Gevo Inc (GEVO) 2019 Q4 法說會逐字稿

Welcome to the Gevo, Inc. Q4 2019 Earnings Conference Call. My name is Adrianne, and I'll be your operator for today's call. (Operator Instructions) Please note, this conference is being recorded.

I'll now turn the call over to General Counsel, Geoffrey T. Williams Jr. Geoffrey Williams Jr., you may begin.

Good afternoon, everyone, and thank you for joining Gevo's Fourth Quarter 2019 Earnings Conference Call.

I would like to start by introducing today's participants from the company. With us today is Patrick Gruber, Gevo's Chief Executive Officer; Lynn Smull, Gevo's Chief Financial Officer; and Carolyn Romero, Gevo's Vice President and Controller.

Earlier today, we issued a press release that outlines the topics we plan to discuss today. A copy of this press release is available on our website at www.gevo.com.

I would like to remind our listeners that this conference call is open to the media and that we are providing a simultaneous webcast of this call to the public. A replay of today's call will be available on Gevo's website.

On the call today and on this webcast, you will hear discussions of certain 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 which is posted on our website.

We will also make certain forward-looking statements about events and circumstances that have not yet occurred, including, but not limited to, projections about Gevo's operating activities for 2020 and beyond. These forward-looking statements are based on management's current beliefs, expectations and assumptions and are subject to significant risks and uncertainties, including those disclosed in Gevo's Form 10-K for the year ended December 31, 2019, which was filed with the U.S. Securities and Exchange Commission or SEC, and in subsequent reports and other filings made with the SEC by Gevo, including Gevo's quarterly reports on Form 10-Q. Investors are cautioned not to place undue reliance on any such forward-looking statements. Such forward-looking statements speak only as of today's date and Gevo disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events or otherwise.

On today's call, Pat will begin with a discussion of Gevo's business developments. Lynn will then discuss Gevo's financing efforts. And lastly, Carolyn will review Gevo's financial results for the fourth quarter of 2019. Following the presentation, we will open up the call for questions.

I'll now turn the call over to Pat. Pat?

Thanks, Geoff.

Our goal in 2019 was to secure 10 million gallons per year of a combination of isooctane for gasoline and renewable jet fuel under take-or-pay contracts. Instead, we achieved 17 million gallons per year. These contracts represent over approximately $500 million of revenue across the life of the contracts. We were able to successfully find pricing that should work for us and the customer. That is a big deal, a major milestone.

For us, that was the last big outstanding question in the marketplace. We had to be able to find pricing that gives attractive returns so that we can attract investors to build out the capacity we need. It's a relief to get this many gallons locked up and see that there are many more potentially coming. It's also a relief to have these gallons under take-or-pay contracts. We needed the take-or-pays to stand a chance of obtaining the project financing that we're going to need.

Our story, our products, our technology are resonating in the market. The vision, whole gallons, net neutral fuels, that catches people's attention and causes them to think differently about what is possible. Whole gallons means that our technology has the potential over time to form the basis for a whole gallon of fuel, no matter whether it is jet, gasoline or diesel fuel. And we've been able to show that there is potential to do that with a net zero or even negative greenhouse gas emissions.

Now in order to accomplish net zero emissions, it requires that the carbon source is sustainable and renewable that will reduce or eliminate the fossil resources required for the energy of production. By that, I mean the electricity or the gas for the boilers. Just last week, we had the ribbon cutting for the grand opening of the wind towers dedicated to supply our Luverne site. Goodbye to fossil-based electricity for Luverne.

We are also developing biogas projects that would use manure as a feedstock and then the biogas output will be used to displace the fossil-based natural gas at our Luverne plant. We expect to get these biogas projects funded this year and operational next year. More on that in a bit.

Now going back to the bigger picture for a minute. The demand for renewable jet fuel is increasing as airlines and other fuel users and suppliers are being pressured to address greenhouse gas emissions. We think that this pressure is going to continue and build over the long run. Already, countries such as Sweden and France have begun to mandate sustainable fuels, which is why SAS and Air TOTAL are customers.

In California, the low-carbon fuel policy provides incentives to low-carbon fuel products. And that California policy has become even more solid and entrenched, it isn't going away, and that gives investors confidence. Not only that, similar types of policies have been adopted in New York and Oregon. Washington and several Midwestern states are likewise discussing how to make low-carbon fuel policies happen or to create other incentives.

In the European Union, they are pushing ahead with requirements to reduce fossil carbon emissions with the EU RED and RED II policies. Companies have to comply.

In addition to policies, we are also seeing major brands recognize that they need to do something about their fossil footprint. Consumers demand it. ESG investors demand it. In fact, already, we are supplying some companies quietly from the limited capacity that we have.

