Gevo Inc (GEVO) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Gevo Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Mark Smith. Please proceed.

Good afternoon and thank you for joining Gevo's fourth quarter 2012 conference call. I am Mark Smith, Gevo's CFO. With me today are, Pat Gruber, our Chief Executive Officer; Brett Lund, our EVP and General Counsel and Brant DeMuth, our EVP of Corporate Communications and Development.

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 on our website at 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.

On the call today and on this webcast you will hear discussions of non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today and is posted on our website.

We will also provide certain forward-looking statements about events and circumstances that have not yet occurred including projections of Gevo's operating activities for 2013 and beyond. These statements are based on management's current beliefs, expectations and assumptions and are subject to significant risks and uncertainty, including those disclosed in Gevo's most recent quarterly report on Form 10-Q, which was filed with the SEC on November 2, 2012, and in subsequent reports and other filings made with the SEC by Gevo.

Investors are cautioned not to place undue reliance on these forward-looking statements. Such forward-looking statements speak only as of today's date and Gevo disclaims any obligation to update information containing these forward-looking statements whether as a result of new information, future events or otherwise. Please refer to Gevo's SEC filings for detailed discussions of relevant risks and uncertainties.

In today's call, Pat Gruber, our CEO, will begin with a review of our recent developments. Brett will then update you on litigation and IP funds and I will review our financial results for the fourth quarter of 2012. Following the presentation we will open the call up for questions. 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.

Thank you, Mark, and thanks everyone for taking the time to listen to our quarterly call. For those of you who are new to the company, in brief, Gevo's technology converts existing ethanol plants in two biorefineries. Our vision is to use technology to enable these biorefineries to produce a multitude of valuable products, cutting across chemicals and fuels using a building block platform approach to reach hydrocarbon fuel markets, plastics and materials.

Our initial product is renewable isobutanol. We have retrofitted our first commercial scale biorefinery in Luverne, Minnesota and we have a marquee list of partners including Coca-Cola, Sasol and LANXESS among others.

As I stated in the press release, we are very pleased with the progress we're making on the technology front and we remain on-track to restart isobutanol production this year. Having taken the additional role of Chief Technology Officer, Chris Ryan is doing a great job. He has focused our team, bringing a tight integration to technology operations, engineering and customers.

The demand for renewable resource space isobutanol remains very strong. Additionally, as pointed out in our press release, we continue to build an extremely strong patent portfolio. Our current objectives remain the same. Number one, produce consistent quantities and quality of isobutanol in order to meet customer demand. And two, produce isobutanol at economically viable rates.

As many of you know, our trial of Butamax starts on April 1st. In light of its pending litigation, I can't talk about details of technology or specific timing. Having said that, I do want to provide you with some color around how we are thinking about 2013 and the restart of isobutanol production. There are basically four steps.

First, win the lawsuit and maintain our freedom to operate. To this end, we remain very confident in our position going into trial. This confidence stems from the fact that, a) the US Patent Office has rejected and deemed all the claims challenged in Butamax's and so called foundational patents as un-patentable; b) the US District Court of Delaware, in denying the preliminary injunction stopped by Butamax stated that the plaintiff, Butamax, does not hold a valid patent, nor would the defendant, Gevo, infringe if it did.

And c) the US Federal Court of Appeals affirmed the US District Court's decision, thus, two courts in the US Patent Office have supported our position. I'll let Brett Lund make a few additional comments in a moment.

Second, demonstrate that our refined operating discipline and equipment changes made at Luverne successfully minimize the risk of infection and or contamination of our fermentation. This is the first stage in our restart and it involves running parts of the plant while managing our cash burn. The objective is to ensure the tweaks we've made to the plant and the procedures we have put in place give us the highest probability of successfully producing commercially viable quantities of isobutanol.

Third, utilizing our next-generation strains of biocatalyst to produce isobutanol utilizing the fully integrated commercial scale system, fermentation and a proprietary separation system or GIFT process. We have a solid plan that should enable us to learn to run the integrated full scale system effectively and manage our cash burn while we're doing it.

Fourth, produce commercial volumes. Other than winning the lawsuit this is our primary goal for 2013. Again, we want to produce consistent quantities and quality of isobutanol at economically viable rates this year.

