Welcome to Gevo's second quarter 2021 earnings conference call. My name is Liz, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will be conducting a question- and- answer session. Please note that this conference is being recorded. I will now turn the call over to Geoffrey Williams, Gevo's Vice President, General Counsel, and Secretary. Please go ahead, Mr. Williams.
Good afternoon, everyone, and thank you for joining Gevo's second quarter 2021 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 Chief Accounting Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss. A copy of this press release is available on our website at 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 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 earlier today, 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 Net-Zero 1 project and our operating activities for the remainder of 2021 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, 2020, that was filed with the U.S. Securities and Exchange Commission, and in our 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, Patrick will begin with the discussion of Gevo's business developments. Carolyn will then review Gevo's financial results for the second quarter of 2021. Following the presentation, we'll open up the call for questions.
I'll now turn the call over to Patrick Gruber. Patrick?
Thanks, Geoffrey. Today, I'm pleased to be able to report an update on our engineering work and financial projections for Net-Zero 1. The results are good. We are on track to complete the next phase of engineering work, the next iteration, if you will, by the end of December this year. This next iteration will tighten up the capital estimates further. This is all in preparation for the debt deal getting done in the first half of 2022. Hydrocarbon capacity is sold out. It's oversubscribed based upon our take-or-pay contracts already in place. This is very good. We did decide to change the scope of Net-Zero 1 a little bit because we figured out how to potentially make more money sooner.
We have added capacity for increased amounts of isobutanol, about 44 million pounds per year, which we plan on selling as a specialty chemical. In addition, we are planning to increase our production of nutritional products like protein and animal feed by 40 million pounds. That brings us to a total of 340 million pounds of those products. We plan on making 46 million gallons per year of hydrocarbons rather than 45, and we still expect to produce about 30 million pounds of corn oil. Now, as a result of that changed scope, and with updated pricing assumptions based upon the pricing in our existing contracts, the Net-Zero 1 project revenue is currently projected to be approximately $340 million-$350 million per year.
This includes the hydrocarbon products, the carbon values, the nutritional product value, the corn oil value, and the revenue from IBA that we expect to produce in excess of what is needed for the feedstock for the hydrocarbon capacity. The really good part is that the current projected EBITDA for the Net-Zero 1 project is approximately $150 million-$160 million per year. That's an increase of approximately $50 million-$60 million compared to what we had previously discussed or previously had told investors. That's really good news. The current projected levered IRR to Gevo is approximately 18%-20% and includes all the revenue streams, and that's the distributive cash, the O&M fees, and all the rest.
The distributed cash to Gevo from the Net-Zero 1 project after debt service and major maintenance is currently projected to be approximately $80 million-$90 million once the plant is up at steady state, and that's based upon an assumed 65% debt load. The capital cost projection is currently expected to be approximately $720 million for equipment and build-out. Those are the installed hard costs.
On a fully financed, fully installed basis, fully deployed, and paying for all the provisional interest during construction, debt reserves, and all the rest, that brings it up to a total of $980 million. Included in these costs are the increased capacity for the hydrocarbon and this additional capital for more IBA capacity to serve the specialty markets, infrastructure to facilitate an easier capacity expansion, and then adoption of certain unit operations to facilitate greenhouse gas reduction more efficiently, and then of course, the increased cost of steel and equipment based on the latest data in the market. Wastewater treatment and onsite biogas production are currently planned to be a separate project with separate funding, and anticipated cost of capital commensurate with infrastructure returns using a third-party build-own-operate model. Onsite biogas production is expected to meet the thermal demand for the plant.
It may be that we choose to finance the water treatment plant. That is a future decision. A separate but related wind power project is being developed to meet the majority of the Net-Zero 1 electricity demand. The wind project would be wired directly to Net-Zero 1. The wind project would be a separate project with separate funding. Again, anticipated lower cost of capital using a build-own-operate model. We also plan on making green hydrogen. Current scope of CapEx includes the capacity of hydrogen we need for our products. We are still determining if and how much excess to make for the marketplace and the corresponding economic benefit to Gevo. Now, we know the world wants green hydrogen. Since we are developing the capability to make it, we are working to figure out the best ways to make excess quantities and take it to market.
