Gevo, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; amounts below are in U.S. dollars unless otherwise stated. Gevo develops renewable isobutanol, biofuels and related hydrocarbons. Its Luverne, Minnesota facility produced ethanol and isobutanol. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $5.616 million | $6.320 million | Down 11% |
| Gross loss / gross margin | $(3.792) million / (67.5%) | $(2.903) million / (45.9%) | Loss widened |
| Operating loss | $(7.182) million | $(5.866) million | Loss widened |
| Net loss | $(5.934) million | $(3.605) million | Loss widened |
| Net loss per share | $(0.51) | $(3.13) | Share count increased substantially |
| Operating cash flow | $(8.047) million | $(5.504) million | Cash use increased |
| Capital expenditures | $0.673 million | $2.247 million | Lower |
Ethanol and related-product sales were $5.494 million, hydrocarbon revenue was $0.090 million, and grant and other revenue was $0.032 million. Revenue fell mainly because ethanol sales volume and distillers-grain prices were lower, hydrocarbon shipments declined, and a grant contract had ended. Ethanol sales volume was 3.3 million gallons versus 3.8 million a year earlier. Cost of goods sold rose to $9.408 million from $9.223 million; operating expenses increased to $3.390 million from $2.963 million.
Cash and cash equivalents were $20.393 million at quarter-end, down from $27.888 million at December 31, 2016. Current assets were $26.635 million and current liabilities $26.432 million. Total assets were $104.587 million, total liabilities $27.687 million, and stockholders' equity $76.900 million. Debt included $16.492 million of 2017 Notes and $1.088 million carrying value of 2022 Notes. The 2017 Notes were secured by substantially all company assets.
The company reported an accumulated deficit of $382.654 million and stated that available working capital was insufficient to fund planned operations for the year following issuance of its 2016 year-end financial statements unless it restructured or extended debt and/or raised additional capital. Management disclosed substantial doubt about Gevo's ability to continue as a going concern.
Material changes and unusual items
- In February 2017, Gevo raised approximately $11.9 million gross in an equity-and-warrant offering and paid $9.616 million against the 2017 Notes. The remaining principal was approximately $16.5 million, with maturity extended to June 23, 2017 and interest increased to 12%.
- Gevo exchanged $8.4 million principal amount of 2022 Notes for 2,155,382 common shares in January, reducing those notes to approximately $1.2 million principal. The exchange generated a $0.964 million loss. Common shares outstanding rose from 7.074 million at year-end to 15.066 million at March 31, partly reflecting the exchange and offering.
- Net loss included a $3.259 million non-cash gain from the change in fair value of warrant liabilities, partly offset by a $0.339 million non-cash loss on fair-value changes in the 2017 Notes. The warrant gain was primarily associated with a decline in Gevo's share price.
- After quarter-end, Gevo agreed, subject to stockholder approval, to exchange the outstanding 2017 Notes for an equal principal amount of 12% secured convertible notes due 2020. The proposed notes provide for 10% cash interest and 2% payment-in-kind interest, and include conversion-price adjustment provisions. Holders also received an option to purchase up to $5 million additional notes. A shareholder vote was scheduled for June 15, 2017; completion was not assured.
- On April 20, the 2017 Notes interest-reserve requirement was eliminated and $2.6 million was released to unrestricted cash. This is a subsequent event, not part of March 31 cash.
Outlook, operations and risks
- For 2017, management targeted approximately 500,000 gallons of isobutanol production, a corporate EBITDA burn rate of $18 million–$20 million excluding stock-based compensation, and binding supply contracts covering at least 50% of anticipated expanded Luverne capacity.
- Gevo said current Luverne operations—co-producing ethanol and isobutanol—were not expected to make the company profitable. It was engineering a proposed expansion focused on isobutanol and downstream hydrocarbons; scale, product mix and capital cost were not yet determined. Management expected to provide estimates in the second half of 2017.
- Production in Q1 included approximately 100,000 gallons of isobutanol. The company said it was matching production to customer development rather than maximizing output. It also produced 3.4 million gallons of ethanol and sold 3.3 million gallons.
- An April 28 HCS agreement provides for an initial isooctane supply phase that Gevo estimated could generate $2 million–$3 million of gross revenue annually. A later phase contemplates 300,000 gallons annually, with an option for 100,000 more, after a commercial facility begins operating. These future amounts depend on production and facility development.
- The proposed Lufthansa offtake for up to 8 million gallons of alcohol-to-jet fuel annually remained nonbinding; Gevo said it was not then negotiating definitive documentation. There was no assurance of a binding contract or financing for a commercial plant.
- Inspection found one older ethanol fermentation vessel might have only about six months of useful life under the current operating approach; a second vessel was also being evaluated. Repairs, replacement or operating changes were under consideration, and a prolonged shutdown could result.
- Management cited uncertainty around renewable-fuel policy and Renewable Identification Number prices, which affect product economics. Other key risks include financing access, market acceptance, production scale-up, facility expansion and continued Nasdaq listing compliance.
Important facts for investors to verify
- Whether stockholders approved and the parties completed the 2017-to-2020 Notes exchange, and the resulting debt terms, dilution and liquidity position.
- Cash runway and financing needs after considering the $2.6 million reserve release, ongoing operating cash use, debt service and any additional financing.
- Condition and repair or replacement plans for the Luverne fermentation vessels, including any production interruption or required capital spending.
- Whether HCS and Lufthansa arrangements became binding, and whether the planned Luverne expansion obtained customer commitments, financing, defined capacity and a credible cost estimate.
- Progress toward the 2017 production and EBITDA-burn targets, and whether reported warrant fair-value gains obscure underlying operating performance.