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Gevo, Inc. (NASDAQ:GEVO)

Q4 2013 Earnings Conference Call

March 25, 2014 4:30 PM ET

Executives

Pat Gruber - CEO

Mike Willis - Interim CFO, Principal Financial Officer and Principal Accounting Officer

Analysts

Mike Ritzenthaler - Piper Jaffray

Caleb Dorfman - Simmons & Co

Jim Medvedeff - Cowen & Company

Operator

Welcome to the Gevo Q4 2013 Earnings Conference Call. My name is Janet and I'll be your operator for today's call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. If you would like to access the PDF file that goes along with the presentation please go to Gevo's Web site, click on the news and media tab, select press releases, select the webcast by microphone and the screen will appear with the link to open the file, Luverne Update on Progress on Commercialization.

I will now turn the call over to Mike Willis. Mr. Willis, you may begin.

Mike Willis

Good afternoon and thank you for joining Gevo's fourth quarter 2013 conference call. I'm Mike Willis, Gevo's CFO. With me today are Pat Gruber, our CEO and Brett Lund, our Chief Licensing Officer and General Counsel. 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 Web site 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 Web site 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, which 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 2014 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 Annual Report on Form 10-K as amended, which was filed with the SEC on March 26, 2013, and in subsequent reports and other filings made with the SEC by Gevo.

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. Please refer to Gevo's SEC filings for detailed discussions of the relevant risks and uncertainties.

On today's call, Pat Gruber, our CEO will begin with a review of our recent business developments. I will then review our financial results for the fourth quarter of 2013. Following the presentation, we'll open the call up for questions.

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

Pat Gruber

Thanks Mike. We have made a lot of progress moving through the isobutanol commercial process learning curve. Fundamentally, our technology works its scale with corn mash, the feedstock. And we are in the midst of learning how to run the integrated full scale isobutanol process. As we have advanced on the curve, we have discovered that the isobutanol technology not only works, but can work concurrently with producing ethanol.

Our original vision was to focus reference on one product, however, we are now confident that we can leverage the flexibility of our technology and more fully utilize all the operating units of the plant to produce ethanol simultaneously with isobutanol. Needless to say, the additional cash flow is a benefit as we work to maximize (inaudible) per dollar as we scale up the technology.

Therefore, we plan to arrange three of our fermenters to produce ethanol. We are (indiscernible) configuration side by side meaning both ethanol and isobutanol, we produce concurrently. I have a presentation for you today that discusses in more detail what we are doing at Luverne, the progress we’ve made on the isobutanol process, what our plans are, and it also discusses the side by side ethanol and isobutanol production.

Let's turn to the presentation. Let's go straight to Slide 2, this is a picture of our plant in Luverne, Minnesota. You see that we have rail and truck access, corn comes in by truck, feed goes out by truck. Product goes out by rail or truck. On the right, you can see our corn storage bin, capacity is about 800,000 bushels, the process building in the center of the picture holds the majority of our fermentation equipment.

The GIFT building near the top of the picture holds our GIFT equipment. The distillation building has majority of our distillation equipment, the utility building holds our boilers as well as our water processing equipments.

Next slide, Slide 3. This is the close up view of some of our equipment, the right side of this slide shows one of our fermenters; it's a big 250,000 gallon or 1 million liter fermenter. This particular fermenter is where we have done much of our isobutanol work. The piping you see going into it and out of the fermenter are cleaning lines, steam lines, and GIFT lines. On the right side of the slide, you see one level of our GIFT columns; the GIFT building has five levels. This equipment is large.

Next slide, Slide 4. Luverne is actually a big plant, the process streams are about 1000 or 2000 pounds per minute. In fact, it is a world-scale plant in the amount it can potentially produce, that is 100 million pounds of isobutanol and 100 million pounds of animal feed. Big plants and new technology do not instantly start up and run well. It must go through a learning curve and optimization. This typically takes 12 to 18 months. It's easy to forget how big Luverne actually is.

