Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Gevo Incorporated Earnings Conference Call. My name is Stacy, and I'll be your conference operator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, to Mr. Mark Smith, Chief Financial Officer. Please proceed.

Thank you. Good afternoon, and thank you for joining Gevo's first quarter 2012 conference call. I'm Mark Smith, Gevo's CFO. With me today are Pat Gruber, our CEO; Brant DeMuth, our EVP of Strategy and Corporate Development; and Brett Lund, our EVP and General Counsel. Slides for today's presentation can be downloaded from the Webcast and Presentations section of our website at www.gevo.com. Earlier this afternoon, we issued a press release, which outlines the topics that we plan to discuss today. A copy of this release is also available on our website. I would like to remind listeners that this conference call is open to the media and we are providing a simultaneous webcast of the call to the public. A replay of our discussion will be available on our website later today. I want to advise you that this discussion will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These forward-looking statements are made on the basis of current beliefs, expectations and assumptions of the management of Gevo and are subject to significant risks and uncertainty. Investors are cautioned not to place undue reliance on any such forward-looking statements. All such forward-looking statements speak only as of May 1, 2012, and we undertake no obligation to update or revise these statements whether as a result of new information, future events or otherwise. For a discussion of risks and uncertainties that could cause actual results to differ from those expressed in these forward-looking statements, as well as risks relating to the business of Gevo in general, see the risk disclosures in the annual report on Form 10-K for Gevo for the year ended December 31, 2011, and in subsequent reports on Form 10-Q and 8-K and other filings made with the SEC by Gevo. This conference call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G, including EBITDA, adjusted for noncash compensation, contributed by our Gevo development segment. The company believes this information is useful to investors because it provides the basis for measuring the operating performance of the company's business and the company's cash flow. The company's management uses these non-GAAP financial measures along with the most directly comparable GAAP financial measures in evaluating our operating performance and cash flow. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP and non-GAAP financial measures presented by the company may not be comparable to similarly titled amounts reported by other companies. As appropriate, the most directly comparable GAAP financial measures and the information reconciling these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP are included in the earnings release, which is posted on our website. In today's call, Pat will begin with a review of our recent accomplishments and update our progress toward commercialization of isobutanol. Following Pat's presentation, I will review our financial results for the first quarter of 2012. Following the presentation, we will open the call up for questions. Brett and Brant will also be available for the question-and-answer section of today's call. I will now turn the call over to Pat Gruber.

Thank you, everybody, for joining us today. Hard to believe we're this far into the year already. Well, the most important thing is that our Luverne plant is on track. We'll begin the commissioning of it pretty soon, and we expect to start shipping product by the end of the second quarter. Our team has done exceptionally well at keeping this thing on track and it's exciting. Now, to remind you all about startups, anyone who has met me in person knows that I always tell them that startups are difficult, and they always are. Your success depends on your team. I have the best team in the world at doing this. And remember that we thought about this for years. We have the Luverne team. That plant has done exceptionally well throughout the years and so they know how to operate that plant. Add to them our engineers and all the people that we acquired from Cargill and all of our experience of commercializing things and I think we're as good a shape as we could possibly be. It doesn't mean we won't problems, we will, but my team will work through them, and I'm excited to get on with it. It's going to be a lot of fun. Now you can see a picture of our Luverne plant on the presentation from the website. Brett here joked that, "Gee, Pat, we should have closed the building completely because it looks more done." You know what? We'll finish that when we're all -- we'll close it up soon, but that plant is just about ready. Now, changing topics a bit to our commercialization strategy. The next slide is a reminder, really, in that we have verticals that we can operate in, specialty chemicals and gasoline blend stocks. Both of those are targeted for isobutanol itself as a product. Sasol, of course, is the South African company, $38 billion of revenue, and we would take a big contract with them indexed to corn. The value proposition: lower cost, drop-in. Gasoline blend stock itself, Mansfield, Total, we have agreements with those folks. There, it's about cleaner performance, a better blend stock. The other markets where we talked about C4, BioPG, bio-jet, hydrocarbon fuels are all based on butylene. That's a derivative of isobutanol. Dehydrate water away from isobutanol, you make butylene, butenes. You can get all these different products. And you see that for the C4 market, those are the butenes itself, that's a structurally short supply in the future because of the change of -- or because of cheap natural gas liquids displacing oil. The bioPET for Coca-Cola and Toray is about green supply chain, bio-jet for Air Force United Center for Security and next generation biofuels for hydrocarbon fuels. Now this one, of course, in the long run is interesting because that is exactly gasoline, exactly diesel fuel, exactly jet fuel. Same kind of hydrocarbons except for they're made by cleaner processes. Another interesting one that we -- it's very important to us, we'll talk more about it in just a minute, is about value-added proprietary feed. We have a great relationship with Land O' Lakes Purina. Purina is the very best brand in the whole world for animal feed products. Everyone knows the checker board and these guys are very, very, very good. Seven verticals: 2 of them focused on isobutanol, 4 on derivatives of isobutanol, 1 on animal feed. Our strategic partnerships continue to be on track. I've just turned to the next slide now and that is Sasol's ready to go. They're waiting for us to deliver to them our product. LANXESS is committed; Coca-Cola, work is progressing; Air Force is continuing to test our jet fuel that we made at our demonstration plant down at Southampton. The MOU for ethanol capacity is progressing. We feel pretty good about that as we have a lot of interest, particularly now as the ethanol world has changed in terms of what people think is possible. And then with Redfield, we continue on with our engineering. So we continue to plug along and make progress according to plan. We have a couple new things to tell you about. One of them is we've done a letter of intent with VP Racing Fuels. VP Racing Fuels is interesting because, one, they are a world leader in racing fuel technology and blending for specialty markets. But they also already have a distribution network and serve small-engine markets in Kansas. And you see a picture of this on the slide that says, First Quarter Highlights for the VP Racing Fuels. And down on the lower right, you see that they supply ethanol-free 4-cycle fuel, for example. Butanol has great potential in small-engine fuels because it doesn't corrode the engines, it's compatible with the materials of construction and it offers an opportunity for distribution through this channel. We like these guys a lot and we think it has a lot of potential, cutting across motorcycles, snowmobiling, power equipment, personalized watercraft, et cetera. We've also -- turning to the next page, we've expanded our relationship with Land O' Lakes and Purina. We originally did a deal for them to do the marketing of our iDGs. Those are the isobutanol distiller grains. We've recognized we're going to be the first in the world to have distiller grains made from isobutanol. We know -- having come from a cargo background, we understand the importance and appreciate the importance of animal feed products and how to manage those to create value. That's an expertise that comes with agri-processing. So we're a little bit unusual in that we cut across chemicals, fuels and agri-processing. We've also done a joint development agreement to expand the relationship. The purpose of that agreement is to do value-added animal feeds and find out of the best opportunities. We have a great technical group. We're good at biotechnology. It is quite a variety of interesting things that we can do and you'll hear about more about those in the future. One of those things, though, is a technology that is from a company called AmbroZea. We recently acquired their patent portfolio. I'm going to ask Brett Lund, our Chief Counsel, to tell you a little bit about that.