I'm extremely pleased with these results. We are continuing to optimize and try to figure out ways to bring more cash and profit back to Gevo sooner while reducing risk in our operations and business systems as we get Net-Zero 1 operational. For more information, please see our updated investor presentation that is available on our website at www.gevo.com. We are also planning to do a fireside chat on Wednesday, August 18 at 4:00 P.M. Eastern Daylight Time with Chris Ryan, our President and COO, and Lynn Smull, our CFO, who will together take questions and discuss the Net-Zero 1 project and give a little more detail as to what's going on there and how we're thinking about it. Please join Chris and Lynn if you can. We expect to be announcing the location and customers for our second Net-Zero project in the near future.
Our discussions with potential customers have shifted. They are much larger. You'll see that in the updated deck in looking at it. The customer pipeline is now approaching about $20 billion of contracts in discussion. That's quite something. We are working out then how to figure out how to grow capacity much faster so we can achieve many hundreds of millions of gallons of production and sales within five years. There are a lot of moving parts. The game has changed. It's bigger and faster. That's what we're driving for. That's what I'm driving my team for at Gevo to achieve. Switching gears to RNG, I am pleased to report that our RNG project is on track in terms of construction. We expect it to start up on time and begin producing gas early next year.
I'm pleased to work with BP to sell the RNG that'll be produced. On Monday of next week, we expect to publish our first ESG report on our website. This ESG report is, I think, well done. In it, you will see our thinking, and if you invest in us, please read it. Overall, we had excellent quarter, and we continue to make progress on our goals for this year. Now I will turn the call over to Carolyn, who will take us through the financials. Carolyn?
Thank you, Patrick. Gevo reported revenue in the second quarter of 2021 of $0.4 million as compared to $1 million in the same period in 2020. During the second quarter of 2021, hydrocarbon revenue was $0.3 million compared with $0.9 million in the same period in 2020. Hydrocarbon sales decreased because of lower production volumes at the South Hampton Resources facility in Silsbee, Texas. During the second quarter of 2020, no revenue was derived at the Luverne facility from ethanol sales and related products, compared to $0.1 million during the same period in 2020. As a result of an unfavorable commodity market during the three months ended March 31, 2020, we terminated our production of ethanol and disposed grains, which resulted in no sales for the period. Cost of goods sold was $2.8 million in the second quarter of 2021 versus $2.6 million in the same period in 2020.
We increased maintenance in preparation for isobutanol production that began in July 2021. Cost of goods sold included approximately $1.6 million associated with the maintenance of the Luverne facility and approximately $1.2 million in depreciation expense. Gross loss was $2.4 million for the second quarter of 2021 versus $1.7 million for the second quarter of 2020. Research and development expense increased by $0.7 million during the second quarter of 2021 compared with the same period in 2020, due primarily to an increase in personnel and consulting expenses as we work to improve our process for growing and fermenting yeast strains.
Selling, general, and administrative expense increased by $2.1 million during the second quarter of 2021 compared with the same period in 2020, due primarily to increases in personnel, professional fees, and insurance to support the growth in our operations, and an increase in consulting related to creating our first environmental social governance report in documenting our compliance with Section 404 of the Sarbanes-Oxley Act. Preliminary stage project costs increased by $5.3 million during the three months ended June 30, 2021, compared with the same period in 2020 due primarily to an increase in consulting for preliminary engineering costs and personnel expenses to support the growth in business activity at our Net-Zero projects. As a result of the business activities noted above, during the second quarter 2021, we reported a loss from operations of $19.0 million compared to $5.3 million for the same period in 2020.
In the second quarter of 2021, cash EBITDA loss, a non-GAAP measure that is calculated by adding back depreciation and non-cash stock-based compensation to GAAP loss from operations, was $17.1 million, compared to $3.1 million in the same quarter of 2020. Interest expense in the three months ended June 30, 2021 was $6,000, a decrease of $0.5 million as compared to the same period in 2020 due to the conversion of all of our 12% convertible senior secured notes due 2021 to common stock during 2020. As a result of the business activities noted above, during the second quarter 2021, we reported a net loss of $18.3 million, or a loss of $0.09 per share, based on a weighted average shares outstanding of 198,137,420.
This compares to a loss of $6 million in the second quarter 2020, or a loss of $0.40 per share, based on weighted average shares outstanding of 15,071,105. In the second quarter of 2021, Gevo recognized net non-cash gain totaling $43,000 due to the changes in fair value of certain of our financial instruments, such as warrants and embedded derivatives. Adding back these non-cash losses resulted in a non-GAAP adjusted net loss of $18.3 million in the second quarter of 2020, or a non-GAAP adjusted net loss per share of $0.09. This compares to a non-GAAP adjusted net loss of $5.8 million in the second quarter of 2020, or a non-GAAP adjusted net loss per share of $0.39. I'll turn it back over to Patrick to wrap things up.
