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Gevo

The purpose of this paper is to critically evaluate the business model of a flagship bio-based fuel and chemicals producer, Gevo. Several recurring themes guide the course of the analysis, to wit: 1. Is the scale of the business model appropriate? 2. Is the style in which the company has stated their case a problem? 3. Is the senior management a problem? Company Overview1 Gevo, a leading renewable chemicals and advanced biofuels company, is developing bio-based alternatives to petroleum-based products using a combination of synthetic biology and chemistry. We plan to produce isobutanol, a versatile platform chemical for the liquid fuels and petrochemicals markets. Isobutanol has broad market applications as a solvent and a gasoline blendstock that can help refiners meet their renewable fuel and clean air obligations. It can also be further processed using well-known chemical processes into jet fuel and feedstocks for the production of synthetic rubber, plastics and polyesters.
Vision

We envision the development and commercialization of biorefineries that can connect the ethanol industrys infrastructure and agricultural supply chain to the petrochemical industrys infrastructure of existing refineries and pipelines. We hope to see biorefineries deliver low carbon solutions, provide renewed economic prosperity to rural areas and contribute to energy independence from fossil fuels.
Technology

We have pioneered a platform technology based on a proprietary fermentation method that relies on an innovative biocatalyst and the efficient separation of isobutanol. The combination of these two proprietary innovations, Gevos Integrated Fermentation Technology (GIFT), was designed to enable the low cost retrofit of existing ethanol capacity for isobutanol production. This provides Gevo a faster route to market. And, when cellulosic biomass processing technology is ready for commercialization, we plan to deploy cellulosic butanol technology.
Strategy

Our strategy is to develop technology for the production of a building block for bio-based fuels and chemicals that can be sold directly into existing refining and petrochemical value chains to provide customers with a bio-derived alternative to fossil fuels at a price that is competitive and less volatile than petroleum.

Manufacturing plan: A comparison of petroleum-based and bio-based fuels and chemicals manufacture. Fig. 1 A simplified petroleum-based model:2

Fig 2 The Gevo bio-based plan:


Source: Adapted from patent application

Petrochemicals Ethanol Butanol Ethylene Propylene Benzene Dimers Pentene Fuels Renewable resources: Sugarcane Corn Lignocellulosic Dimers Trimers Isooctane Jet Kerosene Butadiene Xylenes Ethylbenzene Isoprene

Butenes Fermentors

Markets4 Relative to petroleum-based products, we expect that chemicals and fuels made from our isobutanol will provide our potential customers with the advantages of lower cost volatility and increased supply options for their raw materials. While we intend to focus on producing and marketing isobutanol, the demand for our product is driven in large part by the fact that our isobutanol can be converted into a number of valuable hydrocarbons, providing us with multiple sources of potential demand. We anticipate that additional uses of our isobutanol will develop rapidly because the technology to convert isobutanol into hydrocarbon products is known and practiced in the chemicals industry today. Isobutanol for direct use Without any modification, isobutanol has applications as a specialty chemical. Chemical-grade isobutanol can be used as a solvent and chemical intermediate. The global market for chemicalgrade butanol is approximately 1.1 BGPY, based upon volume data from SRI. Isobutanol also has direct applications as a specialty fuel blendstock. Fuel-grade isobutanol may be used as a high energy content, low Reid Vapor Pressure, or RVP, gasoline blendstock and oxygenate, which we believe, based on its low water solubility, will be compatible with existing refinery infrastructure, allowing for blending at the refinery rather than blending at the terminal. RVP measures a fuel's volatility, and in warm weather, high RVP fuel contributes to smog formation. Additionally, fuel-grade isobutanol can be blended in conjunction with, or as a substitute for, ethanol and other widely-used fuel oxygenates. The potential global market for fuel-grade isobutanol as a fuel oxygenate is approximately 40 BGPY, based on IEA volume data. Isobutanol for the production of plastics, fibers, rubber and other polymers Isobutanol can be dehydrated to produce butenes which have many industrial uses in the production of plastics, fibers, rubber and other polymers. The straightforward conversion of isobutanol into butenes is a fundamentally important process that enables isobutanol to be used as a building block chemical in multiple markets. Isobutanol can be converted into hydrocarbons which form the basis for the production of rubber, lubricants, and additives for use predominantly in the automotive markets. Producers in these markets are looking for new sources of drop-in hydrocarbons. These products represent a potential market for isobutanol of approximately 7.6 BGPY. Isobutanol can also be converted into methyl methacrylate (MMA) which is used to produce plastics and industrial coatings for use in consumer electronics and automotive markets.