Slide 5, there are several systems in the plant all of which need to work together changing parameters of one area of the plant can have a cascading effect throughout the plant. We have to understand the interactions between systems. We have been and we will continue to pin down the details of standard operating procedures. Now, we also need to determine the best techniques to control the process, what works or doesn't, how to respond if there is unplanned event.

For example, suppose if a pump fails and we have to hold the fermentation longer than we want, well that means the flow stocks in the plant delay [ripples] (ph) through the plant. What do we do? How should we respond? What changes happen in the plant given that the plant is biologically active with all the sugars and nutrients?

Of course, we focused on minimizing mistakes, a low yielding batch is expensive, breaking equipment can be expensive, so we think through pretty carefully run plants how we're executing our work.

We also have to deal with the ongoing mechanical and equipment issues that arise with new equipment, it all has to be working correctly for the plant to operate correctly, now this winter I got to tell you that (Audio Gap) and so called that we have a lot of frozen pipes and valves (indiscernible). As we approach the issues in the plant, we like to resolve that by using process window changes rather than capital. This is actually a big deal. It's much easier to use capital to solve a problem, but of course that’s more expensive, instead we'd rather use the process itself by pushing the process window or optimizing conditions in the plant.

We are taking the approach of understanding what works well and what doesn't, and then making decisions about capital improvements. By doing it this way, we'll get a better answer for ourselves and our licensees.

Next slide page six, this shows an ethanol plant. This diagram shows the basic equipment in the plant. There is corn, it’s ground, it’s turned into a mash, its liquefied with enzymes to make it into sugars, the sugars are pumped to fermenters, there is four of them, each one runs individually in a batch, once the batch is complete, it is dumped into a beer well, the liquid is distilled off to produce the ethanol and water, but water is recycled back to the front of the plant. The animal feed, the solids are used for animal feed.

This next slide in page seven shows equipment, the major equipment additions that we've put in for doing isobutanol. The bearer at the top of the slide shows how we think about process series, the systems of the plant. There is feedstock, biocatalyst production, fermentation/GIFT, and those should be thought of as really one system cleaning systems, distillation, water recovery, recycle, and animal feed.

There are three GIFT columns piped to fermenters. There is extra cleaning nutrient equipment, biocatalyst production equipment compared to an ethanol plant. Isobutanol fermentation differs from ethanol, and as the biocatalyst has to be grown and advance the fermentation, then pitched into the fermenter, that means putting it into the big fermenters, where it adds primarily (Audio Gap) to convert sugars to isobutanol, so that's where we have the extra equipment to grow the yeast.

When isobutanol is fermenting, it too operates in a batch mode. However, we continue to remove the isobutanol from the fermentation broth using the GIFT system with back in distillation. We collect the vapor, we conduct it back to liquid, and then the liquid separates into an isobutanol phase and a water phase. So think of this as water and oil where in this case, rather than oil we have isobutanol. Isobutanol is then distilled and send to product storage.

When the sugars have been used up just like in an ethanol process, we would dump it all to the beer well, and the solids would be processed at animal feed. So isobutanol like ethanol operates in a batch system, ours is modified because it has GIFT, and as we optimize, we focus on one fermentation system knowing that it translates to similar equipment.

Next slide page eight, this shows the sequence of commissioning and optimization, so this next series of slide, I'll show, it's really a build slide, and it goes through the steps of what we've been doing. Number one, we have to get the feed stocks right, this means about grinding corn, adding the enzymes, the vitamins, the nutrients, and getting it all sterile, a liquid mixture. Now this liquid mixture does look like wet polenta or raw rough corn muffin pattern, it's difficult to work with. Our proprietary system to sterilize the mash works well, and we now – especially now that we know how to run it.

Slide nine, prior to running the fermentation broth, the pipes and tanks need to be cleaned. Cleaning fluids are used for some of the tanks, some of the pipes we use steam, once tanks are clean, there is a time, they must be used or the procedures need to be repeated.

