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Edited Transcript of GEVO earnings conference call or presentation 14-Aug-19 8:30pm GMT

Q2 2019 Gevo Inc Earnings Call

ENGLEWOOD Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Gevo Inc earnings conference call or presentation Wednesday, August 14, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carolyn Romero

Gevo, Inc. - VP & Controller

* Geoffrey Thomas Williams

Gevo, Inc. - General Counsel & Secretary

* Patrick R. Gruber

Gevo, Inc. - CEO & Director

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Conference Call Participants

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* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

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Presentation

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Operator [1]

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Welcome to Gevo's Second Quarter 2019 Earnings Conference Call. My name is Cheryl, and I will be your operator for today's call. (Operator Instructions) Please note that this conference call is being recorded. I'll now turn the call over to Geoffrey Williams, Gevo's General Counsel and Secretary. Please go ahead, Mr. Williams.

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Geoffrey Thomas Williams, Gevo, Inc. - General Counsel & Secretary [2]

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Good afternoon, everyone, and thank you for joining Gevo's Second Quarter 2019 Earnings Conference Call. I would like to start by introducing today's participants from the company. With us today is Patrick Gruber, Gevo's Chief Executive Officer; and Carolyn Romero, Gevo's Vice President, Controller and Principal Accounting Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss today. A copy of this press release is available on our website at www.gevo.com.

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

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

We will also make certain forward-looking statements about events and circumstances that have not yet occurred, including but not limited to, projections about Gevo's operating activities for the remainder of 2019 and beyond. These forward-looking statements are based on management's current beliefs, expectations and assumptions and are subject to significant risks and uncertainties, including those disclosed in Gevo's Form 10-K for the year ended December 31, 2018, which was filed with the U.S. Securities and Exchange Commission, or SEC, and in subsequent reports and other filings made with the SEC by Gevo, including Gevo's quarterly reports on Form 10-Q. Investors are cautioned not to place undue reliance on any such forward-looking statements.

Such forward-looking statements speak only as of today's date, and Gevo disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. On today's call, Pat will begin with a discussion of Gevo's business and strategy. Carolyn will then review Gevo's financial results for the second quarter of 2019. And 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 & Director [3]

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Thanks, Geoff. Today, I have a short presentation that makes clear our plans and our status. Now this presentation is available on our website and a part of the webcast under the Investors webcast tab.

Before I get into that though, here are some short takeaways. We're making great progress on our commercial offtake agreements. We're very glad to have Air TOTAL signed up. You can read the press release, so I don't need to go into it here. It's good news though, and it's a sign of things to come.

We are engaged with more energy companies and airlines than ever before, in fact, we have something like over 100 million gallons of jet and isooctane under discussion for contracts. We only have about 5 million gallons to sell to justify building out our big plant in Luverne, Minnesota that we've been talking about for a while. 100 million gallons under negotiation, 5 million gallons of (inaudible), I'm pretty sure we're going to get that done. And in fact it's my hope that we -- maybe, we'll even get to build much more than a 10 million, 12 million gallon hydrocarbon plant and maybe it needs to be much, much bigger. That'd be great.

We have several LOIs, or letters of intent, from potential lenders and investors on the table. This is good. I'm very confident we'll be able to get debt deals done to fund what we want to do. We also have some who want to invest equity in our production assets. We'll be sorting this out over the next few months. You'll have to stay tuned because as this comes together, it's going to be very exciting.

Now I'm going to take you through this deck, this presentation. It'll help put into context some of our recent announcement and what's coming. Slide 2 is the standard disclaimer. On Slide 3, one of the very important things I want to drive home is that we are going after the whole gallon of fuel, not 10%, not 15%, not 30% like ethanol, we're going after the whole gallon. Yes, it can be done. Yes, it'll take time and work, but it changes the perception of what biofuels can do. Now imagine this, the whole gallon of gasoline with a net 0 carbon footprint. Imagine if it was negative, that would be better than what electricity can do. Same thing with jet fuel. We see our products as enablers to go after that whole gallon of gasoline or jet fuel. Now the place to start is with isooctane, that's the basis of gasoline, and our sustainable aviation fuel, our jet fuel. We drive the carbon footprint down by selecting the right raw materials to begin with, start to make the fuel and by developing the right energy sources for our manufacturing process and delivering products that meet all the market requirements for performance.

