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Gevo, Inc., (NASDAQ:GEVO)

Q1 2014 Earnings Conference Call

May 14, 2014 16:30 ET

Executives

Pat Gruber - Chief Executive Officer

Mike Willis - Chief Financial Officer

Brett Lund - Chief Licensing Officer and General Counsel

Analysts

Mike Klein - Piper Jaffray

Caleb Dorfman - Simmons & Co

Operator

Welcome to the First Quarter 2014 Gevo Inc. Earnings Conference Call. My name is Janet and I will 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.

I will now turn the call over to Mike Willis, Chief Financial Officer. You may begin.

Mike Willis - Chief Financial Officer

Good afternoon and thank you for joining Gevo’s first quarter 2014 conference call. I am 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 website at www.gevo.com.

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

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, which was filed with the SEC on April 14, 2014 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 recent business developments. I will then review our financial results for the first quarter of 2014. Following the presentation, we will open the call up for questions.

I will now turn the call over to Pat Gruber.

Pat Gruber - Chief Executive Officer

Thanks Mike. Good afternoon. Thank you for joining our quarterly call. We have spent about six weeks since our last call. Since then, we began ethanol production, continued to optimize the isobutanol process, made progress on the commercial front, and of course did financing, which Mike will also talk about in a few minutes.

Well, let’s talk into it then. I have to say like very much what we are doing as we are doing with our Side-by-Side strategy producing isobutanol and ethanol, which we have first started up to do it several years ago, I believe it would have saved us a lot of hard burden pain. Of course, we didn’t note the time we could manage two different using the plant, I am sure, equipment, but we know now.

So, let me talk more about Side-by-Side. The purpose of Side-by-Side is to use ethanol production as a flywheel to drive the plant flow, while we work through isobutanol learning curve. Our plant is a commodity-scale plant. We think it’s really big equipment and decide to be low cost. The plant grinds corn from its shutters and produces animal feed. The plant also recycles nearly all the water used in process. In the Side-by-Side operation, we are using the ethanol to keep the grind going, water recycling consistently at producing animal feed. Resins having to deal with lots of starts and stops of the process flow, which that introduces unnecessary variables.

We expect Side-by-Side to help eliminate these variables. Our equipment at the plant typical at the dry mills is designed to run continuously with large liaised material flowing. The Side-by-Side really got to help us enable to keep things flowing and we can still optimize the isobutanol process concurrently while producing ethanol moving ourselves down the isobutanol learning curve.

The other best thing on Side-by-Side is that it contributes cash to our business by utilizing assets that would have been unused at the time. That is we are using three of our four fermenters for ethanol, one for isobutanol. Since our last conference call, we have completed mechanical work needed to run ethanol Side-by-Side. (indiscernible) since we began the ethanol production, roughly 30,000 gallons per day and expect to exceed 40,000 plus gallons per day, next week and that is our production goal. That overall translates to run rate of about 15 million gallons per unit on an annualized basis. We also have been making progress of running isobutanol inside the plant. In our isobutanol production the first step is to produce the quantity of yeast that we need to conduct the fermentation. We have been working on procedures to more effectively produce the yeast. These procedures include the techniques for cleaning, sterilization and the adding of the nutrient packages. It also verifies the recycle streams from ethanol are what we expect. Our team did a nice piece of work to determine a set of fermentation conditions that favors our yeast at the expense of potentially affecting organisms. This should help us in the robustness of the process.

Now, regarding isobutanol fermentations, we have already achieved 70% of our target gallon per batch. We are focused on achieving 100% of the goal and then making sure that we can minimize batch to batch variation. While we are working at the learning curve the cost tend to be higher per gallon and we would have once we are fully optimized. So, the plan on making relatively modest quantities over the next several months, I expect in the multiple tens of thousands gallons per month. Once we are far down the learning curve, we will have to decide how much the plant use for isobutanol and how much for ethanol. I mean, we can switch some or all of our fermenters back to isobutanol. To be clear, we are running isobutanol plant alongside of ethanol.

I like very much production facilities are flexible and can adjust to changing markets. This is much better to being stuck with one trip pony. I just want to get out of isobutanol and get completely worked out. I like being able to use ethanol production to make the plant run better overall and of course to generate cash while running the isobutanol learning curve.