We are seeing increased demand for renewable isooctane for gasoline because the demand for high-octane gasoline at the pump is increasing. This is due to consumer demand because of new cars with new high miles per gallon engines. What better product to deliver high octane than octane itself like we make. I think the demand for our isooctane could be at least as big, if not bigger, than jet fuel over the long run.

As a side note, I was looking at projections for liquid transportation fuels out to 2050. I was surprised that the EIA and the IEA, even when taking into account growth in electric vehicles, the demand for liquid transportation fuels is roughly similar as today. That is scary from a greenhouse gas point of view.

In addition to the 17 million gallons per year that we currently have under contract, we expect to have more take-or-pay gallons under contract soon. And the additional volume makes us believe that we will need yet another plant built with much bigger volume than Luverne. And we believe we likely need to have it come online soon even maybe in the same time frame as Luverne. So to that end, we are already looking at several new sites for production.

Our plan is for our large-scale build-outs to be online in 2023, assuming we get the financing in place. With the take-or-pay contracts that we have and will have in place, we've got a tiger by the tail. That's a good problem to have for our business.

So with 17 million gallons and considering the next large chunk of gallons we're going to get, we are able to shift our commercialization plans a bit. Previously, we assumed we need a smaller plant at Luverne, about 10 million gallons per year of hydrocarbons, and that we would have to raise money at Gevo, Inc. and use Gevo, Inc. equity for the plant capacity build. Instead of Gevo, Inc. putting up the equity needed for the plants, we plan to step into the role of a developer, licensor and plant operator, but not an owner per se, except perhaps as minority participation for contributions already made. As we build out capacity, we believe that the assets and liabilities will not be part of Gevo's balance sheet.

With the increasing concern over greenhouse gas emissions and their impact on climate change, we expect to attract both equity and debt financers as a result. We've all seen how equity funds at banks are shifting away from investments in fossil fuels, saying they want to move towards sustainable products. Good, good, that's good for us. The momentum for low-carbon defossilized fuels in the marketplace is in our favor. We are in the process of hiring a strategic adviser in the near future to help us sort out our strategic options and to aid in securing financing for the large-scale build-outs we're planning. The economics of our plant build-outs as a project look attractive.

We've achieved another important set of milestones in 2019 that folks might have missed. We obtained certifications from ISCC and RSB, both of whom are well-known sustainability auditors. By obtaining these certifications, we are proving that carbon reductions are real and that a business system like ours really can lower the carbon footprint of fuels or even eliminate them. These certifications have been noticed in the marketplace and contribute to us getting contracts done.

Now back to our biogas projects. Instead of Gevo investing in our biogas projects, we are planning on taking a developer approach here, too. That means we currently do not have plans to invest Gevo, Inc.'s money into the biogas projects other than what we've already spent as a developer. We do expect to become offtakers for the portion of biogas that we need to lower our carbon footprint at the Luverne plant. We believe that the economics of the biogas project will attract equity. And as we mentioned before, we've already raised the debt. We expect that the biogas would become available to us for our boilers at Luverne in 2021.

You all probably know that we have ethanol capacity at our Luverne plant. I haven't said this next part quite this bluntly before, but I want everyone to understand this. Ethanol is a nonstrategic product for Gevo. As we develop plans for larger hydrocarbon capacity at the Luverne Facility, we may cease ethanol production once the expanded isobutanol and hydrocarbon plants begin operation around 2023.

In 2019, we ran ethanol when we believe we had positive contribution margin. It was a hard year for ethanol. The marketplace is terrible. Now in 2020, we plan on doing the same thing. Between now and 2023, we do expect to improve the profit margins for our ethanol even if the basic ethanol commodity markets are crazy. We can do this by qualifying for the low-carbon fuel standard in California first from using renewable electricity and by implementing other plant improvements to reduce our carbon score. And that we'd expect to translate to improved margins on ethanol.

Then in 2021, we expect that biogas for our Luverne plant will be online, lowering our carbon score further, increasing our margins further. Those margins are expected to help the profitability of the Luverne plant. Of course, we should all keep in mind that renewable electricity and renewable biogas are something we want in place for our jet fuel and isooctane build-out.

Turning to recent events. I've been asked about the impact of coronavirus on our jet contracts. The simple answer is that we don't have any. Airlines certainly do have their hands full today, but the reality is that we already have the jet gallons that we needed under contract. Actually, we have more than planned. And it's good, I suppose, that we don't have to deliver fuel until the 2023, 2024 time frame for those large contracts. Of course, over the long run, airline travel isn't going away. It will be back. As it comes back, they still have their fossil fuel footprint that has to be dealt with, their greenhouse gases and their pollution problems.