Thanks, Carolyn. We're looking forward to this. We have a lot of exciting things coming, and we are fired up. Our engineering work whenever you do these things, it's an enormous quantity of work that we're cramming into a small period of time, given that we just got the money to do these things at the beginning of 2021. We're making great progress, and the engineering results really are good. I like having our EBITDA go up. That's exciting, and I certainly like the way our pipeline is growing, and I know everybody wants us to get more contracts signed faster. You know, these are really big. That's what they look like. We're excited, looking forward to it. With that, we'll take questions.
If you would like to asked a question at this time, please press star and then number one of your touchtone telephone keypad. To withdraw your question press the pound key. Again that is star one if you would like to asked a question at this time. Our first question comes from the line of Sameer Joshi with H.C. Wainwright.
Good afternoon, Patrick, Carolyn. Thanks for taking my questions.
Sure.
With this increased scope to 46 million gallons per year, how does that impact or affect the subsequent Net-Zero projects that you will do? Will those be of the larger size as well, and what is the plan going forward?
Let me comment first to just say that one thing We just put up and published on our investor presentation on our website all the stuff that I just said out loud, so you can see it written down, and so it makes it much easier. To answer your question specifically is, we think about it as that we've done the work and the engineering for this, or in the process of it, for this Net-Zero 1. We could translate that directly into making a similar-sized plant. Think of it as a copy of Net-Zero 1. That's the incumbent paradigm. However, we've got people we're working with who are challenging us to think much bigger. We're asking ourselves that question as to how to go about doing that.
It's a very simple path to just simply copy Net-Zero 1, right? That's the incumbent hypothesis, and it makes sense because the demand is so much greater than the product supply. We're asking things like, well, why not a 100 million gallon plant? How can we go bigger? How can you achieve 500 million, 700 million gallons in five years? That's the kind of stuff we're trying to address. Of course, there's a whole bunch of chicken and eggs here because, all right, people, who actually is going to buy this exactly and when? What are you going to do? Yes, we can do it. It's technically possible. It's just a matter of capital. It's getting to be quite interesting for us right now. There's definitely a shift that has occurred in the last several months.
Yeah. No, that was the reason for the call that instead of 46 million gallons, what if you would be able to do bigger, if the industry demands it?
Yeah, we can. There's no limit. What we're doing right now is we took what we had, and we're trying to stay with something we already had well-defined, and we're trying to optimize the returns and capital. I noted that in our models, they project that the EBITDA has increased from about $100 million a year that you and I previously talked about. That's pretty good. That's like a freaking 50% increase from optimizing. I think we should spend some money on optimizing.
It's exciting, certainly.
That was a better result than I ever expected from our people. Well done.
Yes.
There's still so many variables and stuff. Everybody always asks me, "Well, what happens if corn stays high forever?" You know what? We've got enough economics to work with, and we have additional things that we can do with the technology, where we feel pretty comfortable that we're in a good spot in terms of what we're projecting. Yeah, the details are going to move around a little bit in terms of specific IRRs, but overall, we feel we got a handle on it with incredible speed, I think.
Yeah. Just one more clarification on Net Zero. The green hydrogen that is going to be produced is part of the $720 million-$980 million CapEx. For the excess that you're planning to or may produce, is there any additional CapEx incremental to this $980 million?
Yeah. On the $980 million, right now, if you're going to compare us to other projects, it'd be $720 million is the number to use to compare us to other people. Once it's financed and installed and you do the prepaid accounts and all the other crap that goes with project financing, that I really don't like, by the way. You add all that up, now you get to $980 million. In addition to the $720 million, would it take additional capital if we want to make a whole lot more hydrogen? The answer is yes. The game plan for us is to figure out who actually wants to buy hydrogen, where, what, does it make sense, and just do the calculation. If it makes economic sense, it can get equivalent returns or better.
If it has attractive returns, 18%-20% or better or something, then we'd say, "Hmm, that might be a worthy use of our capital. That's how we think about it.
Yeah. No, thanks for that clarification. Moving to the RNG, the 355,000 MMBtu plus capacity, is that all going to be taken by BP for the recent press release? Just wanted to clarify that.
It is. We're going to send it down the pipeline to California because that's how you maximize value. That's attractive, and we could later on take gas up to Luverne, which we do. We are running it again. We could take it up there as we expand Luverne and make it into a hydrocarbon plant or up to Net-Zero 1. Right now, the way you make the most money is just send it to California through BP.
