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Operator
Welcome to GVO'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 Jeffrey Williams, GVO's Vice President, General Counsel, and Secretary. Please go ahead, Mr. Williams.
Liz
Good afternoon, everyone, and thank you for joining Givo'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, Givo's chief executive officer, and Carolyn Romero, Givo'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 www.givo.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 GIVA'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 GVO's Net Zero One 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 GVO'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 GVO, including GVO'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 Jibo disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events, or otherwise. On today's call, Pat will begin with the discussion of Jibo's business developments. Carolyn will then review Jibo's financial results for the second quarter of 2021. And following the presentation, we'll open up the call for questions. I'll now turn the call over to Patrick Gruber. Pat?
Patrick Gruber
Thanks, Jeff. Today I'm pleased to be able to report an update on our engineering work and financial projections for NET-01. 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. Of course, this is all in preparation for the debt deal getting done in the first half of 2022. Now, hydrocarbon capacity is sold out. In fact, it's oversubscribed based upon our take-or-pay contracts already in place. This is very, very good. We did decide to change the scope of Net Zero One 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 per That brings us to a total of 340 million pounds of those products. And then we plan on making 46 million gallons per year of hydrocarbons, resin 45, and we still expect to produce about 30 million pounds of corn oil. Now, as a result of that change scope and with updated pricing assumptions based upon the pricing in our existing contracts, the net zero one project revenue is currently projected to be approximately $340 to $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. Now, the really good part is that the current projected EBITDA for the Net Zero One project is approximately $150 to $160 million per year. Now, that's an increase of approximately $50 to $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 Jibo is approximately 18% to 20% and includes all the revenue streams, and that's the distributable cash, the OEM fees, and all the rest. The distributed cash to Jibo from the Net Zero One project after debt service and major maintenance is currently projected to be approximately $80 to $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. Now, 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. Now, included in these costs are the increased capacity for the hydrocarbons, 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 on-site biogas production are currently planned to be a separate project with separate funding and anticipate a cost of capital commensurate with infrastructure returns using a third-party build-on-operate model. On-site 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 One electricity demand. The wind project would be wired directly to Net Zero One. 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. Now, 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 One operational. Now, for more information, please see our updated investor presentation that is available on our website at www.jibo.com. We're also planning to do a fireside chat on Wednesday, August 18th at 4 p.m. Eastern Daylight Time with Chris Ryan, our President and COO, and Lynn Small, our CFO, who will together take questions and discuss the Net Zero One 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, much, much larger. And you'll see that in the updated deck and looking at it. The customer pipeline is now approaching about $20 billion of contracts and discussion. That's quite something. And 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 GECO 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 will 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 have an 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?
Jeff
Thank you, Pat. Zeebo 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 Southampton Resources Facility in Sylvie, Texas. During the second quarter of 2020, no revenue was derived at the La Verne 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 distillers 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 and preparation for isobutanol production that began in July 2021. Cost of goods sold included approximately 1.6 million associated with the maintenance of the La Verne 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 then an increase in consulting related to creating our first environmental social governance report and 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 of 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 9 cents 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 40 cents 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. Now, I'll turn it back over to Pat to wrap things up.
Patrick Gruber
Thanks, Carolyn. So we're looking forward to this. We have a lot of exciting things coming, and we are fired up. Our engineering work is, 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. And 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. But you know, these are really big. That's what they look like. So we're excited, looking forward to it. With that, we'll take questions.
Operator
If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Again, that is star, then one, if you'd like to ask a question at this time. Our first question comes from the line of Samir Joshi with H.C. Wainwright.
Samir Joshi
Good afternoon, Pat, Carolyn. Thanks for taking my questions. So 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 a larger size as well? And what is the plan going forward?
Patrick Gruber
Well, so let me comment first and 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 it makes it much easier. And then to answer your question specifically is we think about it as that we've done the work and the engineering for this project. and we're in the process of it for this net zero one, we could translate that directly into making a similar size plan. So think of it as a copy of net zero one. That's the common paradigm. However, we've got people we're working with who are challenging us to think much bigger. And so we're asking ourselves that question as to how to go about doing that. So we're running, it's a very simple path to just simply copy net zero one, right? So that's kind of the incumbent hypothesis. And it makes sense because the demand is so much greater than the product supply. So we're asking things like, well, why not 100 million gallon plant? How can we go bigger? How can you achieve 500, 700 million gallons in five years? That's the kind of stuff we're trying to address. And, 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? And what are you going to do? And, yes, we can do it. It's technically possible. It's just a matter of capital. So it's getting to be quite interesting for us right now. There's definitely, definitely, definitely a shift that has occurred in the last several months.
