Gevo, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Gevo develops renewable isobutanol and related biofuels and chemicals; during the period, most revenue came from ethanol produced at its Luverne, Minnesota facility.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $7.5 million | $8.1 million | $13.2 million | $14.4 million |
| Gross loss | $2.2 million | $1.9 million | $6.0 million | $4.8 million |
| Operating loss | $6.2 million | $5.5 million | $13.4 million | $11.4 million |
| Net loss | $10.2 million | $21.5 million | $16.1 million | $25.1 million |
| Net cash used in operations | Not stated for quarter | Not stated for quarter | $13.4 million | $11.4 million |
- Q2 gross margin was approximately negative 28.7%, compared with negative 23.1% a year earlier; six-month gross margin was approximately negative 45.3%, compared with negative 33.1%.
- At June 30, cash and cash equivalents were $16.3 million, down from $27.9 million at December 31, 2016. Current assets were $22.9 million and current liabilities $15.8 million. Cash flow from investing was negative $1.3 million; financing provided $3.1 million for the first half.
- Total liabilities were $29.4 million. Debt included $16.5 million principal of 12% secured convertible notes due 2020 and $0.69 million principal of 7.5% notes due 2022. The 2020 notes are secured by a first lien on substantially all company and subsidiary assets.
- Accumulated deficit was $392.8 million. The filing states that working capital was insufficient to fund planned operations for one year after issuance of the 2016 audited statements, raising substantial doubt about Gevo’s ability to continue as a going concern. The company expects further losses and needs additional financing.
Changes versus the comparable period
- First-half revenue declined $1.3 million, principally due to lower ethanol sales and distillers-grain prices, lower hydrocarbon shipments, and the end of a research-grant contract. Ethanol volume was 7.3 million gallons versus 7.6 million.
- Despite lower revenue, first-half gross loss widened by $1.2 million, while operating loss widened by $2.0 million as research and development and selling, general and administrative expenses increased.
- Net loss improved by $9.0 million, largely reflecting lower interest expense and noncash warrant-valuation gains, partly offset by a $4.9 million loss on debt exchanges and a $1.7 million noncash loss on the 2020-note embedded derivative. Net loss comparisons are affected by these fair-value and financing items.
- Shares issued and outstanding increased from 7.1 million at December 31, 2016 to 16.2 million at June 30, 2017. The filing also reflects the January 2017 one-for-twenty reverse split; per-share comparisons should be read in that context.
Outlook, developments and risks
- Management targeted 2017 corporate EBITDA burn, excluding stock-based compensation, of $18–$20 million. It revised expected 2017 isobutanol production to less than 500,000 gallons, versus a prior target of approximately 500,000 gallons.
- In Q2, Gevo dedicated Luverne production to ethanol because current isobutanol production costs exceeded expected sales prices; it planned limited isobutanol production in the second half to optimize processes and inform expansion design. The company reported approximately 270,000 gallons of isobutanol and 51,000 gallons of renewable hydrocarbons in inventory at quarter-end.
- Gevo exchanged $16.5 million of 2017 notes for $16.5 million of 12% notes due March 2020 and recognized an approximately $4.0 million exchange loss. The new notes have a $0.7359 initial conversion price, potential conversion-price reset rights in certain equity financings, and possible interest-in-kind payments.
- Management was engineering a proposed Luverne expansion for isobutanol and hydrocarbon production; capacity and capital cost had not yet been determined. A five-year HCS isooctane supply agreement included an initial phase management estimated could generate $2–$3 million annual gross revenue, and a later phase for 300,000 gallons annually, with an option for another 100,000 gallons. These are prospective, not reported revenue.
- The proposed Lufthansa aviation-fuel offtake remained nonbinding; Gevo was not then negotiating definitive terms. Customer interest, financing, production scale-up and market acceptance were uncertain. Lower renewable-fuel credit prices (D6 RINs) were also affecting product economics.
- Two older Luverne fermentation vessels were estimated to have approximately two and six years of useful life remaining under current operations. Repairs, operating changes or replacement were under evaluation; vessel condition could require an extended production halt.
- Gevo received a Nasdaq notice for trading below the $1.00 minimum bid price; it had until December 18, 2017 to regain compliance, subject to possible extension and other conditions. Delisting could trigger note repurchase and make-whole obligations.
- Management reported no material litigation or environmental liabilities, no material off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2017. Operating lease commitments totaled $3.7 million.
Most important facts for investors to verify
- Whether available cash and subsequent financing were sufficient to fund operations, debt service and planned development, given the stated going-concern uncertainty.
- Actual cash burn relative to the $18–$20 million 2017 EBITDA-burn target, and progress toward positive unit economics for isobutanol.
- Whether HCS supply volumes and any other customer discussions became binding contracts, and whether the Luverne expansion received a defined scope, funding and schedule.
- The remaining terms, conversion dilution, reset provisions and payment capacity associated with the secured 2020 notes and outstanding warrants.
- Nasdaq bid-price compliance and the condition and continuity of the Luverne fermentation vessels.