So we acquired a IP portfolio from AmbroZea, as Pat mentioned, and this patent portfolio has very early priority dates on their applications. They have already an issued patent with extremely broad claims around the concept of enhancing the nutritional value in animal feed. So this is an added dimension that we can add to our business model by increasing the value of those animal feed products that we make and improving our bottom line.

So we like that a lot. It's -- already, Land O' Lakes Purina had invested in that company and in that technology. And so it makes for an interesting opportunity for the future. We also had a series of patents issue in this first quarter, so let me highlight these. I recognize that there's BP Butamax people on the phone. So somebody's comments might be directed directly to them. For instance, the GIFT separation patent system is a very important patent. It covers C3 through -- 3-carbon through 6-carbon alcohols. Very broad, it also has claims directed to retrofit ethanol plants and it's kind of interesting. We have a series of patents on how to make isobutanol very effectively and at high yield. It's not the just the pathway that's been known since 1965 and done by many others, it's how do you do that in the whole cell, a whole yeast and get rid of all the unwanted byproducts and make the whole thing work effectively in a reasonable process. That's what the majority of these patents are about; 6 of them issued. We did file patents against these guys for those. We expect more patents to come to the future and our intellectual property portfolio is growing. Do you want to add anything there, Brett?

I think you hit the highlights. So, on those patents that issued, we filed patent infringement lawsuits on 4 of those, including the GIFT patent and those other patents that hijack carbohydrates. And we believe that those patents are strictly required in order to make commercially viable quantities and economically viable isobutanol.

And now we go back over to Mark Smith.

