Gevo, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Dollar amounts below are in millions unless stated otherwise. Financial statements are unaudited.
Business context
Gevo develops renewable fuels and chemicals, including ethanol, isobutanol, and isobutanol-derived hydrocarbons. Its Luverne, Minnesota facility produces ethanol and related products; expanded low-carbon ethanol and isobutanol production would require capital improvements. The company is pursuing ethanol-market improvements in the near term while developing markets and supply agreements for isobutanol, alcohol-to-jet fuel (ATJ), and other products.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $9.42 | $7.54 | $17.66 | $13.16 |
| Gross loss | $(1.27) | $(2.16) | $(3.61) | $(5.96) |
| Loss from operations | $(4.38) | $(6.18) | $(9.38) | $(13.36) |
| Net loss | $(11.49) | $(10.16) | $(13.99) | $(16.09) |
| Net loss per share | $(7.19) | $(13.22) | $(10.26) | $(23.86) |
- Revenue growth was driven mainly by ethanol and related-product sales. Ethanol volume was 4.9 million gallons in the quarter and 9.8 million gallons for the half-year, versus 4.0 million and 7.3 million, respectively, in 2017.
- Gross margin remained negative: approximately negative 13.5% for the quarter and negative 20.5% for the half-year. Lower operating expenses improved operating losses, but higher interest expense and fair-value changes in warrants and debt-related derivatives affected net results.
- Six-month operating cash use was $7.81, investing cash use was $0.10, and financing provided $23.38. Cash and cash equivalents rose to $27.03 at June 30, from $11.55 at year-end 2017.
- June 30 current assets were $47.58 and current liabilities $4.29; current assets included $14.13 due from June 29 stock sales, collected July 3. Total assets were $116.03, total liabilities $16.44, and stockholders’ equity $99.60.
- The 2020 Notes had $13.64 of principal outstanding, carried at $11.73 net of discount and costs, and mature March 15, 2020. They bear 12% annual interest, with up to 2% potentially payable in kind. The remaining $0.52 of 2022 Notes was exchanged for stock in January 2018 and is no longer outstanding.
Material changes versus prior comparable periods
- Quarterly revenue increased about 25% year over year; the gross loss narrowed by $0.89 and operating expenses fell by $0.91. Nevertheless, quarterly net loss widened by $1.33, largely reflecting a $3.52 non-cash warrant-liability loss, compared with a gain in the 2017 quarter.
- For the first half, revenue increased $4.51, gross loss narrowed $2.34, and operating loss improved $3.98. Net loss improved $2.10 despite higher interest expense and a $3.04 non-cash warrant-liability loss; derivative fair-value movements were significant in both periods.
- Ethanol and related-product revenue was $8.81 for the quarter and $17.03 for the half-year. The company sold close to 100% of its ethanol production to one customer, which represented 69% of quarterly and 71% of six-month revenue in 2018.
- A 1-for-20 reverse stock split took effect June 1, 2018. The at-the-market (ATM) offering issued 6.29 million post-split shares during the first half for $37.4 million gross proceeds; $14.5 million was received after quarter-end. Shares issued and outstanding were 7.99 million at June 30, versus 1.09 million at December 31, 2017, with share data retrospectively adjusted for the split.
Outlook, management commentary, and risks
- Management expected 2018 ethanol sales of approximately 19 million gallons or more and animal-feed sales of approximately 56,000 tons. It planned to improve Luverne cash flow through process optimization, lower feedstock costs, and higher-value products. These are expectations, not assured results.
- Management described two possible paths to profitability: improving low-carbon ethanol economics at Luverne, or obtaining binding product offtake agreements and financing for a facility expansion centered on isobutanol and derived products. The filing gives no quantified profitability target or timetable.
- The company stated it expected future losses and needed additional capital. Its 2017 financial statements and this filing describe substantial doubt about its ability to continue as a going concern; management said available working capital at year-end 2017 was insufficient to fund planned operations for the following year without additional capital. The filing does not provide a clear cash-runway estimate.
- After quarter-end, Gevo reported approximately $14.9 million of ATM proceeds received from pre-quarter-end sales and additional post-quarter-end ATM sales. It also reported an additional $0.4 million of gross ATM proceeds and remaining ATM capacity of approximately $52.1 million. Further equity issuance may dilute shareholders.
- The EPA approved on-road gasoline blending of isobutanol up to 16% on June 12, 2018. Gevo announced a long-term ATJ supply agreement with Avfuel, effective July 1, 2018. On July 27, it entered into equipment leases for a DGS dryer and corn fractionation machine, with stated payments of $1.0 million and $2.5 million over 48 installments following specified start events; the equipment was expected to be operational in first-quarter 2019.
- Key risks include financing availability, ongoing cash burn, 2020 debt service, production and scale-up difficulties, feedstock and natural-gas costs, customer concentration, uncertain market acceptance and product pricing, and the need to secure binding offtake agreements. The company had not yet produced low-carbon ethanol, and it acknowledged limited commercial-scale isobutanol production experience.
- Gevo reported no material litigation known to it and no material change in market-risk exposure. Management concluded disclosure controls were effective as of June 30, 2018.
Most important facts for investors to verify
- Cash actually available after settlement of ATM proceeds, subsequent cash use, and the company’s funding needs and runway.
- ATM issuance, remaining offering capacity, share-count changes, and potential dilution, including conversion of the 2020 Notes and warrants.
- Outstanding 2020 Notes principal, interest and maturity obligations, and the terms governing any further conversions or refinancing.
- Progress and economics of Luverne improvements, including the leased equipment, expected operating date, and whether low-carbon ethanol and animal-feed targets are achieved.
- Whether the Avfuel agreement and other customer discussions lead to binding volumes, viable prices, and sufficient financing for expansion; also monitor dependence on the major ethanol customer.
- Actual production yields, cost per unit, gross margins, and cash flow: the filing reports continued gross losses and does not establish that management’s profitability plans will succeed.