Gevo, Inc. (GEVO) Q2 2018 Earnings Report, Transcript and Summary

Hello, and welcome to the Gevo, Inc. Q2 2018 Earnings Conference Call. My name is Michelle, and I will be your operator for today’s conference. [Operator Instructions] Please note that today’s conference is being recorded. I will now turn the call over to Mr. Geoff Williams. Sir, you may begin.

Good afternoon, everyone, and thank you for joining Gevo’s second quarter 2018 earnings conference call. I would like to start by introducing today’s participants from the Company. With us today is Pat Gruber, Gevo’s Chief Executive Officer; Tim Cesarek, Gevo’s Chief Commercial officer; and Brad Towne, Gevo’s Chief Accounting Officer. Earlier today, we issued a press release which outlines the topics that we plan to discuss. A copy of this press release is available on our website at www.gevo.com. I would like to remind our listeners that this conference call is open to the media and we are providing a simultaneous webcast of this call to the public. A replay of today’s call will be available on Gevo’s website. On the call today, you will hear discussions of certain non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today and which is posted on our website. We will also make certain forward-looking statements about events and circumstances that have not yet occurred, including, but not limited to, projections about Gevo’s operating activities for the remainder of 2018 and beyond. These forward-looking statements are based on management’s current beliefs, expectations and assumptions, and are subject to significant risks and uncertainties, including those disclosed in Gevo’s Annual Report on Form 10-K for the year ended December 31, 2017, and in subsequent reports and other filings made with the SEC by Gevo, including our Quarterly Reports on Form 10-Q. Investors are cautioned not to place undue reliance on any such forward-looking statements. Such forward-looking statements speak only as of today’s date and Gevo disclaims any obligations to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. On today’s call, Pat will begin with an overview of Gevo’s business and strategy. Brad will then review Gevo’s financial results for the second quarter of 2018. Following the presentation, we’ll open up the call for questions. I’ll now turn the call over to Pat. Pat?

Thank you Geoff, and thank you all for joining us today. What a difference six months can make? If you compare our balance sheet from the end of the year till now, you see that we’ve made quite the improvements. Cash on hand in December was $11.6 million whereas at July 31, last week, we held more than $40 million in cash in the balance sheet. Our total liabilities last December were more than $25 million, now they’re less than $17 million. The additional cash that we now have will make it easier for us to move forward with plans to make the company profitable. This change is significant and shouldn’t be underestimated. It makes discussion with vendors, customers, strategic partners, much more productive as it removes any doubt that we expect to be around for the long run. How are we planning to make the company profitable? Last we have discussed, we see low carbon fuels as the future. By improving our plant site at Luverne, we set the stage for low-carbon isobutanol, low-carbon jet fuel and low-carbon isooctane. Along the way, we intend to produce low-carbon ethanol. We expect to announce more detailed steps to improve the plant economics, once the timelines for the equipment and such are pinned down and that should be relatively soon. At Luverne, we use sustainable nonfood corn for raw material. We see it’s possible to improve the value of our business by upgrading the protein and oil for use in the food chain. We are taking steps to make that value upgrade happen, which we expect to add to the possibility of the site. On the business front, we continue to work to aggregate confirmed offtake, meaning for customers, if we make it, they buy it. We’ve been making progress. For example, in June, we signed our first long-term supply agreement with Avfuel Corporation, to supply our alcohol-to-jet fuel product. Avfuel is one of the largest suppliers of jet fuel for corporate aviation, with over 3,000 outlets. They signed an agreement to take product both from Silsbee and from our Luverne facility, once we build it out to improve the production of renewable hydrocarbons from our renewable isobutanol. This agreement is significant and that – it represents the first definitive long-term agreement that we expect to be useful in securing debt financing for the buildout of the Luverne facility. We still have work to do to aggregate more demand to support the buildout, but we believe we’re making progress and I’m optimistic we’ll get it done. On the isooctane side of things, we continue to see market interest. The challenge is getting the pricing and volumes right. We are working on additional long-term offtake agreement to isooctane as well, for outsource contracts once they’re signed. So overall, we’re making progress, we see there’s possibility to become profitable from selling and producing our products in the near term via low-carbon ethanol, which will provided us some more time and freedom to probably develop the markets for isobutanol jet fuel and isooctane. I’ll keep it short today, we plan on doing an update call in the near future to talk in more detail about our strategic plans. So I’ll turn it over to Brad. Brad?

