the corporate level. So rather than having to come back to the market in 6 to 8 months or whatever the number would have been, we decided to try and then achieved raising enough capital to get us to that bridge to EBITDA positive.

Okay, that's fine. Appreciate it, guys. Have it going.

Thank you. Your next question comes from the line of Colin Rusch, ThinkEquity. Please proceed.

Hi, gentlemen. It's Noah, in for Colin. How are you? Just to ask about so far the back end, the part of production utilizing GIFT. How was the productivity looking in that respect? Do you see the kind of the rate of the off take ticking up over time, or is it pretty much steady state? In other words, are we really solving here for the initial fermentation phase?

Well, we do phase startups, but it's a -- we've been working on the fermentation phase. We haven't run the GIFT system full out. We have actually have not done that. We have run to purify, so I kept the railcars (inaudible). I mean I was going to ship them right away. And then I hung on to them and I ran part of it back through the plant, and that's because we wanted to test out that back part of the system. So, we're making progress on the whole thing.

We have to get good fermentations. We're not there yet as I mentioned and then get the whole system steady state. Then I will be happy.

Okay. With corn prices being where they are, creating some pressure obviously on ethanol plants. Can you give us your view on how the opportunity is looking for follow-on deals? And do you have a better sense of timing on when you think you'll be able to announce the third facility?

I would say that -- whenever ethanol is in trouble, it wasn't being good for us from everybody now has refocused to meet motivated new deals. And so, I'd say that our ability to model companies that we have engaged has gone up dramatically and there are some bigger players in there.

Again, to do a definitive deal, the conditions are these. I got to have a crystal clear view of the market volume requirement and pricing. If I do a deal too soon, then I am going to crash the pricing, and that's a mistake, a very common mistake that people make entering a market. What I want to do is make sure we're doing this in a balanced, disciplined approach. So, you'll see us do things kind of in combination. And we have the right kind of customers in right place.

My most valuable gallons currently are the gallons that I have out of my Luverne plant and internal capacity I don't want to push through there and it will be Redfield. That's how I make the most money as a company.

But the deal after that, I would like it to be bigger and that's why we did our [Biofuels] International, with Biofuels, those guys, and there's others. So, I can't give you specific guidance on the plant three because it's too early. But that's at least how we're thinking about it.

Okay. That's very helpful. Thanks so much, guys.

Sure.

Thank you, Noah.

Thank you. Your next question comes from the line of James Medvedeff, Cowen & Company. Please proceed.

Good afternoon.

Hi. How are you?

Good. How are you?

Good. Thanks.

Just for clarity, was there any revenue at all from the DDGs in the quarter, or was it all ethanol?

Well, ethanol and DDGs related to ethanol but it was not sale of IDGs which I think is where you might have been going with that question.

I'm sorry. I didn't quite catch that.

Through May, we sold ethanol and DDGs from our ethanol production process and that's all the revenue from production that we reported in Q2.

Right. Okay. Understood. So then the question is, if the front end of the plant is the same why are you unable to ship DDGs now on these initial runs as you get the plant up to speed and working out the bugs? The front end where you actually product the DDGs is the same, right?

No. The front end of the plant (inaudible) is the same, but where the DDGs come out is out of the fermentation and then it goes through a process and it goes through a [beer still] and then with recycles and all the rest. So it isn't as simple as what you described.

Okay.

So, it's further processing of them. And so, will we sell them? Yes, I got a pile of them. I might very well do that, but not yet I don't want to (inaudible) homogenous at least.

Okay. Understood. Nobody has asked yet about Lanxess. Did you have an update for us on that?

No, same thing. They are plant three type off-taker. So it's a great relationship. For those of you who are wondering they're still an investor.

Good one. But in terms of their plans to build a conversion facility?

There's still predisposed to do that, yes, to my knowledge.

Okay. All right, I'll get back in the queue and let somebody else take over. Thank you.

Thanks, Jim.

Thank you. Your next question comes from the line of Michael Klein, Sidoti & Company. Please proceed.

Hi. Good afternoon, guys.

Hi, Michael.

Targeting the transportation market -- the announcement with the BioFuel Energy, even though that's not setting stone yet. Just the way you are thinking about it, are you targeting plants and then do you get the obligated party to partner with you after that? Is it a chicken and egg type dynamic? What's the thinking behind moving forward on that end?

Well, the way to think of it is that we look at each one of these verticals almost discretely. Now remember, we're lucky. We have a platform molecule. This platform molecule can serve any one of those seven vertical markets. The market development rates can occur at their own pace at each one of those seven. That's a tremendous advantage over most companies. Right? And it gives us confidence that we actually stand a chance for success.

