Gevo, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results; dollar amounts below are in millions unless stated otherwise.
Business context
Gevo develops renewable fuels and chemicals, including ethanol, isobutanol, alcohol-to-jet fuel (ATJ), isooctane and isooctene. Its Luverne, Minnesota facility produces ethanol and related products and is intended to support lower-carbon ethanol and future isobutanol production. Hydrocarbon products are also produced at a demonstration facility in Texas.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $8.6 | $7.7 | $26.2 | $20.9 |
| Gross loss | $(2.1) | $(2.0) | $(5.7) | $(8.0) |
| Operating loss | $(6.1) | $(5.1) | $(15.5) | $(18.5) |
| Net loss | $(6.9) | $(4.2) | $(20.9) | $(20.2) |
| Operating cash flow | Not separately stated | Not separately stated | $(10.2) | $(16.4) |
- Q3 gross margin was approximately negative 24%; nine-month gross margin was approximately negative 22%.
- Revenue growth reflected higher ethanol and distillers’ grain sales and increased hydrocarbon shipments. Ethanol sales were 5.1 million gallons in Q3 versus 4.2 million; 14.9 million gallons year to date versus 11.5 million.
- Cash and cash equivalents were $38.3 million at September 30, 2018, up from $11.6 million at December 31, 2017. Nine-month investing cash use was $0.9 million and financing provided $37.9 million, primarily from equity issuance.
- Total liabilities were $18.1 million and stockholders’ equity $93.2 million at quarter-end. The 2020 Notes had $13.7 million principal outstanding (reported net carrying amount $12.2 million), bear 12% annual interest and mature March 15, 2020. The 2022 Notes were fully exchanged for shares in January 2018.
- The company reported an accumulated deficit of $422.2 million. It issued 6.39 million shares through its at-the-market program during the first nine months for $37.8 million gross proceeds; approximately $52.0 million of program capacity remained at quarter-end.
Material changes and unusual items
- Nine-month revenue increased $5.4 million, while gross loss narrowed $2.3 million and operating loss narrowed $3.0 million year over year. Net loss was slightly higher, largely reflecting other expense and fair-value movements.
- Q3 net loss increased $2.7 million year over year. Operating expenses rose $1.0 million, including higher R&D spending associated primarily with the South Hampton facility expansion; other income in Q3 2017 included a $2.2 million gain on the 2020 Notes embedded derivative.
- Nine-month other expense included a $3.0 million noncash loss on warrant-liability remeasurement and a $2.2 million noncash loss on debt exchange/conversion, partly offset by a $2.3 million noncash gain on the 2020 Notes embedded derivative. Such valuation changes can materially affect reported earnings.
- Common shares outstanding were 8.10 million at September 30 and 8.64 million at October 31. Share and per-share figures reflect the June 2018 one-for-twenty reverse stock split.
Outlook, 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 expected to improve Luverne cash flow through process optimization, higher-value products and lower feedstock costs.
- Gevo targeted completion of certain Luverne decarbonization projects by approximately the end of 2020 and projected that the facility could achieve positive non-GAAP Cash EBITDA by approximately the end of 2021. These are targets, not guarantees.
- Two Shockwave equipment leases were signed in July 2018: a dryer arrangement totaling $1.0 million and a corn fractionation arrangement totaling $2.5 million, each payable over 48 months after specified installation/operational milestones. The equipment was not yet operational at quarter-end; the process was expected to be operational in the first half of 2019.
- Management stated that substantial additional financing is needed and that the company may never achieve profitability or positive operating cash flow. The filing cites substantial doubt about the company’s ability to continue as a going concern, dependent on raising capital and executing its plans. Equity financing has caused significant dilution; additional funding may be unavailable or unacceptable in cost or terms.
- Key execution dependencies include completing facility improvements, securing financing and binding product offtake agreements, achieving market acceptance and favorable economics for low-carbon credits, and managing feedstock, commodity-price and production risks. Ethanol sales were concentrated in a single customer, which accounted for 72% of revenue in both the quarter and year-to-date period.
- Management reported no material litigation and concluded disclosure controls were effective as of September 30, 2018. No material change in market-risk exposure was reported.
Most important facts for investors to verify
- Cash runway and financing needs, including the going-concern disclosure, remaining ATM capacity and post-quarter share issuance.
- Debt repayment and interest obligations on the 12% 2020 Notes, including any additional PIK interest and conversion-related dilution.
- Whether Luverne improvements and Shockwave equipment become operational on schedule, within budget and deliver expected cost and carbon-intensity benefits.
- Progress toward ethanol sales targets, customer diversification, and binding offtake agreements and financing for expansion.
- Underlying operating performance apart from noncash derivative and debt-related valuation effects; the filing does not provide a clear cash-flow runway estimate.