As it relates to restarting Luverne, I am very pleased to announce that we hiring [Steve Tune] as our EVP of Plant Operations and Process Development. He will be officially joining the team next week, but has been some work with us recently in the consulting capacity. I've known Steve a long time and, in fact, he played an instrumental role in starting up and managing the fermentation assets at Nature Works, Midwest Lysine, M&C Sweeteners and others.

Steve is a veteran of many startup new technology battles. He likes to win. He brings together that rare combination of expertise combining industrial fermentation, plant startups and operations. Our whole organization will benefit for him joining.

Additionally, we have also hired an Operating Disciplined Expert who used to work for us at Cargill Nature Works. He already has made contributions to our team in Luverne.

Turning to customer development, interest in renewable isobutanol as a drop-in chemical, a drop-in blend stock for fuel and as many derivative applications has continue to expand. The Navy and Air Force remain committed to their strategic intent of enabling renewable hydrocarbon fuels such as alcohol to jet or ATJ.

Our work with Sasol is going well. Sasol is continuing to work with us so we can provide ratable volume and most importantly they remained committed to purchasing the majority of our production at Luverne; they remain a true partner.

LANXESS continues to be interested in buying renewable isobutanol to help displace petroleum based [bisputylene]. Recall, as petrochemical crackers switch feed stocks from expense of naphtha to relatively in expensive natural gas liquids due to the dramatic increase in shale gas production to supply four carbon building blocks including butylene is becoming very tight. Seat natural gas is a very positive mega trend for us.

Relative to other chemical markets, our work with Toray and Coca-Cola produce renewable paraxylene and fully renewable PET is moving forward and remains on track.

Our work in the marine fuel area is ongoing and it remains very encouraging. Marine, as in the US Coast Guard, are looking for a fuel blend with an oxygenate that is not water soluble. The incumbent oxygen and gasoline ethanol does not meet this requirement, whereas gasoline blended with isobutanol eliminates the water solubility concern and ensures compatibility with a wide variety of engines already used in the industry. PET then continues to demonstrate isobutanol's value proposition as a blend stock.

Additionally, our work in Southeast Asia is progressing. The business plan is coming together and we have multiple interested stakeholders on both the customer side and on the project development side, including several large petrochemical companies. We continue to think that Southeast Asia will be very strategic to international growth in the future. Our relationships and LOIs with ethanol plant owners remain in place as ethanol economics remain very challenged. We continue to have many opportunities to secure future replicate projects for not only first generation production but also for advanced in cellulosic based production.

Finally, I would like to make a comment about our balance sheet from a very high level. Mark will be discussing our numbers in more detail in a moment but I wanted to emphasize we believe we have enough cash on hand to accomplish our 2013 goals.

The majority of Luverne's CapEx is behind us. Our trial at Butamax is only a month away and we feel very confident in our position, but preparing for the trial has been expensive. If we win, and everything we know suggests we should, our legal expenses should go down. We have flexibility in our OpEx, meaning we can reduce further if needed. So while we are not providing specific guidance at this time, suffice it to say I feel confident about our outlook and our financial position.

Now I would like to turn the call over to Brett Lund, our General Counsel for some brief comments about our outstanding patent portfolio, then Mark will walk us through the numbers.

Thanks Pat. It was another busy quarter. We are gearing up for our trial in April and planning to win. We added Steve Neal to our litigation team. Steve is the Chairman and CEO of Cooley LLP, our outside counsel, and the Chairman of Levi Strauss & Co. He is one of the most experienced and highly regarded litigators in the country and a great addition to our team.

As Pat highlighted, three independent governmental agencies -- the Delaware District Court, the Court of Appeals for the Federal Circuit and the USPTO have already sided with Gevo. I'm very confident in the merits of our case and looking forward to our trial in April.

We continue to grow our industry leading IP portfolio. In early November, the USPTO awarded Gevo US Patent Number 8304588 or what we call the 588 Patent, which covers any retrofitted isobutanol plant using GIFT or using liquid - liquid extraction.

There are two ways to remove isobutanol. One way is to remove it as a vapor as Gevo does in our GIFT system. The other way to remove it is as a liquid which is called liquid - liquid extraction which is what we understand Butamax intends to do. Our 588 Patent covers both methods.

In the first quarter of 2013, the USPTO also awarded Gevo two additional patents, US Patent Number 8373012 and 8378160. Both of these patents are related to our methods of making renewable hydrocarbons and or jet fuel blendstocks from our biobased isobutanol.