Slide 10, step three, we grow the quantities of the biocatalyst to meet in a separate set of fermenters these are called propagation tanks. The purpose here is to study the quantities of biocatalysts we need to run the fermentation, the yeast as we produce them we want them to be happy meaning they are ready willing and able to produce isobutanol that means we have to hit a certain processing window that is a sweet spot for these yeasts.

Slide 11, it's the step four. One of the key things about an ethanol plant is that we don't have a waste treatment plant typically. So you recycle all of the water back to the front of the plant. There is no waste treatment plant per se. In order to run a production fermenter water really does need to be recycled. Now the water quality could be quite variable depending upon what is going on in the plant variability in the water quality means the variability in yeast growth and fermentation performance.

So as you start up you have to actually generate enough water first then put it back to the front of the plant and the impurities that are present impact the fermentation. So those are the kind of things we have to learn about and have been learning about. We've been working over the last couple of month to improve our water quality (Audio Gap) 90% of the water with good fermentation performance our ultimate target is to get upwards of 95%.

Next slide page 12, shows step five, once we have the water flowing back to the fermentation system we operate the fermenters now these are 250,000 gallon to 1 million liter fermenters and that all of our fermenters have been tested they all begin systems work, they all work mechanically but for doing the optimization its really optimal to focus on one system first one fermenter, one GIFT system and learn how to run the process. I can see this running GIFT in full scale with the full scale of production fermenter, the GIFT system works very well.

Slide 13, step six, once the isobutanol liquid is separated form the water using the GIFT system it needs to be distilled to purify it that's pretty straight forward.

Slide 14, step seven, once we distill then we recycle water more water it adds to the quality back to the fermentation systems in the plant. So that has to be taken into account as well.

Slide 15, step eight, once you run a fermentation run the GIFT systems run the biocatalyst production system and you brought a batch then you have to clean everything again. Now cleaning systems also change the water recycle and its impurities.

Slide 16, step nine, once the fermentation is completed the solids go to animal feed producing animal feed is the key mechanism that gets solids out of the plant we don't have another way to get solids out of the plant.

Slide 17, 10 and of course, we want to distill the product to put in a storage tank and then ship it out.

Slide 18, step 11 in a course to run the rest of the plant you do the whole cleaning cycles again biocatalyst production run the fermentation GIFT system, it all repeats.

And then Slide 19, when all fermenters are running feed and product are produced continuously even though each fermenter operates in a batch water continues to be recycled back to fermentation and it reaches a steady state and of course that minimizes variability.

With isobutanol, we are currently working through the optimization of steps three, five, seven and eight and their impact on each other set differently we're working on recycle of water, the cleaning techniques, managing impurities, managing sterility and yeast process window. There is no choice but to go about this systematically to make sure we know what happens and why something happens as we make changes. It's worth noting that we need to do this work with just one fermentation GIFT system first.

So turning to slide 20, the key to success in some of the results and a fundamental level the pipes and systems need to be free from excess infections this was the issue we had in 2012, we modified the plant, we eliminated those infections the whole new ballgame for us in operating the plant now. We can actually work on the process. Feedstocks and nutrients have to at the right mix and sterile, the answer is yes. We just need to optimize it. In biocatalyst production we have to get the right quantity and quality yes we've been able to achieve that. Fermentation, we've been able to match lab results about to 90% recycled water we're still not consistent and we need to optimize the overall system here given the recycles.

GIFT works well with corn mash in our fermentation, cleaning procedures meet requirements, the answer is yes. We still need to optimize it and become proficient at reproducibility. Water to be recycled and reused, so far we've done up to 90%, our target is greater than 95%. Product purity meets requirements yes, and animal feed can be produced, yes, but it's been consistent, we're starting the topic. So in short, we've seen success in all the parts of the plant, we need to continue to bring it all together.

Slide 21 shows the progress on batch gallons and rate. Now we have been producing isobutanol and this chart shows some of the progress on full scale fermentation. We have a goal for gallons produced per batch. Currently the best that we have done is little better than 70% of our goal, our focus is to push the gallons produced per batch upward.