Okay. Thank you, Pat. For the first quarter of 2012, we reported revenue of $14.9 million compared to $15.3 million in Q1 of 2011. The decrease in revenue reported in the first quarter of 2012 was mainly due to lower ethanol pricing in the current quarter. Compared to the fourth quarter of 2011, when we reported revenue of $17.2 million, our ethanol pricing was $0.31 per gallon lower in the first quarter of 2012. Lower ethanol pricing in the quarter resulted in negative gross margin of $138,000 for the first quarter of 2012 compared to a gross margin of $88,000 in the first quarter of 2011. Our gross margin for the fourth quarter of 2011 is $1.7 million. The first quarter has been a challenging quarter for ethanol, especially in light of the expiration of VTEC in December 2011, coupled with low demand. This quarter is a prime example of the ethanol plant performance volatility that we seek to address through our transition to isobutanol and our business model of selling on to longer-term agreements with pricing formulae that take account of feedstock price or feedstock cost. Our first quarter results did benefit from grants and research development rise revenue of $614,000, including revenue from the sale of jet fuel to the U.S. Air Force and revenue under our agreement with Coca-Cola. During the first quarter of 2012, Gevo development, which includes their operations at Luverne, generated a negative EBITDA of $436,000. Since our acquisition of the Luverne plant in September 2010, we have generated positive EBITDA of $5.3 million, including the results of this quarter from its operation as an ethanol plant. This result has contributed significant additional working capital to Gevo before and throughout the retrofit process. Research and development expense increased to $5 million in the first quarter 2012 compared to $3.3 million for the same period in 2011. The increase primarily results from the costs associated with increased biotech and engineering personnel as we prepare for the initial isobutanol production at Luverne in the upcoming second quarter. SG&A expense for the first quarter of 2012 increased to $13.1 million compared to $5.2 million for the same period of 2011. Included in this increase is a onetime charge to severance to the former comanaging directors of Gevo development totaling $3.8 million. This onetime severance amount includes a cash payment of $1.2 million plus a non-related noncash expense of $2.6 million resulting from accelerated vesting of warrants granted to the executive in 2009. These separations were previously announced in February. Also included in the SG&A for Q1 2012 were legal expenses related to our ongoing litigation with Butamax, including costs to prepare for and support the preliminary injunction hearing in March. Within our operating results for the first quarter of 2012 was a total of $4.1 million in noncash stock-based compensation, including the amount accrued as part of the onetime severance item noted earlier. After accounting for interest expense of $1.1 million, we reported a net loss of $19.3 million for the first quarter of 2012. We finished the quarter with $73.6 million of cash on hand. Cash on hand included borrowing an additional $5 million under our debt arrangement with TriplePoint Capital in January 2012, bringing the total borrowed to help with funding the retrofit to $15 million. Looking ahead for the balance of 2012, we are planning for the transition from ethanol production to renewable isobutanol production at the Luverne facility in this second quarter. This is expected to involve a shutdown period of a couple of weeks to complete the tie-in of retrofit equipment and the startup of isobutanol production. As with any plant startup, we anticipate operating at significantly less than full nameplate capacity initially. Throughout the shutdown, we will produce no revenue from ethanol or DDG sales. From the time of the shutdown through delivery of final product, we will not generate revenue from production of isobutanol. This is typical of startup operations, where we will commence initial production, aggregate products for initial shipments and once aggregated and tested to meet specification, deliver product. Projecting plant operations through 2012, which will include ethanol production, shutdown and startup of operations at Luverne and initial isobutanol production is challenging. Based on production -- projected operations for the Luverne facility, we anticipate using $10 million in 2012 to support plant startup and operate -- and working capital needs. As we described last quarter, one of our key measures of progress will be variance from name plate operating capacity at Luverne and we anticipate being able to give guidance on this metric once we transition to isobutanol production. We do project the Luverne facility will exit the year at an annualized production run rate of approximately 10 million to 12 million gallons per year. To be clear, we do anticipate producing renewable isobutanol at Luverne by June 30 of this year, meeting our target for commercial production to start in the first half of 2012. Beyond our Luverne operations, we anticipate non-plant net operating spend to be approximately $40 million for 2012, excluding noncash compensation, depreciation and amortization. As with any development stage company, there will be ebbs and flows in our quarter-to-quarter spend rates. For instance, in the current quarter, we reported severance compensation of approximately $1.2 million and higher than average litigation expense resulting from their preliminary injunction hearing that took place in March. The first quarter is projected to be a higher than average spending period. This projected full year rate of operating expense is consistent with our prior guidance. I will now turn the call back to Pat.

Thank you, Mark. All right then, so what's coming up for us? The most important thing of all is to get that plant started up and all the effort is going to go there over the next couple of months. In July, we anticipate delivering our first isobutanol to Sasol under our contracts with them. That's actually pretty exciting, because it will prove to people that, in fact, it can be done. In August, we'll start to get more specific guidance as to what other milestones to look for throughout the end of the year. By the end of the year, you heard me say before, that we're targeting roughly a 1 million gallon per month production run rate. That's a goal that we have. It forces the whole of the plant and operating system along with the technology against a very firm goal. That's where we want to be. We are continuing the engineering work at Redfield. What I anticipate is we'll get more gallons of capacity than what we originally expected. We have to pin down the exact numbers yet. We're not done with that, but I'll let you know at our next call. We still expect construction to commence later this year and it would take about 12 months for it to come online. Of course, one of the things that I want to do is operate that plant at Luverne, Minnesota enough to see what issues there are, to make sure we don't copy mistakes. That would be stupid. And so what we want to do is make sure that we take as much learning as we possibly can and incorporate it to the design changes for Redfield. Many of you have asked us about where we stand in this preliminary injunction, how come it's taking so long, how come the judge hasn't done anything yet. Good question. It could be any day, hour, minute. I don't know. I've seen a lot of people checking it literally by minute. It could be anytime. We expect to win that injunction and we expect to win it soundly. IP is the foundation of our company. We are a technology company. We will fight forever on technology and we don't mind sharing and having other people in the marketplace. That's not a problem, but we don't like unfairness and we know that, that's all about the stakeholder value in the end. It's the value of our product. Where we stand on these things, of course, is -- there's been lots of back and forth about lawsuits. In fact, people liken it to a tennis match, volleys back and forth over the net. And remember, our friends at Butamax has sued us over basically, one patent with a divisional. Those are the 88, 188, 89 patents. On May 15, they'll have another divisional issue that's been allowed and I expect them to sue us over that one too. We'll invalidate that one just like the others. That's what we'll do. It's the same basic technology that they're talking about and it's the technology described in 1965. It's been genetically engineered by many other people and the patent office agrees with us. It's been -- in fact, those original patent has been rejected by the Patent Office as unpatentable. So that's where we stand. We like where we're at in terms of our business, in terms of our market, in terms of the progress. I look forward to starting this plant up. And with that, we can open up for questions.