These patents highlight the flexibility of isobutanol as a platform molecule and cover the chemical steps necessary to efficiently convert biobased isobutanol into various types of aviation and jet fuels, diesel fuels and gasoline.

Now I will turn the call over to Mark to review our financial statements.

Thank you, Brett. Operations in the fourth quarter of 2012 focused on our works to optimize our isobutanol technology in anticipating and resuming isobutanol production at Luverne in 2013. With this focus, we reported revenue in the fourth quarter of 2012 of $1.9 million, which included revenue under our research agreement with Coca-Cola, sales of biobased jet fuels to the US Air Force, revenues from ongoing research agreement and proceeds from the reduction of corn inventory on hand.

Revenue in the fourth quarter of 2011 was $17.2 million and was primarily comprised of sales of ethanol and related products. During the third quarter of 2012 call we described that we were accessing the market conditions for ethanol production and, if they are favorable, our intention to transition to ethanol production during the quarter while continuing our work to optimize our isobutanol production technology.

During the fourth quarter of 2012 and through today, our assessment of the economic conditions for ethanol production has been that active ethanol production operations would generate greater negative cash flows compared to maintaining the facility at idle. As a result, we do not transition to ethanol production in the fourth quarter and we have not transitioned to ethanol production so far this year.

Our assessment was based on the prevailing selling prices for ethanol, the cost of corn and the one-time cost of switching to ethanol production versus our fixed cost of operations of Luverne. In light of this decision, we reduced our working capital by liquidating a portion of corn on hand in Q4. These proceeds are included in our Q4 revenue.

Research and development expense was $4.3 million in the fourth quarter of 2012 compared to $5.9 million for the fourth quarter of 2011. The focus of our development activities in the fourth quarter of 2012 was on startup operations with Luverne and optimization of specific parts of our technology to further enhance isobutanol production rates.

The decrease in research and development expense between the fourth quarter of 2012 versus the fourth quarter of 2011 reflected construction related cost through for the hydrocarbon demonstration facility of Southampton Resources location in the fourth quarter of 2011. Comparable costs were not repeated in the fourth quarter of 2012.

SG&A expense for the fourth quarter of 2012 decreased to $7.8 million compared to $8.9 million for the comparable quarter of 2011. The decrease in SG&A was driven by lower compensation expenses including the decision of our Gevo executives in the fourth quarter of 2012 to waive their 2012 bonus announce. This decrease was partially offset by increase in legal related expenses, including expenses in support of our ongoing litigation with Butamax. As we have previously described, these expenses ebb and flow with activity.

We did direct actions in the fourth quarter to manage our litigation expenses downward resulting in a decrease in legal expenses in the fourth quarter of 2012 of more than $2.5 million from the preceding third quarter of 2012. These actions did not impact our overall approach to the litigation and intellectual property remains unchanged. We intend to aggressively defend our intellectual property and our freedom to operate.

Within total internal operating expenses for the fourth quarter of 2012, we reported $1 million for non-cash stock-based compensation. Interest expense for the fourth quarter of 2012 was $2.2 million compared to $1 million in the fourth quarter of 2011. The increase resulted from interest incurred on our $45 million, 7.5% convertible notes due 2012 which were issued in July of 2012.

We also recorded a non-cash gain of $2 million related to changes in the fair value of embedded derivatives contained in the convertible notes. These derivatives results from the rights that debt holders have upon conversion and will result in non-cash amounts being recorded in our statement of operations to changes in the market value, the embedded derivatives in each reporting period to convertible notes remain outstanding.

For the fourth quarter of 2012 we reported a net loss of $13.2 million or $0.34 per share, this compared to a net loss of $14.2 million in the fourth quarter of 2011 or $0.54 per share. Cash on hand at year end was $67 million.

With regards to our convertible debt, during January and February of this year 2013, holders of approximately $4.2 million of convertible notes have opted to convert their convertible notes into shares of our common stock.

As a remainder the conversion rate of common stock represents an initial conversion price of approximately $5.59 per share, upon conversion each holder was entitled to receive a may call payment representing eight future interest payments. In accordance with the terms of the convertible notes, we opted to settle these may call payments through the issuance of our common stock.

The conversion rate that is used when settling a coupon may call payment in shares of our common stock is based on the prior average 10 day bargain rated trading price. Through yesterday March 4, we had issued 1,453,968 shares at effective issue price of $3.68 per share in full settlement of the $4.2 million in principal amount of bond conversions together with the may call payments associated with such conversions.

