Gevo, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial statement amounts are in thousands of dollars unless otherwise noted. Gevo develops renewable chemicals and biofuels, principally isobutanol, and operates its Luverne, Minnesota facility producing ethanol and, following a March restart, isobutanol.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $6.320 million | $5.899 million |
| Gross loss | $2.903 million | $3.335 million |
| Operating expenses | $2.963 million | $6.201 million |
| Operating loss | $5.866 million | $9.536 million |
| Net loss | $3.605 million | $7.343 million |
| Net loss per share | $0.16 | $0.88 |
| Cash used in operating activities | $5.504 million | $9.489 million |
| Cash used in investing activities | $2.247 million | $0.126 million |
- Revenue increased 7% year over year. Ethanol and related product revenue rose $0.659 million to $5.757 million; hydrocarbon revenue fell $0.219 million to $0.298 million, largely due to shipment timing. Grant and other revenue was $0.265 million.
- Gross margin remained negative: gross loss was about 46% of revenue, compared with about 57% a year earlier. Cost of goods sold was nearly unchanged at $9.223 million.
- Operating loss improved by $3.670 million, primarily as R&D fell $0.678 million and selling, general and administrative expense fell $2.560 million, including lower legal expenses. Net loss improvement also reflects a $5.248 million noncash gain from warrant remeasurement; results included a $0.836 million noncash loss from remeasurement of the 2017 Notes.
- Cash and cash equivalents were $8.672 million at March 31, down from $17.031 million at year-end; cash declined $8.359 million during the quarter. Capital expenditures were $2.247 million, mainly for the Agri-Energy facility.
- Current assets were $13.536 million and current liabilities $32.468 million, implying negative working capital of about $18.9 million. Total liabilities were $48.069 million; stockholders’ equity was $47.443 million.
- Debt included $26.1 million principal of 10% convertible 2017 Notes, due March 2017; $22.4 million principal of 7.5% convertible 2022 Notes, with holders able to require repayment in July 2017; and $0.5 million principal of secured TriplePoint debt, due May 2017. The 2017 Notes are reported at fair value, while the 2022 Notes are reported net of discounts and issuance costs.
Material changes and developments
- Gevo completed facility capital projects intended to lower isobutanol production costs and restarted production in one fermenter in March 2016. Management said ramp-up and optimization would take time.
- A March 21 fire damaged the distiller-grains dryer at Luverne, suspending facility operations for about a week. Production resumed March 28; the company said it did not expect a material adverse effect.
- In January, Nasdaq notified Gevo that its share bid price had been below the $1.00 minimum for 30 consecutive business days. The initial compliance period ran through July 25, 2016.
- On April 1, after quarter-end, Gevo completed a unit offering with gross proceeds of approximately $3.5 million, excluding potential warrant proceeds. $1.2 million had been received before March 31 and was included in quarter-end cash as an advance deposit; the remainder was not reflected in the quarter-end statements.
- On April 12, ASTM published approval of renewable-isobutanol-derived alcohol-to-jet fuel as a blending component, eligible for up to a 30% blend. A first Alaska Airlines commercial test flight was expected in the first half of June 2016.
- Gevo entered a license and joint-development arrangement with Argentina’s Porta Hnos. for plant retrofits; the first plant was expected to begin producing in 2017, with planned capacity of up to 5 million gallons annually.
Outlook, risks and contingencies
- Management reaffirmed 2016 guidance: produce 750,000 to 1 million gallons of isobutanol; reduce variable production cost to $3.00–$3.50 per gallon, assuming corn at $3.65 per bushel and credit for distillers’ grains; and target an average selling price of $3.50–$4.50 per gallon. The stated cost and price assumptions imply a targeted positive contribution margin, not company-wide profitability.
- Management also targeted a corporate-wide quarterly EBITDA burn rate of $3.5–$4.5 million, excluding stock-based compensation, and plans to increase isobutanol sales into markets including renewable jet fuel, marina, off-road, isooctane and solvents.
- The filing states that available working capital was insufficient to fund planned operations through December 31, 2016 without additional capital, raising substantial doubt about Gevo’s ability to continue as a going concern. The company expects further losses and negative operating cash flow and may pursue debt or equity financing, strategic capital, debt restructuring or cost reductions.
- Gevo discussed possible recapitalization with Whitebox and other lenders. It warned that failure to reach a recapitalization or obtain alternative financing could require it to seek bankruptcy protection. No assurance was given that additional capital or a restructuring would be achieved.
- Potential risks include execution and economics of the isobutanol production ramp, market acceptance, financing availability, debt maturities and covenants, dilution from equity and warrant issuance, Nasdaq listing compliance, and the ability to commercialize products and technology. The company reported no material litigation, environmental liabilities or debt defaults at quarter-end.
Key facts for investors to verify
- Whether the post-quarter offering proceeds and any subsequent financing provide sufficient liquidity, and how much cash remains available after operating and debt-service needs.
- Progress against the 2016 isobutanol production, variable-cost, selling-price and EBITDA-burn targets, including actual contribution margins as production ramps.
- Plans and outcomes for the 2017 Notes maturity and the 2022 Notes holders’ July 2017 put right, including any recapitalization or debt amendments.
- Nasdaq bid-price compliance and the effect of post-quarter share and warrant issuance on dilution and the share count.
- Operational effects of the dryer fire and whether the ASTM approval, Alaska test flight and Porta project translate into commercial sales or licensing revenue.