In the automobile fuel market, right now, it hasn't been part of our near term plan other than do some testing and things like that, and we'll hold on for a little while on that front. In the meantime, we'll do marine engine testing and small engine testing because those are so pretty interesting niche markets where we can get paid good money for our product.

The automobile market, if we are going to actually sell to a refiner it requires us to have maybe 200 million gallons in that one refiner. That's a tough nut to crack. That comes later.

So in the meantime, we place the product where we can show the benefit clearly of isobutanol compared to other renewable resource-based fuels and show that in fact customers like it and its valuable. That's where our focus will be in the near term.

Okay. Thank you for that. As we look at your goal of 350 million gallons on the line, I guess part of that expectation is further down the road having a licensing and royalty-based model. Can you just talk about the challenges, or maybe just the nuances of that type of business model and working with the different parties associated with that versus the retrofit model you're going after right now?

Sure. So in licensing works, when you have a product of known value in a growing market and a technology that unequivocally works and you know its operating cost and capital cost that's when one can strike a very good life in deal where everybody is happy and it works, okay?

Now, I happen to differ than most of my colleague companies and when I talk about licensing because I actually believe you need those things to occur. Now remember, I was the guy who people brought when I was in the big company previously. I was the guy that people brought technology to. And I was not very nice sometimes. I would say, well, yes, but I got all these assets and what do you got? Nothing without me, and I would beat them down to dust. So, I don't want to be in that situations, right?

We had to do this to prove our technology. The right way to prove your technology is to make sure you own the asset. You're going to hope for it. It's also with the way you make the most money. I think we do not need to own lots and lots of plants.

The second thing that we have to consider is that each segment could develop differently. It may very well be that we do slightly different isobutanols for different market segments. These are very newest subtleties that we would do, but for jet fuel we might want a slightly different isobutanol than say for other stuff, and we have to take that into consideration, too. So all in all, I'd say it's too early. We do think about this in each vertical segment and each one is going to develop slightly differently. Right? That helps you?

It does. Thank you. And last question, I think someone may have touched upon this; with Redfield and construction starting and what not. I guess my question is, do you still expect it to come online in the back half of '13?

Yes.

That's still the expectation?

Yes.

Okay, great. Thanks a lot.

Thank you. Your next question comes from the line of Mike Ritzenthaler, Piper Jaffray.

Hi, guys.

Hi, Mike.

I guess my first question. I already a lot of good questions asked, but since you already have a partnership with M&G and the cellulosic sugar technology, has there been interest in other aspects of your technology like the PET or the PX?

Do you mean other people wanting to license and partner?

No. I'm talking about energy in particular.

Good comment on that. Let me say this, step back from them for a minute and more broadly is that, yes, there seems to be quite a lot of interest in paraxylene and for making PET. For everybody on the phone, paraxylene is the chemical ingredient that's used to make the major building block of polyester plastic for bottles, film, and for fibers, but yes, there's quite a lot of interest.

Okay. And then I guess if we just kind of take a step back I think this touches on earlier question but from a little bit different angle. Given that you've done this type of thing so many times before, have you seen anything unusual either on the positive side or the negative side from starting up Luverne versus the half a dozen or so that you have done previously?

Yes. I was just telling someone earlier today that today I feel like Groundhog Day. It does. And so, it is a been here, done it before. It's the same kind of issues run into where we have to have people. I am glad that we have a team that's experienced. Thank God. Because what happens you get crazy things pop up. Right?

Take the bacteria that comes from pigeons. Right? We already knew about that one, so we knew where to look. Right? It's a question of once we saw that particular bug, we knew what kind of things we are looking for. You know what I'm saying?

Yes.

Why? Because we knew we've been there and done it before. Can you imagine scratching your head if you remember seeing these things?

So, it's very much along those lines. One of the things that we did, and again I can't talk about the operational detail on what we did. Our guys came up with some extreme -- we got into a problem that something that we've never seen before even though we demo, plan it -- we had the stuff in the demo plan, you know what? They came up with an outstanding creative solution, implemented very fast and it works great. That's experienced talking. And we'll face more of these, too.

The game really is to get to be good at running this plant day-in and day-out, and it's a brand new technology for God's sake. Big plant. It takes work to learn how to run the thing, which button you push and which sequence. And that's something that we have to get good at, reliable ourselves at. And when we're doing not -- think of them as a sort of experiment. Right?

We are still in that mode of what happens when this goes bad or what happens when that goes bad, we'll wait. It did go bad, now what do? Those are all things we have to learn right now before we are supplier. We have to do.

Operator, we probably have time for maybe two more questions. Mike, are you done?

Yes. Thanks, guys.

Thank you. Your next question comes from the line of Gregg Goodnight, UBS.

Good afternoon, gentlemen.

Hi, Gregg.