People often ask me if I'm worried about electric cars. I like electric cars, and I think they can be an important contribution to reducing greenhouse gases, if and only if we reduce the greenhouse gases from electricity production. If the greenhouse gases from electricity production go down, then companies like us, who use electricity, also benefit. Our fuel GHG footprint goes down as the electrical grid becomes more green, so let's get after it. Even with successful electrification now and the green of electricity, I doubt that all cars that use gasoline are going to be eliminated. I'm happy going after the giant niche of gasoline for those areas where electrification can't work or is impractical or just simply takes too long.

Same story with jet fuel. I doubt jets are going to be electrified soon. Let's reduce and eliminate the GHGs from their fuel. Slide 4 is a reminder of what we have to consider in making our fuel with low or no net carbon greenhouse gas emissions. We use renewable carbon that originates from carbon dioxide, that's CO2 in the atmosphere. We too are capturing carbon from the atmosphere for our raw material, we just do it through plants, the things that grow. Raw material is part of what we need, low carbon, green energy is the other part. When we measure our carbon footprint, the majority of our emissions come from the fossil-based natural gas and fossil-based electricity use. Eliminating the fossil carbon from energy sources makes a major reduction in our carbon footprint.

Slide 5 shows the way to think about our business system we are working to set up in Luverne. Carbon dioxide is captured by corn. Notice our corn is happy. That's because farmers in our area are very good and use good farming techniques, better than most in the USA. With their advanced farming techniques, they are capturing and sequestering carbon in the soil. We calculate about 2 pounds of carbon dioxide per gallon of jet fuels actually sequestered in the soil based on past studies, and I think that we shall see increases going well beyond that because farmer techniques have improved further. Note that the corn that we use is not the stuff of corn on the cob, it is not the stuff in canned corn, it is not what cornflakes are made from, no. This corn isn't even easy to get into the food chain without significant processing. The corn is grown for its protein and carbohydrates, that's why this corn is grown, and it's very efficient at generating protein.

We separate the protein from the carbohydrates. We use the carbohydrates to make our alcohols by fermentation. We can sell those alcohols, that's the ethanol and the isobutanol, as a gasoline blend stock, or better yet, use them as raw materials to make gasoline and jet fuel using chemistry. It's a large amount of protein we produce. It's about 10 pounds per gallon on a jet fuel basis. We sell the protein into the food chain. It's food and fuel for us here at Gevo. I know of no other process that generates this much protein for the food chain while making jet fuel or gasoline.

Now we sell our protein as animal feed. The animals eat the protein, they eat the feed, they make manure. We are working at setting up a subsidiary that takes the manure, digests it to make renewable natural gas that we can take back to our plant for our production process or sell to the pipeline. We are well along in getting this established, and we expect to finalize the deal soon. We also have several options for financing with debt proposals on the table. We'll be sorting it out in the next month or 2. We are planning to call this renewable natural gas subsidiary business Gevo Energy. It would supply renewable natural gas for our Luverne plant and the pipeline. It's a good opportunity.

We are planning on reducing our electrical load by working with Juhl Energy to establish wind power. This project is very far along. We are waiting for the final documents. I appreciate the city of Luverne and all the parties that are working to make this happen. They're doing a great job. We expect that what we will pay the city for electricity will remain the same, but we'll get the value from the renewable credits. Renewable electricity, renewable natural gas, reduce our footprint, that's what this game is about and then capturing the value through delivered fuels.

One final point in this slide. You saw the press release on Locus just last week. Locus has technology that could boost the amount of carbon capture in the soil by a lot, maybe even an order of magnitude or more. So instead of talking about 2 pounds per gallon, maybe it'll be much, much more. We're keen to find out. I really believe that the improved agriculture offers a tremendous opportunity for capturing carbon while growing raw materials for people like us.

Maybe you folks saw the article last week in New York Times how farmers may be the answer to GHGs. I think that with the right systems in place that reward improvement back to the farm level, the agriculture will be increasingly important. Instead of running away from the food and fuel, we can see how to generate lots of protein for food, not giving up anything on that front and capture more carbon, reducing our footprint even further.

On Slide 6, the purpose of this one is to remind us all that our production technology works with our feedstocks too. I care that the feedstocks are sustainable, available and cost effective. We could use egg residues, wood, waste wood, municipal solid waste or even food waste. All are fair game for us. Now one of my favorites is rice straw, where we work with Praj on that for India, using rice straw's potential to solve a waste problem, while making jet fuel and gasoline.