Even in the midst of all this turmoil, there are still players, even with all the distraction over the last few weeks, who need jet fuel in the future, they know they need it, and they haven't lost focus. And they are still moving forward on contracts. So I suspect and believe we'll get some additional contracts in the not-too-distant future.

Now our isooctane customers don't appear to be impacted at all. Isooctane need is clear.

As far as the Saudi-Russian oil price war goes, while it's terrible timing, it too will pass. I don't know where oil prices will settle eventually. The good news is that we've already assumed pretty cheap oil prices when calculating returns from our big plant project build-outs. They're attractive. And as we know from history, oil can swing wildly. And while none of us know what the future holds, it's worth noting that our production costs don't have the volatility that oil brings. Sustainable corn as a feedstock has a built-in hedge, both from the protein feed products that track with the value of corn. And in the future, I think that the carbon value tied to corn will also be of help, too.

Now on the market side, consumers aren't going to give fossil fuels a pass. It's the belief, probably even heightened these days, that climate change is an existential threat to the Earth. It's simply a question of when we cross the point of no return. That seems to be the growing belief of consumers, especially younger ones. Products such as ours are designed to directly address greenhouse gas issues associated with transportation fuels and be a part of the solution. The potential, whole gallons, net zero or lower emissions, demand is increasing, we have a solution that works. We need to make it a big business. Look, reducing and eliminating greenhouse gases and pollution across business systems matters even in this crazy world and more so in the future.

Okay then. This year is all about arranging financing, both equity and debt. We also expect to land more contracts, pick a second site and get on with building this business. We recognize the potential to make this business really large is real. We're seeing the contracts. We figured out the pricing. We know that pricing can drive large scale. Yes, we will have to raise money, no question, but the vast bulk that we would be expected to raise would be off-balance sheet project financing. We've done the economics around the projects. They're attractive. We already know from initial conversations with potential financiers that they like what they're seeing. We just got to bring it home and get it done.

And now that brings me to introducing Lynn Smull, who I hired specifically because of his project development expertise. Lynn, I hand the call over to you.

Thank you, Pat.

This is my first earnings call. I'm very happy to be here. I joined Gevo because I could see that the technology is proven, the products are increasingly in demand and my career experience, particularly around project finance, can be put to immediate use. Because we have take-or-pay contracts and the business has been substantially derisked, we are well positioned to secure both debt and third-party equity for the project financings that Pat mentioned. We expect to establish the financings at subcompany special purpose entity levels, which will avoid dilution that would normally be associated with on-balance sheet plant construction.

As Pat mentioned, contract terms are settling down. And with that cornerstone, detailed modeling indicates the projects will yield pro forma financial returns that are attractive on a risk-adjusted basis, thereby enabling us to secure necessary debt and equity construction capital. We're also in the process of engaging a blue chip financial adviser to take on the project capital structuring and placement lead on both debt and equity as well as to perform strategic advisory roles at the parent entity level. We are moving along in the process of selecting a credible and capable EPC firm that can mitigate completion risk to the levels customary in the project finance discipline as well as commencing various other development activities necessary for financing. I'm delighted to be here. I'm looking forward to getting the initial projects off the ground and to positioning Gevo for financial success.

Now I'll turn the call over to Carolyn, who will take us through the financials. Carolyn?

Thank you, Lynn.

Gevo reported revenue in the fourth quarter of 2019 of $6.9 million as compared to $6.6 million in the same period in 2018. During the 3 months ended December 31, 2019, hydrocarbon revenue was $1 million compared with $100,000 in the same period in 2018. Hydrocarbon sales increased because of higher production volumes at the South Hampton Facility. During the 3 months ended December 31, 2018, Gevo reduced production at the South Hampton Facility to upgrade the facility and to double production capacity. During the 3 months ended December 31, 2019, revenue derived at the Luverne Facility from ethanol sales and related products was $5.9 million, a decrease of approximately $0.6 million from the same period in 2018. As a result of an unfavorable commodity environment during the 3 months ended December 31, 2019, compared with the same period in 2018, Gevo reduced its production of ethanol and distiller grain, which resulted in lower sales for the period.

Cost of goods sold was $9.4 million in the fourth quarter of 2019 versus $9.7 million in the same period in 2018, primarily as a result of decreased production of ethanol during the 2019 quarter. Production was decreased due to an unfavorable commodity environment, largely the result of greater corn costs as compared to national markets that the region has historically experienced.

Gross loss was $2.5 million for the fourth quarter of 2019 versus $3.0 million for the fourth quarter of 2018.