Producers of MMA are looking for new sources of raw materials. These products represent a potential market for isobutanol of approximately 739 MGPY. Propylenes used in packaging, fibers, and automotive markets may also be made from isobutanol. Producers of propylenes are looking to find new sources of raw materials and biobased alternatives that will allow them to market their products as environmentally friendly. These products represent a potential market for isobutanol of approximately 31.7 BGPY. Isobutanol can also be used to produce para-xylene and its derivatives, including polyesters, which are used in the beverage and food packaging and fibers markets. Producers of these products are looking to find bio-based alternatives that will allow them to market their products as environmentally friendly. These products represent a potential market for isobutanol of approximately 15 BGPY. Styrene and polystyrene can also be made from isobutanol for use in food packaging. Producers of these products are looking to find bio-based alternatives that will allow them to market their products as environmentally friendly. These products represent a potential market for isobutanol of approximately 12 BGPY. Isobutanol for Hydrocarbon Fuels. The hydrocarbons that can be produced from isobutanol can be used to manufacture specialty gasoline blendstocks, jet and diesel fuel, as well as other hydrocarbon fuels. The hydrocarbon fuels that can be produced from isobutanol collectively represent a potential market for isobutanol of over 900 BGPY, based upon volume data from the IEA. Senior Management4 Patrick R. Gruber, Ph.D. has served as a director of the company since 2007 and has served as Chief Executive Officer of the company since 2007. Prior to joining the company, from 2005 to 2007 Dr. Gruber was President and Chief Executive Officer of Outlast Technologies, Inc., a technology and marketing company primarily serving the textile industry, where he was responsible for all aspects of Outlast Technologies' business. Previously, Dr. Gruber had cofounded NatureWorks LLC (formerly Cargill Dow, LLC), a bio-based plastics company. He served as Vice President, Technology and Operations, and Chief Technology Officer there from 1997 to 2005, where he was responsible for all aspects of the business' project, application and process technology development. Dr. Gruber holds a Ph.D. in chemistry from the University of Minnesota, an M.B.A. from the University of Minnesota and a B.S. in chemistry and biology from the University of St. Thomas.

Christopher Ryan, Ph.D. has served as Executive Vice President, Business Development, of the company since June 2009. Prior to joining the company, he co-founded NatureWorks LLC, a bioplastics company, in 1997. Dr. Ryan served as Chief Operating Officer for NatureWorks from 2008 to 2009 and Chief Technology Officer for NatureWorks from 2005 to 2008, where he was involved in the development and commercialization of the company's new bio-based polymer from lab-scale production in 1992 through the completion of a $300 million world-scale production facility. Dr. Ryan holds a Ph.D. in organic chemistry from the University of Minnesota, a B.S. in chemistry from Gustavus Adolphus College and completed the Management of Technology program at the University of Minnesota. David Glassner, Ph.D. has served as Executive Vice President, Technology, of the company since October 2009, where he leads the company's isobutanol technology and engineering development. From March 2009 to September 2009, he was Vice President, Technology, and from July 2007 through February 2009 he was Vice President, Bioprocessing and Engineering, of the company. Prior to joining the company, he led the development of novel yeast biocatalysts for the production of lactic acid and ethanol, and the development of lactic acid, lactide and polylactide technology at NatureWorks LLC from 2000 to 2007. Prior to NatureWorks, from 1993 to 1999 he was Biofuels Technology Manager at the National Renewable Energy Laboratory where he led the development of cellulosic processing technology and the construction of the biomass to ethanol process development unit. Dr. Glassner holds Ph.D., M.S. and B.S. degrees in chemical engineering from Michigan State University. Headcount4 41 R&D 23 - Admin & Selling (includes clerical workers) 27 Manufacturing at Luverne

ANALYSIS The recurring themes: Scale: Gevo aspires to replicate many aspects of a petroleum firms downstream integrated refining and chemicals business. The enormous scale of their lofty goals is underscored by the following table.
Billion Gallons per year (BGPY)

Table 1: Gevos addressable markets and current supply arrangements, 11/1/2011 Supply Agreements: Lanxess,i-butanol, 10 years Sasol, i-butanol, 3 yrs. Manseld oil, fuel, 5 years Non-binding Letters of Intent: Total (2/2010): i-butanol, 5 years Toray (4/2010): p-xylene United Airlines(6/2010): jet fuel Propylene: Styrene: Methyl methacrylate: Isooctane: Gasoline Diesel fuel: Total

Market Size Market (BGPY) Share, %

0.02 0.012* n.a.

7.6 1.1 n.a.

0.26 1.09 n.a.

0.01 0.003 0.153 0 0 0 0 0 0.198

40 15 94 31.7 12 0.007 349 484 1034

0.02 0.02 0.16 0 0 0 0 0 0.019%

*Volume from letter of intent; Source: Gevo prospectus4, press releases.

As the table suggests, their claimed addressable market is over 1 trillion gallons per year. Furthermore, the claims are to global markets in all of their addressable segments. The table also suggests that Gevo has had some success in obtaining supply agreements. Those that have been obtained, both binding and non-binding, total to 198M gallons per year. Still, this volume represents less than .02% of their claimed addressable markets. Gevos planned manufacturing capacity, outlined in the table below, doesnt indicate that they will have the ability to improve much upon this market share in the next few years. For isobutanol, their planned manufacturing capacity is expected to reach 350M gallons by the end of 2015. But this is capacity for isobutanol manufacture. To address the fuels market, by far the largest of Gevos addressable markets, two other considerations must be taken into account.

First, Gevos capacity to produce the isobutanol derivatives necessary for fuels blending stocks lags significantly. As the table below suggests, they are just recently adding a demonstration scale plant capable of supplying fuel blending components in the C8-C12 range. And that capacity is 10,000 times less than their initial commercial-scale isobutanol plant.