Right. This next question probably has been asked before, but just wanted to understand. The preliminary stage project costs are being expensed as against capitalized. That is because they're not associated with a particular project, but it is just pre to the project. Is that correct?
I was going to say, there's some that we capitalize and some that we don't.
Right.
Carolyn can explain.
Right. The RNG related costs are being capitalized effective with the second quarter. That's because we got the financing and we're able to move forward with the project. The costs related to Net Zero are being expensed until we get past all of the FEL3.
Okay. There could be some in the future.
Yeah. It will be when we get to near the closings and stuff is what she's talking about. Shorthanding, though, for some of the folk is to call it FEL3, but FEL3 is not well understood by a broad group.
No.
When we get down to that plus or minus 10% level and say, "We're going to do the financing now, here it is," that's the time when the stuff will be capitalized. There will be a look back as well, because we are keeping track of our expenses and putting them into buckets in a very onerous process of tracking all of our time. Carolyn makes us do it. Lynn makes us do it.
No, this is good. Okay. Thanks. That's all I have right now. Congratulations on the progress and good luck.
Thanks.
As a reminder, that is star, then one to ask a question. Our next question comes from Poe Fratt with Noble Capital Markets.
Good afternoon, Patrick.
Hey, Poe. How you doing?
I'm doing well, thank you. With the project costs moving around a little bit, I was hoping to get your current estimate of what you think the equity investment from Gevo into the first SPV would be.
We're assuming 65% debt, so if it's $980, that's like $340 or something like that. Lynn, are you there? I got that right. Right, Lynn?
Yeah. $345. Yeah.
Yeah.
Okay, great.
That's up from $270, is what we thought earlier. It's good. It's all in the space of good and nice and doable. You know what? One of the questions that has come up over and over again, you've even asked me, how can you get more returns sooner back? How more distributable cash sooner? Well, here you go. We deploy more capital sooner with good returns sooner.
Have you firmed up or could you give us a maybe potential timing of Net-Zero 2?
Yeah.
I know it's tough, Patrick, but can you take a stab at when we're going to see additional capacity at Net-Zero 2 sold out?
We've already sold since earlier this year, we've announced 10 million more gallons, that I think we're up. There's 10 million more. That's a lot. 10 million more gallons. To do another 35 million gallons, I think what's going to happen is we're going to be well over that. We're probably up in another 50 or 60 million gallons immediately, and there's discussions for several hundred million gallon, actual, real stuff being negotiated that's way bigger, like order of magnitude bigger. We're sitting here trying to figure out how to do it. The opportunity is here in front of us. It's an outstanding problem to have. How do we go bigger sooner? Much bigger. That is part of the question. Yes, we can keep deploying net zero copies. I kind of like that because I can understand it. It's straightforward.
It's relatively bite-sized for this market space. We want to be bigger, and we have one of the very few technologies that actually works. We've got to figure it out, and that's one of the active things we're working on. For as far back to your question, when can I announce the Net-Zero 2? I'd expect soon. I always say that though, Poe.
Yeah.
I expect these contracts to be done. They're not done, and I know why. It is this final negotiations. These are big contracts. Remember, a 45 million gallon contract off take, that's worth about $1.5 billion across the life of it. These aren't chump change for people. They all play serious in doing it, and they're inching along, getting done. I think we'll see ones that are bigger or intent for ones that are bigger.
Understood. On the engineering work that you're doing, you've gotten the estimate down to ±30%. I think I heard you say that you need to get to ±10%. Ge t the bond closed. It sounded like you might expect that by the end of the year. Is that what I heard?
I think that what we'll see is it mostly in that range by the end of the year. What we're going to really need to get it closed is take those numbers and have the EPC company, who we will announce in the not-too-distant future, where they say, "Here's the wrap that goes with it." That's actually what's needed to get to the bond financing. What'll happen is we'll get those engineering numbers refined around the end of the year kind of a thing, and we'll continue to work on it and keep refining. We won't stop the engineering. We'll just keep plugging along. We'll get to a point where now the EPC company goes, "Here's the number," boom, that they're willing to guarantee.
Okay. Then do you have a working estimate for the wastewater and then the wind component of Net-Zero 1?
Lynn, what's the wastewater treatment plant is what? $100 million-ish?
No, it's less than that, it's a little less than $100 million. These numbers are incorporated in our models as cost of service, estimating the capital cost, return of and on capital to a build-own-operate as well as their operating costs. That's the same thing we've been doing all along with the wind. We're doing the same thing now with wastewater and AD.