Research and development expense decreased by $0.9 million during the fourth quarter of 2019 compared to the same period of 2018, due primarily to a decrease in costs associated with our South Hampton Facility, partially offset by an increase in personnel and consulting expenses.

Selling, general and administrative expense increased by $1.0 million during the fourth quarter of 2019 compared with the same period in 2018, due primarily to an increase in personnel, legal, consulting and investor relations costs, partially offset by a decrease in professional fees.

Within total operating expenses for the fourth quarter of 2019, reported approximately $0.4 million for noncash stock-based compensation.

For the fourth quarter of 2019, we reported a loss from operations of $6.2 million compared to $6.7 million for the same period in 2018.

In the fourth quarter of 2019, cash EBITDA loss, a non-GAAP measure, which is calculated by adding depreciation and noncash stock-based compensation to GAAP loss from operations, was $4.0 million compared with $4.7 million in the same quarter of 2018.

Interest expense for the fourth quarter of 2019 was $0.6 million, a slight decrease compared to the same period in 2018.

For the fourth quarter of 2019, we reported a net loss of $6.8 million or a loss of $0.50 per share on weighted average shares outstanding of 13,659,944. This compares to a loss of $7.1 million in the fourth quarter of 2018 or a loss of $0.83 per share.

In the fourth quarter of 2019, Gevo recognized net noncash gain totaling $13,000 due to changes in fair value of certain of our financial instruments such as warrants and embedded derivatives. Adding back these noncash gains resulted in a non-GAAP adjusted net loss of $6.8 million in the fourth quarter of 2019 or a non-GAAP adjusted net loss per share of $0.50. This compares to a non-GAAP adjusted net loss of $7.5 million in the fourth quarter of 2018 or a non-GAAP adjusted net loss per share of $0.87.

Having a strong balance sheet is important to moving our business forward, developing and growing our business. With that, I would like to thank all of our shareholders for their continued interest and support in Gevo.

Let's open up the call for questions. Operator?

(Operator Instructions) And our first question comes from Amit Dayal from H.C. Wainwright.

So just with respect to Luverne, is this a fully green production now or will that transpire in 2021?

I'm sorry, fully green production, I'm not sure exactly what you mean by that.

Yes. I mean in terms of all the energy consumption, is it all coming from renewables?

No, the electricity is displaced. So what's interesting about Luverne is that we have a large portion of it comes from South Dakota, where it's hydro powered. And then we have 5 megawatts that are up now. And so that, in essence, takes us off the grid. And so no more fossil-based electricity. So it gets rid of all of that. And then that's enough capacity for us and our big plant as well as we build it out.

When we add renewable biogas for our boilers next year, that will take our footprint down further. I don't think we need to get to 0 renewable or 0 fossil-based energy. We don't write our contracts that way that gets us down to 0, even though we see it's possible when we include agriculture to take us down to a net zero emission. With ethanol, it's not the main focus. We're trying to improve the margins for sure and lower the CI score for sure because that improves margins. But at the end of the day, we're very focused on making sure we got the hydrocarbon game all figured out.

Then with respect to the current market environment, a lot of volatility. How is this impacting your financing plans for these capacity build-out?

Well, what's interesting is that we have good take-or-pay contracts. They're backed by real players. The people who are under NDA know who it is that we're talking with next for the next set of gallons. They can see them. They're real players. And the ESG funds and other people who keep talking about sustainability or moving away from fossil-based resources, what are they going to invest in? You can invest in wind. You can invest in electricity. What are you going to invest it? Electric cars? Yes, sure. Batteries, yes.

But you know what, our solution is different. Our solution goes for the potential for enormous portion of a gallon, if not the whole gallon, and we can drive the carbon footprint extremely low and we've been able to prove that, like as in eliminate it. So that's pretty darn interesting for people and the process technology works. So you put that story together. You put it together in a project. And here's where Lynn has done a great job of going through, putting in the very detailed project pro formas with all the costs and bake them all in.

You know what, and at the end of it, the returns are pretty good and that catches people's attention. Hence, hey, we've got a good list of strategic advisers that we're talking to. We're going to pick one. And they think it plays. I think it plays. Based on the feedback from the funders that we've talked to so far, I think it plays. Did you want to add something, Lynn, here?

Well, I was also going to point out that the lead time for these projects is long as you can imagine. So current market conditions today have some time to work through the system before they would ever impact what we're doing. Project finance people, the profession, the discipline is much more dampened and looks over the long term. So we're continuing development and financing activities on those projects.

Just have 2 follow-ups to your commentary on this topic. One is, these airlines seem to be looking for bailouts, et cetera. I know your time line is '23, '24 for bringing all of this into commercialization. But will this potentially impact your discussions, et cetera, with these partners?