On January 2, we announced that our board of directors had approved the stock repurchase program which authorizes the company to repurchase up to $15 million of our common stock over a one year period. We entered into the program because we believed our stock price was undervalued. As is typical with these programs, we are subject to some limitations including Board approval of certain repurchases in compliance with applicable trading rules. To date we have not repurchased any shares of our common stock under the program.

Consistent with the projections made at last quarter's earnings call, our adjusted EBITDA loss for the full year 2012 was $60 million. This result reflected the actions we took in the second half of 2012 to reduce our operating cash burn. As Pat outlined, our planning focus for 2013 is on optimizing our isobutanol production technology for resuming production of isobutanol at Luverne at an economic rate in 2013. We are also fully focused on supporting our litigation and intellectual property strategies.

In addition to our development goals in defending our freedom to operate, we are also focused on preserving cash. We took a number of organizational operational steps in the second half of 2012 to reduce our ongoing cash burn, which were reflected in our fourth quarter reduced burn rate.

With the cash on hand at year end of $67 million we are strongly positioned to aggressively pursue our business strategies. While executing our strategy we expect significant period to period fluctuations in operating results including due to activity and ongoing litigation and operational decisions resulting from product development and production activity at Luverne.

I will now turn the call back to Pat Gruber.

Thank you Mark and with that I think we can open it up to questions. Operator.

(Operator Instructions). Your first question comes from the line of Mike Ritzenthaler with Piper Jaffray. Please proceed.

Good afternoon, gentlemen.

Hi, Mike.

Hi, Mike.

My first question is around the absence of guidance from your prepared comments about how we should think about the next couple of quarters, whether that's around volumes or a more narrowly defined timeframe for startup. Are there ramifications for the trial or are there competitive concerns or is it something else entirely.

I'm going to point this one at Brett.

Sure. Hi, Mike. Given that we're only a few weeks away from our trial, all we can say at this time is that it is consistent with what we detailed during our September conference call and, unfortunately, we need to refrain from updating any comments regarding the future timing of events given the lawsuit coming up.

Right, other than what we just said as well here on this call.

Okay. You mentioned in your prepared comments, too, that Luverne is being readied. Is there any way to expand on that? I guess in other words, was there something equipment related that had to be installed or is it more like stretching before a long run, you are just making sure everything works properly before you take off.

You know I think it's a bit of combination of two. So if you recall in September we talked about the need to modify the plant and change some of the equipment around so we can get rid of some of the sterilization issues that we had. In other words there are pockets of infections that we had to take care of and that required some changes to the plant. There is also a ton of work being done on operating discipline. We haven't been idle in the true conventional sense and that the plant hasn't been fully shut down. People are there. They have been training and working on the plant and it is being readied to start back up again. And so it's a pretty active environment out there.

Okay. I guess one other one for Brett. On the Markman hearing, is there any resolution there on the words solely or is that still sort of up in the air yet? And then maybe could you kind of help us understand the ramifications one way or the other?

Sure, happy to. So, we held the Markman and summary judgment hearings and Judge Robinson's practice is to announce her decision on those two events at the pre-trial conference and the pre-trial conference is scheduled for March 20.

With regard to the Markman hearing, in the preliminary injunction the judge utilized the term solely NADPH dependent and we received some comments from the Federal Court of Appeals for the Fed Circuit that they thought it would be best to drop the word solely. And so then it would read just NADPH dependent. And as you are aware, we have an NADH dependent enzyme not an NADPH dependent enzyme. So we would be very happy with dropping the word solely, and just having it read NADPH dependent. Likewise, we would be happy with having just NADPH dependent or solely NADPH because our enzyme wouldn't fall under any of those claims.

Okay, so for your IP it doesn't really matter exactly what happens with that word?

No, we're very happy to have that word dropped because our enzyme is an NADH dependent enzyme as opposed to NADPH dependent enzyme. So if you drop the word solely, it still works. If you keep the word solely, it still works. And even if you drop the word dependent and keep the word solely, it still works.

Okay. Great. That's it for me, guys. And I'm glad to hear that Tune is on the team. That guy is awesome.

Thanks, bud.

I'm glad about it, too.

Talk to you guys later.

Your next question comes from the line of Chris Kovacs with Baird. Please proceed.