What you should expect, I think, and what all of us expect, what I expect is that we'll wind up being a co-investor with other people to get everybody seated. Everybody feels more comfort when we do that. Just like we did with our wind project out in Luverne. Then we go build it out, and we have lots of several parties who want to play with us here. That's good.
Yep. I just wanted to clarify and make sure that the $720 million does not include the wastewater nor the wind at this point in time.
That's right. You'll see that in our slide deck that we just put up when you get.
Yep
A chance to go through it. Yeah. We try to be, for all of you listening who go look at our. We put out an enormous quantity of data into that slide deck that we just put up. It goes on and really tries to be crystal clear about the assumptions we're making and what we're thinking about things. We're trying to be really transparent. I need everyone to understand where we are. We're in the midst of sorting out making sausage, figuring things out. We're trying to manage it. I even laid out principles of how we're thinking about things as we design. It'd be easy to go super fast, and a lot of people go tell me, "Patrick, go faster." I tell 'em goes, "Yeah, I can go faster, and I can waste, like, $100 million or $200 million.
That's what I can do." We can do what we just did, optimize it, figure it out, incrementally increase capital, and boost the EBITDAs and distribute distributions. That's the work to be done here, is to be smart about how we figure this out to make the most money at the least risk.
Yep. Yeah, I looked at slide 28.
Yeah
Just trying to figure out what else, what other capital costs might be associated with the entire project.
Yeah. Well, Poe, let me just go back. Poe , look on slide 28, you'll see that table. There's enough information there now. People could build a pretty darn good model and then do sensitivities around it with various assumptions. Look at slide 29 as well. On slide 29, you'll see some more information. We decided to just put that out there. One of the things about people always asking about is corn. Oh, what happens if corn stays at this high price? Well, guess what? That has a relatively minor impact on the overall project. Now, guess what? Over 50% of the cost of corn is offset by the co-products, the nutritional products, and corn oil value. That's an internal hedge we have. That helps us.
This is what helps make these projects attractive is it isn't quite as volatile as people would think, just looking at simple commodities.
Yep. Those two slides are really helpful. If we could talk about the timing of CapEx now that the RNG bond financing proceeds are on your balance sheet or on your financial statements. Can you talk about the timing of CapEx on the RNG plant?
Lynn?
We'll be complete. The project is on schedule, and the anticipation is that we'll start up operations and begin producing very early next year. The way it works is we pay our contractors, and then we submit to the trustee for reimbursements out of those bond proceeds. There's always a lag of a month or so from when we put the cash out till we get it back.
Lynn, that full $70 million will be laid out over the next three quarters? Is that sort of how we should cash walk that down?
No, we expect to be complete by year-end, so we will have done all the work and paid all the bills, but it may drip into the first quarter on recovery of those last bills, those last contractor payments.
Okay, great. On Net-Zero 1, if you could just highlight what you are going to spend in the third and fourth quarter on that project.
I'll take that. I think the largest uncertainty is around the long-lead equipment deposits. We have budgeted $20 million for long-lead deposits. The timing of that is uncertain, but we need to get that out before year-end to secure equipment to maintain schedule. I don't really have the numbers in front of me in terms of a cash burn for the other elements around engineering and site development. It's going to be a fairly substantial number. I think we've always said that the total development cost, including engineering and long lead and financing up to close, would be somewhere around $45 million. We'd recover that at financial close as contributed equity.
Perfect. Great. Thanks for your time.
Yep, you bet.
That concludes today's question and answer session. I'd like to turn the call back to Patrick Gruber for closing remarks.
Thank you all for joining us. I encourage you to take a good look at our recent investor presentation. You will see that we did go into more detail about where we are on our Net-Zero project and how we're thinking about capital. The results are turning out, as I said, better than I expected. The EBITDA have gone up and stuff. We still got a lot of work to do to sort it out. We're working it. This customer pipeline thing is a big deal, and there's no one more impatient for getting contracts done than me. I can make my people crazy from bugging them, but we are moving it forward, and the size of the discussions, these are getting to be big. It's in the billions of dollars of capital.
Many billions of dollars of capital in the future, and people wanting to participate with us. All those things have to be sorted out. Net-Zero 2, much more straightforward. That one's far along, and I can see that one being a copy of the Net-Zero 1. We got to grow bigger and faster, and that's where our attention is turning. How will we do that? There'll be more to come as this all unfolds, but it's an interesting time and place. Thanks for joining us.
This concludes today's conference call. Thank you for participating. You may now disconnect.