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Executives

Hala Elsherbini - Halliburton Investor Relations

Kenneth T. Hern - Chairman, and Chief Executive Officer

Richard Talley – Vice President of Technology and Projects

Jay Fillman - Chief Financial Officer

Russell D. Sammons - Vice President of Operations

Analysts

Laurence Alexander - Jefferies & Company, Inc.

David Woodburn – ThinkPanmure

JinMing Liu - Ardour Capital Investments, LLC

Daniel J. Mannes - Avondale Partners, LLC

Ron Oster - Broadpoint Capital

Nova Biosource Fuels, Inc. (NBF) F3Q08 Earnings Call September 18, 2008 11:00 AM ET

Operator

Welcome to the Nova Biosource Fuels investor conference call. Your host for today’s call is Ken Hern, Chief Executive Officer of Nova Biosurce Fuels. (Operator Instructions)

I would now like to turn the call over to Hala Elsherbini with Halliburton Investor Relations.

Hala Elsherbini

Participating on our call today will be Ken Hern, Chief Executive Officer; Dick Talley, Vice President of Technology and Project; Jay Fillman, Chief Financial Officer; and Rusty Sammons, Vice President of Refining Operations.

Before we begin I would like to remind you that during the course of this conference call management may make statements concerning the company’s future prospects, business strategies, and industry trends. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties which could cause actual results to differ materially from expectations.

Please refer to our most recent Form 10-Q filed with the Securities and Exchange Commission and other reports filed with the SEC for more information on those risk factors. The company undertakes no obligation to publicly update or revise any forward-looking statements.

At this time, I would like to turn the call over to Ken Hern, Nova’s Chief Executive Officer.

Ken Hern

We are pleased to take this opportunity to discuss our financial and operating results along with our plan of operations and outlook with your shareholders and interested parties. I am going to present a very short refresher course on biodiesel for all of you. In essence, I will explain what biodiesel is, why there is a demand for it, what the overall industry looks like and why we think Nova has the advantage over our competitors.

First and simply put, biodiesel is a clean burning alternative fuel produced from renewable resources. It is interchangeable with also low sulphur petroleum diesel without engine modification. It normally is and should be blended with petroleum diesel.

Normal blends will be 5% of what we call the 5 or 11% referred to as the 11 which is specifically important in the state of Illinois where Nova’s largest refinery is located. In the United States, in round numbers, we consume 65 billion gallons per year of petroleum diesel. In 2007 domestically the industry as a whole generated approximately 450 million gallons of B100. If America adopted a B5 blend, the market opportunity would be approximately 3.5 billion gallons annually. As you can see, the market opportunity for Nova is substantial.

Domestically produced biodiesel receives a premium above conventional petroleum diesel due to federal excise tax credits, small producer credits, state tax incentives and mandates and customer preference. We currently own or have the right to the production of 80 million gallons per year of biodiesel at three refineries. This production is from our flagship, the 60 million gallon refinery in Summit, Illinois; our first 10 million gallon refinery at Clinton, Iowa; and half of the 20 million gallon refinery in Greenville, Mississippi we built for Scott Petroleum Corporation.

We believe we are well positioned to take advantage of the market opportunity because of Nova’s patented process which results in a consistently higher quality product and leads to superior margins. Our process sets us apart from our competitors in two ways: first our process allows us to take advantage of our multi-feedstock technology to use the lowest cost feedstock available in the requisite quantities to generate the highest margin possible based on prevailing prices for B100. The Nova process can seamlessly react, high free fatty acid feedstocks to produce high quality biodiesel without yield loss. Higher free fatty acid feedstocks can usually be purchased at a discount to typical biodiesel feedstocks; and secondly our patented proprietary refining process allows us to meet and exceed US and European quality standards on a consistent basis that is required by the hydrocarbon industry.

Nova has made remarkable progress in the last two years as it has transitioned from being an engineering and construction company to a technology driven biodiesel productions company. We won’t argue that the process has taken longer than anticipated, but we have made genuine progress. We feel that Nova is on the threshold of making a significant impact in the domestic biodiesel market. Management is focused on bringing all three refineries to full capacity and profitability.

As we reported Seneca and Scott are substantially complete and Clinton County has been producing biodiesel since September 2007. At Seneca we recently reached a significant milestone of 10 million gallons of biodiesel production. We have completed all of our construction contracts for others and to date we built over 110 million gallons of biodiesel production capacity. Our technology is fully demonstrated at commercial scale.

While we reached many milestones during the past several months, we were impacted by commodity price volatility and unprecedented high feed stock prices, especially during the summer months. The commissioning process took longer than anticipated at the Seneca facility because of the dramatic increase in feedstock prices coupled with limited working capital that hindered operations at maximum capacity and reduced profitability at this refinery. In spite of these challenges we managed to commission each of Seneca’s 20 million gallon per year trains as we worked toward reliable, sustainable, operations. We have maintained a constant focus on operating the Seneca refinery and preparing for the final performance test demonstrations required by our credit agreement.