Hi, guys. Thanks for taking my questions. First of all, can you kind of give us a sense of how much inventory you have left at the plant and maybe how long that can last you in terms of what you need to do with various partners?

You are talking about on the product side?

Yes, of isobutanol.

Yeah. We produce roughly a 150,000 crude gallons last fall. We actually did the bulk of it in about a little over a month, right before we quit producing isobutanol and that will carry us through till we start up again.

Okay. And then I think, Pat, you mentioned in your prepared remarks about cash that there was potentially room or flexibility in terms of OpEx. Can you maybe give us -- I know you can quantify it exactly, but give us a sense of what you potentially look to curtail and where you can drive a little bit more efficiency, if need be?

I'm going to point this one over to Mark.

What I would characterize it, Chris, as is most of the decisions are ahead of us, as you think about it. We've got the trial ahead of us, we've got some of the operations decisions ahead of us, but what it really means is that with $67 million of cash that we started out 2013 with, that that gives us ample flexibility to pursue all of the key strategies we have maintaining our freedom to operate as well as making the development strides we need to around producing isobutanol at Luverne and utilize that asset to meet those goals and the flexibility, just for flex that we don't just have one pathway to meet the goals so we can take the multiple paths.

Yes. So where we have looked at this model in lots of different ways and we can get out into 2014 in good shape. It's important to do so. We have the main focus for us really is doing this phased approach or starting up this plant, minimizing the cash burn while we do it. Some of the equipment changes that we made to the plant helped to enable that.

Okay. And then lastly, respecting that commentary with regard to technology can be limited right now given the upcoming case. Just looking at your website and some of your current job openings, you have a lot on the science side. Could you maybe talk to is the new employees, is that more towards some of the new applications you are pursuing to some of your partners like Toray and Coke or is this to bolster your force here focusing on the east?

Some of them are. Well, it's a mixed bag. Some of them are around like analytical chemistry, hiring people just to beef up the team a bit. We have other ones who are involved with the biotechnology. We don't have any critical short falls, I think is what you are actually asking me. Do I have a critical short fall, a plug that I have to fill? The answer is no.

Okay. Great. Thanks, guys. I appreciate the time.

Thanks, Chris.

And your next question comes from the line of John Quealy with Canaccord Genuity. Please proceed.

Hi. Good afternoon, guys. Just going back to working capital question, just so I am clear, did you say that you could have produced Gen 1 ethanol if the spreads were favorable? And I assume that you'd continue to do that moving forward if the spread is there?

The answer is we could have produce Gen 1 ethanol, but we opted not to because the economics were unfavorable through frankly today.

Right.

Yes. Yes. Okay. Second question, again just to clarify, when you talked about trialing isobutanol production through the different test beds or the different parts of the facility at Luverne, in the past three months have there been anything surprising or different about that process than I think the last time you talk to us publicly?

No, it's the same basic game plan in that we had the issue of we have to separate the operating window where our yeast is happy compared to the other bugs who want to take over the fermentation, so we have been busy working on that.

The second one is getting rid of the -- finding the extraneous bugs who are getting into the fermentation system and through the process and eliminating them and limiting their access to the plant. And part of it is we also added some steam lines into our GIFT system to make sure that we can sterilize it.

So those things have all been ongoing and then in the biotechnology front, it's that when we did the work we did last year it brought into focus the areas where we needed to address the bug and so our team has been busy doing that.

Okay. Great. And then I am sorry if I missed this, in terms of the timeline we should be thinking about for the upcoming trial, I know we talked about pretrial on the 20th, but what type of timeframe we should be looking for, for a verdict for the trial and then also talk us through the potential applications for appeal on either party or just the framework of the next steps? Thanks, guys.

Brett.

Sure. So the trial will start on April the 1st. It will most likely be a 5 or 6 day trial and then the jury will make its decision. And I would expect them to deliberate for around a day or less, but again that is subject to how long it takes them to come to a decision.

In this particular trial, the issue of damages is bifurcated from the trial so the jury will make a decision on who wins and if they find that Gevo wins then we continue on and Butamax can try to appeal. If Butamax were to win, then we could obviously appeal as well and then there would be hearings on the damages phase of it and those could typically last anywhere from 9 to 12 months.

Okay. Thanks very much, guys. Good luck.

Yes.

Thanks, John.