Well, what's interesting is, we've already sold more gallons into the jet market than I was originally counting on, so we presold them. We're going to get a bunch more, but it's people who have a long-run view and a different kind of problem they're trying to solve than an airline per se. So a lot of people trying to position themselves rightly in the supply chain.

But remember our business, and this is an extremely important point, we make both isooctane for gasoline and jet fuel. We can control the ratios. Isooctane generally is worth more money per gallon than jet fuel. Everyone should keep that in mind. I've mentioned it many times over the years. And so we're keen on selling isooctane. And we like that. What we see coming down the road at us in additional contracts should be weighted, I expect, towards isooctane. That's a good thing. And that's because isooctane market is, people believe it's going to be short in the future as octane at the pump needs to increase. So that's okay.

Now regarding the bailouts. I get briefed several times a day right now from potential legislation. It's pretty interesting. There's definitely going to be a bailout right now. The number they're throwing around in the United States is $50 billion, $200 billion worldwide. There's actually proposals to loan money to airlines. There's even one proposal I saw from a -- we'll see. I actually like this one, of course. But it's that if the loans could get deferred or reduced if they used sustainable aviation fuel as the feedstock. But who knows, they're going to get helped. The world has to have airlines. And so yes, this is a problem. They're a strategic industry. They're going to get bailed out. There might be some consolidation. But it hasn't impacted anything we're doing. But again, like I said, we haven't been today, at this date and time, we haven't been trying to rack up gazillions of gallons of jet fuel. We're trying to keep a balanced portfolio approach.

Right. That makes sense. And that's a good comment, Pat. On the commercialization front, it looks like plans have changed a little bit from the last quarter update. You're looking at more of a developer, an operator role versus the majority owner.

Right.

Is this coming from sort of the parties you're having these discussions with or are you sort of trying to minimize your risk? How do the economics play out in this type of a scenario for you?

Well, what's interesting about it, the reason for it is, previously, remember, I had a goal of 10 million gallons per year of hydrocarbon. So we can make a business and be a pretty good business and very profitable. That would be the first stepping stone. What's happened is we secured contracts for 17 million gallons per year. That's bigger than I originally thought we might do at Luverne. In fact, I haven't decided that I'm going to do 17 million gallons at Luverne. I might cut it back. It could be up as high as 20 million. So that's sort of what we're looking at.

However, the gallons that I see coming at us in the near term in the contracts are way, way bigger than that. In which case then, I get to think about a separate site much larger than Luverne. And as we do that, we got to do kind of the balanced portfolio thing on production as well, and we got to deliver it in the same time frame. What that means is now there's more gallons available to support us on if we're licensing or we're going to be the plant operators, that's for sure because this is a new technology. We're expert in it. We got to teach people how to do it. So we'll get paid for that. We get paid for development along the way. People used to refer to this as a capital-light model.

I know that one of the concerns our shareholders have had is, well, god, Pat, how are you going to raise all that money for the equity portion of the capital? Well, you know what, because we have so much business coming at us, we don't have to. There's other people who are interested in that. And so Gevo's cash flows would come from the various fees. Lynn, you want to comment further on this? Just outline the fees.

Well, yes, there's technology licensing fees during the construction period. Recovery of development capital at financial close is a common project finance structural element. So the money we use to develop the projects will be coming back out of the proceeds of financial close of the project financing. We'll also perform a project management role during construction to ensure it gets built the right way. And then we'll be operator and asset manager. And both those functions will tie us into the projects long term. And we'll have a carry on the back end, some type of residual equity interest that we'll negotiate with the third-party equity investors. And the projects are rich enough to support all of those streams for Gevo. So when you look at the actual dollars out for development capital versus what we can expect back under the development model, it's quite attractive and fairly low risk given the fact that we don't start development until we know we have offtake contracts.

Yes. And it's a pretty interesting game to play. And what enabled this was us being able to figure out the right pricing so that it works for the customer, it works for ourselves and get the project returns and that everyone could share that common view of what it might look like. That's what's changed. And that's because the world at large knows they're going to be held accountable for carbon, and that's not going away. Even in this turmoil, it's still not going away. Maybe you can get a reprieve for a month or 2.

But you know what, remember what I said earlier, people keep asking me, well, gosh, you're doing gasoline. What about EVs? Are they going to take over the market? Yes, no, they aren't. Nobody predicts that. They might take a share of growth. And so do you think that people are going to tolerate spewing out these greenhouse gases into the future? Are they going to continue to raise havoc in the future? That's the question. And so brands are already figuring it out that they got to do something. They aren't going to get away from it. Legislation already is happening around the world. The EU RED II policies are good policies. France and Sweden, they went down the mandate path for jet fuel. So the world has changed. It's just hard to keep up with it all these days.

