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Edited Transcript of GEVO earnings conference call or presentation 3-Aug-17 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Gevo Inc Earnings Call

ENGLEWOOD Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Gevo Inc earnings conference call or presentation Thursday, August 3, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Geoffrey T. Williams

Gevo, Inc. - General Counsel and Secretary

* Michael J. Willis

Gevo, Inc. - CFO and EVP of Corporate Development & Strategy

* Patrick R. Gruber

Gevo, Inc. - CEO and Director

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Conference Call Participants

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* Amit Dayal

Rodman & Renshaw Research - Analyst

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Presentation

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Operator [1]

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Welcome to Gevo Second Quarter 2017 Earnings Call. My name is [Eric] and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Geoff Williams, Gevo's General Counsel and Secretary. Please go ahead, sir.

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Geoffrey T. Williams, Gevo, Inc. - General Counsel and Secretary [2]

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Good afternoon, everyone, and thank you for joining Gevo's second quarter 2017 earnings conference call. I'd like to start by introducing today's participants from the Company. With us today is Pat Gruber, Gevo's Chief Executive Officer; and Mike Willis, Gevo's Chief Financial Officer.

Earlier today we issued a press release that outlines the topics that we plan to discuss. A copy of this press release is available on our website at www.gevo.com. I would like to remind our listeners that this conference call is open to the media and we are providing a simultaneous webcast of this call to the public. A replay of today's call will be available on Gevo's website.

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

We will also make certain forward-looking statements about events and circumstances that have not yet occurred, including, but not limited to projections about Gevo's operating activities for the remainder of 2017 and beyond. These forward-looking statements are based on management's current beliefs, expectations and assumptions, and are subject to significant risks and uncertainties including those disclosed in Gevo's Annual Report on Form 10-K for the year ended December 31, 2016, and in subsequent reports and other filings made with the SEC by Gevo, including our quarterly reports on Form 10-Q. Investors are cautioned not to place undue reliance on any such forward-looking statements. Such forward-looking statements speak only as of today's date and Gevo disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise.

On today's call, Pat will begin with the discussion of Gevo's business developments; Mike will then review Gevo's financial results for the second quarter of 2017. Following the presentation, we will open up the call for questions.

I'll now turn the call over to Pat.

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [3]

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Thank you, Geoff, and thank you to everyone for joining us today. On today's call I'm going to provide an update on; first, restructuring of our balance sheet; second, the operations of the Luverne facility; third, licensing and our latest news with our partner Praj; and fourth, our progress on the market development front.

So then starting with restructuring. You'll recall that we entered the year with the goal of restructuring our balance sheet in a manner that addresses the debt that was coming due in 2017 and that enables us to continue to execute on our long-term strategy and business development plans. With the conclusion of the debt exchange with Whitebox that we announced in June, we believe that we've accomplished this goal. To put this in perspective, at the end of the first quarter of 2016, we had less than $9 million of cash on our balance sheet and over $51 million of debt that was potentially coming due in 2017. With our strong balance sheet this was causing issues for both our existing and potential partners, as well as customers, vendors and the like. Fast forward 15 months, and we now have over $16 million of cash and only about $17 million of debt, which is not set to mature until 2020 and beyond. There is a much stronger balance sheet with which we now have to work and you can imagine the positive impact this is having at customers and partners interested in doing business with Gevo. I can tell you that we've had feedback from customers they needed to see us in a much better liquidity position. With the stronger balance sheet in place, I am hopeful this will help us get some of our potential partners that are interested in our ATJ, isooctane and isobutanol over the goal line. As I mentioned earlier, I will address our market development efforts in more detail a little later in my presentation.

Now moving on to the update on Luverne. As you would have seen from our earnings release, we dedicated all of our production capacity to ethanol in the second quarter. This is in line with what we disclosed previously in that running of Luverne facility for the sole production of ethanol that preserves cash for the company. Under the current configuration of the Luverne facility with only one of 4 fermenters set up to run isobutanol, we currently lose money on every gallon of isobutanol produced given that we are not able to produce enough isobutanol to sufficiently absorb the fixed cost associated with the isobutanol side of the Luverne facility. Once we install new equipment for the anticipated Luverne expansion and we are dedicating 100% of our alcohol production to isobutanol, we expect isobutanol to be profitable. But until we complete that expansion, the best way to preserve cash at the Luverne facility is to not run isobutanol simply for the sake of maximizing our production levels. Thus we need to be mindful and strategic as to when and how much isobutanol we produce, otherwise we are simply increasing our cash burn rate.