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

Yes. Hi, guys. Again, I understand that for tactical reasons you don't want to get into timing on Luverne, but from an operational standpoint are there any remaining hurdles that would keep you from resuming production let's say in April should the trial conclude at that point?

Well, we are going to do a phased approach. So the way to think about this is phase one is to work on the equipment, startup -- basically it's a start up, startup the plant, start working at it and making sure that we have our act together in terms of understanding the operating discipline and if the improvements that we've made actually work as improvements.

And then the next step will be to run the fully integrated GIFT system with the fermentation, what that entails is you take full scale fermenters, operate it normally, operate the GIFT system and practice on that first, learning how to do that well. And then the third thing would be to go ahead and make a commercial decision to run. All those things will happen in 2013 and obviously there's a sequence to them.

Okay. And then on Redfield, any guesses on when retrofit might begin at that facility?

We've continued to engineer it and as I've said before we are going to hold off deploying any capital until we have buttoned down at Laverne.

Okay. Got it. And the last question from me is, are you anticipating any defense department revenue in 2013?

Mark?

Yes, mostly a little bit. We've got an order that we received in the fourth quarter of last year for 45,000 gallons of jet to the Air Force and we do anticipate -- well, not anticipate, we will fulfill that order this year. And we continue to look for opportunities with the defense department. In fact as an aside, we did actually deliver a first amount under that 45,000 gallon order that we received in the fourth quarter. We delivered last night.

All right. Great. Glad to hear it. Appreciate it, guys.

Yes.

And your next question comes from the line of Michael Klein with Sidoti & Company. Please proceed.

Hi. Good afternoon.

Hi, Mike.

I just want to be clear, is your plan to produce isobutanol in 2013 or to sell isobutanol in 2013?

The plan would be to produce and sell.

Okay. I just want to make sure I am clear on that.

Yes. Yes.

Okay. And looking at cash burn and levers to pull, can you talk about your ability to possibly refinance some of the Triple Point debt and any conversations you might have on that front?

I don't have any specific updates on that however it is being an object -- that continues to be something we look at. Obviously, yes, we entered in to the Triple Point arrangement. They have been a great partner from the time we acquired the plant. However that is a significant obligation of ours while we're comfortable with our resources to meet that obligation. It's certainly is one of those triggers that we would look to pull and we continue to explore opportunities to lower those cost of financings or change the timeframe under which the financing amortizes.

And I got to tell you that Triple Point is a good partner.

Yes.

They are good to work with, they are good people.

Okay. And just a follow-up on the last question on Redfield, is the engineering design for Redfield complete and are you just waiting to spend capital pending the litigation outcome or can you just talk about where you are right now in that process?

Sure. We've gone back and looked at the design of the technology based upon what we have done and learned already at our Luverne plant this last year. And so, I'd say it's mostly complete. Now it's pinning down details and to see what else changes or if anything does. The game to play for Redfield is to minimize capital outlay for over the maximum efficiency in the technology. We've got to get some more learning under our belts to make sure we get that right.

Okay. And you think that CapEx is still going to be about a dollar per gallon? Is that correct?

To the best of my knowledge on the numbers that we have today, that's what it looks like and that's even recent estimates. Now, we still have to go through and get our bug to perform at the levels we need to hit that but we are attracted to do that it looks like.

Okay. Thank you very much.

Thanks, Mike.

And your next question comes from the line of Caleb Dorfman with Simmons & Company. Please proceed.

Hi, Caleb.

Thanks for taking my question. I guess first of you touched on the US Air Force contract a little bit, how are your discussions with your other customers going and how are they feeling about the delivery timeframe that you are possibly going to able to offer to them?

Sure. You know what, we have great partners. So a company like Sasol, they are used to plant startups and the type of them that we're working in is in the normal category. So we have been -- they are great partners. We have an open dialogue with them, so easy to manage. Companies like the Coca Cola and Toray, they are also a great partners and their focus is on paraxylene which can be drive from isobutanol and they are continuing to sponsor that development work and they're great.

So all in all everyone remains on track and committed. They're a good group. And the game of this is to have -- oh, and Mansfield. I forgot them. They're really good as well and as a partner.

So all of together guys together, the way we manage them, is be open with them and upfront and they appreciate not having expectations mislead in terms of the supply, because remember with the disaster is if you were to supply and then shut it off. That is a disaster.