We have experienced delays with financing and commissioning, but we continue to work with our lender and potential members of the syndication group, to expand the working capital facility required to support sustained operations at full capacity levels and achieve maximum profitability.

In order to reach full capacity it is critical that we expand our working capital needs. We believe that if our financing needs are met as expected we can be cash flow positive on a project and a consolidated basis before the end of the calendar year. In fact Seneca was cash flow positive for the month of August.

Once we become cash flow positive and profitable on a consistent basis across all three refineries we will continue to execute on our overall growth strategy of reaching an annual production capacity of between 200 and 220 million gallons. This presupposes that feedstock and B100 processes remain consistent and of course with equity financing or a strategic partner, we can accelerate this strategy. I would like to now turn the call over to our vice president of technology and projects, Dick Talley, who will provide additional details on our process technology and plan operations.

Dick Talley

I would like to cover three major areas: First I would like to discuss the current biodiesel markets and the resulting plant economics; secondly I would like to discuss the status of feedstocks and their impact and corresponding co-product revenue generation; thirdly I would like to provide an update on the current operational status at each one of our refineries.

Let’s begin with planned economics. There are three inputs to the cost of good side: feedstock, variable processing costs, and fixed costs. Feedstock cost is simply the delivered price per pound multiplied by the yield. In our case this translates into a multiplier of between 8 and 8.7 pounds of feedstock to produce one gallon of biodiesel. Therefore, for $0.40 per pound feedstock this equates to $3.20 to $3.48 per gallon of finished B100.

Variable costs consist of utilities, methanol, and consumable chemicals. For our refineries, given current methanol pricing and utility costs, our variable costs range from $0.40 to $0.45 per gallon of finished B100.

The fixed costs include labor, depth service, depreciation, general administrative and maintenance expense. Currently for our Seneca facility this cost is approximately $0.60 per gallon of finished B100.

We view co-product revenue derived from the facility as an offset to our overall production costs. Co-product revenue is defined as the value received for our finished glycerin and other co-products generated from the purification and recovery process of our finished biodiesel. Historically the value derived at Seneca has been approximately $0.40 per gallon of finished B100. Therefore our gross production costs, to included fixed and variable processing costs, range from $1.00 to $10.05 per gallon with a net production cost, after subtracting off the co-product revenue of between $0.60 and $0.65 per gallon.

Naturally these numbers are variable based on market conditions. In summary therefore, based on a $0.40 composite feedstock price, our total cost of goods, FOB the plant gate, ranged from $3.80 to $4.13 per gallon of finished B100.

Now let’s focus on the revenue side. Biodiesel generally correlates to #2 rack price and heating oil. Biodiesel spreads over traditional petroleum diesel markets are driven by government incentives, environmental considerations, and consumer preference. Typically we have seen good correlation to indexing biodiesel pricing against heating oil. The spread for higher crowd point biodiesel tends to narrow during the winter months, which I will go into in more detail later.

During the third fiscal quarter our biodiesel selling prices have ranged between $3.54 to $4.80 per gallon. Our biodiesel sales prices were affected by our fixed price sales commitments we entered into prior to the start up of the refinery. As you are aware, over the past six months we have experienced unprecedented price swings for feedstock ranging from $0.30 to $0.50 and back to $0.40 per pound. During this same period, crude oil prices ranged from $90.00 up to $140.00 and back down to $90.00 per barrel. We also experienced considerable variability in the spread during this same period.

I would like to discuss the feedstock costs in more detail. The run up of all commodity prices during the spring and summer of 2008 has been challenging to work through. As we have mentioned every penny per pound of feedstock price increase translates into $0.08 of cost in biodiesel production. All feedstocks, from waste greases to animal fats to vegetable oils climbed to all-time unprecedented highs this summer with spikes of more than $0.25 per pound above historical trading values being seen. This has put enormous pressure on the many industries that rely upon these feedstocks including the soap and detergent industry, the animal feed industry, and our biodiesel industry.

This increase meant an almost $2.00 per gallon increase to the biodiesel production costs. Fortunately the price of hydrocarbon diesel also climbed during this period, however it did not climb as fast or as high, meaning that the margins for biodiesel production were reduced dramatically. Given current feedstock pricing and current hydrocarbon diesel pricing, biodiesel production profitability has returned to sustainable levels and we expect it to remain so for the near future.

I would now like to turn the discussion over to the excise tax credit.