To remind our investors, our current isobutanol production strategy isn't to maximize the gallons we produce. We run isobutanol for 3 core reasons. First, to produce sufficient gallons to continue to build to develop our markets. Second, to prove out meaningful optimizations of our technology and generate data that will help us decrease our operating and capital cost associated with our planned expansion of the Luverne facility. And three, to facilitate due diligence of the Luverne facility by potential partners and customers. So until we complete the Luverne expansion we believe the best way to preserve our cash is to produce ethanol only and run isobutanol as needed. Note that this strategy has an additional benefit of improving the margins we can generate from ethanol. First by focusing on only one product rather producing both ethanol and isobutanol, we are able to drive efficiencies at the Luverne facility, and we've already seen this in the way of higher throughput and more up time. Second, our ethanol production costs aren't 100% variable, thus the margin that we generate from each incremental ethanol gallon is marginally higher than the previous gallon produced. This translates into a better cash flow profile at the Luverne facility, which means that we can extend our current cash that much further. Now, one of the targets we set out for ourselves at the beginning of this year was to produce at least 500,000 gallons of isobutanol during 2017. We set this target as an increase over the 440,000 gallons we produced in 2016. Given our current operating strategy for the Luverne facility, however, we believe that we are now unlikely to meet that 500,000 gallon goal. This is a strategic decision to extend our operating runway, which we believe is far more important than simply producing isobutanol gallons for the sake of hitting the target.

Now, I'd like to turn to licensing and in particular the exciting news that we announced in conjunction with Praj last week. Together with Praj, we announced that we are now ready to begin licensing our isobutanol technology to processors of sugarcane and molasses feed stocks. Praj has targets already identified in India, as well as other regions where they have a customer footprint. The licensing model is one where other companies put up the CapEx needed to build out the isobutanol production facilities. We would get paid a license fee and/or royalties. We would also be the marketers of the isobutanol and generate a fee for that work. Praj would be the EPC Company and licensor of any non-isobutanol technology. In licensing isobutanol technology to sugar mills, we expect to work closely with Praj, leveraging their extensive global footprint for context. Praj sites a track record of 750 projects for ethanol plants, spread across 75 countries. It's satisfying for us to see Praj use our proprietary isobutanol producing yeast, as well as our process information and adapting it to the use of sugarcane juice and molasses as feed stocks in a process that integrates into sugar mills. They've done a good work in figuring out the fermentation system, process flow diagrams, mass and energy balances and capital. For many months they have been running many plants developing data on the process parameters. They've also verified that Gevo's isobutanol yeast works well with sugarcane juice and molasses as we predicted it would. Both Praj and Gevo believe the process is at a point where we should begin taking it out to customers. Sugarcane and molasses are interesting feed stocks for 2 reasons. One, they are available in many parts of the world; and two, they are generally considered to be low-carbon feed stocks. In the future as countries and businesses try to decarbonize, we see that low-carbon feedstocks will be expected to play a significant role. Praj also has been using our Gevo isobutanol yeast with cellulosic sugars from bagasse and straw, the results are good so far. I am looking forward to them scaling up and building out their cellulosic plants. This should be yet another option for low-carbon feedstocks.