[Operator Instructions] Your first question comes from the line of John Quealy with Canaccord Genuity.

Just, Mark, just back to the P&L for a moment, if you would. I just want to make sure I understand some of the expectations that you see for Luverne. The next couple of quarters, as you switch that down in June, is this going to take 3 or 4 weeks to swap it out and shut it down? So we have about 2 months of production out of ethanol or what are we thinking about there?

We haven't given an exact month-to-month or blow-by-blow description, but what we said is that we expect that -- you've got the top there, the process correct. We'll shutdown ethanol production at some point here in the next week or a couple of weeks then we'll go through a process of tying in, which we've described is in a few weeks, and then we will ramp up on isobutanol production. I mean, as you guys know, it's not like switching on a light switch. You don't just sort of jump straight into that 100% run rate. You build that initial production up and that's the sort of the startup process that we've tried to describe for everyone to understand how the flow will work. But it's going to be a -- obviously, Q2 is not about revenue. It's about starting up production at Luverne.

And on the OpEx side, you're talking about an additional stock comp charge that you called out in the release, but you're saying additionally, we should have some extra charges there. How should we think about that moving forward?

No. The start -- what I was trying to call out that there is a significant onetime event in Q1 that was related to a stock charge. When the co-managing directors of Gevo development left the company, there was acceleration of their warrants that they were granted back in 2009. And that amount was $2.8 million, which distorts the 2 Q1 number a bit.

Okay. And then lastly, I'll switch to qualitative questions. With regard to other platforms, the butane, the bio-PET, the bio-jet, et cetera, what are some of the other milestones we should look for as we go through the next 6 to 9 months beyond Luverne in terms of development there? If you could, perhaps, maybe rank them or see what we should have for near-term expectations there?

I think what you should hear are more specifics about what we're doing. For instance, on -- for butenes or the jet fuel or for -- in the PET. All of these, we have to do in a coordinated fashion. We like to try and get things get done, make sure we can deliver on the milestones. Remember, our capacity for our Luverne plant is sucked up by Sasol and the Mansfield agreements. We don't have lots of extra capacity. And so we will be mostly quiet on these other milestones. They'll be the normal business development type of things, strengthen the relationships type of things. But we aren't going to have some giant blockbuster, that would be an unrealistic expectation. We have to go ahead and build demand in a controlled way to make sure that this market develops properly.

John, it's Brant. So for example, on the Air Force testing, that will continue through the year. The milestones will be announced as we get through successful testing of the jet and if we get a chance to fly in an airplane this year, we'll announce that as well.

And you'll see other things. I mean, there's other strategic interest in us and, of course, if and when that happens, we'd announce it.

Your next question comes from the line of Ben Kallo with Robert W. Baird.

First, Mark, you mentioned $10 million of startup fees or costs. How do we flow that through the P&L or does it flow through the P&L?

Essentially, it's meant to be there was -- we will not -- I'm trying to describe that we will not generate a positive earnings out of our plant operations while we go through the thrust of Q1, which was obviously a tough quarter for every ethanol plant. And then the transition out of ethanol to isobutanol when we won't be doing any production for a couple weeks and then building up to isobutanol to the ramp rate I described. I'm trying to describe like a planned EBITDA number of about $10 million.

Got it. And then, Pat...

Negative, just to be clear.

Right, right. And in your discussions, I mean, have your discussions heated up because of the tough ethanol environment or are you just focused completely on Luverne right now?

We're primarily focused on Luverne, although we have lots of interests. And oddly enough, it's not from just here, it's around the world. And so we have to go out and have those discussions. The ethanol industry is in tough shape. And I don't see any relief for it anytime soon. So I hope it doesn't get any worse, actually. We don't need that.

Okay. And my last question, could you just remind us if the Sasol agreement has any sort of time frames around production? I know it's take or pay, but do you have to deliver on certain schedules or are there penalties around that? Can you just remind us about that?

No, we don't have penalties like that. It is a real take or pay. It has a trigger date and they're a great partner and they understand startups. They've been through them. They think that we have a very realistic view of the world and that startups are lumpy sometimes. And so, they work with us until we say it's a go and now we're off running on take or pay.

Just to clarify the Sasol. So we control -- Gevo controls the trigger date of when we need to deliver product.

Right, but I was being polite in saying it's because they're a very good customer, partner, friend of ours, that we don't just decide stuff without them.

Your next question comes from the line of Tim Arcuri with Citi.

It's Seth on for Tim. I was wondering if you could give us any update in terms of the next capital raise. I believe you guys have a registration statement that's kind of in the works and any timing you could give there?

No more guidance than what we've already done before. I think it's been pretty clear that it would be sometime here soon and that's really all I can say about it. The market conditions look nice, though, I got to tell you. We're -- I think it was record high in the Dow today, right?

I think so.

Yes. So we just -- what we need to do is get the preliminary injunction decision behind us. It'll be a win in our favor. That would be good, and then we'll go from there and decide.