Now, changing topics our paraxylene production has gone well, our jet fuel production, isooctane production, those are all things have worked very well. We are pleased to be working with Lufthansa to further improve our renewable jet fuel product. Our process to make renewable jet fuels exciting, simple, cost effective, makes jet fuels desirable properties. We see a lot of interest in renewable jet fuel.

Mike Willis, our CFO is up next. He will take you through the numbers and deal with Whitebox and how we are thinking looking forward. Mike?

Mike Willis - Chief Financial Officer

Thank you, Pat. Gevo reported revenue in the first quarter of 2014 of $0.9 million as compared to $3.5 million in the same period in 2013. Revenues in the first quarter included proceeds from sales from Gevo’s hydrocarbons demo facility of $0.6 million including sales of bio-based jet fuel to the U.S. Air Force and the U.S. Army and sales of isooctane for specialty fuel applications. We also recognized revenue from ongoing research agreements. In 2013, first quarter revenues benefited from the sale of excess corn inventory of approximately $2.4 million.

R&D expense was $4.1 million in the first quarter of 2014 compared to $5 million reported in the first quarter of 2013. Our R&D activities in the first quarter of 2014 continue to be focused on the optimization of our technology to further enhance isobutanol production rates at Luverne as well as production related activities at our hydrocarbons demo plant in Texas where we produce our bio-jet, paraxylene and isooctane products. R&D expense decreased in the first quarter of 2014 compared with the same period in 2013 due to ongoing cost cutting measures within the R&D group as well as lower operating costs at the hydrocarbons demo facility.

SG&A expense for the first quarter of 2014 decreased to $5 million compared to $7 million for the comparable quarter in 2013. Our first quarter 2014 results continued to show the benefit of cost savings, actions including decreases of $1.1 million in salary and compensation related expenses and $0.7 million in legal related expenses. Within total operating expenses for the first quarter of 2014, we reported approximately $0.9 million for non-cash stock based compensation. Interest expense for the first quarter of 2014 was $1.6 million compared to $3.3 million in the first quarter of 2013. The reduction was primarily the result of declines in the outstanding principal balances of both our convertible notes as well as secured debt from TriplePoint Capital. We also reported non-cash of gain of $2.5 million related to changes in the fair value embedded derivatives contained in the convertible notes and our warrants.

As we have commented previously these changes results in non-cash amounts being recorded in our statement of operations for changes of fair value for the period. For the first quarter of 2014 we reported net loss of $12 million or a loss of $0.18 per share based on weighted average shares outstanding of 67,760,721. This compares to a loss of $18.4 million in the first quarter of 2013 or a loss of $0.45 per share. During the first quarter there were no conversions of the convertible notes and at quarter end we had 68,858,219 shares outstanding.

Cash on hand at March 31 was $8.4 million. To bolster the company’s liquidity, we announced the financing last week with Whitebox Advisors that can result in additional funding of up to $63 million assuming certain options are exercised. The initial investment to close our May 9 resulted in gross proceeds of $25.9 million. The investment was made via term loan that is exchangeable into convertible debentures. The term loan includes a first priority lien on all of the company’s assets and carries a 15% coupon, of which 5% is payable in cash and 10% is payable in kind capitalized to the principal amount of the term loan. The term loan is exchangeable into convertible debentures within 90 days of closing the financing subject to certain ownership limitations.

The convertible debentures can be converted into common stock of the company at a price equal to the lesser of $1.49 per share or a 15% premium to the five-day forward-looking volume weighted average price following closing of the financing. The convertible debentures carry a 10% coupon, of which 5% is payable in cash and 5% is payable in kind. Under certain conditions, the 10% coupon is payable entirely in cash at the election of Whitebox.

In conjunction with the Whitebox financing, we also restructured our debt with TriplePoint Capital. We used 9.3 million of the proceeds from the Whitebox financing to pay down TriplePoint’s debt leaving a balance with TriplePoint at 1 million and which will now be subordinated to the Whitebox debt. TriplePoint’s remaining debt will amortize over 36 months and carry a coupon of 9%.