Next Slide 22, IBA optimization approach and plans, so here is what we're planning on, we'll optimize individual batches improving the gallon per batch, we'll do this including the water recycles. Optimizing the biocatalyst dosage per batch. And then we have worked to do around the process window, this includes the pH, nutrients, the sugar mix, the enzymes et cetera. We'll then work to increase the number of batches minimizing the turnaround time between batches while keeping the process clean from infections.

Turning to Slide 23 now. I just want to talk about the isobutanol ethanol side by side plant.

So here is slide 24 side by side isobutanol and ethanol at Luverne. Question comes up why do this, why do it now? Well, there are several reasons, one is that it leverages the flexible nature of our technology. Second thing is, we confirmed that we can control the ethanol use for infecting the isobutanol fermentations. We did that as a matter of fact, in fact we have run ethanol and we have eliminated ethanol brews and yeast from our isobutanol fermentations that's actually a big deal.

By running the plant and using all the assets in all fermenters, we get more stable operations that means more stable mash, water recycle, feed production that helps us navigate through the systems interactions in the plant for the optimization by isobutanol. Of course, it's a long way. It improves the asset utilization, the margins for ethanol are good using these assets which would otherwise be ideal for the time being to generate some revenue and profit seems like a good idea. And of course our potential licensees are interested in Side by Side. Our licensees have crossed to ethanol plants and they see adding isobutanol Side by Side to an ethanol plant increases their top line and bottom line revenue.

Side 25, this is the diagram side by side isobutanol ethanol plant at Luverne. Now running Side by Side, we plan on doing just what would do otherwise with isobutanol in that we optimize the biocatalyst production, the fermentation, GIFT systems, operations, workout the systems interactions with the recycles. However, we can use the other fermenters to produce ethanol rather leaving them idle. So in this slide, the equipment marked with blue they would be used for isobutanol production. The equipment marked in grey will be used for ethanol production.

The green indicate potentially shared equipment and processes. Now on a approach like this make sure better use of assets given where we are in isobutanol learning curve and also simplifies our life by having a continuous flow of mash water recycles, the feed production et cetera.

Slide 26. With isobutanol we'll be focused on the optimization of one train to maximize learning and minimize cost. Now along the way, we'll produce enough isobutanol to maintain our contracts for the military for making hydrocarbons for Toray and Coca-Cola and others. Once we have perfected the isobutanol production process we can switch any or all of our fermenters to produce isobutanol rather than ethanol.

With ethanol, we'd expect the run rate of greater than 15 million gallons per year, run rate. Now producing ethanol improves Luverne's operating environment for the optimization of isobutanol production by creating continuous stable mash flow and consistent recycle of water back to the fermenters.

We wanted to spend so much time dealing with the equipment initiatives associated, we started to stopping the plant that's a benefit. Now also, the expected increased available cash flow to the company as we optimize our isobutanol production technology. And as I mentioned it broadens the potential market to license as partners increasingly see the benefit of co-producing isobutanol and ethanol at a single site in the Side by Side model.

Now in addition progressing at the commercial production learning curve you get some other extreme developments. We signed a letter of intent with Porta, the leading ethanol player in Argentina, they would be a direct licensee for their plans that and a sub licensee for plants that they build for others.

We also began selling isooctane, now this is an interesting one in that the customer sort us out, we seem to be the only ones who make renewable isooctane. Isooctane made from our isobutanol at our plant in Texas seems to work well in high performing engines. I expect we will able to talk more about this as the applications become more visible. Our hydrocarbon plant in Texas that converts isobutanol to jet fuel octane paraxylene continues to perform well, hydrocarbons will be important for our businesses to grow.

I will now turn it over to Mike Willis, our CFO, who will take us through the financial discussion.

Mike Willis

Thank you, Pat.