Table 2: Gevo Planned Manufacturing Capabilities Isobutanol: Commercial-scale plants Plants Acquire Retrot Operational Total Production Capacity Luverne 2H2010 15 mos. 1Q2012 10M GPY Redeld 2H2011 1H2013 3rd End 2013 60 M GPY 4th-6th End 2014 200 M GPY th-9th 7 End 2015 350 M GPY Hydrocarbon processing: Demonstration scale plant Plants Partner Build Operational Prodn. Houston, Tx. 7/2011 Yes YE2011 120k GPY

Year 2012 2013 2014 2015

Year 2012

Demonstration plant will convert Gevos isobutanol into renewable jet fuel, gasoline, and pxylene (for PET plastic); also is to supply other customers with product qualication and evaluation quantities. Source: ICIS5

Second, 350 million gallons of isobutanol does not yield 350 million gallons of fuel equivalents. Because it must be dimerized and trimerized to create motor gasoline and diesel/jet fuel blending components (see table below)
Table 3: Fuel equivalent of isobutanol Fuel Market, % of total Conversion Equivalent of BGPY fuel market ratio, 350M GPY isobutanol isobutanol in to fuel fuel Isobutanol 40 4.5 1:1 16 Isooctane 349 35.5 2:1 62 Jet Diesel Total 94 484 967 10.0 50.0 100.0 3:1 3:1 12 58 148

350 million gallons of isobutanol might (conservatively, 100% conversion rate assumed), yield about 148 million gallons of motor gasoline and diesel/jet fuel blending components. Compare this to their competition on the petroleum-based manufacturing side. Gevos 148M GPY of equivalent fuel capacity would rank them just slightly ahead of Lunday Thagard, 58th on the list of 65 US refiners, with 0.05% of the US market. They would have approximately 0.01% of the global market.
Table 4: US, Worldwide Rening Capacity (2010) Firm United States BGPY % of market ConocoPhillips 31.12 11.48% Valero 29.69 10.95% ExxonMobil 26.92 9.93% Marathon 18.37 6.77% BP 16.97 6.26% Chevron 14.50 5.35% Flint Hills 12.54 4.62% Shell Oil 12.46 4.60% Motiva 12.00 4.43% Citgo 11.41 4.21% Tesoro 10.59 3.91% Sunoco 7.82 2.88% PDVSA 5.27 1.94% PBF Energy 4.91 1.81% Hess 4.74 1.75% Lyondell 4.14 1.53% Husky Oil 3.65 1.35% Western Rening 3.40 1.26% Total 2.67 0.98% Frontier Oil 2.64 0.97% Murphy Oil 2.42 0.89% Alon USA 2.35 0.86% Sinclair 2.08 0.77% Holly Corp. 1.92 0.71% Coffeyville Resources 1.72 0.63% Suncor 1.53 0.57% Stratnor 1.53 0.57% Petrobras 1.53 0.57%

Worldwide Global % of market 46.28 40.58 89.24 19.13 27.76 23.79 12.54 53.01 12.00 11.41 10.59 7.82 51.80 4.91 4.74 4.14 5.37 3.40 42.07 2.64 2.42 2.35 2.08 1.92 1.72 1.53 1.53 34.40 3.39% 2.97% 6.54% 1.49% 2.03% 1.74% 0.09% 3.89% 0.87% 0.84% 0.78% 0.57% 3.80% 0.36% 0.35% 0.30% 0.39% 0.25% 3.08% 0.19% 0.18% 0.17% 0.15% 0.14% 0.13% 0.11% 0.11% 2.52%

NuStar Krotz Springs NCRA Cenovus Wynnewood Delek Rening Lion Oil Northern Tier Energy United Rening PetroStar Calumet Lubricants Hunt Rening Paramount Petroleum Ergon Big West Oil US Oil and Rening HDG Intl Calcasieu Rening Kern Oil Little America Rening San Joaquin CountryMark Co-op Gulf Atlantic Hunt Southland Thomas Silver Eagle Rening Wyoming Rening Greka Energy American rening Lunday Thagard Montana Rening Cenex Placid Rening Cross Oil Somerset Tenby Foreland Total US Total Worldwide

1.36 1.30 1.24 1.12 1.10 1.10 1.07 1.07 1.07 1.03 0.86 0.80 0.77 0.64 0.54 0.54 0.48 0.46 0.38 0.38 0.37 0.35 0.26 0.26 0.21 0.20 0.18 0.15 0.15 0.14 0.14 0.14 0.12 0.11 0.08 0.05 0.03 271.16 271.16

0.50% 0.48% 0.46% 0.41% 0.41% 0.41% 0.40% 0.40% 0.40% 0.38% 0.32% 0.29% 0.28% 0.24% 0.20% 0.20% 0.18% 0.17% 0.14% 0.14% 0.14% 0.13% 0.10% 0.10% 0.08% 0.07% 0.07% 0.06% 0.06% 0.05% 0.05% 0.05% 0.05% 0.04% 0.03% 0.02% 0.01% 100.00% 19.87%

1.36 1.30 1.24 1.12 1.10 1.10 1.07 1.07 1.07 1.03 0.86 0.80 0.77 0.64 0.54 0.54 0.48 0.46 0.38 0.38 0.37 0.35 0.26 0.26 0.21 0.20 0.18 0.15 0.15 0.14 0.14 0.14 0.12 0.11 0.08 0.05 0.03 532.45 1364.20

0.10% 0.09% 0.09% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08% 0.07% 0.06% 0.06% 0.06% 0.05% 0.04% 0.04% 0.04% 0.03% 0.03% 0.03% 0.03% 0.03% 0.02% 0.02% 0.02% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.004% 0.002% 39.03% 100.00%