There is a lot of misconception surrounding this tax credit and it is important for all of us to realize that this is a blender tax credit and not a producer tax credit. The tax credit is provided to fuel blenders as a means to reduce their excise tax liability on a quarterly basis and is awarded based upon the amount and type of biodiesel that a blender will purchase and blend off. The intent was that the blenders would pass this tax credit onto the biodiesel producer in the form of increased market price of the B100. This has not been entirely successful in that the fuel blenders have kept a portion of the credit for their own use in constructing blending and handling facilities, marketing, and profitability and the feedstock providers have indirectly received a portion of the tracked credit as well through the increased value of their feedstock supplies.

Many are under the assumption the biodiesel producers simply get the $1.00 per gallon payment as a result of this tax credit. We hope we have clarified this misconception for investors so that they can fully understand profit margin opportunities as reported by biodiesel producers.

Additionally two pieces of legislation have been working their way through Washington with respect to this tax credit. The first is the Ag bill that passed last spring. This bill essentially equalized the payment for both first and second use feedstocks beginning in 2009. Unfortunately the current tax provision has a sunset provision which expires at the end of 2008. Congress has been unsuccessful in getting the tax credit extended through a variety of attempts at an extender package. Management does believe, however, that the tax credit will get extended this fall through the end of 2009 and the normalizing of the credit to first and second use feedstocks will begin in January of 2009; however, we do believe that Nova is well positioned if the tax credit does not get extended. With the RSF mandate for the usage of 500 million gallons of biodiesel in 2009 Nova’s quality will be sought after and utilized.

I would like to discuss another market dynamic called cold weather properties. The fledgling biodiesel industry is starting to see pricing structures evolve that are dependent upon the cold weather properties of the biodiesel or what is called the crowd point. Crowd point is the temperature at which the saturated ether content in the biodiesel begins to crystallize. If not handled properly, these crystals can plug fuel filters, much like what diesel does in cold weather if it is not handled properly. ULSD #2-hydrocarbon diesel has a crowd point of about 0° Fahrenheit. When biodiesel is blended with ULSD at rates of less than 10% of Bpen [ph] the resultant composite crowd point remains at or near 0F. At blends nearing 20% biodiesel the effective crowd point can be considered detrimental in cold weather applications.

A concern does exist in the fuel industry that has led the markets to be conservative when looking at biodiesel synthesized from feedstocks other than soy oil. We are working with the fuels industry so that they can understand this and not induce unjustified price discounts on non-soy based biodiesel; however, this communication will take time. For example, biodiesel markets are currently divided into two sectors, SME or soy methyl esters and FAMEs fatty acid methyl esters and there is about a $0.50 to $0.65 per gallon preference provided to SME over FAME. This is based upon the fact that SME has a crowd point of near 32° F, where FAME will have a crowd point of around 55° F. This is for a 1005 biodiesel mixture. We remain convinced that this stigma will be lifted with the continued education of the marketplace and the continued production of high quality, high purity FAME and will narrow the current price spread.

Additionally, as DM specification is expected to be adopted October 15, 2008 entitled cold soap filtration. This test method subjects the biodiesel to a soak period at cold temperatures, rewarms the fuel and then filters the fuel over a set period of time. The test is attempting to replicate real life performance of the fuel in colder climates. Nova has successfully passed this new performance test for more than a year and we are very supportive of its full adoption this fall. We believe that the new specification will add credibility and confidence to the fuel blenders that on spec, high quality biodiesel will blend seamlessly with their existing fuel market and that what the biodiesel is made from will become less important as they begin to understand and be assured of the biodiesel’s performance.

I would like to address another important part of our business model, glycerin which is a value added co-product of biodiesel production was recognized in the early stages of the technology development and we integrated a full glycerin refining and recovery step in our process. As a result, approximately 0.3 to 0.5 pounds of technical grade glycerin are recovered for every one gallon of face biodiesel that is produced.

Current market conditions establish a value for this refined glycerin at about $0.30 to $0.35 per pound, meaning that a credit can be recognized of about $0.15 per gallon of B100 for the refined glycerin. This $0.15 per gallon is one of the major contributors to the co-product revenue of $0.40 per gallon we discussed earlier.

The Seneca refinery has shipped several loads of glycerin since its start-up and the economic impact has been quite welcome. It is important to realize that glycerin is sold in three general categories, crude, technical, and US feed grades. Crude is typically less than 95% pure and technical is 95% pure or better with USP being 99% pure or better. More importantly, the US P grade requires a pedigree on the feedstock that would place an unnecessary restriction on the feedstocks available for the biodiesel production.

USP also requires certification of process which would subject the refinery with undue FDA regulations and certifications that do not make it worthwhile for the biodiesel plant to pursue

USP grade glycerin production: hence, Nova produces a glycerin co-product that is 97% or more pure and meets the requirements for a technical grade.

I will now provide a progress report on each of the operational refineries. Let’s begin with Seneca.