So you're are spending 45,000 gallons to the Air Force this year. Of those others leftover gallons that you have from back when you were producing last fall, how many your customers are you going to be able to feed with gallons for I guess tax purposes or those feeding purposes are already taken care of?

It's all right. We already took care of them. Well, a lot of it would go to Jet, but the rest of -- isobutanol is isobutanol once you purified it. It's a same old stuff, in a way just. It's just that ours is renewable. So there isn't a whole lot of qualification on that front.

Great, that is helpful. Then I guess one follow-up question. When we are thinking the plant coming back this year, should we also think about IDGs being produced at the same time? I know that last time the plant was running they won't really getting produced and sold?

Yes. That is one other thing that we want to work on and make sure that we understand how to do and get it right as it comes back up.

Great. Thank you, guys.

Thanks, Caleb.

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

Hi, guys. How are you?

Good. How are you?

Never better. So I noticed the inventory actually rose about $3 million in the quarter but you liquidated corn and I am sure you are working down a little bit of that isobutanol in the tanker cars out there. How do I understand the inventory increase?

We did increase some of the inventory in the beginning of early part of the fourth quarter and we liquidated some of the corn, as I mentioned, in the fourth quarter and frankly we'll continue to reduce that inventory a little bit in the beginning of this year.

The other part of the inventory that does creep up, does arise is that we account for our spare parts within the inventory category and clearly as we finished up work on the retrofit at Luverne we added spare parts just as part of the normal cost of prepping around that plant.

So you added to your corn inventory early in the fourth quarter. What was the thinking there?

It was just the normal planning cycle of fulfilling some of the commitments we had with local farmers and as well as in anticipation of where ethanol economics would be as we stand out, ethanol economics did not make sense to make ethanol and we did not.

Okay. Thanks, Mark. And on that, how much of the economic -- uneconomic ability of -- if I can coin a term -- of ethanol is involved in the switchover time and cost? In other words if it were costless and timeless to switch over, could you be profitable or cash flow positive with ethanol today at Luverne.

Not through the fourth quarter. Margins would have been negative.

And can you give us a sense of the cost and timeframe to make the cut over.

We've really described that in terms of a couple of weeks time. We haven't described it in terms of exact dollars. It's an invest -- there is a small changing cost between switching between ethanol and isobutanol and back but while it's a cost, it's not a major cost. There is, as I said, a period of time as well.

It's a small amount of money on a relative basis and a very fast payback, would be the way to look at it.

Yes, but its two to three weeks of lost time is the true cost.

One to two weeks.

It's more like one or two weeks.

Okay. Thanks. And then finally, how many gallons remain in inventory?

We haven't broken that out. It's just we've really commented, as Pat said, that we produce around 150,000 gallons of crude IBA and that that is more than enough to meet the obligations that we've -- customer requirements that we've entered into. We haven't articulated a gallon amount on hand at the end of the year.

Okay. But it's enough to satisfy the US Air Force contract and market ceding efforts with existing and future customers.

Yes.

All right. Thank you very much. Talk to you soon.

Okay, Jim. Thanks.

(Operator Instructions).

Operator, if there's no other questions --

We do have a question and it comes from the line of [Brian Craft]. Please proceed.

Say, gentlemen, probably this is Pat's question but in regard to the drought in the Midwest, your primary ingredient of course is corn and there's a possibility that if there's not enough moisture this spring you may have some more problems with production and higher prices. What is the alternative for a situation like that where the ingredient cost are dramatically affected being that the last couple of years have been as dry as they have been?

Well, it would be interesting to see what happens. Thank goodness they are getting dumped down with snow over the last several weeks.

Right.

That will help and we will see what happens, but I think we have to less generalize your question. Suppose corn prices are higher, what do you do? Well basically, we go after the same kind of business plan that we're talking about and that you target these higher value niche products. And what's interesting about is the isobutanol markets and the applications are so large that tiny niches can support a decent price still. It'd take work to develop and it'd take a little more work to get into place but, you still execute the same business plan.

Right, is there any other substitute ingredients besides corn that you can utilize in that process?

There is. There is. In general anything that ferments. Our plants are set up so we can take in sugars into that plant. So whenever liquid sugar stream, we can take in to that plant.

Thank you.

So, if we had sugar beet or we had-- we can take a variety of stuff if we want to.

Thank you.

Yes.

Thank you.

There are no further questions at this time.

Thank you very much everybody. I appreciate all of your support. Thank you.

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