Great. Could you also maybe talk about the opportunity here for -- with the Department of Defense and some of the requirements, or the requests for deliveries that are going to be putting out for jet?

You know what? We were involved in the industry effort to put the funding back in for that program. And I think that there's quite a lot of industry support. There's pretty good governmental support -- I mean, the legislator -- legislative support. So I think that's going to help things. But the government doesn't move fast ever. So I think it's got -- we got to take it and see what happens in the near future. They just put some of the funding back in one of the bills like 2 days ago. So we'll see. It's -- we'll see what happens.

Your next question comes from the line of Brian Gamble with Simmons & Company.

The -- I know you don't want to get too specific on the ramp-up, but are we to assume that there are milestones that would be lumpier as we go from July into December, or is it more of a linear ramp as you guys have it planned?

Do you know what? I've never done a start-up in my life, and I've done a lot, where it's been linear. And usually what happens is you start up the plant, and it has -- you start it up in a such a way just to make sure you know what you got and what's broken or what wasn't put in right. For example, maybe a pump -- I've seen pumps wired backwards and crazy things. We also worry about infections. This is the enemy of these plants, is an infection. So you these are living systems, and I have seen infections take over a plant, and then it's a lot of work to get rid of them. So you start up very, very carefully, making sure that you understand what's going on. You monitor for infections. The common way to get infections, for instance, is you wind up with some pipe that has sloped the wrong way. So there's over a period of weeks something starts growing in it that you don't want, and then it gets flushed into your fermentation system at some point and pollutes it. Those are the kind of things you worry about. The only way we can deal with them is by going ahead and running the plant. When that happens, though, then you're going to shut it down and fix the pipes and re-slope them. That's a typical thing to occur. So we don't plan it as linear at all. And in the fact, the goal we're focused on is this end-of-the-year goal. That's one that matters to me the most -- is making sure that this plant is on a track that I can predict.

Great. And then, on the expectation from the injunction judgment, has there been any communication there at all, or is it just -- well, the date was supposed to be around the end of April, and you haven't heard anything yet? I mean is it as simple as that?

We'll ask Brett here.

Yes. So this judge is particularly busy. She is one of the most prolific judges in the Delaware courts. She has a really high caseload. She told us that she would try and get it to us by the end of the month. But obviously, her caseload was such that she couldn't do it. So that's why we're expecting it any day or any minute.

Your next question comes from the line of Mike Ritzenthaler with Piper Jaffray.

Quick question. On Redfield just really briefly, if the construction has gone up -- is scheduled to kind of start later this year. Have any long-lead equipment purchases been made? Or maybe just give us a little bit more on the construction timeline. I know that we're still pretty early in that process. But I think it would be interesting to get a little bit more color on where the equipment design is and that type of thing.

We wouldn't have to buy equipment until the first quarter of next year. There's nothing that we have that's exotic or crazy materials or construction or any of those kind of things. It's all pretty simple equipment. And it doesn't take that long to get it built and up and installed, as you know from watching this last one we did, which had extra equipment in it.

Yes, right. And then, can you just remind us where we are on the interparty talks with the re-exams, kind of the timing around that? I mean, you mentioned it a little bit in your script. But just kind of remind us where that is and in terms of the timing and that type of thing.

Well, maybe we should do this. I'll just -- I'm going to ask Brett then to -- why don't you just give us a summary of where we are on the re-exams, because it does get confusing for all of us on who's, what, where, how, right?

Yes. So the 2 patents in question are the 188 patent and the 889 patent. The 889 patent is a divisional or the child application of the 188 patent. We filed for re-examination on those patents. The 889 patent re-exam was granted straightaway on all of the claims that we challenged. When the USPTO granted re-examination, they simultaneously issued the first office action, and that first office action rejected and declared as unpatentable all of the claims that we challenged. The 889 patent, we -- or, sorry, the 188 patent, we filed for re-examination on that one. The USPTO felt that there wasn't enough information, and that the arguments weren't presented in the way that they would have liked to have granted it. So what we did is we filed an appeal...

Sorry -- what he meant to say was the first time we missed. We swung and we missed, and the exam -- the re-exam guy said, "Nice try. Not persuasive enough." That's actually what Brett just said. And so, we added more art, more documents. This stuff, remember, has been the literature for so many years, and there's so much stuff out there it's beyond comprehension that anyone could think that in fact they could claim it as their own, okay? There's my two cents.