Slide 7 shows the greenhouse gas reduction potential of our hydrocarbon fuels. On the left is the greenhouse gas profile of jet fuel isooctane. If we replace the carbon in energy, we can get to very low levels of net emissions. On the right side of the slide, shows we are tending to do it at Luverne. The chart on the right of the slide has lots of dots. The dots represent fuel ethanol plants by various feedstocks. These values are the reported carbon index scores for individual production plants. We are targeting to be well below all the others. That's what I'm showing by the green line. If we replace the fossil-based natural gas with renewable natural gas and replace the fossil-based electricity with renewable electricity, we expect to be at or below that green line that I've shown on that chart, using the California-type scoring system.

Moving to Slide 8. The left side of Slide 8 shows the greenhouse gas profiles of farmers who supply us. On average, our farmers generate 50% lower greenhouse gas emissions compared to the national average. If you look at the bars on the left side of that graph, you can see that some farmers can do negative greenhouse gas emissions. The note in the blue arrow above that chart declares our intent. We intend to track how things are grown at individual farms and create a reward for farmers who supply a lower carbon footprint corn.

On the right side of this slide, there's a chart that shows the greenhouse gas profile that for growing corn depends in large part on tilling practices and also on how one uses nitrogen for fertilizer. The blue box is pointing at a bar talking about reduced tillage practices. We had an announcement this last week for an ISCC PLUS certification. They're a certifying agency in the EU. And they certified this type of corn supply through isobutanol at our plant. We are pleased that they determined the same amount of emissions that we had measured and predicted. Note that the bar to the right of where that arrow's pointing is negative. That's because of how they use manure on the field, displacing some nitrogen and that they use no till oppose to that's -- instead of doing strip tilling or plowing, they would be using drills, for example.

And on this next slide, I'm going to show you why it matters. On -- the chart on Slide 9 shows the greenhouse gas footprint of our hydrocarbon fuels using the methodology required under Europe's EU RED II policy. The first green bar next to the black bar shows that using our farmers and the average values from the collection of farmers, we do very well, being below the requirements for EU RED policy. The next bar over is negative. Think about that. Negative carbon fuel per isooctane. Negative. This is the result of using corn in isobutanol we just certified with ISCC PLUS. That's a big deal. Negative carbon fuels. Yes, it can be done. Moving to the right, you can see its value for greenhouse gases emissions could even go more negative. No-till corn would give a negative of 30 to 40.

If we count techniques like Locus suggests, then it might be possible to get a much, much, much more negative carbon profile. These data profiles are game changing. Imagine gasoline with its greenhouse gas profile eliminated, while the raw material is certified to be sustainable and while producing large amounts of protein for the food chain. It's potentially game changing. To accomplish all this and prove what we're doing though, we're going to have to track farms, corn, how it's produced, what the sustainability practices are, get it all certified, and we have to track where we send our fuel. We have some very extremely creative ideas on how to do all this tracking using DLT technology. I'll talk more about that in the future.

Slide 10 shows the business system we're trying to build at Luverne. This is stage one. It includes dry frac, which we've already deployed; wind power, which is in the process of being deployed; and 1 million gallon hydrocarbon plant that will produce jet fuel and isooctane. The purpose of the 1 million gallon plant is not to prove technology, we already did that. But to provide larger amounts of isooctane for Haltermann and to supply Avfeul and to supply Air TOTAL as well as some others. The capacity at this plant is already sold out. It makes for an attractive investment, and that's why debt lenders are interested in this. We project that it'll be about $16 million investment to build the 1 million gallon plant, and it's backed by the take-or-pay contracts.

On Slide 11, this shows how we're thinking of setting up Gevo and its subsidiaries. Agri-Energy is actually the official name for our Luverne site and its production assets. We plan on building the 1 million gallon hydrocarbon plant at Luverne once we get financing. We expect that it could be deployed in 12 months or less because it could be skid-mounted and delivered mostly built. We plan on setting up Gevo Energy, which develops renewable natural gas projects. We already have an LOI in place for our first biogas project. This is contemplated to be done with USDA loan guarantees even.

The note at the top of this slide, in yellow, tells what we are working on. $40 million of debt at Gevo. If we are able to get the $40 million, we would use about $15 million to pay off Whitebox or alternatively, we may refinance our debt with Whitebox, who has a -- been a very good partner for us. We would use $16 million to build the 1 million gallon hydrocarbon plant and the remaining money we would use to contribute equity at Gevo Energy or for other purposes. Now suppose we did all of what I just described, we would have about 20 million gallons of low carbon footprint ethanol that we would get into California, that's where we would be targeting and about 1 million gallon of hydrocarbons. The ethanol that we target for California shouldn't be thought of as just general commodity ethanol, this is like a specialty product that's value-added because of its low carbon footprint. They should give us preference on people wanting to buy our stuff and paying a premium price because of the lower carbon footprint.