Source: Wikipedia list of reneries and capacities, 20106

There are several potential problems associated with this strategy. First, if you are a believer in scale and market power as conferrers of competitive advantage, the numbers are hardly encouraging. Furthermore, not only is Gevos volume tiny by comparison, its starting from a very small base and growing at a comparatively slow rate. To attain even 1% of the global fuels market, Gevo would need to produce some 9.7B GPY of fuels. Thus, growing at its current rate of plant construction 350M GPY of isobutanol manufacturing capacity added every five years equals the added capacity to supply about 136M GPY of fuels every five years equals the added capacity to supply about 27M GPY of fuels every year equals 359 years! to be able to supply a 1% share of the global fuels market. Furthermore, the global fuels market could change fundamentally long before such lofty goals are met. Transportation powered by competing disruptive technologies such as electricity, fuel cells, solar cells, hydrogen (and their hybrids) all could shift the fuel requirements of transportation away from the traditional fuels Gevo currently targets. And this could occur well before they can achieve significant market shares. Finally, there are some pending questions about whether the industrial biotechnology model proffered by Gevo scales well to large markets such as fuels and commodity chemicals that must also be answered. For if individual bioreactors continue to be limited to about 600k liters in capacity by transport phenomena, then the sheer number of bioreactors (and the attendant infrastructure/hierarchy to manage them) needed to service such global market shares is daunting. For example, if Gevos 9 bioreactors can produce 350M GPY of isobutanol by 2015, then Nine of them can produce approximately 136M GPY of fuelsand it would take 71 times as many (640 reactors) to produce 1% of the global fuel supply. Management Style. If your strategy bent leans towards the resource-based view rather than I/O economics, Gevos strategy may still have room for improvement. For such large market claims, and the lack of manufacturing capacity to support them, certainly might do damage to the reputation of this firm. There are considerations beyond manufacturing capacity that shed doubt upon the scale of Gevos claims too. For example, the total headcount at ExxonMobil (2010), for example, is 103,7007. Granted, the firm engages in upstream activities such as exploration and production,

and downstream activities such as retail, and still other activities that Gevo shuns. Nevertheless, even if 1/5 of the workforce at ExxonMobil were dedicated to refining and chemicals production, this implies that some 20,500 people are involved in these activities. Gevo, by comparison, has a total headcount of 914. Of that total, 23 are engaged in administration (including clerical) and selling activities. Clearly, to reach the scale of an ExxonMobil, Gevos headcount is not only inadequate but must also be increased at a rapid rate. And the resources would need to be found to do that. Neither does Gevos financial situation suggest that it is about to dominate all of its addressable markets anytime soon. Sources of cash: 1. The company is currently (Nov. 2011) sitting on about $90M owing to its recent IPO 2. It is realizing ethanol sales ($46.7 million through 3Q2011), however, its gross margins (3.6%) on this revenue are generating only minimal amounts of cash ($1.7M through 3Q2011). 3. It has the following plans, partially based upon its supply agreements, to generate cash by selling isobutanol:
Table 5: Gevos projected cash generation for isobutanol sales, 2011-15 Year Volume Assumed price Assumed cash Cash generation cost 2012 2013 2014 2015 Total
Source: ICIS5

10 M gal 60 M gal 200 M gal 350 M gal 620M gal

$3.50-4.00/gal $3.70-4.00/gal $3.50-4.00/gal $2.95-4.40/gal

$1.60/gal $1.60/gal $1.60/gal $1.60/gal

$21M $129M $430M $665M $1245M

The margins cited above by Gevo are encouraging. In fact, Gevo claims a $1.00/gal advantage in cash costs versus petroleum-based isobutanol manufacturers. This, of course, could be due to a number of temporary or longer-lived factors: tightness in C4 supplies, lower raw material prices, first-mover advantage, etc. And some will be addressed in the discussion to follow. Suffice it to

say here that it is not the authors intention to imply that Gevo will be uncompetitive in the isobutanol area per se. 4. Gevos stock, an IPO at $15 per share in Feb. 2011, currently sits at about $7.50 per share. Though its not out of the question, clearly public financing now would not raise capital at the rate which was realized in their IPO. Furthermore, it would dilute the ownership of those who had bought during the IPO. 5. Gevos debt ratios are not exorbitant. At the end of the third quarter it reported total debt of about $30M, total assets of about $133M ($98M of which was in cash), and shareholders equity of about $103M8. A more mature firm would likely have less problem raising debt financing, however the recently IPOed Gevo is stilling burning through $40M per year in operating costs. This traditionally raises some doubts as to whether a firm can service more debt. Too, the debt Gevo has been able to accumulate carries a high interest rate and substantial covenants. For example its current loans, agreements it entered into to enable it to purchase of Agri-Energy (including its Luverne, Mn. Plant), contained the following provisions4:

The aggregate amount outstanding under the loan and security agreement bears
interest at a rate equal to 13%, is subject to an end-of-term payment equal to 8% of the amount borrowed and is secured by substantially all of the assets of Gevo, Inc., other than its intellectual property. Additionally, under the terms of each of (i) the loan and security agreement and (ii) Gevo, Inc.'s guarantee of Gevo Development's obligations under the loan and security agreement described below, Gevo, Inc. is prohibited from granting a security interest in its intellectual property assets to any other entity until both TriplePoint loans are paid in full. The loan matures in four years, and provides for interest only payments during the rst 24 months. Upon the consummation of the Agri-Energy acquisition, this loan will also be secured by all of the assets of Agri-Energy, LLC. Additional debt financing, though not out of the question, would clearly come at a price. Uses of Cash: Against these money-raising options, Gevo will still have the following needs for cash: 1. Operations: As mentioned previously, Gevo is currently burning through about $40M per year. To cover this, if this continues, Gevo will need an additional $170M between now and the end of 2015.