Given the fact that we have just restarted the plant in the Side-by-Side mode, we are not ready to give very specific guidance on Luverne operations. We expect to be in a much better position to provide more detailed projections on next quarter’s call. That said, for those modeling us out, good assumptions to use for Luverne would be ethanol production run rates should reach approximately 1.25 million gallons per month or 15 million gallons per year. Isobutanol production rates to be in the tens of thousands of gallons per month, while we are first starting up in Side-by-Side mode. We expect these volumes to ramp once it become more consistent and confident with our isobutanol fermentations. One of the key drivers for this increase in volumes will be economics. As we have said before, we are trying to maximize our learning per dollar as we commercialize isobutanol production. And this should translate roughly into cash flow breakeven at the plant as a whole on a monthly basis.

In terms of cash burn, we expected this to continue to decrease over the coming quarters, in particular due to our decision to transition Luverne to the Side-by-Side configuration. As we have previously discussed, this model better utilizes all Luverne’s assets and dramatically improves the cash flow of the plant while still enabling us to commercialize our isobutanol technology. As a result of this improved cash flow profile of Luverne and our ongoing corporate expense control measures, we expect Gevo’s quarterly cash burns to decline into the single-digit millions in the second half of the year. As always, we will look for ways to enhance our overall cash position. We continue to receive meaningful interest from third-parties to license various aspects of our technology, not only our core isobutanol related IP, but also for our technology related to our hydrocarbons patents. And our global shelf remains in place. So, we may act opportunistically in the future to raise capital through various forms of underwritten financings.

With that, I will now turn the call back to Pat.

Pat Gruber - Chief Executive Officer

Thank you, Mike. Overall, we are continuing to see strong interest at renewable isobutanol for the specialty chemical markets as the blended stock for gasoline and is a building block for renewable jet fuel plastics, high-performance automobile fuels like isooctane. Our overall view of the economics of production of selling price hasn’t changed. It remained attractive and yes, we have reviewed it several times.

Going forward, our focus is to keep the plant running while we optimize isobutanol production moving down the learning curve as fast as possible, do it responsibly without wasting money. We will also use ethanol production to generate cash to keep the steady flow at the plant. I expect this usual renewable isobutanol in the marketplace for jet fuels, isooctane, paraxylene and various specialty chemical uses as well as gasoline blend stocks.

With that, let’s turn to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Mike Ritzenthaler of Piper Jaffray. Please go ahead.

Mike Klein - Piper Jaffray

Hi, good afternoon. It’s actually Mike Klein filling in for Mike Ritzenthaler.

Pat Gruber

Hey, Mike.

Mike Klein - Piper Jaffray

Just a question on balancing Luverne right now, how do you balance generating positive cash flow from ethanol with ramping isobutanol, I guess is it a matter of ethanol economics throughout the rest of the year or more about where isobutanol is and how that’s ramping?

Pat Gruber

It’s actually the combination of the two, because we are doing smaller amounts and working and still doing some experiments on the fermentation. Those costs more but we generate enough cash at the plant producing ethanol to offset the costs and so that’s actually a pretty big contributor for us of cash. So overall yes, it depends upon our volumes of ethanol we produce, the margins of ethanol, but it also then depends upon how we ramp up the isobutanol and produce.

Mike Klein - Piper Jaffray

Okay. In – how many batches per week are you running right now of just isobutanol?

Pat Gruber

It depends I mean it depends on exactly what we are doing. One to two has – we have been doing one to two at times, hope sometime we took a break while we are making sure we understand what it was. We have just started the side by side operations we want settle into a pattern.

Mike Klein - Piper Jaffray

Alright, okay. I would like to just squeeze one more. And I believe there are milestones or determinants for Whitebox to invest in additional $37 million. So I guess what are some of those milestones that you have to achieve and what’s the potential timing of when you could receive those payments?

Mike Willis

Yes. So in terms of timing everything will be set and done within call it 90 days of closing. There are two options. One is an option in our favor for $5.2 million and the tests is related to just how our stock prices reacts to the news of the financing over the course of the next call 20 to 30 trading days. The balance, the $32 million is an option in Whitebox’s favor and it’s purely just that is an option in their favor and not milestone driven.

Mike Klein - Piper Jaffray

Okay, great. Thanks a lot.

Operator

And our next question comes from Caleb Dorfman of Simmons & Co. Please go ahead.