My last question, Pat, is with respect to the cash on hand and your burn. How are you managing this in the current environment and are you comfortable with how you are situated right now?

We started hunkering down a while ago because I saw the reports from the coronavirus. And so in here, we already started hunkering down. You saw that we reported that we had $16 million at the beginning of the year, and we're going to spend every dollar wisely along the way. And that, I think, already, the amount of money we had, I think, would have surprised people because they weren't predicting us to have that much. And we'll be managing our burn extremely carefully. Still trying to move the ball ahead. Right now, we're hunkered down like everyone else, literally hunkered down because of the way the world is working. But we've had many, many call, everybody on the finance front, the people are off still working. So that's good.

On the project finance front, we're all continuing to do our jobs because literally for a project that won't commence construction until next year for delivery in 2023, every task has to be done. The current market conditions really don't impact that.

So we'll try and stretch it out further, of course. We have to in this situation. That's what you got to do.

And Lynn, maybe one last one for you with respect to project financing. Is this something that could materialize over the next few quarters or is this pushed out a little bit further?

No. The reality of developing a project to the level of sort of quality that meets a project finance discipline's requirements, it will take time to properly develop it, mitigating risk. I mean that is the discipline of project finance is risk mitigation and allocation to the parties that can best price the risk. For example, completion risk, we'll have to get a global credible and capable EPC firm to take on performance risk and that takes time. So there's a lot of engineering work that has to be done, and I don't think that there's any possibility of a project financing materializing in 6 months.

Understood.

So Amit, what is interesting, though, is that we've had enough discussions to know that our story of what we're talking about here is something that they haven't heard before. As soon as we start showing them the data around what we can do with jet fuel and gasoline, and we're sitting there talking about gasoline, of doing whole gallons and look and hear how we can drive it to net zero, even negative carbon emissions, that's possible to do. We have to have the whole business system up and running, of course. But that's pretty interesting because that can make a material difference. It falls square in the camp dead on for a sustainability play. And it's been derisked absolutely as much as possible because we've done all this stuff at full scale. And it's known and the products all work and are qualified in the marketplace. There's customers standing on the other side. That's interesting.

Now as equity players look at us, we've already had conversations where they say, if I'm going to invest this here at this project level, oughtn't I invest it at the corporate level, too? And these are questions that we just got to get down the road further to see how all of this unfolds. And yes, time matters, it does matter. And so we're trying to fit those pieces together.

Our next big thing, we're going to be hiring a strategic adviser. That strategic adviser will look at all options for the company because this is one of these cases where to grow our business, we need very large amounts of capital to grow the plants, right? And I think it will always be done at a project level for the first bunch of gallons. And we're going to get help from big guns who can help us. That's what we're going to do. And I think it will be interesting to see. So we're looking forward to getting on with it and get on with the discussions. I don't like the turmoil that we have right now in the marketplace, obviously.

And our next question comes from Poe Fratt from NOBLE Capital Markets.

Pat, I know you probably don't want to tip your cards too much, but can you just talk about how you're looking at the additional site that you're looking at? Whether geographically, you find that you'd rather not be up in the Upper Midwest or just sort of frame a little bit what you're looking for as far as that site and what are the potential features you're looking at?

Sure. The things that we consider are the cost of a carbohydrate, that's number one. And this is in rank order. Number two goes with it, is the sustainability profile of that. We can't have some of these products that people want to put forth that just are not sustainable. I mean I was in a discussion earlier today and was like, you got to be kidding me. It's like that carbon footprint is too high for that stuff. Yes, okay, it's cheap. So it's that balancing act of driving that footprint down, of how do we acquire those carbohydrate, what is it made from, does it fit the sustainability profile that we want for the long run?

Number three would be access to renewable energy. Renewable energy is an important part of our story. The greenhouse gas footprint that we would have in our products in large part would come from the electricity and the use of natural gas. And so we're keen on picking sites where we can mitigate those things or have the ability to mitigate those things.

Number four would be transportation in and out. We like rail. In the long run, we could use pipelines. But really, it's rail that matters most or good. And I can't imagine that we would go somewhere that doesn't have rail. And so you start looking at places and there's some interesting places I could see in California because that's closer to where a lot of this market is going to be. I can see places in the Midwest, in the Pacific Northwest, with those spaces that have been suggested down in the Southeast.