Gevo reported revenue in the fourth quarter of 2013 of $1.7 million as compared to $1.9 million in the same period in 2012. Revenues in the fourth quarter included proceeds from sales from Gevo's hydrocarbon demo facility of $0.9 million including sales of bio-based jet fuel to the U.S. Air Force and the U.S. Army and initial sales of isooctane for specialty fuel applications.

We also recognized revenue under Gevo's agreement with the Coca-Cola Company and revenue from ongoing research agreements. As you may recall in 2012, fourth quarter revenues benefited from the sale of excess corn inventory of approximately $1 million.

R&D expense was $3.9 million in the fourth quarter of 2013 compared to $4.4 million reported in the fourth quarter of 2012. Our R&D activities in the fourth quarter of 2013 continue to be directed to the start-up operations at Luverne and the optimization of our technology to further enhance isobutanol production rates as well as production related activities that are hydrocarbons demo plant in Texas where we produced our bio-jet, paraxylene and isooctane products.

R&D expense decreased in the fourth quarter of 2013 compared with the same period in 2012 due to ongoing cost cutting measures within the R&D group partially offset by increased cost at the hydrocarbons demo facility due to higher production levels at that plant.

SG&A expense for the fourth quarter of 2013 decreased to $5.8 million compared to $7.8 million for the comparable quarter in 2012. Our fourth quarter 2013 results continue to show the benefit from cost savings, actions begun in the second half of 2012. The reduction in SG&A expense primarily resulted from decreases of $1.5 million in legal-related expenses in support of our ongoing litigation with Butamax and $0.8 million in salary and compensation related expenses.

Within total operating expenses for the fourth quarter of 2013, we reported approximately $0.8 million for non-cash stock-based compensation.

Interest expense for the fourth quarter of 2013 was $2 million compared to $2.2 million in the fourth quarter of 2012, the reduction was primarily a result of declines in the outstanding principle balances of both our convertible notes as well as our secured debt from TriplePoint Capital.

We also reported a non-cash loss of $2.4 million related to changes in the fair value of embedded derivatives contained in the convertible notes and our recently issued warrants. As we have commented previously, these changes result in non-cash amounts being recorded in our statement of operations for changes in fair value in each reporting period.

For the fourth quarter of 2013, we reported a net loss of $17.3 million or a loss of $0.35 per share based on a weighted average shares outstanding of 49,758,100. This compared to a net loss of $13.2 million in the fourth quarter of 2012 or loss of $0.34 per share.

In December 2013, we raised gross proceeds of $28.8 million or net proceeds of $27.1 million associated with the issuance of 21,303,750 common stock units. Each unit consisted of one common share and one warrant to purchase one share of common stock priced at $1.85 per share.

In conjunction with that equity financing, we also restructured our secured debt with TriplePoint Capital. We used $5.1 million of the proceeds from our equity offering to pay down TriplePoint debt and as a result TriplePoint agreed to among other things waive Gevo's obligation to make principle payments on the secured debt through December 31, 2014.

In total, we paid $7.8 million of the TriplePoint secured debt in the fourth quarter, $5.1 million associated with the restructuring and $2.8 million in scheduled principle payments made prior to the restructuring. At December 31, 2013, our outstanding balance from TriplePoint was $11.1 million.

During the fourth quarter, there were no conversions to the convertible notes and at year end we had 68,492,894 shares outstanding. Cash on hand at quarter end was $24.6 million, the higher than normal burn for the quarter was mainly related to the $7.8 million principle payments made to TriplePoint as well as $5.2 million associated with capital expenditures primarily for Luverne, the bulk of which assets were actually deployed in the third quarter of 2013.

We expect our cash burn to continue to decrease over the coming quarters as a result of one transition due to the side by side model whereby we improve the utilization of the assets of Luverne and increase cash flow of the plant; two, the TriplePoint restructuring which meaningfully decreases our debt service charges; and three, our continuing expense control measures.

To support our future growth we will continue to look to enhance our balance sheet including working to refinance our secured debt on the plant. We are also looking for ways to enhance our cash positions through non-dilutive means such as licensing. And lastly, with our global shelf in place, we are positioned opportunistically on other forms of underwritten financing.