Lastly, I want to give an update on our market development efforts for isobutanol and hydrocarbons. The focus of our isobutanol market development for selling isobutanol as a gasoline blend stock is to establish supply chains, proving our price points of our blended gasoline and then growing in selected regions. We've been told by our distribution partners in the Houston region that over the last 5 to 6 months, the number of pumps selling gasoline containing our isobutanol has almost doubled and that the weekly number of gallons being sold from those pumps has increased by approximately 750%, showing a significant increase in sell-through at each pump. Sales to our isobutanol by our distribution partners in the Houston region continue to look strong and we expect them to remain fast growing over the balance of the year and we expect this demand result in new sales of isobutanol by Gevo to its distribution partners. What is most interesting is that the product is selling from $0.60 to $1 a gallon premium over E10 gasoline. Based on feedback from retailers, they're pleasantly surprised that the paradigm that customers will change gas stations for a few cents a gallon is wrong. In this case the isobutanol gasoline is drawing customers to the stations and at a premium. Customers appear to be willing to pay for the performance advantages, with both small engines and cars are buying the gasoline. Mercury Marine recommends in their owner's manual to use isobutanol containing gasoline, the word is spreading. As we announced in May, a bill was signed by Arizona Governor, Doug Ducey, letting gas stations sell isobutanol blended gasoline for on-road vehicles, enabling higher performing finished fuels with renewable content for drivers in the state. We're still in the process of setting up a supply chain to Phoenix, working with our distribution partners to get the tanks, blend stocks and blending capability set up. We appreciate the work and the costs that our distribution partners bear in setting up these supply chains. We are also working at building the supply chain that will supply the East Coast to the U.S. We'll announce it once it's up and running. On the hydrocarbon front, sales and interest in our isooctane remains high, I wish we had more capacity to serve this premium market from our current hydrocarbon facility in Silsbee, Texas. (inaudible) Carlos has been taking product as planned. We've also shipped some jet fuel recently to conduct testing under the Federal Aviation Authority's Continuous Lower Energy Emissions and Noise otherwise known as a CLEEN program.

As we stated at the beginning of the year, our primary business development goal in 2017 is to secure offtake agreements for 50% of the plant capacity of a build out Luverne. We are plugging away at this goal. (inaudible) Carlos is certainly relevant to achieving this goal and we are clearly discussing our negotiating terms for long-term supply agreements with 2 potential customers for our jet and isooctane markets that we believe would have the potential to allow us to achieve our 2017 goal of obtaining binding supply contracts for a combination of isobutanol and related hydrocarbon products equal to at least 50% of the capacity of the anticipated expanded Luverne's facility that we plan to construct. I could say this having a better balance sheet is a big deal. When we sell to a customer there is usually a champion for us on the customer side, as that champion makes the case as to why their company should be adopting Gevo products, the customer senior management asked, tell me about Gevo, is it worth our time and effort? Will they be around? If we hadn't successfully restructured our balance sheet and refinanced the debt, customer discussions would be much more difficult. As it stands though customers see that we are making progress, doing what we said we would do. Our focus is on obtaining the offtake agreements. The ask is that the customers agree to purchase our products from expanded Luverne facility starting in and around the 2020 time frame. It takes a lot of work to sort through all the scenarios and challenges of ultimately getting products to these customers, but we believe it's better for everyone over the long run if we try to solve for these issues upfront rather than getting hit with them in the future. It's the best way to build a strong long-term supplier-customer relationship and help to lower our cost of capital for expanding our production.

We'll continue to update investors as we get things done or signed. With that, I will now turn the call over to Mike. Mike?

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Michael J. Willis, Gevo, Inc. - CFO and EVP of Corporate Development & Strategy [4]