Perfect. So we filed an appeal, and we also simultaneous -- or just after that, we filed a second re-exam request on it. And the examiner who rejected the first one and then also granted re-exam on the 889-patent is the same examiner who's handling all of this. And so, this examiner granted our second re-exam request and, at the same time, dismissed the appeal because there's really no need for the appeal once it's already in re-exam. So the long and the short of it is both patents are in re-exam. All of the claims that we challenged on both patents are all in re-exam, and office actions were issued immediately rejecting and declaring as unpatentable all of those claims. So what that means now is that Butamax, in essence, has to start from scratch and go back and try and persuade the Patent Office that they should have granted those patents. The problem is now they have to consider all of the prior art that we submitted that we believe Butamax should have submitted when they first issued the patent. So when you apply for a patent, there's a duty on the applicant to submit all of the prior art, because you can only get a patent if you're the first one to invent something. We felt there was a lot of prior art, which Butamax failed to submit. We submitted that. And now, going forward, Butamax will have to argue that they should get those patents, which will be difficult for them in light of prior art that we submitted going back to the 1960s, demonstrating their pathway, which they had claimed as their own. And now, this time, in addition to having to consider all the prior art, Gevo will be a participant to this examination process. And so, we'll get to be a party at it and tell the USPTO what we think, and what we've seen out there in the prior art to make sure that all the sides are heard. So this process will take a while. And I think your question was really around timing. So right now, the ball is in Butamax's court to try and persuade the patent office otherwise. But it's a lengthy process. It will probably take a couple of years.

Your next question comes from the line of James Medvedeff with Cowen and Company.

I'm just wondering, would you characterize your MoU pipeline as being more full than it was previously, with ethanol being in such a bad state?

Well, Jim. So, relative term, I guess, we're still in communication and discussions with over 1 billion gallons of ethanol capacity. So to characterize it as more full, probably, I would say that the conversations have picked up in urgency given how distressed the ethanol markets have been from the last quarter.

Right. And remember, the overall game here is to, one, we got to prove to everybody Luverne works and prove to ourselves too. I mean, it should work, we know it. We piloted the demo plant. It will make it happen for real. Get the stuff into the marketplace, and then we got to get the Redfield plant up. Then it's game on as to how big we grow and where we grow and all the rest. And so, we have lots of interest. Signing up companies with these superficial LOIs or superficial stuff, that doesn't do it for us. We try to avoid that. We like definitive agreements and make things real. And the way you do good businesses is you have a technology that you know works, robust growing market and then, it's actually easy to extract the value that's appropriate.

Yes. If you're going to exit this year on track with the 1 million gallons per month kind of run rate, I guess, that would mean we'll also enter next year kind of at that rate. When do you think you'll be -- when do you expect to win -- internally, when do you plan to be up to the full 18 or maybe slightly higher than that run rate?

I think that what I would hope and -- I think, the truth is, I don't know it until I know what problems we have and what I have to solve. I don't know for sure. What I would expect and what would hope for is that within about 12 months, we should be at the nameplate -- the original nameplate capacity and know what's the trajectory is to move it upward. And that is a pretty normal expectation. Even a brand -- even an ethanol plant that's a cookie-cutter me-too kind of a plant, takes like 12 months to get figured out for its little nuances. So it's in that kind of a time frame. What I tell people who ask me is don't bother me with the economic details until about 9 to 12 months from now, after we start up, because I got problems to solve, and I'm going to solve them. I've got a great team. And then we can start talking about optimizing the business system in the plants.

Okay. Go ahead.

That's it.

Okay. And on the JDA with Land O'Lakes, what do you realistically think you can increase? How much value do you think -- do you hope to be able to increase a pound of DDGs?

So we haven't guided to that. And obviously, that's part of the R&D effort to define that. But just to give you some sensitivity, if we can move the value of the DDG up by about 10%, that adds about $0.09 of EBITDA per gallon of isobutanol, to give you kind of rough sensitivity.

Okay. And just finally, how much did you pay for that -- for those patents? And is that in SG&A this quarter, or where does that show up?

We have not disclosed that, Jim.

And it's not going to be in SG&A.

Yes, it's an asset. Totally, it's an asset.

Your next question comes from the line of Colin Rusch with ThinkEquity.

It's Noah in for Colin. Just a clarification question first. Pat, I think you're saying around 12 months think about trying to be at normal nameplate capacity. Does that refer to the ethanol nameplate capacity?

No...

The 22 million gallons?

No. It would be 18 million gallons for the butanol.

Okay. Great. Yes, just clarifying that. Second -- I mean, as you get closer to this, can you take us a little bit through some the key mechanics to separate out construction from testing, subsystems you got to test, any last permitting? And I guess, as a part of that, should we expect that some kind of announcement after, say, a first successful batch that you're satisfied with?

Well, the real milestone that we're shooting for is, and this, honestly, is the absolute milestone that our bonuses are tied to and how you provide clarity. I want rail cars full of isobutanol and shipped to Sasol by July 1, 2 of them at least. And that's the real goal that we have internally, and that's where we're focused. Of course, whether it really is a couple of weeks, it doesn't matter so much. The fact is getting enough butanol through that plant that it's material quantity that we can take and meet the spec that we can ship off is what matters because that's the only way we're going to really determine what goes on. So, that's the thing we truly are managing to. Now walking away, I was told today that some of the -- I think ST, or what's the term, Brant?

Mechanical completion.

Mechanical completion. We don't -- in my career at Cargill, where we'd done so many plants, we never used that one ever. So I'm like unfamiliar with it, maybe it's used in other industries. We do commissioning -- begin the commissioning of plants, meaning, the -- starts to put water through it and do the testing, and then we'll get on with the fermentation and batching. Nothing counts, though, until product is in the rail cars, I got to tell you. So for us, we'll probably -- I'll probably say something publicly once we're into the commissioning.