I will now the turn call back to Pat Gruber.

Pat Gruber

Thanks Mike for that.

And with that I think we should open it up for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Mike Ritzenthaler. Please go ahead.

Mike Ritzenthaler - Piper Jaffray

Yes. Good afternoon. Two questions on Slide 21, the first question is, if Gevo achieved 100% isobutanol production per batch versus the target, what would the mix of isobutanol versus ethanol be with the current margin environment, would you still want to run one fermenter on isobutanol?

Pat Gruber

I think, right now, I think ethanol like 1, what was it Mike, what was the price today of ethanol?

Mike Willis

I mean stock margins at Luverne are well over a dollar right now.

Pat Gruber

Right. It would be a tough call at that point. But, I think in general we would want to move into isobutanol.

Mike Ritzenthaler - Piper Jaffray

Okay. And then what types of, I don't know nuts and bolts on the organism or operational parameters need to be improved to get from that 70 to 100?

Pat Gruber

Optimization around some heat exchangers, optimization around some of the fermentation conditions themselves. So, this is a combination of the nutrient packages, pH, how we feed the dextrose, practical things like that.

Mike Ritzenthaler - Piper Jaffray

And it just –

Pat Gruber

In light of the recycle streams coming back and through the plant.

Mike Ritzenthaler - Piper Jaffray

So, it’s more of getting further growth account during the batch, the organism growth that –

Pat Gruber

That's for example. And so, one of the things that we have – one of the things that we deal with is, this plant has had some variability as we start to stop and are running partial batches, full batches and getting the plant all the equipments operating.

These plants capture all the water and then recycle it. And so, getting it to a steady state has been a pain.

Mike Ritzenthaler - Piper Jaffray

Okay.

Pat Gruber

And so, what happens as impurities build up in the plant and then they come back in the fermentation, and then bite you. So what we are doing is, we spend a lot of time trying to manage that water balance, running ethanol helps probably.

Mike Ritzenthaler - Piper Jaffray

Yes. I was supposed to say it running ethanol probably helps on that front.

Pat Gruber

Big time, because it allows – it helps in two ways. One, is it gets the stable flows on the mash that makes it easier to do the sterilization systems for the isobutanol, because it has more continuous flow. We don't have to stop and hold things when they are warm and fully sugar. Second thing is, it allows the water to be recycled more easily and it makes it more consistent which is a big deal because we are sitting here responding to variability in the water recycle, and the question is always in the back of our mind is that real or an artifact that the way the process is going.

And then the last one, and this is really important is getting solids out of the plant that happens through animal feed.

Mike Ritzenthaler - Piper Jaffray

Okay. Just one last one from us, I guess maybe a little bit higher level on the licensing deals. Not to get specific about any one particular potential license, but maybe could you just walk us through the regions internationally and what areas look particularly or structurally favorable for producing isobutanol or maybe a side by side isobutanol with ethanol?

Mike Willis

Well, I mean sums the couple of logical ones, obviously are Canada and Argentina based off of (inaudible) LOIs that we have announced. Both areas Southern Ontario and Canada as well as in Argentina are both corn growing areas with very favorable commodity prices there. Other areas or regions that have shown interest have been Europe in particular. As we mentioned earlier, there has been some interest around bio-isooctane, and there is some demand from Europe for that product, and then in Southeast Asia, there is significant demand just based off of again biomass prices in that region.

Mike Ritzenthaler - Piper Jaffray

Okay. Thanks very much.

Operator

And our next question comes from Caleb Dorfman of Simmons and Co.

Caleb Dorfman - Simmons & Co

Good afternoon.

Pat Gruber

Hi, Caleb.

Caleb Dorfman - Simmons & Co

I guess, Pat you certainly talked about 15 million gallons of ethanol, can you sort of walk us through what sort of run rate you're expecting initially in isobutanol front, and at what point you would think about switching all of the plant to isobutanol production?