2. Plants: Gevo plans on obtaining 7-8 more isobutanol plants by 2015. Retrofit for the first, a relatively small, approximately 100kL facility which is slated to produce only about 10M GPY, cost about $24M. Debt and warrants totaled another $21M for a total of about $45M capital4. Subsequent plants will be larger (approx. 5x more or 50M GPY). Gevo estimates retrofit cost for a 100M GPY plant to run about $40-$45M4 while the capital needed to obtain the larger plants will almost certainly be more than the smaller initial plant. A very crude estimate suggests that 7-8 more isobutanol plants might require in the neighborhood of $700M. Too, there are the commercial facilities necessary to produce the derivatives (fuels and chemicals) upon which 993B GPY of the projected 1,034B GPY in sales are predicated. There is no current estimate available from Gevo for the capital required to put these commercial-scale plants in place. However, if the isobutanol plants alone cost in the neighborhood of $700M, its not unreasonable to expect that these commercial-scale plants would soak up whatever remains of the projected profits from isobutanol sales. 3. Working Capital: As with any growing business, there will be increased working capital requirements as well. While these requirements may not be nearly as large as those required for manufacturing facilities, they still must be factored in. Conclusion: Gevo alone would likely not be in a financial position to accelerate its growth rate beyond that which it has currently projected in the next four years. However, it could possibly accelerate growth if it were willing to engage in strategic alliances to obtain the needed resources/facilities. Patent Infringement Suit Yet other considerations further impair the reputation of this young firm. Consider the following: WILMINGTON, Delaware, January 14, 2011 -- Butamax Files Patent Infringement Action Against Gevo, Inc. to Protect Biobutanol Intellectual Property9 Butamax Advanced Biofuels, LLC today filed a patent infringement lawsuit against Gevo, Inc for its use of Butamax biobutanol technology. Butamax patent 7851188 was granted in December, 2010. This patent encompasses biocatalysts developed to produce isobutanol and provides protection for Butamax and its pioneering work in this field. Butamax has filed an extensive patent portfolio for its proprietary technology across the biofuels value chain including biocatalyst, bioprocess and fuels. A number of patent applications by Butamax have been successfully accepted into the United States Patent and Trademark Office (USPTO) Green Technology Pilot Program for accelerated review.

The U.S. patent system is designed to encourage research and development and to protect inventions. Butamax and its owners were the first to develop this technology and it is our belief that the protection of intellectual property serves the best interest of the biofuels industry, our customers and the U.S. energy policy, said Tim Potter, Butamax CEO. Butamax Advanced Biofuels, LLC was formed to develop and commercialize biobutanol as a next generation renewable biofuel for the transport market. The company benefits from the synergy of DuPonts proven industrial biotechnology experience and BPs global fuels market knowledge. Butamaxs patent-protected technology offers a cost-advantaged manufacturing process with value from field to pump. Globally focused with operations on four continents, Butamax is poised for commercial launch from 2012/2013. ENGLEWOOD, Colo., Mar 25, 2011 (BUSINESS WIRE) -- Gevo Denies All Claims of Infringement in the Butamax Patent Infringement Complaint: Gevo, Inc., a renewable chemicals and advanced biofuels company, today filed its answer in Delaware District Court to the patent infringement complaint filed on January 14, 2011 by Butamax Advanced Biofuels LLC, which alleges that Gevo is infringing one patent that has been assigned to Butamax relating to the production of isobutanol. "Our answer, filed in Delaware district court, formally denies all claims of infringement, as we use Gevo's Integrated Fermentation Technology(R) (GIFT(R)), which is covered by over 150 patent applications, and is a different approach than the one described in the Butamax patent," said Brett Lund, Gevo Executive Vice President and General Counsel. "We will vigorously defend against the claims asserted in the complaint." Could Gevos aggressive market claims have had something to do with this suit? Or could the following have provoked a reaction from its competitors? Gevo Patent Application #201101724753

BACKGROUND OF THE INVENTION


Conventional transportation fuels and chemicals (e.g., monomers, polymers, plasticizers, adhesives, thickeners, aromatic and aliphatic solvents, etc.) are typically derived from nonrenewable raw materials such as petroleum. However, the production, transportation, refining