The way that I think this unfolds is, we're going to have to partner with somebody who wants to do something else with their ethanol assets because ethanol margins really are bad, like as in, historically, never this bad before. That's just the way the market is. The only hope that someone can save their ethanol business, I think, is to shift away from ethanol to something else. And it may be that some places can lower the carbon footprint enough to make money by selling stuff into California. That could be something we can do. We'll find out next year if that works even from our Luverne plant. And that will help mitigate some cash. But how are people going to solve their problems? So what we've been doing is having a series of conversations with folk and it's going to come down to having multiple candidates and sorting out the best deal, all of whom meet those basic criteria. Lynn?

Well, it's a choice between a straight-up M&A, an acquisition and financed inside of the project finance sources of funds or a joint venture or a combination with the assets contributed in kind. Either way, the markets are looking attractive for acquisitions or JVs at this point.

Yes. Because people recognize that it's a better deal to take that asset that doesn't make any money or loses money and turn into something to make a bunch of money. And yes, okay, it needs investment, but there is investors who want to invest. So that's why I think it unfolds.

So you're looking at essentially modifying an existing plant. Is that a short way of saying it?

Yes, yes, yes.

Are you at the point where you're talking about some state incentives or local incentives or is that too far down the road?

That would be a next step. And that definitely goes into the thinking of what we might pull off that might be available. SAF is interesting because people do want it and it's part of a long-run plan, even though it's hard to believe in this day and age when people are worried about their existence, but they're going to get bailed out. And this octane thing is a big deal. So that's one that everyone always wants is to shove aside because they don't want to think about it. But no really, EVs can only do so much. And I'm telling you, look at all the projections for the future, how much gasoline is planned on being sold. It's enormous. But it's also going to higher octane gasoline. It has to because for the engines that get higher mileage, but we can help solve that problem.

And then I'm intrigued because you're talking about 17 million gallons per year at least and then scaling up potentially to 70 million gallons per year. And you have contracts that are 17 million already. What's your preferred ratio of iso to essentially SAF? Have you sort of thought about that? Is it 50-50 or 25-75? Or sort of what component of that production or that hydrocarbon capacity will be iso versus SAF?

Well, I think 50-50 is a good place to think about. And that's kind of where things are kind of unfolding. And what's interesting about it is this technology lends itself that we can swing it around a bit. So even if I have an asset that's hydrocarbons, I can change ratios on the fly if I want. So we don't have to lock in and build out for any one particular dedicated thing. But the way our contracts are unfolding, it's kind of split.

And then when you look at sort of this perfect capacity, would you look at having some available from a merchant standpoint or would you be looking at just your take-or-pay?

We primarily have it driven by take-or-pay but reserve some capacity for the merchant market because as you know from other businesses, when this happens and you're building the spec like we are under take-or-pays, having some merchant capacity is usually very profitable because other people need to get the product. And the only way you can get it is from people like us.

Right. And I think third-party equity investors in the projects will also opt to have a bit of optionality on the spot.

Got you. I was sort of thinking 85-15 or 75-25 as far as 15% to 25% of capacity that potentially gives you that optionality.

It depends a little bit on the dynamic on the debt side and calculating debt service coverage ratios under stressed cases as to how much we need to have contracted vis-à-vis spot. But I think that's a decent starting point, but maybe a little less spot.

Yes. And I think the way it will come out because these are the first projects, it will be less probably.

Yes.

That's what I think. Just exactly the reason is, the way the analysis gets done is you'd look at all the things that can go wrong and plan for those. And if the economics still look like you can cover debt and make some money, then people go, okay. Well, that's what our model shows. We should be able to do all that, survive all that but even with some of the capacity.

Well, then hopefully...

Yes. It won't be 15%, but this is an ongoing discussion.

I think in future projects after we get what we call bundle one done and prove that concept that future projects will allow for a little bit more risk taking on the spot. It will evolve.

Yes. And I was going to say, as you get up the learning curve and as you debottleneck and potentially with the engineering improvements, I mean, typically refinery capacity creep has historically been 3% to 5%.

Yes.

Lynn, when you talked about the different fee streams, and then the one that, I think, was the big component was the recovery of development costs at financial close. Can you put a number on that recovery of development costs at financial close or is it something that will be dependent on the timing of when you actually do the financial close?

There are a number of things it's dependent on. For example, we could align ourselves with an EPC contractor earlier rather than later that would do the bulk of what we call the FEL-3 engineering. That could save quite a lot of money. But generally speaking, it's an expense that's absolutely required to get a project to close.

And then you get paid back as the project closes. The way we think about it, it's pretty much of a standard development model. There is one twist though, we own all the intellectual property. We are the experts in it. And so that makes it a little bit different in how the things go. We also are the market makers. This is another subtlety about this business model. We're the people out there and continue to be out there developing the marketplace and writing contracts. We see that off into the future as well.