Pat Gruber

Sure. So as far as the 15 billion gallon per year run rate for ethanol, that was pretty straight forward because the original plant capacity was about 22 million gallons or so for ethanol. When we're using -- we'll be doing the development process optimization work on one of the fermentation systems. We're in the 10s of thousands of gallons range in the near term as we perfect how we operate a batch and reach our goals, and then we shorten the cycle times between batches, then I think you'd be up in that. If you added all the gallons together, you'd be up in the total name plate kind of capacity range.

Caleb Dorfman - Simmons & Co

Okay…

Pat Gruber

Did that answer your question?

Caleb Dorfman - Simmons & Co

I think I guess what type of volume should we be able to – be expecting on isobutanol front during 2014, if all goes according to plan?

Pat Gruber

In this, will be tens and thousands of gallons and then over the several months pushing it to what 200,000 gallons per month later in the year.

Caleb Dorfman - Simmons & Co

Okay. And then…

Pat Gruber

And when you go beyond that, and that's out of one train, and as we go beyond that, then it will, we could step it up even further, but that we have to decide overall economics of the time.

Caleb Dorfman - Simmons & Co

So when do you think we should start expecting, may be the entire plant could switch to isobutanol if all goes according to plan?

Mike Willis

I'll answer from a financial standpoint Caleb. I mean part of what we're doing here is leveraging the flexibility of our technology to be able to switch between ethanol and isobutanol or produce both same time. As I just mentioned or seeing outlandish ethanol margins right now, so I think part of the answer is what happens to the ethanol margin structure over the course of time.

Pat Gruber

It does and the course of that is that goes down and isobutanol would be expected to hold more steady we want to switch more of the capacity over to isobutanol. On the other hand, I suppose ethanol they're a $1.5, yes it's pretty attractive too.

Mike Willis

Yes. So to me it's an economic decision where there is an inflection point where it makes sense to make that transition from ethanol to – or side by side approach to fill isobutanol.

Caleb Dorfman – Simmons & Co

That makes sense. I guess earlier you had indicated that you'd hope to reach EBITDA profitability at the same level sometime mid this year, I guess with ethanol margins where they are do you think that's still possible and how much do ethanol margin if that is, how much to ethanol margins needs to climb from where they are to where that would be break-even again?

Mike Willis

Well, we're still in the midst of the transition to the side by side approach. So we're not giving specific items but we do believe that we could be EBITDA positive at the plant under this…

Pat Gruber

Great expansion by construction.

Mike Willis

Yes. Under this construction or this structure.

Caleb Dorfman - Simmons & Co

That's helpful. Thank you.

Operator

And our next question comes from James Medvedeff of Cowen & Company.

Jim Medvedeff - Cowen & Company

Good afternoon fellas.

Pat Gruber

Hi James. How are you doing?

Jim Medvedeff - Cowen & Company

Never dull. So let me just clear up a couple of things there were no commercial shipments at all to Sasol or any of the other initial up takers in the quarter?

Pat Gruber

The sample quantities we've sent but not – we send it to ourselves down to Texas and make jet fuel out of it or octane.

Jim Medvedeff - Cowen & Company

And that's all going under grants and collaboration revenue?

Mike Willis

It is –

Pat Gruber

Mike will explain it here, where the way its done.

Mike Willis

Yes. It did not, correct, grants revenue, research and development programming revenue, correct. So I mean basically or mostly, what we call hydrocarbon sales, so that's about $900,000 of that was based off of jet sales and isooctane sales.

Jim Medvedeff - Cowen & Company

Okay. So of the what's – of the Toray and Coca-Cola collaboration, how much has come in and how much remains on those deals?

Pat Gruber

So on the Toray deal as you know they provided $1 million to help fund the construction of the facility itself and that we're producing on an off take with them and the details of which we haven't made public to basically produce paraxylene and ship that to them. And so we're in the midst of finalizing the production and the logistics in and around that shipment. So that should be a near term thing that we'll be talking about and then Coca-Coal we continue to generate some revenues from them in the Q4 of 2013.

