Gevo, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial amounts are in U.S. dollars; figures below are generally in millions unless stated otherwise. The company develops renewable fuels and chemicals and operates its Luverne, Minnesota facility. The unaudited results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $6.40 | $8.24 |
| Gross loss | $2.56 | $2.34 |
| Operating expenses | $3.07 | $2.66 |
| Operating loss | $5.63 | $5.00 |
| Net loss | $6.14 | $2.50 |
| Cash used in operating activities | $5.71 | $4.35 |
- Revenue included $5.66 million from ethanol and related products and $0.74 million from hydrocarbons; hydrocarbon revenue was zero in the prior-year quarter.
- Gross margin was approximately negative 40% (gross loss of $2.56 million on revenue of $6.40 million).
- Cash and cash equivalents were $35.47 million at quarter-end, up from $33.73 million at December 31, 2018. Investing activities used $2.20 million, principally for capital expenditures; financing provided $9.64 million, principally net proceeds from stock sales.
- Total assets were $111.46 million and total liabilities were $18.93 million. The 2020 Notes had $13.84 million of principal outstanding and a 12% annual interest rate; they mature March 15, 2020 and are secured by a first lien on substantially all company assets. Their net carrying value was $12.96 million, classified as current at March 31, 2019.
- Quarter-end accumulated deficit was $435.46 million. Common shares outstanding rose from 8.64 million at year-end to 11.89 million at March 31, largely reflecting the at-the-market offering.
Changes versus the prior-year quarter
- Revenue declined $1.84 million, or about 22%. Ethanol and related-product revenue fell $2.55 million; ethanol volume decreased to 3.7 million gallons from 4.9 million, with lower ethanol prices and reduced distillers-grains sales also cited.
- Cost of goods sold fell $1.62 million, but by less than revenue, so gross loss widened by $0.22 million. Management attributed lower costs to reduced production amid an unfavorable commodity environment.
- Operating expenses increased $0.41 million, including higher R&D consulting costs and stock-based compensation in SG&A.
- Net loss increased $3.63 million. In Q1 2018, non-cash gains from changes in fair value of the embedded derivative and warrant liability were substantially larger; the 2019 quarter recorded a $0.25 million embedded-derivative gain and a negligible warrant-liability gain.
- Operating cash use increased $1.36 million. Capital expenditures rose to $2.20 million from $0.07 million.
Outlook, risks and notable items
- Management expects continued net losses and says operations depend on raising additional capital; it cautions that financing may not be available on acceptable terms or at all, and that profitability and positive operating cash flow may never be achieved. It stated losses were expected through at least 2020.
- The company issued 3.24 million shares through its ATM program in Q1 for $9.9 million gross proceeds. Although approximately $34.7 million of program capacity remained, the filing says Gevo was then unable to sell additional shares under the program because of Form S-3 limits tied to its public float and prior sales.
- Management is pursuing Luverne improvements to reduce fossil-energy use and carbon intensity and to increase coproduct sales. The Shockwave corn-fractionation process was expected to be operational in the first half of 2019; certain decarbonization projects were expected to be completed around year-end 2020. These are expectations, not reported completed results.
- Two Luverne fermentation vessels were scheduled for repair, expected to be completed in Q2 2019 at an estimated cost of about $0.6 million. A third carbon-steel fermenter was retired following inspection.
- After quarter-end, on April 4, 2019, Gevo signed agreements with Praj Industries concerning commercialization of isobutanol using sugary feedstocks and a memorandum of understanding for renewable hydrocarbons in India. Commercial outcomes remain contingent on development and customer adoption.
- Contractual obligations included $14.11 million of principal and $1.34 million of debt interest due within one year. The filing reported no material litigation, no material change to the annual-report risk factors, and no material off-balance-sheet arrangements other than disclosed operating leases. Management reported disclosure controls were effective at March 31, 2019.
Key facts for investors to verify
- Whether Gevo can secure financing, given ongoing cash burn, ATM restrictions, dilution from prior stock issuance and the 2020 Notes’ March 2020 maturity.
- Whether Luverne’s production, product mix and cost-reduction projects improve unit economics and reduce the persistent gross loss.
- Whether the planned vessel repairs and Shockwave process were completed on schedule and within expected costs.
- Whether hydrocarbon sales and the Praj arrangements progress from demonstration or development activity to recurring commercial revenue.
- The assumptions and potential share dilution associated with the convertible notes, embedded derivatives and outstanding warrants.