Hi. Pat, you've given me some serious flashbacks to a former career that I had with the startup. A couple of questions for you. I thought the Lanxess conversion was constrained by their timing on the NOVA Chemicals cracker conversion project, which is 2014. I'm surprised not to see more progress on that front. What's going on here? I mean why is this dragging out?

They had to do the engineering it's their timeframe not ours.

Okay. But to your knowledge, is the 2014 cracker conversion on schedule, or is it slipping?

You know what, I can't comment on it. That's Laxness' business. So, they had not anticipated taking product from us in 2014. So they had to make other arrangements I am sure.

Okay. Second question. You talked about trying to be reliable and consistent. One thought that came to my mind is, your St. Joe plant experience, were you able to use that to develop process documentation that's in place now and how applicable was that to your current experience at Luverne?

There is. There's process documentation from that facility, but also process documentation from Luverne facility. There are some related things. Where it differs is in the nuance of we built the [seed train]. Right? How do you handle the seed train? What are the procedure and protocols? How do we do this particular fermenter in this circumstance? What happens when we see event X occur? What the immediate steps? Those are all the things that we have to do and they're slightly different.

Okay. Makes sense. Last question if I could. In terms of the temporary in junction against DuPont, what would that prevent them from doing?

This is Brett.

(Inaudible), I'm sorry?

Sorry. This is Brett Lund. What that would do is, it would basically prevent them from utilizing our technology in their bug by any means. So if it's granted, it would limit all of their R&D work. Now, they don't actually have a plant in the US up and running that we're aware of, so there is not plant to shutdown, but in essence that would shutdown all of their activities with our technology and their organism.

Okay. So at this point, primarily R&D and then maybe later a conversion or something like this more full scale production.

Correct.

Okay. That's all I had.

Thanks, Gregg.

Your next question comes from the line of Ben Kallo, Robert W. Baird. Please proceed.

Thanks for the follow-up. I just want to get your thoughts about how the Butamax cross lawsuit is affecting your business development on both, your partnerships with future ethanol plants. I guess your existing customers and future customers maybe are they less likely to take out long-term contracts? And then, basically just that.

Okay. So one, all lawsuits are hassle. Make no mistake. And I don't like reading these press releases as much as you guys don't like reading these press releases. And I don't like it at all. And especially when we're in the technology leadership position and we're having to find out two big Goliaths like this.

So, I don't care for it at all. And we are very sure that they're infringing our technology. And we're very sure that we're not infringing theirs. Now of course, they'll have the same opinion vice versa. That's the reality of life.

In the meantime, we are the ones with the commercial plant, learning the technology and how to make it all real and develop the marketplace. So, from a standpoint of had the lawsuit hindered us with customers? It is a hassle to deal with their customers. I can't even tell you the number of companies who have gone through this portfolio and had a good comfort before they signed up and doing business with us.

So it's pretty much everybody. That's just the way it works. Brett, you want to add some?

Yes. I just wanted to add that while it's a hassle, in my opinion, it hasn't foreclosed on those opportunities. And if you think about it, we find a very important deal with Coca-Cola. They spent a lot of time going through it. We signed deals with Lanxess, with Total. We signed deals with tons of partners along the way. We just signed a deal recently with Toray.

We obviously did the Redfield deal, all of those folks and our investors who invested tens of millions of dollars in the Company each after going through expensive diligence. So everyone is going through, done tons of diligence and all have gotten comfortable with it. So it's one of those things where everyone has gone through, done the work, have come to the same conclusion we have.

I'd say this, we're not doing an R&D project. We're trying to make something commercially real, and that's where our focus has been and all along has been. It isn't some hypothetical thing. So, that's where we're focused.

The lemonade part of this lawsuit is -- and this is actually the real truth. Isobutanol is a valuable molecule more so -- probably more valuable than other molecules that anyone is talking about in the marketplace today because of its versatility against the vertical market cutting across specialty chemicals, automobile fuels, hydrocarbons of all different types, plastics and materials.

That's why we are all having a little fight about this to making sure that we know who owns what in what property. So, it's worthwhile recalling, for instance, that -- how many times we sued them Brett?

Sure. So we filed suit against them for infringing 7 of our patents. They filed suit against us for infringing 5 of theirs. And of those 5, all 3 are related to the Donaldson technology.

Yes. And ours are each one to stick the separate. So it's one of these things where -- getting the stuff settled is going to be important, getting it organized -- sort it out as to what is important. So, that will happen in time.

Operator, I think that about does it for time. Why don't we go to closing comments? Pat, do you have any?

No, I think we've covered it all. Thanks for all your questions. I appreciate it. Thanks for joining us today.

We appreciate you guys joining us. I think, with that, we will conclude Gevo's Second Quarter Call. Thanks, guys.

Thank you for joining today's conference. This concludes the presentation. You may now disconnect. Good day.