Caleb Dorfman - Simmons & Co

Good afternoon gentlemen.

Pat Gruber

Hi Caleb.

Caleb Dorfman - Simmons & Co

It’s nice to see the progress on side-by-side, I guess what I am curious about is the actual yield I know that you are around 71% yields back in March price of butanol, when we talked, what is the issue in improving the yields and what type of timeline do you think we will need to be looking at to get let’s say I think 80% or 90% yields?

Pat Gruber

I think – okay, so yes that’s where we are we kind of stalled out at that level and that was a result of remember it in the last quarterly call we talked about the recycles and have been up to 95% recycle and we achieved those yields. And as we went we are optimizing as we went from 95% to 100% recycle with its trace impurities, we stalled out, we are running into trouble that last 5% of stuff to recycle was both variable and it hurt the fermentation. So we had to improve some of the processes around the recycle, but that’s also one of the primary drivers of why we are – why we like the side by side and that recycle stream now is steady because of the ethanol production rather than being variable from the stopping and starting. So I would expect this may progress on it straight away.

Caleb Dorfman - Simmons & Co

Have you had a batch of isobutanol since you have had the side by side up on May 5?

Pat Gruber

There is one going on right now.

Caleb Dorfman - Simmons & Co

Okay. So we don’t have any results while we have actually had side by side operating?

Pat Gruber

No, just started. So back to this recycle point, if we started on the 5th, it gets the fermentation is going to get the full – the plant full of water and recycle with all of its scrap and then studied out that took until yesterday.

Caleb Dorfman - Simmons & Co

Okay. That’s helpful. And then I know obviously because you haven’t got isobutanol production up to full scale it sort of makes economic sense to run ethanol and what type of margins are you seeing in the forward outlooks for the Luverne facility specifically because I know corn base just sort of makes it different than what we will look at generalized?

Pat Gruber

Are you asking about the margins fir isobutanol?

Caleb Dorfman - Simmons & Co

For ethanol, sorry.

Pat Gruber

Go ahead, Mike.

Mike Willis

Currently ethanol margins in Luverne are approximately $0.35 to $0.40 spot.

Caleb Dorfman - Simmons & Co

And let’s say that you got to 85% or 90% yield for isobutanol what type of margin profile would you consider switching over to more isobutanol production?

Pat Gruber

That’s an interesting question and the way that we will think about it is along these line Mike you might have additional perspective, but the way I think about it is there is fundamental question of how much cash can be generated because that’s what plants are supposed to do. We have a strategic objective to those to produce and grow the market of isobutanol. We will be balancing those two things. On a straight up economic basis, we favor isobutanol I would imagine. If it’s overwhelming towards ethanol then we are going to continue to favor ethanol. If it’s overwhelming towards isobutanol, then obviously we are going to favor isobutanol.

Caleb Dorfman - Simmons & Co

That’s helpful. I get finally…

Mike Willis

I think that’s the right answer and ultimately economics are going to range and taxes always came to this company. So that enters into the equation the other part of the equation is just the technology itself. So if we do see the technology obviously at a place like I just talked about where we are consistent, confident in our fermentations, we still believe in the long-term economics of isobutanol over ethanol. However, if the short-term blips like we just saw recently where ethanol margins were over $1 you can’t ignore those types of margins and operating for those types of margins.

Pat Gruber

Yes, and I would say nice to reemphasize. When we look at our view of the $0.50 to $1 EBITDA margins for isobutanol that still looks to be achievable or realistic, that’s more direct answer to your question.

Caleb Dorfman - Simmons & Co

Okay and I guess final question for me is, so Mike you have the LOI in Argentina, LOI in Canada any shift that we could get an update on just general LOIs when we might be seeing some progress on that front?

Mike Willis

We are seeing progress on that front in particular Pat and I were down in Argentina just recently. Those guys are really excited by the opportunity to work with us, really excited about isobutanol as an opportunity. And while there is as you can imagine a lot of details that need to earned-out as it relates to these types of deals, we would be hopeful to provide progress, significant progress on that as early as next quarter.

Caleb Dorfman - Simmons & Co

Thank you.

Operator

And I am showing no further questions at this time.

Pat Gruber - Chief Executive Officer

Alright. With that I think we will end. Thank you very much everybody for joining us. 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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