Samir Joshi
Yeah, 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?
Patrick Gruber
Yeah, we can. There's no limit. So the reason what we're doing right now is we took what we had, and we're trying to stay with it. It's something we already had well-defined, and we're trying to optimize the returns and capital. So, you know, I noted that in our models, they project that the EBITDAs increase 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. I mean, that was a better result than I ever expected from our people. Well done. You know, there's still so many variables and stuff. Everybody always asks me, well, what happens if corn stays high forever and, you know, all this stuff? 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 pretty – we've got a handle on it. Much – incredible speed, I think.
Samir Joshi
Yeah, yeah. And just one more clarification on net zero. The green hydrogen that is going to be produced is part of the 720 to 980 million capex. But then for the excess that you are planning to or may produce, is there any additional capex incremental to this 980 million dollars?
Patrick Gruber
Yeah. So on the $980 million right now, we're at seven. If you're going to compare us to other projects, you'd be 720 million. It's a 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 the 980. So in addition to the 720, would it take additional capital if we want to make a whole lot more hydrogen? The answer is yes. So 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. And if it makes economic sense, you can get equivalent returns or better. So if it has attractive returns, 18%, 20% or better or something, then we'd say that may be a worthy use of our capital. That's how we think about it.
Samir Joshi
Yeah, no, thanks for that clarification. Moving to the RNG question, The 355,000 MMBTU plus capacity, is that all going to be taken by BP for the recent press release? I just wanted to clarify that.
Patrick Gruber
It is. We're going to send it down the pipeline to California because that's how you maximize value. And that's attractive, and, you know, we could – you know, later on take gas up to La Verne, which we do, we are running it again, but we could take it up there as we expand La Verne and make it into a hydrocarb plant or up to NED01. But right now, the way you make the most money is to send it to California through BP.
Samir Joshi
Right, right. And this next question probably has been asked before, but just wanted to understand, The preliminary stage project costs are being expensed as it is capitalized. That is because they're not associated with a particular project, but it is just pre to the project. Is that correct?
Patrick Gruber
You know, I know that, yeah, I was going to say there's some that we capitalize and some that we don't. So, but Carolyn can explain.
Jeff
Right. So, the RNG-related costs are being capitalized effective with the second quarter. That's because we've 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 FL3.
Patrick Gruber
Okay, okay. So there could be a future. Yeah, yeah, it will be when we get to the near the closings and stuff is what she's talking about. Well, you know, shorthand lingo for some of the folk is to call it FL3, but FL3 is not well understood by a broad group. What it is, 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 this stuff will be capitalized and when 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.
Samir Joshi
That is good. Okay, thanks. That's all I have right now. Congratulations on the progress and good luck. Thanks.
Operator
As a reminder, that is star then one to ask a question. Our next question comes from Poe Frett with Noble Capital Markets. Good afternoon, Pat. Hey, Poe. How are you doing?
Poe Frett
I'm doing well. Thank you. I was hoping to, you know, 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 Jibo into the first SPB would be.
Patrick Gruber
We're assuming 65% debt, so if it's 980, that's like 340 or something like that. Lynn, you're there.
Lynn
I got that right. Right, Lynn? Yeah, 345.
Samir Joshi
Yeah.
Patrick Gruber
Yeah, and that's up from 270 is what we thought earlier. But, you know, it's good. You know, it's all in the space of good and nice and doable. And you know what? Getting those, 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.
Poe Frett
And then have you firmed up or is there any potential or could you give us maybe potential timing of net zero too? And I know it's tough, Pat, but can you take a stab at when we're going to see additional capacity at Net Zero 2 sold out?