Jim Medvedeff - Cowen & Company

What I'm getting at is there was, I'm guess there was an initial size of the collaboration agreement which was never disclosed which is fine. But I'm wondering how much of that initial agreement has now run its course how much remains?

Pat Gruber

Well, we're in the midst of extending the agreement with Coca-Cola. Again, we can't obviously get into the specifics given the nature of the discussions with them.

Jim Medvedeff - Cowen & Company

And how much of the 60,000 gallons, 66,000 gallons for the military, how much of that has been shipped?

Mike Willis

Well, in the quarter we would have shipped approximate – well, generated revenue of, I'll call it $800,000 just shy of that. So we would have shipped about call it 16,000 gallons plus or minus in Q4.

Jim Medvedeff - Cowen & Company

Okay. When did you actually begin the first runs of ethanol side by side with isobutanol, when did that actually start?

Pat Gruber

Well, we just made the decision in the last or last quarter being do to switch to side by side sort of in the midst of converting the plant. But in fact, we have run ethanol side by side with isobutanol at Luverne already. And part of this was a practical matter as we are operating the plant and we had, we loaded up a fermenter and we threw yeast – to answer the question what would happen, if we had ethanol pressing yeast in our plant, can we manage it, we actually had that experiment.

Jim Medvedeff - Cowen & Company

So the experience of running side by side at full run rate and rapid recycle times is yet to be done, right?

Pat Gruber

Yes. Yes. I would say that's a fair statement putting ethanol plant will run like a normal ethanol plant. And then we will have our isobutanol production line operating like its a isobutanol production line.

Jim Medvedeff - Cowen & Company

Well, I'm curious –

Pat Gruber

Rates altogether.

Jim Medvedeff - Cowen & Company

I'm curious, how do you keep any co-mingling of – I understand you have really buttoned down the isobutanol process so you can keep the ethanol bugs out and you have done some pre-treatment to kill the ones that do get in?

Pat Gruber

Right.

Jim Medvedeff - Cowen & Company

How, what about in the back-end, the isobutanol as to run over to the GIFT system and does the ethanol not go anywhere near that part of the plant, how is it done?

Pat Gruber

Correct. The ethanol does not go near the GIFT system.

Jim Medvedeff - Cowen & Company

Okay. If you were running – once you get this going, three of one, and one of the other, what would be the actual mix of gallons? Would it be three to one?

Pat Gruber

At full rates, it will a little less three to one because there is a shrink when you produce isobutanol rather than ethanol.

Jim Medvedeff - Cowen & Company

So slightly greater than three to one?

Pat Gruber

Slightly greater than three to one, right.

Jim Medvedeff - Cowen & Company

Okay.

Pat Gruber

If you are running –

Jim Medvedeff - Cowen & Company

Very interesting.

Pat Gruber

Yes. It is interesting, I will tell you what, it excites our partners in the marketplace.

Jim Medvedeff - Cowen & Company

Yes. Congratulations on the LOIs. What are the hurdle rates – what are the milestones for turning those into contracts?

Pat Gruber

Mike?

Mike Willis

Just to – [genuine] (ph) negotiation and discussion with those partners. So we are hopeful that in 2014, we will be able to effectively monetize one of those into something more concrete including our expectation for some upfront payments.

Pat Gruber

Interesting is, of course these partners had look another hood so to speak at Luverne, so they can see what we are doing, why we were doing it, how it makes sense? And they of course are familiar with operating plants and get the practical matters, what we are doing commercially at the plant.

Jim Medvedeff - Cowen & Company

Okay. You have been generous. I will get out of the way and let other people ask some questions. I will talk to you later. Thanks. Bye.

Pat Gruber

Thanks Jim.

Operator

We have no further questions at this time.

Pat Gruber

Okay. Great. Thank you very much everybody. Bye-bye.

Operator

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

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