and separation of petroleum to provide transportation fuels and chemicals is problematic in a number of significant ways. For example, petroleum (e.g., crude oil and/or natural gas) production poses a number of environmental concerns. First, the history of petroleum production includes many incidents where there have been uncontrolled releases of crude petroleum during exploration and production (e.g., drilling) operations. While many of these incidents have been relatively minor in scale, there have been a number of incidents that have been significant in scale and environmental impact (e.g., BP's Deepwater Horizon incident, Mississippi Canyon, Gulf of Mexico, 2010). World petroleum supplies are finite. Thus, as world petroleum demand has increased (84,337 M bpd worldwide in 2009 ; US Energy Information Administration ), easily accessible reserves have been depleted. Accordingly, petroleum exploration and production operations are more frequently conducted in remote and/or environmentally sensitive areas (e.g., deepwater offshore, arctic regions, wetlands, wildlife preserves, etc.). Some remote locations require highly complex, technically challenging solutions to locate and produce petroleum reserves (e.g., due to low temperatures, water depth, etc.). Accordingly, the potential for large-scale environmental damage resulting from uncontrolled discharge of petroleum during such complex, technically challenging exploration and production operations is substantively increased. In addition, when petroleum is produced in remote areas and/or areas which do not have infrastructure (e.g., refineries) to further process petroleum into useful products, the produced petroleum must be transported (e.g., via pipeline, rail, barge, ship, etc.), often over significant distances, to terminal points where the petroleum products may be refined and/of processed. Transportation of petroleum is also an operation with associated risk of accidental discharge of petroleum in the environment, with concomitant environmental damage, and there have been a number of significant incidents (e.g., Exxon's Valdez tanker spill, Prince William Sound, Ak., 1989). Furthermore, much of the world's proven petroleum reserves are located in regions which are politically unstable. Accordingly, supplies of petroleum from such regions may be uncertain since production of petroleum or transportation of petroleum products from such regions may be interrupted. Comments: Upon reflection, the reader of this intro might call it a rather harsh, biased viewpoint of Gevos supposed advantage. For example, the record of the oil industry is not being compared to that of any other industry in this introduction. In fact, it would be very difficult to make such a comparison given the data offered. Second, the evidence cited is largely anecdotal. Perhaps a comparable approach would be to admonish Gevo for its foray into hazardous chemical production because of incidents such as Bhopal, Times Beach, Love Canal, or the existence of Superfund sites? Third, its likely there are accidents in the cultivation and harvest of renewable resources just as there are in the production and transportation of crude oil. And fourth, while the text poses risks

to remote environments in oil exploration and transportation, risks of accidents may actually be moved closer to humans if renewable resources are harvested and cultivated. The point is (1) that the advantage is not clearly stated, (2) Gevo may have presented their position in a very biased manner, and (3) perhaps needlessly so. Senior Management: Given the plethora of problems cited above, it would be hard not to question the senior management at Gevo. In addition, one should note here also that the three key members of senior management do not come from backgrounds in the fuels or commodity chemicals businesses. Rather, they are all alumni of NatureWorks, a former Dow/Cargill joint venture, whose claim to fame is the introduction of a bio-based plastic, poly (lactic acid). It is puzzling why all three should be selected to lead such a large scale, prominent foray into fuels and commodity chemicals. What could be done? 1. Focus! -On areas in which Gevo has a competitive advantage -On areas in which Gevos best opportunities lie. -To relieve the resource shortfalls that attend such expansive goals. -To improve the credibility/reputation of the firm. Examples: a.) Ethanol. Should this firm be in the ethanol business? In its own promotions for isobutanol, Gevo has already argued that isobutanol is superior to ethanol in a number of ways. Also, the ethanol margins Gevo is currently reporting are not impressive. Finally, there are the following personnel issues4: David Black is Executive Vice President of Upstream Business Development for Gevo and is responsible for structuring and executing joint ventures with and acquisitions of industrial production assets. Mr. Black has extensive experience in ethanol and clean technology transactions. Prior to joining Gevo, Mr. Black was a co-founder and co-managing partner of ClearDevelopment Partners, a renewable energy and clean technology project development company. In 2004 he co-founded, developed, financed, and operated AS Alliances Biofuels, LLC (ASAB), an ethanol production company that was later sold for $725 million. He served as Chief Executive Officer of ASAB from 2005 to 2006. Prior to ASAB, Mr. Black was a partner with Deloitte and Touche where he served as co-head of the national corporate finance consulting practice. Mr. Black received an M.B.A. from Southern Methodist University and a B.S. in finance from Arizona State University. Michael Slaney is Executive Vice President of Upstream Business Development for Gevo and is responsible for structuring and executing joint ventures with and acquisitions of industrial production assets. Mr. Slaney has extensive experience in ethanol and clean technology

transactions. Prior to joining Gevo, Mr. Slaney was a co-founder and co-managing partner of ClearDevelopment Partners, a renewable energy and clean technology project development company. In 2004, he co-founded, developed, financed, and operated AS Alliances Biofuels, LLC (ASAB), an ethanol production company that was later sold for $725 million. He served as Chief Operating Officer of ASAB from 2005 to 2006. Prior to ASAB, Mr. Slaney was a partner in the corporate section of Akin Gump Strauss Hauer & Feld LLP specializing in M&A and joint venture transactions and worked for large public accounting (KPMG, LLP) and investment banking (Kidder Peabody & Co.) firms. Mr. Slaney received a J.D. from Indiana University and a B.S. in accounting and business administration from the University of Kansas. The two have no technology degrees. Furthermore, its hard to understand what Upstream is in a bio-based fuel and chemical business? b.) Ethylene. Perhaps the raison dtre for the Gevo ethanol business, since Gevos patent application #20110172475 claims the capacity to produce ethylene from ethanol? But why would producing ethylene be attractive in the current US market? Natural gas is currently down fully 75% from its 2008 high while crude oil is down only 33%. Natural gas hasn't been this cheap relative to crude for decades, thanks to significant new drilling techniques (horizontal drilling, fracking) which have resulted in a natural gas production bonanza in the U.S."10 Consequently in the U.S., with natural gas prices having diverged from petroleum prices, cracking ethane/propane has become more attractive. This produces proportionately more ethylene (C2s) and proportionately less heavier molecules (including C4s). This might create lower ethylene prices but create supply tightness and supply opportunities, in the U.S. at least, in C4s. Thus, if the trend continues, it would seem that Gevos opportunity would lie with its strength, in C4 molecules in the U.S., not in ethylene. For these reasons, occupying positions in the ethylene, propylene (by metathesis), and benzene businesses just do not seem consistent with Gevos strengths and opportunities. c.) Other commodity chemicals. To quote Gevos prospectus4: It (isobutanol) can also be further processed using well-known chemical processes into jet fuel and feedstocks for the production of synthetic rubber, plastics and polyesters. If the processes that produce fuel and chemical derivatives of isobutanol are well-known, it is hard to understand how such processes could provide an advantage for Gevo. Moreover, given the capital-intensive nature of this business and the paucity of resources with which Gevo has attacked this large market, larger, better-capitalized fuel and chemical companies might be better positioned to play in this space. In fact, Gevo has been financing R&D internally too to develop these well-known processes, resources that could be redirected toward endeavors (isobutanol) which still require more resources.