Now the cash flow for all of this set of activities models out to project that we could generate enough cash to be profitable, depending upon how much we spend to do the development to build the big business with isobutanol and jet fuel. It's pretty exciting.

The next 2 slides, 12 and 13, show what we call step 2. This includes the build-out of a large isobutanol plant and the 10 million to 12 million gallon per year hydrocarbon plant. This is what we actually are targeting and are trying to get accomplished and have been for so long, and we're getting there, making progress. (inaudible) and I am still is large offtake agreements for the remaining unsold 5 million gallons of capacity. I mentioned earlier that Tim's got 100 million gallons in discussion. I think he's going to get the 5 million gallons pinned down with take-or-pays, and we'll get on with this. We're going to get it nailed pretty soon. I hope that we get enough contracts so we can build an even bigger plant, much bigger than the 10 million to 12 million gallons per year. That's my hope. We'll see.

We already have lenders in discussion and draft term sheets on the table for this step 2 project. In fact, we have some people who are interested in financing both step 1 and step 2. Now the key thing though is we need to discuss more contracts and then we'll be off to the races.

Slide 14 is here to remind everyone that we're still developing projects in other places in the world. Things are looking good for us. I love having active negotiations on these debt deals. We have multiple lenders who understand what we are doing. They see that customers are interested. They see that the contracts are being negotiated. They recognize their products and processes are far along, having largely been de-risked. We also have several potentially large equity partners who are also beginning discussions with us. They can see the potential as well. I really love the uptick and interest in our jet fuel and our other products. I believe that we can make a really big profitable business.

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

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Carolyn Romero, Gevo, Inc. - VP & Controller [4]

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Thank you, Pat. Gevo reported revenue in the second quarter of 2019 of $5.1 million as compared to $9.4 million in the same period in 2018. Cost of goods sold was $8.5 million in the second quarter of 2019 versus $10.7 million in the same period in 2018. Cost of goods sold included approximately $6.9 million associated with production of ethanol, isobutanol and related products and blendstock $1.6 million in depreciation expense.

Gross loss was $3.4 million for the second quarter of 2019 versus $1.3 million for the first quarter of 2018. Research and development expense decreased by $0.5 million during the second quarter ended 2019 compared with the same period in 2018 due primarily to a decrease in cost associated with our South Hampton facility, offset by an increase in personnel consulting expenses.

Selling, general and administrative expense increased by $0.5 million during the second quarter 2019 compared with the same period in 2018 due primarily to an increase in personnel, travel, legal and investor relations cost, offset by a decrease in professional fees. Within total operating expenses for the second quarter of 2019, we reported approximately $0.1 million for noncash stock-based compensation. For the second quarter of 2019, we reported a loss from operations of $6.5 million compared to $4.4 million for the same period in 2018. In the second quarter of 2019, cash EBITDA loss, a non-GAAP measure, which is calculated by adding back depreciation and noncash stock-based compensation to GAAP loss from operations was $4.7 million compared to $2.6 million in the same quarter of 2018. Interest expense for the second quarter of 2019 was $0.8 million, a slight decrease compared to the same period in 2018. For the second quarter of 2019, we reported a net loss of $7.1 million or a loss of $0.60 per share based on weighted average from share outstanding of 11,885,524 shares. This compares to a loss of $11.5 million in the second quarter of 2018 or a loss of $7.19 per share. In the second quarter of 2019, Gevo recognized net noncash gains totaling $0.1 million due to changes in fair value of certain of our financial instruments such as warrants and embedded derivative. Adding back these noncash gains resulted in a non-GAAP adjusted net loss of $7.2 million in the second quarter of 2018 or a non-GAAP adjusted net loss per share of $0.61. This compares to a non-GAAP adjusted net loss of $5.3 million in the second quarter of 2018 or a non-GAAP adjusted net loss per share of $3.31. Having a stronger balance sheet is important to moving our business forward, developing and growing our business.

With that, I would like to thank all of our shareholders for their continued interest in supporting Gevo. Let's open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [2]

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So from your comments, Pat, it seems that there is quite a large appetite for your jet fuel and isooctane products. I know you are negotiating, financing, et cetera, to build everything out. The question, I guess, is are you moving as fast as you can? Or are you just held up a little bit because of bureaucracy, formalities, processes, et cetera? What is the time line on securing all this and starting to actually meet this type of customer demand? At least with the 1 million gallon level first and then going on to step 2 of your plan.