Seneca began B100 production in early April. We took a very measured approach to the start up working with one train at a time. By mid-May we shut down the first train and began production with the second train, which lasted until mid-June. We continued with the shut down of the second train and the start-up of the third train into late July, when all three trains were idled for a period for maintenance and to preserve cash flow and accumulate feedstock inventories sufficient for a substantial completion performance run.

All three trains were brought online in early August and operated up to 80% of capacity where they were held for the substantial completion test period. Yield, through put, quality, and other variable numbers such as energy and methanol consumption and co-product production rates were validated and recorded with our lenders independent engineer approvals. We achieved substantial completion on August 18.

We have optimized refinery production to manage within our existing working capital constraints. At full production rates the Seneca refinery requires about 10.3 million pounds of feedstock every seven days. Assuming feedstock costs of $0.40 to $0.42 per pound, this would be about $4.2 to $4.4 million required for just one week of feedstock.

The accounts payable receivable cycle is four to five weeks, meaning that our working capital needs just for Seneca are nearly $20 million. We currently have a $5 million working capital line that is fully drawn. We have augmented this line with corporate cash to the full extent possible to be able to maintain refinery production levels at approximately 50 to 60%. We are working with our lender to expand our working capital facility, at which point we will be able to operate the refinery at full production capacity.

It is very important to understand that as part of our working capital discussions with our lender we continue to review our file performance test schedule, as it is totally dependant upon increasing the working capital line. The final performance test is not a requirement for additional financing; it is simply a condition which triggers our loan repayment schedule when the construction loan converts to a term loan.

The feedstock markets appear to have softened over the last two months. Biodiesel pricing has dropped as well given the recent drop in crude oil prices. Feedstock sourcing at Seneca will continue to focus on the aggregation of as many different off spec high free fatty acids feedstocks as can be located to improve the economic viability of the refinery and stretch and grow our working capital as rapidly as possible.

Let’s turn our attention to Scott.

The Scott refinery has been in production since completing the repairs to the damaged equipment suffered in April during the Honeywell system fire. We replaced the pumps that were in question at the Scott refinery and the associated damaged piping instruments, wiring and insulation and restarted the refinery in late June. The Scott operations teams fully commissioned the refinery in July and the refinery was declared substantially complete and the off take agreement became effective in mid-August.

Currently we are planning to load out our first shipments of B100 at the Scott refinery next week, which will represent our half of the production since August 18. Our plan is to continue operations at the refinery in concert with Scott and slowly increase through put to a full nameplate by late fall with full glycerin production online as well. We anticipate procuring approximately 100,000 gallons for August production with increasing production volumes as the refinery settles into routine operations.

Let’s now discuss Clinton.

The Clinton refinery has continued with intermittent operations over the course of the past six months. We have very carefully managed Clinton’s production times as part of the overall corporate cash balance. During periods when we could source cost effective feedstock we run the refinery for production and at other times we idle production and work on repairs and improvements to the refinery depending on our cash flow. As noted, we have focused on keeping as much feedstock in front of the Seneca refinery as possible, even using corporate cash where necessary and have strategically operated Clinton to maintain profitability.

We have begun work on some of the improvements that are necessary to convert the facility to a true multi-feedstock refinery. Some of the completed improvements include a replacement of pumps, installation of the feedstock tank and procurement of what we call the 200 series, which is the equipment we use to synthesize high free fatty acid feedstock and other activities to facilitate the refineries transition. This refinery is operated almost exclusively on beef tallow and choice white pork since we acquired it.

The refinery has been operating at about 60% of capacity except for some periods of refinery maintenance for the past three to four weeks as feedstock prices have moderated, enabling the refiner to be profitable. We have initiated per main engineering design activities required for the expansion of the refinery’s capabilities. Our intentions are to continually and methodically make improvements to the refinery and begin the capital improvements this fall and through out the winter as financing and cash flow out.

In the mean time we intend to continue measured production through out this period with full focus given to the production margins. When they are profitable we will operate the refinery at levels that can be supported by our working capital and when not, we will idle the refinery and work on improvements in capital investments.

I will now turn the call over to Mr. Jay Fillman, our chief financial officer.

Jay Fillman

I will review our key financial results for the quarter. Biodiesel revenues were $25, 538,000.00 and $34, 318,000.00 for the three to nine months ended July 31, ’08 respectively. Revenue was generated through out the period at both the Clinton County, Iowa and Seneca, Illinois refineries. There were no biodiesel revenues for the comparable periods last year as sales first began in late September ’07 with the acquisition of the Clinton County refinery.

Nova reported net losses of $4, 639,000.00, or $0.04 per share and $16,353,000.00 or $0.15 per share for the three and nine months periods ended July 31, ’08 respectively. These were similar to the net losses of $5, 180,000.00, or $0.05 per share and $15,309,000.00 or $0.15 per share for the comparable periods last year.