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Thank you, Pat. Gevo reported revenue in the second quarter of 2017 of $7.4 million as compared to a $8.1 million in the same period in 2016. The decrease in revenue during 2017 is primarily result of the production and sale of approximately $6.8 million of ethanol, isobutanol and distillers grains at the Luverne facility as compared to $7.2 million in the second quarter of 2016. This decrease in revenue was mainly due to lower ethanol and distiller grain prices in the second quarter of 2017 versus the same period in 2016. During the second quarter of 2017, hydrocarbon revenues were $0.7 million, down $0.1 million as compared to the same period in 2016. Gevo also generated grants and other revenue of $43,000 during the second quarter of 2017, down $0.2 million as compared to the same period in 2016. The decline was primarily due to the completion of our project with the Northwest Advanced Renewables Alliance or NARA in the third quarter of 2016. Cost of goods sold was $9.7 million in the second quarter of 2017 versus $10 million in the same period in 2016. Cost of goods sold included approximately $8.2 million associated with the production of ethanol, isobutanol and related products and approximately $1.5 million in depreciation expense. Gross loss was $2.2 million for the second quarter of 2017 versus $1.9 million for the second quarter of 2016. R&D expense for the second quarter of 2017 increased to $1.9 million compared to $1.5 million for the comparable quarter in 2016, due primarily to an increase in employee related expenses and costs associated with production of our hydrocarbons down in Silsbee, Texas. SG&A expense for the second quarter of 2017 was $2.1 million, which was essentially flat versus the comparable quarter in 2016. Within total operating expenses for the second quarter of 2017, we reported approximately $0.1 million for non-cash stock-based compensation. For the second quarter of 2017, we reported loss from operations of $6.2 million up $0.7 million from a loss from operations of $5.5 million in the second quarter of 2016. In the second quarter of 2017, cash EBITDA loss, a non-GAAP measure, which is calculated by adding back depreciation and non-cash stock-based compensation to GAAP loss from operations was $4.4 million compared with $3.7 million in the same quarter of 2016. Interest expense for the second quarter of 2017 was $0.6 million, which was down $1.6 million as compared to the same quarter last year. The decrease was primarily due to the lower principal balances on our outstanding debt. During the 3 months ended June 30, 2017, we incurred a non-cash gain of $2.3 million from a change in the fair value of the derivative warrant liability and we incurred a non-cash loss of $1.7 million from a change in the fair value of the embedded derivative associated with the newly created 2020 notes. During the second quarter, we also incurred a non-cash loss of approximately $4 million as a result of debt exchanges, primarily due to the exchange of the 2017 notes for the 2020 notes. For the second quarter of 2017, we reported a net loss of $10.2 million or a loss of $0.66 per share based on the weighted average shares outstanding of [$15.372485 million]. This compared to a loss of $21.5 million in the second quarter of 2016 or a loss of $8.75 per share. In the second quarter of 2017, Gevo recognized net non-cash losses totaling $3.4 million due to changes in the fair value of certain of our financial instruments such as warrants, convertible debt and an embedded derivatives. Adding back these non-cash losses resulted in a non-GAAP adjusted net loss of $6.8 million in the second quarter of 2017 or non-GAAP adjusted net loss per share of $0.44 per share. This compares to a non-GAAP adjusted net loss of $7.5 million in the second quarter of 2016 or non-GAAP adjusted net loss per share of $3.7. As we announced in June and as Pat discussed a moment ago, on June 20 of this year we completed debt exchange with Whitebox, whereby they exchange all of their outstanding principal amount of the 2017 notes for an equal principal amount of the 2020 notes. The holders also have an option to purchase up to an additional aggregate principal of $5 million of the 2020 notes on substantially the same terms. The key terms of the 2020 notes are as follows. They mature on March 15, 2020. They accrue interest to 12% per annum. Note that at the company's option we can pay this interest as 10% cash and 2% as pick interest. Their convertible at the option of the holders into shares of the company's common stock with a conversion price equal to $73.59 per share. The holders will also have a one-time right to reset the conversion price upon any equity financing that occurs within 180 days following the exchange. Following the exercise of this reset provision, the holders will also have a right to consent to certain equity financings during the 180 day reset period. And the notes also provide for certain make-whole payments to be made to the holders under certain circumstances. For a more detailed description of the terms of the 2020 notes, including the indenture pursuant to which the 2020 notes were issued, please see the current report on Form 8-K, which we filed on June 20, 2017.

As a last update on our debt, on June 9, 2017, Gevo entered into a private exchange agreement with a holder of Gevo's 2022 notes to exchange an aggregate of $485,000, the principal amount of 2022 notes for an aggregate of 736,671 shares of common stock. In addition, on July 3, 2017, Gevo repurchased $175,000 of the 2022 notes, leaving a $515,000 principal balance of the 2022 notes issued in outstanding. As a result, we currently have approximately $17 million of convertible debt outstanding between the 2020 and 2022 notes. And at quarter end we had cash on hand of $16.3 million.

With that, I'd like to thank our stockholders for their ongoing support to Gevo, and we'll now open it up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question on line from Amit Dayal from Rodman & Renshaw.

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Amit Dayal, Rodman & Renshaw Research - Analyst [2]

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In regards to the Luverne expansion, could you give us any color on where we are with (technical difficulty)?

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [3]

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Amit, how are you doing? This is Pat. I couldn't quite hear you. Are you asking about an update on the Luverne expansion?