d.) Fuels. Fuels constitute over nine-tenths of Gevos addressable claimed market by volume! Again, this is also a capital-intensive business inhabited by several large firms possessing scale and resource advantages over Gevo. Too, the molecules required to service this market are farremoved from a strong Gevo advantage: bio-based butanol. In fact, Gevo has to add three extra steps from isobutanol to butylenes, from butylenes to dimers and trimers, and then dehydrogenation of these molecules to get the fuel blending components3. Rather the strongest, and as yet minimally developed opportunity Gevo has, lies in isobutanol. By their calculations the demand for iso-butanol blended directly into fuel is still pretty large (40MGPY). Furthermore, Gevo has patents that might protect them in this space, depending, of course, on the results of their current lawsuit with Butamax. For a small company with limited resources, it might make more sense to focus upon the opportunity in isobutanol first. Once a decent-sized business is built there (and that still may take a while!), once Gevo has demonstrated the ability to execute a plan that achieves this kind of goal, once Gevo secures some sort of advantage in this space, and once it has built the necessary managerial resources to take it further, then it might be more appropriate for Gevo to think seriously about other businesses. Leadership It is possible that spending several years in bio-based plastics might have allowed Gevos 3 key, former NatureWorks executives to obtain some experience and form some relationships that would allow it to procure feedstocks effectively. Surprisingly, this aspect of the Gevo story has not received as much attention in their prospectus and press releases. However, it is not likely that the presence of all three is necessary to do so. Rather, some diversification of the experience of the top management team seems in order. Specifically, incorporating experience in the fuels and commodity chemicals markets seems needed. Conclusion: Evidence has been presented above that supports the notion that Gevo, a flagship bio-based fuels and commodity chemicals producer in the U.S., has opportunities to improve its strategic direction. Its claimed addressable market is wildly optimistic and, in fact, Gevo is incapable of addressing any more than .01% of the global market for fuels and commodity chemicals it claims within the next four years. Strategic problems associated with this position may include A lack of scale or market power, Preemption by competing, disruptive technologies due to slow growth, and An underlying problem with applying industrial biotechnology models to large industries (e.g., fuels). The evidence presented above also establishes a pattern of management communications coursing across many different activities, a management style if you will, that is inconsistent with building a sustainable competitive advantage via a good, fundamentally sound reputation. Evidence for this claim includes Wildly expansive claims to markets without commensurate resources to back them up,

A patent infringement suit, and Inflammatory, potentially unnecessary claims about petroleum-based competition. Finally, the evidence presented above suggests deficiencies in senior management that may have caused Gevo to overlook some strategic aspects of their proposed business, including Lack of experience in fuels or commodity chemicals, the proposed markets for Gevo, among key senior executives, Lack of technological sophistication among some members of senior management, Cronyism among three former NatureWorks executives, An overall strategy that seems to run counter to certain opportunities and/or Gevo strengths, and A stock price that has withered since Gevos splashy IPO less than a year ago. It is possible that Gevos claimed cost advantage in isobutanol could overshadow any or all of the aforementioned problems. However, its also possible that the factors that create such an advantage are temporary. Either way, such an advantage may not constitute a justification for neglecting the problematic aspects of Gevos strategy mentioned in this treatise. Thus, it is the recommendation of the author that Gevos strategy might more profitably focus on the strengths Gevo possesses and its opportunities that are consistent with such strengths rather than on the more expansive approach it currently espouses.

Appendix Gevo Financial Statements k$ Income Statement


Year
Revenues Grant revenue Licensing revenue Ethanol sales rel.products Total Revenues Cost of Goods Sold Gross prot as % of revenues Operating Expenses: Research &Development General, Selling, & Admin. Lease termination cost Loss on assets aband. or disposed Total Operating Expenses Loss from Operations Other Income/Expenses: Interest expense Interest income Loss, fair value warrant liab. Net Other Income/Expenses Net Loss (6 mos.)
4,8,11

(9 mos.)