Share based compensation expense for the nine months ended July 31, ’08 and ’07 were

$4, 025,000.00, and $6,175,000.000 respectively. We have reduced the SG&A and are operating as efficiently as possible to conserve our restricted working capital. At the reduced rates we have been operating, our plants are running at a break even to a slightly profitable cash basis.

For the month of August on a consolidated basis we were cash flow positive having generated approximately $12.5 million in revenue with approximately $11 million in operating expenses. Additionally, we are taking a number of measures to manage the corporate overhead including head count reduction, relocation of our principle administrative offices from Houston to Butte, Montana and we have consolidated our accounting functions.

We currently have forward sales commitments for approximately 3, 600,000 gallons of B100 biodiesel, with the sales prices ranging from $3.75 to $4.31 per gallon and an estimated weighted average sales price of $3.943 per gallon. Of these forward sales commitments, approximately 2 million gallons are subject to a fixed price contract and the remainder our index is spread to the NYMEX heating oil index.

Another major truck stop chain recently placed orders for our B100 for delivery at index prices over the winter months, indicating additional customer acceptance of the quality biodiesel that Nova produces.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Laurence Alexander from Jefferies & Company, Inc.

Laurence Alexander - Jefferies & Company, Inc.

My first question is if feedstock prices stay the same for the balance of this quarter what would you target as a range for your cash burn for Q4?

Jay Fillman

Do you mean on a company wide scale?

Laurence Alexander - Jefferies & Company, Inc.

On a company wide scale.

Jay Fillman

It could possibly be positive. I am not sure if you’re asking about if I would be cash negative or cash positive, but if feedstock prices would stay similar to where we are and we attained the production volume that we have projected we would project being cash positive for the next quarter.

Laurence Alexander - Jefferies & Company, Inc.

Secondly, on the most recent quarter what was the revenue from glycerin and then how much revenue do you expect to receive in Q4 and is there any sort of timing lag between the biodiesel production and the glycerin sale?

Jay Fillman

I don’t have an exact figure for glycerin in my notes. As we start up we have varying quantities so we hold back and then sell when we get a certain amount, so I would have to get that amount for you and then provide it to you later.

Laurence Alexander - Jefferies & Company, Inc.

Lastly, could you just sketch some of the key milestones that are upcoming in the first four, what your lenders might be looking for to expand your working capital line and secondly what milestones you were looking for for the corporation before you would look to a partnership on the next planes?

Ken Hern

We have had very good meetings with our lender, very good discussions with our lender. We have a model that we have put together in consort with them. Current feedstocks are such that on Seneca specifically we should be able to generate and by the way this is presupposing that feedstock stays below $0.40 per pound and that the current revenue numbers will be the same. But, we should be able to generate, in round numbers, positive cash without question going forward. This is certainly something that the lender is looking for. It is something we believe we can achieve and I feel very good about where we are with our lender at this point.

Laurence Alexander - Jefferies & Company, Inc.

Then, in terms of which milestones you might be looking for before you would undertake looking for another partner to pursue another plant?

Ken Hern

Well certainly we would want to be at the full sixty-man gallon run rate at Seneca that would be very, very important. We would want to have Clinton retrofitted fully and I would think that we would want to have some sustainability and maybe some stabilization of feed stock pricing. It is not a milestone, but it is so important to us.

As you know the Nova’s and all biodiesel organizations, your earnings, your cash, is so profoundly impacted by feedstock costs so we anticipate that if we can see a reasonable price for feedstocks we will get our earnings of projections, we will hit the milestones we have been talking about and at that point we would certainly be out seeking to grow as we have explained earlier.

Operator

Your next question comes from David Woodburn from ThinkPanmure.

David Woodburn – ThinkPanmure

Ken you mentioned that Nova relative to your competitors, given the demand for biodiesel right now is it fair to say that your bigger competitor might be other feedstock users and not necessarily on the finished product?

Ken Hern

I don’t know quite how to answer that, David. Our competition really, there are 175 organizations that are competitors of Nova. Nova is really a very unique organization. Our process is different, our ability to use feedstocks that are considerably below the normal market is very important to us. I just feel like that at this point and you know it is hard to extrapolate, but I feel like that Nova has turned a corner. We were so profoundly impacted by the very high prices we had. We are not now as impacted. We had, as I stated earlier in the remarks that I made to you, we were positive that Seneca, I expect Seneca to continue to be positive and with that I feel like we are in a very good position going forward.

David Woodburn – ThinkPanmure

Let me rephrase a little bit. Do you see more competition in bids for your finished product or in bidding for the feedstocks? I guess what I’m after here is as you scale up over the long-term with more facilities, how much capacity or flexibility is there in the feedstock market, that you won’t be bidding up the prices yourself?