Patrick Gruber
We've already sold since, you know, earlier this year we've announced like 10 million more gallons. So I think we're up, there's like 10 million more, that's a lot, 10 million more gallons. So to do another 35 million gallons, I think what's going to happen is we're going to be well over, that so we're probably you know we're up in another 50 or 60 million gallons immediately and there's in discussions for several hundred million gallon actual real stuff you negotiate that's way way way bigger like order of magnitude bigger but so we're sitting here trying to figure out how to do it so the opportunities here in front of us it's an outstanding problem to have but how do we go bigger sooner much bigger And that is part of the question. Yes, we can keep deploying, you know, 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. But, you know, we want to be bigger, and we have one of the very few technologies that actually works. So we've got to figure it out, and that's one of the active things we're working on. So as far back to your question, when can I announce the net zero, too? I'd expect soon. I always say that, though, Poe, and 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 offtake, that's worth about a billion and a half dollars across the life of it. So these aren't chump change for people. They all play serious in doing it, and they're inching along, inching along, getting done. But then I think we'll see ones that are bigger or intent for ones that are bigger.
Poe Frett
Understood. So on the engineering work that you're doing, you've gotten the estimate down to plus or minus 30%. I think I heard you say that you need to get to plus or minus 10% to get the – get the bond closed. It sounded like you might expect that by the end of the year.
Patrick Gruber
Is that what I heard? I think that what we'll see is it mostly in that range by the end of the year, but 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. And so what will happen is we'll get those engineering numbers refined, you know, 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. But we'll get to a point where now the EPC company goes, here's the number, boom, that they're willing to guarantee.
Poe Frett
Okay. And then do you have a working estimate for the wastewater and then the wind component of net zero one?
Patrick Gruber
Lind, the wastewater treatment plant is what, $100 million-ish?
Lynn
It's less than that, but it's a little less than $100 million. But these numbers are incorporated in our models as cost of service, estimating the capital cost, return of and on capital to a build-on operator, as well as their operating cost. 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.
Patrick Gruber
So 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 down in La Verne. And then we go build it out, and we have several parties who want to play with us here, so that's good.
Poe Frett
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.
Patrick Gruber
That's right. You'll see that in our slide deck that we just put up when you get a chance to go through it. And 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. But 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 because it'd be easy to go super, super fast. And a lot of people go, tell me, Pat, go faster. How come you can't go? Yeah, I can go faster and I can waste like $100 million or $200 million. That's what I can do. Or we can do what we just did, optimize it, figure it out, incrementally increase capital, and boost the EBITDAs and distributions. And so that's the work to be done here is to be smart about how we figure this out to make the most money at least risk.
Poe Frett
Yep. Yeah, I looked at slide 28, and so just trying to figure out what else, you know, what other capital costs, you know, might be associated with the entire project.
Patrick Gruber
Paul, let me just go back. So on slide 28, you'll see that table. And there's enough information there now. People can build a pretty darn good model and then do sensitivities around it with various assumptions. And look at slide 29 as well. And on slide 29, you'll see some more information. We decided to just put that out there. One of the things about people always ask you 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 coproducts, 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.
Poe Frett
Yeah, those two slides are really helpful. If we could talk about the timing of CapEx now that, you know, 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 plan?
Lynn
Lynn? Yeah, we'll be complete. The project is on schedule, and the anticipation is that we'll start up operations and begin producing funds. 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. So there's always a lag of a month or so from when we put the cash out until we get it back.
Poe Frett
And so that full, Lynn, that full, what, $70 million will be laid out and reimbursed over, or laid out over the next three quarters? Is that sort of how we should cash walk that down?
Lynn
No, I think it'll, we expect to be complete by year end, so that 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.
Poe Frett
Okay, great. And then on Net Zero One, if you could just highlight what you are going to spend in the third and fourth quarter on that project.
Lynn
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, you know, equipment to maintain schedule. We probably, 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. But, you know, 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. And then we'd recover that at financial close as contributed equity.
Poe Frett
Perfect. Great.
Operator
Thanks for your time.
Patrick Gruber
Yep, you bet.
Operator
That concludes today's question and answer session. I'd like to turn the call back to Patrick Gruber for closing remarks.
Patrick Gruber
Well, thank you all for joining us. I encourage you to take a good look at that, 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. In fact, the EBITDAs have gone up and stuff. Yep, we've 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 like getting to be big. It's in the billions of dollars of capital, many, many billions of dollars of capital in the future, and people wanting to participate with us, and so all those things have to be sorted out. Net zero two, much more straightforward. That one's far along, and I can see that one being net zero, a copy of the net zero one, but We've got to grow bigger and faster, and that's where our attention is turning. How will we do that? So there will be more to come as this all unfolds, but it's an interesting time and place. Thanks for joining us.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
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