So there's the developer sort of TopCo, DevCo/YieldCo model that you might see in some of the other renewable power sector. It's a completely different model because of the nature of our unique technology. We're not selling just the ability to snap together power projects. We are selling the technology itself. And we're actually developing a market that is much different than responding to, say, RFPs for power projects. We're in a dynamic and growing market instead of one that's relatively flat. So our developer characteristics are substantially different.

It is. And the other thing we'll be active on a worldwide basis as well and that's, again, another subtlety here. In other places, we might just simply take a licensing approach. For instance, in India working with Praj. I don't talk about it much. Those projects are moving forward. And so it will be fun when we can announce who it is, the customer and how big the offtakes are. But that kind of stuff is happening. We just can't talk about it quite yet.

And likewise in Europe, it's the same kind of thing is that there's a demand for these fuels. And does it make sense to ship them from Luverne? Well, everybody makes money if we do that. It works. It lowers the carbon footprint the way we want. But optimum? No. And so you'd start off in Luverne, but shortly you'd be having a conversation who wants to play the real game in Europe. But it's the same criteria. What's the cost of product, from what carbohydrate source? What's the sustainability footprint look like? What's the carbon score? What's logistics to get it to who wants the product in exactly the right location? And that's the kind of stuff we are doing.

Great. And then just if I can ask just 2 more, if you wouldn't mind. On your build-out, the development cost or the capital cost required to do at least 17 million gallons per year. Have you quantified exactly how much it's going to cost to build a gallon of capacity?

Well, what we've talked about previously is that if we built out 10 million to 12 million gallons a year, that might cost $130 million to $150 million. And if I'm building 17 million to 20 million, you might multiply by 2, ballpark.

Okay. Great. And then when you look at the gating factor to refinance the Whitebox debt, it looks like project financing is not going to be done soon enough to generate any funds to refinance those notes. What's the gating factor because you make the statement in the press release that you expect to refinance it. Can you give us an idea of how that's going to happen?

Yes. I think there's a couple of different paths. We're engaged with people who could do straight-up refi type things. We have to figure out what the best deal is and we'll do it. I think that some of these people are interested in the projects. They recognize that Whitebox is there and we have to work through it. They recognize that, that's an issue. And Whitebox has been a cooperative partner with us, too. So they also are trying to make money out of this whole deal too and recognize that there's a growth business here potentially. We just got to get the right thing organized and get it financed the same way.

So I have a bunch of capable players around the table. We have to just figure out the pieces. And this week, last week, it's crazy. Next week probably is going to be crazy, too. Week after, it should be settling down and we'll know what's what. But in the meantime, all the discussions of the financings and who we're working with, who the banker is, as we get more color and get on with who will want to do this project really and when, that changes things.

There's bridge financing solutions that I could do. We could do bridge financing things. We could do stuff like that. A lot of companies that are in that situation where they have a piece of debt like that, they do that. Ideally, we want them to be paid off or refinanced as part of the overall build, it's just a question of who, what, where, how. And we also have some strategics who are here waiting to see how the pieces come together. So we just got a lot of pieces that got to come together and sequence it, but got to go work it out.

And that concludes the question-and-answer session. I'll now turn the call back over to Pat Gruber for final remarks.

Yes. Thanks all for joining us. I appreciate it. I know you took time out your day and it's, like I said, crazy world. None of us likes where our stock price is, I can tell you that. And it doesn't make a whole lot of sense given the progress we've made in the marketplace, and I actually hate it.

I look forward to the future here. We do have these big contracts in place, and that creates a whole new set of options for us, creates a whole new level of discussions with players more on the marketplace, but also in the financing world that we wouldn't have been able to have before. And like I said, with Lynn here, who's been able to turn this stuff into like really solid project pro formas, professionally done, here they are and they've been thought through, I can already see that they're attractive to get people around the table and talk to us.

And of course, the basic fundamentals, we have customers. The technologies work. The products are derisked. This business works. How many other plays are there out there really that can solve big time sustainability issues? I about fainted a few weeks ago when I was looking at projections of fuels for the future because everyone keeps asking me, well, what about those EVs? Yes, I'll tell you about the EVs, good for them. We need all of them. All that we can get, good. And it's still going to be hundreds of billions of gallons of fossil fuels out for the next 30 to 50 years. That's a problem. And it has to be dealt with. And technology like ours does that. And you know what, we'll be able to find people who share that same point of view. So we're off to play this new game and get on with it. Yes, we don't like the turmoil.

Now thanks for all of your support and your investment. I appreciate it. Bye.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.