Rusty Sammons

You are correct that other industries, certainly soap manufacturers and other oleo chemical companies are bidding for the some of the same feedstocks that we also utilize; however the great thing about Nova’s technology is that we can use a wide range of feedstocks that might not be a good fit for those manufacturers as well. We have not seen a limitation of feedstock available to feed the plant and there is a lot of demand for a biodiesel as well, so to answer your question directly we have not seen any limitations of feedstock for Seneca in Clinton with other industries and we feel comfortable that we can move the volume comfortably out of our sites that the market is demanding.

David Woodburn – ThinkPanmure

Great, then if I can ask on the credit expansion with West LB, should we be considering that the possibility of a partial or is it an all or nothing type arrangement and then what about the actual interest rate that you would pay on that. Is that fixed from your existing agreement?

Ken Hern

We have had a very good dialogue for quite a little while with our lender. We feel very good about where we are. I haven’t thought about it being an all or nothing. There doesn’t seem to be any specific or any rationale that would restrict it below what we think we need and basically in round numbers Nova needs about $4 to $5 million a week to run Seneca, on a monthly basis that is about $20. We are optimistic. We certainly are having sensible dialogue with our lender and I feel good about where we are.

David Woodburn – ThinkPanmure

Is tolling an option that might help you get past some of the working capital restrictions right now?

David Woodburn – ThinkPanmure

Tolling has been an option and we have considered it several times. We have actually had more than one group come to us for tolling. Tolling gets to be complex. It is two people trying to bite out of the same side of an apple if you ask me and so we have an opportunity still, if you want to go that way, if we wanted to, it’s just not a direction that I want to go and at this point I am actually not considering it.

Operator

Your next question comes from JinMing Liu from Ardour Capital Investments, LLC.

JinMing Liu - Ardour Capital Investments, LLC

My first question is about the competition. I noticed that there have been a lot more animal fats being used for biodiesel production. Like I know a few companies use pork fat or chicken fat to produce the biodiesel. Do you see those companies increasing the use of animal fat and will that impact your effort to procure animal fat?

Dick Talley

There have been a lot of press releases that indicate other biodiesel production companies are tending to try to utilize a multi-feedstock and they generally attack it three different ways: one is just simply buying one load of animal fat per every five loads of soy if you will and blending it off. The second way they attack it is using a pre-treatment process where they will purify or strip out some of the undesirable contamination that is present in animal based and the third way is with some like after this purification based technology. There are a number of producers that are preceding that way. The reality of the marketplace is how many actual gallons are produced on a monthly basis of fames versus how many gallons on a monthly basis of SME and when you look at the actual production statistics nationwide, it does not support the press releases.

So to answer your question directly, I see a lot of people talking about it, but I see one company that is doing it and that is Nova.

Ken Hern

Another thought for us too, we know that people are buying these higher free fatty acid containing materials and what they do, as Dick just said, is they steam strip it. The reason we know that is those materials are on the market and we are actually now buying that. There is another feedstock that we haven’t talked about to an extent, but we are interested in it and of course that is the corn oil from the distiller’s drain that comes from the ethanol plants. We have run quite a bit of it recently. We have isolated the train at Seneca and run it. We are very pleased with the quality we get. We are pleased with the, especially on the crowd point and this whole float test we are talking about, it is another feedstock that Nova can utilize, we think, much better than anyone else.

JinMing Liu - Ardour Capital Investments, LLC

My next question is about the management team. I noticed there have been quite a few changes since late last year. Can you comment on that?

Ken Hern

There have been some changes. One of the changes is here with us today; Mr. Jay Fillman is our chief financial officer. The original chief financial officer we had, Mr. Gullickson, was certainly the appropriate CFO at the time. As we grew and changed and became an operating company it was my opinion and certainly the board’s opinion that we needed a man who was more hands on, so Mr. Fillman is now with us. Another change of course was Mr. McGraw. Mr. McGraw of course was very impactful. He was a founder. He helped us raise $160 million of capital if you will and he has gone onto other business interests and moved away, so those are the two basic business changes. We also had it, for your information, Mr. Fred Zeidman, so some changes but I think very rational sensible changes.

JinMing Liu - Ardour Capital Investments, LLC

My last question is about the 3.6 million gallons you have contracts for. What is the percentage of those 3.6 million gallons will be delivered before the end of October?

Rusty Sammons

Essentially all of those gallons will be delivered by the end of October. At full capacity the Seneca refineries will produce over 4.5 million gallons per month and so with those forward sales we are essentially ¾ of a month ahead of the total production. We have essentially sold ¾ of a month production, again at full rates.

Now as we have talked about with our working capital limitations, we are operating 50 to 60% at present, but essentially all but 200,000 gallons will be sold by the end of October.

Operator

Your next question comes from Dan Mannes with Avondale Partners, LLC.

Dan Mannes - Avondale Partners, LLC

First of all just talking about the cash flow profitability and the expectation, what does that imply on a per gallon basis in order to be cash flow positive, cover SG&A interest etc… what do you have to be getting?

Ken Hern

Let me back up just a bit with you. As I have said earlier the cost of feedstock is so incredibly impactful and so profound, right now we are buying feedstock at under $0.40 a pound, so at under $0.40 a pound and if you run the math on it and I am going to do some simple math for you if you don’t mind. If you take $0.35 feedstock at eight pounds you have $2.40 as your cost, if you had eight pounds per gallon and if you have to add the $0.60 which Dick referred to earlier, you would be sitting on $3.40, so right now with the current prices of diesel and biodiesel it varies, but it would certainly be between $0.30, $0.40 and $0.50 per gallon would be your cash positive number. Then if you run the math on Seneca, at 90% we are at about five plus million, so it is $5 million x $0.30 or $0.40 or $0.50 that would be the number.

Dan Mannes - Avondale Partners, LLC

When you talk about $0.60 are you including just plant level costs or are you including any of the corporate level SG&A and management etc… is that an all in cost?

Ken Hern

That’s an all in cost.

Dan Mannes - Avondale Partners, LLC

So that is not just plant level expenditures?

Ken Hern

Correct. By the way, as we stated in our opening remarks, we have reduced our corporate overhead, we have seriously worked to make sure that that is the minimal number possible because I don’t want corporate to be a cost leader if you will. I want Seneca and Clinton and Scott to be the profit centers and I don’t want them to have to support a lot of overhead and by the way the way Dan, they are not supporting very much overhead.

Dan Mannes - Avondale Partners, LLC

On the fixed price that is going through the end of this quarter, obviously diesel prices have come down fairly significantly. Are those fixed contracts above current markets and as you move through those do you expect actually your revenue per gallon all other things being equal, coming down?

Rusty Sammons

The majority of the fixed price contracts they are about 50% or still have the fixed prices, those are essentially at market price at present and with the volatility in the market, that is why I qualify it with essentially there is a lot of movement in the market every day. We have seen the price over the past 30 to 60 days decrease for heating oil and diesel and several of our contracts going forward will be indexed to heating oil, IMEX heating oil or ultra low sulfur diesel to move with the market.

Dan Mannes - Avondale Partners, LLC

So when you say the prior contracts are approximately at market, so if we are looking right now at, for instance let’s call diesel $2.80 a gallon and add somewhere between $0.60 and $0.80, so $3.50 to $3.80 is probably the right range?

Rusty Sammons

In Jay’s comments he mentioned that in our release the 3.6 million gallons of biodiesel that has been sold, or I am speaking to ranges from $3.75 a gallon to $4.31 a gallon.

Dan Mannes - Avondale Partners, LLC

Right, so that would sort of confirm that relative to where current prices are it is above market.

Rusty Sammons

Yes.

Dan Mannes - Avondale Partners, LLC

Your relationship with, it used to be ConAgra trade group I think it is now called Gavalon [ph] and I believe Gavalon was partially funded by Osprey. Can you talk at all about the current relationship with Gavalon? Are there any issues there, or is that going on normally?

Rusty Sammons

Gavalon is correct, that is our trade partner. Gavalon takes 100% of our biodiesel, does a terrific job of marketing and selling it and the relationship is very strong. Moving forward they are an industry leader in moving that material and that is a big part of our, when we set up Nova our focus was on doing a great job of producing biodiesel and we identified some great partners in Gavalon to market and sell our biodiesel and lipid logistics on the feedstock side to identify these low cost feed stocks to enable us to be a profitable operation.

Dan Mannes - Avondale Partners, LLC

My question wasn’t so much about that, it was more the fact that the primary partner in Gavalon was Osprey who from what I understand was liquidating a lot of their funds. I was wondering if there was any impact to Gavalon that you were aware of.

Jay Fillman

I looked into that and the funds that Osprey is liquidating are not related to their Gavalon holdings. They had some issues with some other funds, but I feel that the sector that owns Gavalone is safe and that we are okay still marketing everything through them.

Operator

Your last question comes from Ron Oster from Broadpoint Capital.

Ron Oster - Broadpoint Capital

I was wondering, I wasn’t sure if I heard this correctly, but did you say that with your current working capital capacity that you could operate at roughly 60% of capacity at Seneca, was that correct?

Jay Fillman

Yes.

Ron Oster - Broadpoint Capital

And would that put you at you would still be cash flow positive under that scenario?

Jay Fillman

It is a very close number as far as covering my fixed costs and all of the variable costs at Seneca at that number, but with feedstocks coming down we have also been working to design some lease costs type of product buying, feedstock buying and that is also helping and so at 60% it is very close to being cash flow positive or just a hair cash flow negative, it just depends on the economics of the market. The feedstock costs and the biodiesel selling price, but I need to be somewhere around there and as we build cash in Seneca we procure more feedstock which allows us to increase our capacity, which generates more cash so that all goes together and helps.