2005 1
0 0 and 0 0 0 0 0

2006 2007 2 3
100 0 0 100 0 100 100% 275 0 0 290 0 290 100%

2008 4
208 0 0 208 0 208 100%

2009 2010 5 6
660 0 0 660 0 660 100% 1493 138 14765 16396 13446 2950 22%

2011 7
572 0 46748 47320 45062 2258 5%

Total

3308 138 61513 64959 58508 6451 10%

161 99 0 0 260 260

902 328 0 0 1230

3699 2601 894 243 7437

7376 6065 0 78 13519 13311

10508 14820 8699 23643 0 0 22 0 19229 38463 18569 35513

13815 20001 0 11 30546 31569

51281 61436 894 354 113965 107514

1130 7162

0 1 0 (1) 259

0 20 0 (20) 1110

140 76 0 64 7226

1385 154 0 1231 14542

1103 277 490 1316

2374 108 2333 4599

2541 85 29 2485 34054

7543 721 2852 9674 117188

19885 40112

Balance Sheet K$ Year


Current Assets: Cash & Equiv. Accts. Receivable Inventory Prepaid expense/other Derivative asset Margin Deposit Total Current Assets Fixed Assets: Property, Plant & Eqpt. (Net) Deferred Offering Cost Debt issue Cost Deposits and Other Assets Total Fixed Assets Total Assets Liabilities & Shareholders Equity Current Liabilities: Accts. payable Current portion of L/T debt Derivative liability Fair Value of warrant liability Total Current Liabilities Long-Term Liabilities: Secured Long-Term Debt Other Liabilities Total Long-term Liabilities Total Liabilities Shareholders Equity Convertible Preferred Stock Preferred Stock Common Stock Additional Paid-In Capital Earnings Decit Total Stockholders Equity Total Liabilities & Shareholders Equity

(9 mos.)

2005 2006 2007 1 2 3


183 1005 63

2008 4
9635

2009 2010 5 6
21240 15274 99 2830 3765 163 1040 40 361 624 21542 23894

2011 7
97605 2749 4794 1287 1370 0 107985

40 35 228 1776 2391 9710

3132

4632

252

209

23465 3152 929 169 27175

24372 0 692 130 25194 133179

228

1776

2391

13094

26383 51069

1644 1769

2521

3413

982 3503

7903 1785 405 2034 12127

10219 1747 0 0 11966

1579

6409 114

7701 96

18647 876 19523

17671 247 17918 29884

44

205

3029

9936

11300 31650

80 12 26203 23137 3158

259 184

1369 1571

8595 -638

146 0 0 0 12 12 260 57382 105128 223510 42437 85327 120475 15083 19959 103295

126

228

1776

2391

13094

26383 51609

133179

Cash Flow Statement K$


Net Income Operating Activities: Depreciation & Amortization Stock-based compensation Stock expense (license agreement) Debt disc. to noncash interest exp. Loss, fair value of warrant liab. Loss (gain) from change in derivative Loss, aband., disposal of xed assets Decrease (increase) in A/R Decrease (increase)Prepaid expenses Decr. (incr.) Deposits and other assets Increase (decrease) in A/P Decrease (increase) in inventory Margin Deposit Net Cash Flow from Operations Investing Activities: Acq. of plant, property, & eqpt. Acq. Of Agri-Energy (incl. Luverne plt) Proceeds from sale of PP&E Restricted CD Net Cash Flow from Investment Financing Activities: Dividends Paid Sale (repurchase) of stock Sale (repurchase) of preferred stock Sale of conv. promissory note Sale of warrants Proceeds from exercise of warrants Increase (decrease) in debt Principal pmts. On L/T debt

(9 mos.)

2005 1

2006 2

2007 3

2008 4

2009 5

2010 6

2011 7

Total
-11718 8

-7226 -14542 -19885 -40112 -34054

240 55 10 54 0

678 207 0 1102 0

1511 945 0 235 490

3188 10511 0 762 2333 -561

3372 4897 0 625 29 -1414 11 81 -535 0 1813 -1209 624

9064 16617 10 2778 2852 -1975 354 -750 -652 -90 7975 -1404 892

243 -33 -253 -205 1246

78 33 247 147 309

22 -99 -128 4 806

0 -732 47 1 3594 -195 0

-5869 -11741 -16099 -20896 -25760 -81517

-1341

-2630

-2982

-806 -24936

-3580 0 0 40 -3540

-11820 -24936 5 -79 -36830

0 -218 -1559

5 40 -2315

0 40

0 40

-2942 -25702

0 0 5000 0 0

0 6 13957 3000 0

0 0 32500 0 0

0 16 31564 0 0 592

114725 114947 86025 3000 1 592 0 -1402 9078 -7795

1568 0

7396 -521

114 -622

17500 -5250

Payment of stock issuance cost Debt issuance cost Deferred offering cost Net Cash Flows from Financing Net Increase (decrease) in cash

-82 0 6486

-210 0 23628 9572

-1346 0 30646 11605

-153 -1033 -2604 40632 -5966 -1692

-1867 -1033 -4296 111631 215952 82331 97605

Bibliography 1. http://www.gevo.com, 11/24/2011 2. http://www.eoearth.org/article/Petrochemicals?topic=49557 3. Adapted from U.S. patent application #20110172475 4. http://www.gevo.com, Form S-1 Registration (prospectus for IPO) 5. http://www.icis.com/cgi-bin/mt/mt-search.cgi? search=Gevo&IncludeBlogs=148&limit=20; 9/13/2011 6. http://en.wikipedia.org/wiki/List_of_oil_reneries 7. http://money.cnn.com/magazines/fortune/global500/2011/snapshots/387.html 8. http://www.gevo.com, 3Q earnings, press release 9. http://www.butamax.com/_assets/pdf/butamax_press_release_140111.pdf 10. http://mjperry.blogspot.com/2011/11/two-charts-on-natural-gas-vs-oilprices.html 11. http://www.gevo.com, Annual Report, 2010

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