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

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Right. So there's several parts to this, right? One of them is the decarbonization because that's almost a prerequisite that we have to reduce the carbon footprint and that it gives us the most secure and profitable position for delivering our fuels. The Juhl Energy wind project is very far along, and I expect to sign definitive documents very soon. It's just a matter of days or weeks could be, I suppose, as the lawyers get to it in the final details. But it's something very, very soon. And that's a big deal because that wipes out the vast majority of our electrical footprint. The biogas projects, we're going to get them underway and then we'll get Gevo Energy going. We have several parties interested in both offtaking gas from us, but I want that gas for our plant because it lowers our carbon footprint, and we think it's more valuable putting it through a biofuel than it is to selling it to a pipeline. And we have a number of people offering to finance that. So we're in the midst of -- we have lots of -- we've got to get deals, to finish off the deals with the farmers, the dairies, the banks, et cetera, but that's going to happen, I think. I'm very, very confident, and that's a nice business onto itself and it's going to lower our carbon footprint. Then as far as the build-outs go, we have several parties interested in financing the 16 million gallon -- or sorry, the 1 million gallon hydrocarbon plant. It's already designed. It's ready to be built. That's just waiting on the financing. I don't want to spend the money that I currently have in the balance sheet for that because we have good take-or-pay offtake agreements in place. It's a profitable plant, good paybacks. It's a nice deal. And people can see that on the debt side, and they like it. So we're going to try and get ourselves set up so we can take advantage of that. And then in the -- overall, the big plant, we are get -- we're going to have, I think, I hope, we'll have the financing in place, as Tim delivers these contracts, they'll be ready to go. So that means it won't take very long. So the time line would be in 12 months from now, we could have our 1 million gallon hydrocarbon plant online. I would expect something like that. Maybe it'll be 13 months or 14 months, but it's in that kind of a range because it'll be skid-mounted. To build a big plant it's going to probably take 2.5 years or less, maybe 2 years. And so we've got to get it financed. And that'll be the gating item. But like I said, we've got lots of people now negotiating with us on financing things.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [4]

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Understood. With respect to sort of how you're managing the business right now, with no prices pressured in the market at this point, how are you planning to manage production for the rest of the year to keep the [credit] at a minimum.

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

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Yes. Sure. I'm glad you asked that because this is like one of my irritating things is that our profitability isn't driven by ethanol. We're more of a milestone business, yet we have to report these things like a earnings per share. It's quite irritating to see these instantaneous reports about how we miss. We're -- we were able to slow down our grind, reduce our grind. We produce less when -- or stop even or put a pause on it when ethanol prices are low and core prices go up. I mean it's stupid to keep grinding once you're going to negative contribution margin space. So we don't do that. We just -- it's a policy, we just don't do that. So throughout the year, you're going to -- compared to what we thought what the margins were going to be from the beginning of the year, we're going to have less overall margin, less overall revenue from ethanol. Animal feeds have been doing pretty good, but we turn it down. And we had to install the dry frac system, which, by the way, is working pretty good. We just didn't hurry and rush and turn it back on when corn prices are high. That'd be stupid and self-defeating.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [6]

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Right. Understood. In the press release, you talk about hydrocarbon shipments being delayed this quarter. Could you give any color on what happened over there?

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

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Part of it was due to electrical outages down in the Houston area, down in Silsbee. And that was partly due to storms, partly due to just some plain old infrastructure issues like a transformer blew or something like that. And that caused power to be down, that caused stuff to fall behind in production. They made up the production. The plant's working quite well. And then we tried to get the stuff out the door so we could hit this quarter, but it just didn't make it in time.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [8]

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Understood. And then just one final one for me. In terms of your inventory right now, what is in it?

Is it (inaudible) what the -- isobutanol?

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

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The total number of inventory? We have isobutanol.

Yes. We got a lot of isobutanol. Our hydrocarbons were -- we don't have very much in inventory per se, not because our plants are generally small there, anyway, but we're shipping that stuff as soon as we -- generally as soon as we can. We have some jet fuel that is now committed because of TOTAL and Avfuel.

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Operator [10]

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And we have no further questions in queue at this time.

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

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All right. In that case then, I thank you all for participating in this conference call. These slides are important, take a really good look at them. This is really telling what we're intending to do, planning to do in our business. There's a lot of interest, a lot of excitement. The financing thing is quite the different story. These are debt financings we're talking about here, and it's quite interesting and it's based on having these offtake agreements in place, which, in part, we have already. Thanks for joining us. Bye-bye.

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Operator [12]

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And thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect.