Gevo, Inc. — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed March 28, 2018. The filing also reports fourth-quarter results. Gevo develops renewable isobutanol, fuels and chemicals, while its Luverne, Minnesota facility primarily produced ethanol and co-products. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $27.5 million | $27.2 million |
| Cost of goods sold | $38.2 million | $37.0 million |
| Gross loss | $10.6 million | $9.8 million |
| Operating expenses | $12.7 million | $14.2 million |
| Loss from operations | $23.3 million | $24.0 million |
| Net loss | $24.6 million | $37.2 million |
| Net cash used in operating activities | $20.6 million | $20.5 million |
| Cash and cash equivalents at year-end | $11.6 million | $27.9 million |
Revenue increased about 1% year over year, but gross loss widened; gross margin was approximately negative 38.6%. Lower operating expenses helped reduce operating loss. Net loss improved by $12.6 million, reflecting, among other items, non-cash fair-value gains and lower interest expense; it did not indicate operating profitability. The company reported an accumulated deficit of $401.4 million.
FY2017 revenue consisted of $26.3 million from ethanol and related products, $1.0 million from hydrocarbons, and $0.2 million from grants and other sources. Ethanol and related products represented about 95% of revenue. C&N Ethanol Marketing accounted for 76% of consolidated revenue and Land O’Lakes Purina Feed for 17%.
At December 31, current assets were $17.7 million and current liabilities were $11.2 million, including a $5.2 million embedded derivative liability. The company said available working capital was insufficient to fund planned operations for the year following issuance of the financial statements without additional financing. The auditor identified substantial doubt about Gevo’s ability to continue as a going concern. Operating cash outflow remained approximately $20.6 million; investing cash outflow was $1.9 million, and financing cash inflow was $6.2 million.
Year-end debt included $16.7 million principal of 12% secured convertible notes due March 2020 and $0.5 million of 2022 notes. The 2020 notes are secured by a first lien on substantially all company assets. Gevo exchanged the remaining 2022 notes for shares in January 2018. Year-end common shares outstanding were 21.8 million; 22.6 million were reported outstanding as of February 28, 2018.
Fourth-quarter results
Q4 2017 revenue was $6.7 million, gross loss $2.7 million, operating loss $4.8 million, and net loss $4.4 million. In Q4 2016, revenue was $5.8 million, gross loss $2.3 million, operating loss $6.5 million, and net loss $2.3 million. Thus, quarterly revenue and operating loss improved year over year, while gross loss widened and net loss increased.
Material changes, outlook and risks
- Luverne produced 15.6 million gallons of ethanol, 47,000 tons of animal feed and 1,050 tons of corn oil in 2017. It also produced about 206,000 gallons of isobutanol; sales of isobutanol and derived hydrocarbons totaled approximately 49,368 gallons and generated $1.1 million of revenue.
- Management planned to sell approximately 19 million gallons or more of ethanol and 56,000 tons of animal feed in 2018, while improving facility cash flow through process optimization, higher-value products and lower carbohydrate costs. These are management expectations, not guaranteed results.
- Management described two possible paths to profitability: improving Luverne’s ethanol economics, or obtaining binding offtake agreements and financing for an expansion focused primarily on isobutanol and related hydrocarbons. Isobutanol production at the existing 1.5-million-gallon annual capacity was said to consume cash because the low run rate did not cover fixed costs.
- Commercial expansion depends on financing and binding customer commitments. The HCS isooctane agreement included an initial demonstration-plant phase estimated by Gevo to generate up to $2–3 million in gross revenue annually, and a separate 300,000-gallon annual purchase commitment, with an option for 100,000 more, conditional on production starting at a commercial facility.
- Management reported structural concerns in two older carbon-steel fermentation vessels. One was estimated to have about two months of remaining life and the other at least one year before repair; repair was estimated at about $250,000 per vessel. Vessel condition could constrain production or require downtime.
- Key risks include the going-concern funding gap, high-cost secured debt, possible further dilution, limited commercial-scale isobutanol sales, commodity-price exposure, customer and supplier concentration, production and scale-up risks, and dependence on fuel regulations and incentives. Nasdaq had granted until June 18, 2018 to regain the $1.00 minimum bid-price compliance, with a reverse split identified as a possible remedy.
- As of the filing, the EPA had published a notice for comment on its intent to register isobutanol for gasoline blending; final approval had not occurred. The filing also notes possible regulatory requirements for products, facilities and animal-feed co-products.
Important facts for investors to verify
- Whether Gevo obtained enough additional financing to fund operations and meet debt obligations, and the terms and dilution associated with any financing.
- Whether the 2020 notes remain current and compliant, including interest, security, conversion and any potential repayment obligations.
- Whether binding offtake agreements and committed financing support the Luverne expansion, rather than relying on preliminary arrangements or management targets.
- Whether Luverne’s vessel repairs, production reliability, product yields and unit economics support sustained positive cash flow.
- Whether the EPA and other relevant authorities granted required approvals, and whether Gevo regained Nasdaq bid-price compliance by the stated deadline.