Your next question comes from the line of Michael Klein with Sidoti & Company.

On the R&D effort, what are the expectations going forward, I guess, for the rest of the year and, kind of, as we ramp up? Should we expect it to stay at similar levels, or is spending going to pick up for some of these other initiatives?

No. We'll stay pretty -- it might be incremental. It depends upon what problems we run into, but it's going to be roughly at this level for a while. And that's, I guess, the answer, really. It's about -- the focus is going to be all about improving the bug performance at the Luverne plant, figuring out what new opportunities for improvement there are, sorting out whatever issues there are, et cetera.

Okay. And just one quick follow-up on that. Have you guys begun to really focus on cellulosics, or is that more of a 2013-and-beyond effort?

Of our own resources deployed, that would be more of a next year type of a thing. And remember, Cargill is already working on it for us.

Right. Okay. And any update on LANXESS and the Southeast Asia opportunity?

Nothing that we're prepared to talk about. Hopefully, we'll have enough progress and results by the next conference call. I like that area of the world a lot.

Right. Okay. And kind of -- as we wait for Luverne to come on before construction really starts to get spent or starts to occur at Redfield, I guess, in terms of the learning opportunity, is it more of -- or how much -- is it kind of the engineering phase that we're in now? Or how much do you expect to learn once the plant is up and running? I guess, the time -- where these learning processes are going to come before construction really starts to happen at Redfield?

Well, the first one, remember, is that the first thing that we're still sorting out is where the bottlenecks are for these plants. We are under the same constraints of an ethanol plant in how it's run in terms of how much -- in their case, they're running the toxicity issue of ethanol in that the basically, the bugs get drunk at a certain concentration. They can't produce anymore, right? And one of the historical problems with butanol is that you can only get to make very small amounts of butanol before the bugs get, well, poisonously drunk, right? Our GIFT separation system removes the butanol as it's formed. That's a big deal because that removes that constraint as to how much throughput a plant can do. That's why we made our GIFT system bigger at our Luverne plant. That's one of the reasons. And we've got to figure out where the rest of the bottlenecks are and get some good mass balance-energy balance data on a real system and sort that out. We can then translate it over into the Redfield operation. So when we talk about being able to produce more at a place like Redfield is because we know we're not under the same constraints. And so, it's that detail we're working through. We're already going through that Redfield plant and figuring out is it electricity, is it water, is it steam, is it grind, is it a pump here, a pump there or whatever. We're doing those things already.

Your next question comes from line of Mahavir Sanghavi with UBS.

Just -- most of my questions have been answered. Just one 2-part question. Can you give us some color on the kind of discussions you're having with your existing and new customers around the impact of low natural gas prices on their existing feedstock? And then the second part, are there any incremental opportunities arising from this that was thought of as not so meaningful before and that have become more meaningful?

Yes. It's interesting. Okay. So natural gas prices -- so the background, for everybody listening on the call, is that natural gas prices are low, natural gas liquids are lower priced. Low natural gas liquids are being switched into crackers in displacing oil. When that happens, less C -- less 3-carbon and 4-carbon building blocks, the propylenes and butenes, are produced. Now as that -- the long-term projections that most everybody has, the natural gas liquids are going to be low priced for the long run. We're starting to see that in Asia as well, which means that there's going to be structurally short C3s and C4 opportunities. This creates opportunities for any of us who are doing the basic C4 opportunities or even for C3s. Because, remember, you can get the C3s by doing -- one of the ways that's being the fastest-growing method for making propylene right now is to take a butene plus an ethylene, you put them together and do what's called metathesis and it splits them apart. So you make 6 carbons to get -- start with 4, add 2, you got 6, break in 2, and now you got 2 3s. That's how that works, okay? So that technology's already being commercialized, so you can make a partially renewable propylene. So those are the kind of opportunities that are out there that are interesting and as the world continues to change. We also have -- the fundamental view is that most of the people downstream of us think that the economy in the world is going to grow still, particularly driven by Asia. That's the view of the world, which means that material demands -- actual, real demand for material is going to continue to grow double. Even Coca-Cola predicts that their demand for PET is going to be in that same kind of a range over the next 5 years to 10 years. It will be doubling. So all of that makes it for a very interesting marketplace to have these fundamental building blocks. All of it -- all the opportunities that we have, all of them are driven by this spread between the renewable resource base, the carbohydrate against the oil. And so, as that spread continues to increase over time, the better it is for us. And our products don't get displaced by that cheap natural gas liquids, it presents more opportunities. For example, isobutanol has very excellent properties as a blend stock. It has a low vapor pressure, meaning the rate it evaporates, which means that you can mix it with something that evaporates more, like natural gas liquids, and you can make a gasoline of it. There will be opportunities along those lines as well that are interesting for us.

At a more granular level, there -- it also helps on the OpEx side because feedstock represents approximately 80% of your OpEx. But natural gas is the second most important for those plants, and they're operated with natural gas as a feed. So...

Yes. Basically, it's an odd thing, but cheap natural gas -- cheap natural gas liquids helps us on every front. It creates opportunities in the marketplace. It creates opportunities in the business system.