Ron Oster - Broadpoint Capital

So for modeling purposes, until we see this additional $20 million in financing access is it fair to assume that you will just continue to operate at that 60% level?

Jay Fillman

Yes that would be pretty reasonable.

Ron Oster - Broadpoint Capital

My other question had to do with the conversion rates from feedstock to gallons. You mentioned a range of 8 to 8.7. What have you been operating at? Has it been closer to that 8 or the 8.7 and what drives that because it can make a pretty big difference on your economics depending on where you fall within that range. I just want to get a better feel for what the drivers are of where you fall within that range.

Dick Talley

Since our start up, if we measure yield as total inventory feedstocks brought in versus total inventory it would be 100 ships are produced and shipped out. We are running about an 8.5 cumulative average for the entire since start up.

Your next question is what impacts that yield and obviously probably one of the biggest detractors from yield is inconsistent run rates. What I mean by that is when we have to start a train up or shut a train down or throttle a train back as we manage our cash the chemistry and the reliability of the plant is affected and that obviously ends up in a corresponding yield hit, so it is difficult to maintain or optimize your yields when you can’t have a long run rate in front of you.

With that said, we fully anticipate that when we are fully commissioned and running consistently we will see our yields down around 8.2.

Ron Oster - Broadpoint Capital

In your press release that you put out last week there was a table on page three that showed your costs versus typical soybean oil costs and it showed your cost advantage in May and June being over $0.20 per pound and then it declined to less than $0.10 in August. I was just wondering what drove that change in terms of your cost advantage and where do you think it’s going to be going forward, what is a sustainable advantage that you expect.

Dick Talley

We have seen soy prices spike to some incredibly large numbers, particularly in July if most of you will recall soy jumped up over $0.70 a pound at one point. Historically soybean is always traded at a premium to other fats, oils and greases. Most of them are indexed off of it, but generally you will see about a $0.10 to $0.15 per pound break between crude gum soy and your edible beef tallow for instance. That has been a very historical number for a very long time. I would expect to see that. What we are seeing right now is much more of a historical spread between soy and say beef tallow than the anomaly that we show there in July.

I don’t quite understand why soy went so high in relation to the rest of the markets, but I think what we’re showing you there with a more like a $0.10 per pound kind of number is much more conducive or representative of what we will see going forward.

Your last question is what does that mean to us? Simplistically it is an $0.80 per gallon credit or improvement over a straight soy based methyl ester. That is why we talked a lot about this crowd point issue, because at face value a soy methyl ester is commanding about $0.50 to $0.75 gallon premium to fatty acid methyl ester and if we can close that gap up then the price for the B100 or the net revenue to us will be greater given the fact that we are able to mitigate our costs on the per feedstock side by some $0.80 to $1.00 a gallon.

Ron Oster - Broadpoint Capital

The last one on the financing, what type of timeframe are you looking at with regards to securing the additional $15 million in working capital?

Ken Hern

I can’t give you an absolute date for that, but I can tell you and as I have stated earlier we are in having conversations daily, federally with our vendors, very good conversations, very positive conversations. I cannot give you just an absolute, but I will say again I am confident where we are.

Operator

There are no further calls.

Ken Hern

Thank everyone. Let me close by saying that this year we weathered through the challenge of a historical spike and beat stock costs and working capital constraints. We have also been steadfast in our commitment to commission the Seneca facility in an effort to achieve profitability and our unwavering belief in our process technology continues to solidify our position within the alternative energy industry and prepares Nova to capitalize on opportunities that lie ahead. Our constant goal is to maintain the highest quality standards for biodiesel and to deliver long-term shareholder value.

Before I close, I would like to acknowledge the hard work and dedication of our entire team. I have a great deal of confidence in Nova’s leadership, its engineers and operating crews who have done a superb job to ensure that Nova is continually progressing towards our goals and reaching new milestones. And Nova’s patented proprietary process distinguishes us from the others in this industry and I am part of that part of Nova Biosource Fuels.

I truly believe that Nova is providing one prong of the energy solution for the future and I would like to thank everyone for joining us and if anyone has any further questions, I want you to feel free to call me or our team at Halliburton Investor Relations.

Finally for those of you who are already shareholders who have been with us for a while, I want to express my gratitude and my thanks for hanging tough with us and reassure that we are doing everything in our power to make your investment grow. A special thank you to everyone for your participation and your continued interest in Nova Biosource Fuels and I wish you a good day.

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Source: Nova Biosource Fuels, Inc. F3Q08 (Qtr End 07/31/08) Earnings Call Transcript

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