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Amit Dayal, Rodman & Renshaw Research - Analyst [4]

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Yes. Sorry. Is this better?

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [5]

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Much, much, much better.

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Amit Dayal, Rodman & Renshaw Research - Analyst [6]

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Yes, so I was just trying to get some color on where we are with the expansion efforts if construction has started or is still sort of in the design process?

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [7]

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We're working on the engineering still. So we're in pretty good shape on the isobutanol site, because we already knew how to do that because of the fermenters that we built last year and installed and the process worked the way we expected. We had pretty good data on that, couple of tweaks that we're looking at, but that's in great shape, and the engineering is far along now on the hydrocarbon side. That's good, because it allow us to look at the build out as whatever looked like at Luverne, but it also allows us to have additional conversations as to how do we do it more cost effectively and cheaply.

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Amit Dayal, Rodman & Renshaw Research - Analyst [8]

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So when do you expect to sort of finish the expansion, I mean is it by the end of 2017 or will that bleed into early 2018?

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [9]

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No, no, this expansion it would be requiring us to build a couple of new fermenters and then build a hydrocarbon plant. That whole thing would come online in year '20, targeted in that time frame of 2020 or so, that's what we've been talking about, that was in our previous stuff that we've in the past.

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Amit Dayal, Rodman & Renshaw Research - Analyst [10]

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All right.

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [11]

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So it's not something, there's nothing we'd have to spend significant chunk of money to install the fermenters to make our whole plant capable of making isobutanol at the right cost structure to be profitable, but really to do that we should also be having the hydrocarbon side of the plant ready.

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Amit Dayal, Rodman & Renshaw Research - Analyst [12]

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So at this point, just to clarify, so we are producing some isobutanol at Silsbee, but nothing at Luverne right now, right?

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [13]

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No. We produced isobutanol earlier this year and we did produce in the first quarter at Luverne -- but we produced isobutanol at Luverne, we then converting all along the isobutanol into jet fuel and isooctane down at Silsbee -- it never stopped. Yes, and the isooctane, like I said in my comments, I wish we had more capacity for that because it seems people want that stuff, it's selling quite well and at a good price.

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Amit Dayal, Rodman & Renshaw Research - Analyst [14]

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In regards to Praj, do these guys have -- do you have any minimum in terms of revenue obligations et cetera from this -- once they start -- maybe in the -- not in the near future immediately, but in 2019 time frame, are they obligated to sort of license out certain number of plants a year or any revenue type of obligations on their side?

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [15]

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What's interesting, the way that I think about it is like this. The Praj did a great job adapting our technology to using molasses and sugarcane feedstocks as well as using cellulosic sugars, and they are building some cellulosic plants. We are working with them to license, there's a target down in South India, that's what we'll start with as a first example. Hopefully, it'll be on line in the 2019-2020 time frame, that's what we would expect. We're working through the detail of exactly what that license would look like. We have previously negotiated with Praj, the general outline, but now we've got to get really specific. What's interesting about this is in this Praj model remember, it's someone else's capital not ours, I like that a lot, that's a good thing. And the -- looks like the economics look reasonable that they could be practical and they could work. We're not done optimizing yet and so we're still working with Praj as to how to do that, but that's a shared load with them. So I like it because it creates these other opportunities and the way that Praj, you should hear them talk about it, they are excited by it. And for them to take it out publicly like they did it by it was a big deal, that's putting their stamp of approval on it, telling their customers of which they've done -- like I said in my comments 750 projects across 75 countries, they are the biggest ethanol technology supplier in the world. They're putting their stamp of approval on it, that's actually kind of a big deal that's underappreciated here in the States because no one knows Praj. So we feel pretty good about it, the way it would work is that we would be licensing the technology directly, they'd be the EPC supplier and equipment supplier as well. And so -- and we would also be the off-taker and marketer for the products. So we don't have a -- I can't give you the specifics. We'll announce them when it's ready, but we have at least a clear view as to the next steps of how we're going to go about doing it, we know the timeline generally.

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Operator [16]

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I'm showing no additional questions at this time.

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Patrick R. Gruber, Gevo, Inc. - CEO and Director [17]

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Great. Thanks everybody for joining us. I appreciate it, and I appreciate your support. That will end the call. Thank you.

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Operator [18]

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