[Operator Instructions] Your next question comes from the line of Pavel Molchanov with Raymond James.

Two quick ones. One is, you've mentioned in the past that your target gross margin is $0.50 to $0.80 per gallon. Is it fair to say that any work that you do with Purina on the co-product side is going to provide upside to that range?

Correct.

Okay. And I think you mentioned earlier that you're not ready at this point to talk about kind of quantitatively, but any sense of how much upside might there be to that $0.50 to $0.80?

Well, let me say this. We have the economics that we've given you so far use the assumption that the animal feed value is about 75% of the value for the corn. That's what our own internal model show, and that's what we've guided to.

And so, the sensitivity I gave was -- the delta on a 10% change of that. So going from like $0.75 to $0.85 would give you about $0.09 to $0.10 of EBITDA additional value.

And what was the animal feed value for the good-quality animal feeds?

In Luverne, we have reached in the high $0.70 -- $0.75.

And at Redfield?

At Redfield, last fall, it was running over 100%.

And that's about managing quality, having a good supply chain to the marketplace. So there's upside here, and the very significant value can be added over time. It's not that many business systems exist. We have a highly instrumented plant. Remember what was done at Luverne. We had spent a bunch more capital than just the standard retrofit. This is about making sure the thing works right, and then we have, we've encompassed -- or try to think of anything to go wrong, but it's heavily instrumented more or so than probably any ethanol plant that I've ever -- well, it's for sure, anything that I've ever seen. But it -- that's unusual. So we can try new things there, and it's a great proving ground. And there aren't that many places that can go get this work done. That's why Purina finds us interesting.

Okay. And then on the Coca-Cola relationship, you obviously signed a deal last December. Has the timing of events been progressing along the lines of which you expected at the beginning, or is it a little slower or a little faster? And when might we expect then an offtake to emerge from this?

Yes, it's progressing as we expected. There's been no surprises one way or the other. It keeps plugging along. In terms of the offtake agreements, I'm not sure of the timing of that yet. We have to decide that with them. And the challenge in doing PET is that it's a long supply chain, and the plants that actually make the raw materials for the PET are immense. So we have to figure out how to skin that cat. Do we set up a specialty system outside of it? There are some opportunities to do that. There are some technologies that can simplify how it's done. We have to sort it all out. The easy thing to do would be to wait -- the easiest thing to do is to sit and wait and just do it at a really large scale when we have enough isobutanol capacity. But that's not much fun because that takes more time, and Coca-Cola wants to be the leader in causing the plant bottles to go 100%.

Your next question comes from the line of Patrick Jobin with Crédit Suisse.

So, Pat, on the capacity front, I believe, in the past, you've mentioned some exciting opportunities you saw at Redfield to increase capital efficiency. Any additional thoughts on that? And maybe trying to quantify some of that upside, would that benefit margins, or is that more on the capital efficiency side?

More on capacity side for what we spend versus what we get out of it would be the way to think of it. So one of the things that has -- is different from when we first did the IPO was that I thought I had 3 plants to get the cash flow breakeven and to keep a substantial R&D spend. Now I think I can get it done out of 2 plants, out of Luverne and out of Redfield. I can get enough gallons and enough margin to make enough money to become a breakeven company and have a very substantial R&D group and be defending our intellectual property.

Got it. And then, Pat, I guess, on -- you made an interesting comment about some of the interest you're seeing around the world. Any additional color there? Is that on the kind of supply side, or is that more offtake side given the structural shortage in C3s and C4s?

Interestingly enough, it's been both. And people recognize that there is that renewable resource base products are going to happen. The story that we tell really is about cleaner, greener, cheaper. And what I mean by that is we know our resource base. We don't have all the side products, co-products and toxic stuff that comes in with a barrel of oil. We don't have that. It's much more simplified. Renewable resource base stuff we have to grow. There are certain regions of the world outside the U.S. that have great potential, but it's relatively unorganized. And so, people recognize that this is what the future holds. Already, we're at the cusp of being cost competitive directly with petrochemical-based products or even cheaper in some market segments. So I think we're at the very beginning of those kinds of opportunities, and people recognize that this change is going to continue to occur. Now everyone that we talk to believes that oil is going to go up in price over the long run, even though there's pockets that they can find, even though they can find it will level off for a period of time. I think I've met 1 person out of, I don't know, several hundred, who think it's going to go down.

That was a portfolio manager.

Yes, yes. One out of several hundred. Everybody thinks it's going to go up over the long run. And on the carbohydrate side, there will be more and more opportunities to grow products. We're talking with a company yesterday who's outstanding in agriculture, and they're showing us some projections about what crop yields are going to do over the next decade. And it's amazing what can be done when there's focus and value to be created. Throw that in, with all the cellulosic technologies that are coming to bear, so what will happen is that we'll see a bigger spread between oil and carbohydrate and that will enable more and more market opportunities. People recognize that.

And at this time, I'd like turn the call back over to Mr. Pat Gruber for closing remarks.

Well, I think that's it. Thank you all for paying attention to us. We tried to keep it shorter. We beat Mark up after the last time. He read the half-hour disclaimer, and we're good to go today.

Thank you.

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.