Thank you, Pat. Gevo reported revenue in the second quarter of 2018 of $9.4 million as compared to $7.5 million in the same period in 2017. The increase in revenue during the second quarter of 2018 is primarily a result of the production and sale of approximately $8.8 million of ethanol, isobutanol and distillers grains at the Luverne plant as compared to $6.8 million in the second quarter of 2017. This increase in revenue was mainly due to increased ethanol production and higher distiller grain prices in the second quarter of 2018 versus the same period in 2017. During the second quarter of 2018, hydrocarbon revenues were $0.6 million, as compared to $0.7 million in the second quarter ended 2017, principally as a result of differences in the timing of shipments of isooctane during the quarter. Cost of goods sold was $10.7 million in the second quarter of 2018, compared to $9.7 million in the same period in 2017. Cost of goods sold included approximately $9.1 million associated with the production of ethanol, isobutanol and related products and approximately $1.6 million in depreciation expense. Gross loss was $1.3 million for the second quarter of 2018 versus a gross loss of $2.2 million for the second quarter of 2017. R&D expense for the second quarter of 2018 decreased to $1.5 million compared to $1.9 million for the comparable quarter in 2017, due primarily to a decrease in employee-related expenses. SG&A expense for the second quarter of 2018 decreased to $1.6 compared to $2.1 million for the comparable quarter in 2017, also due primarily to a decrease in employee-related expenses. Within total operating expenses for the second quarter of 2018, we reported approximately $0.1 million for non-cash stock-based compensation. For the second quarter of 2018, we reported a loss from operations of $4.4 million, down $1.8 million from a loss from operations of $6.2 million in the second quarter of 2017. In the second quarter of 2018, cash EBITDA loss, a non-GAAP measure, which is calculated by adding back depreciation and non-cash stock-based compensation to the GAAP loss from operations was $2.6 million, this compared to $4.4 million in the same quarter of 2017. Interest expense for the second quarter of 2018 was $0.9 million, which increased $0.3 million as compared to the same quarter last year. The increase was primarily due to higher interest rates on our 2020 notes. During the three months ended June 30, 2018, we incurred a non-cash loss of $2.2 million due to a change in the fair value of the 2020 senior secured convertible notes due March 15, 2020, primarily as a result of the company stock price on the dates the $3.2 million of the 2020 notes were converted into approximately 260,000 shares of our common stock. During the three months ended June 30, 2018, we incurred a non-cash loss of $3.5 million from a change in the fair value of the derivative warrant liability primarily as a result of the increase in our stock price at the time certain warrants were exercised during the second quarter of 2018. During the second quarter of 2018, we also incurred a non-cash loss of $0.5 million due to a quarterly mark-to-market valuation of the 2020 notes embedded derivative liability. For the second quarter of 2018, we reported a net loss of $11.5 million or a loss of $7.19 per share, based on a weighted average shares outstanding of $1.6 million. This compares to a loss of $10.2 million in the second quarter of 2017 or a loss of $13.22 per share, based on a weighted average shares outstanding of $0.8 million. In the second quarter of 2018, Gevo recognized a net non-cash loss totaling $6.2 million due to the changes in fair value of certain of our financial instruments, such as warrants, exchange of convertible debt and embedded derivatives. Adding back these net non-cash gains resulted in a non-GAAP adjusted net loss of $5.3 million in the second quarter of 2018 or a non-GAAP adjusted net loss per share of $3.31. This compares to a non-GAAP adjusted net loss of $6.8 million in the second quarter of 2017 or a non-GAAP adjusted net loss per share of $8.83. To emphasize what Pat discussed previously, we raised approximately $36.9 million between April 1 and today, August 8, 2018, providing for increased liquidity and improvement to our balance sheet resulting in current assets exceeding current liabilities in excess of $40 million. With that, I would like to thank our stockholders for their continued support of Gevo. We will now open it up for questions. Operator?

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] The first question in the queue comes from Amit Dayal with H.C. Wainwright.

Thank you. Hi, guys. Thank you for taking my question. Firstly, maybe on the low-carbon ethanol, Pat. Maybe it's too early but if you could provide any color on how quickly we could get to profitable and meaningful low-carbon ethanol production? How do you expect this to ramp up in terms of volumes? What kind of capital out there required et cetera? That would be helpful.

Sure. So taking reverse order. I would expect it'd be relatively small volumes of capital out of our pocket and the – and then the timing, I'm not ready to say that with certainty yet, but it's in the relative near term. It's a something that we can see in due and make progress on along the way. And in fact, you'll notice that our – we've already taken steps along the path of approving the plant profitability because you noticed that plant is operating better and generate more – less losses and we'll continue on that track. And then you asked me one other thing, I'm sorry, I forgot now.

In terms of the volume ramp up. I mean, you're doing around $9 million to $10 million in revenues now and how does this scale up from here?

It's hard to predict how the revenue scale up will work. But if we're doing – talking about the ethanol plant, the capacity of it, and it's operating at a rate of around 19 million to 20 million gallons per year right now. And so would go with whatever those prices are on a commodity basis. And now we happen to have a very good corn basis out of Luverne that helps us quite a lot. As we start to add in the low-carbon value then the profitability would go up, revenues would go up. When we – I know the schedule of things, I'll be able to make that a more clear call.

Understood. And I guess, in regards to the ATJ offtake agreement what are the next steps here? And are any deliveries in the works before the end of the year on this agreement?

Sorry, that was garbled. Could you say that again?

On the ATJ side, what are the next steps from here in terms of actually delivering product to this customer?

Well, if you mean for Avfuel, we already have begun. Avfuel – and remember these committed to buy pretty much all of our capacity at our plant, down in the sales would – and then, of course, they have a contract for volume out of expanded plant, with a definite offtake agreement, we make it, they buy it, kind of thing. So that’s already begun and there – it seem to be going – there's lots of interest and it's going pretty well.

Okay, got it. And you were shipping some product to Europe as well, is that still continuing? Or was that just sort of a short-term pilot, et cetera, with some customers over there?

No, I'd have to say that the interest in isooctane for gasoline comes primarily out of Europe. Haltermann Carless is still working it and so on the product. We've had interest from many, many other companies and it's going to be interesting once we're able to finally publish that list, I'll tell you all about it because there'll be some names you recognize from the past and some ones you won't recognize at all from the future. And isooctane, remember, is one of the ways of putting in low-carbon content into a gallon of gasoline. So as the carbon value comes up, that makes it way more interesting. Now our – we project that our isooctane, if it was built out of the burn would be competitive with petrochemical-based isooctane anyway in Europe, that's what it looks like. And so that makes it extra interesting, because then the carbon value provides a big upside. In the U.S., it takes combination of isooctane value, which is really gasoline value, plus a little bit of premium for its properties, but with carbon value, in order to make it make sense, but we're still working on that market. But it looks like it all pencils in and makes it interesting. And so what you should anticipate, as we put forward our plans for building out Luverne, we're going to make a mix of jet fuel and isooctane, it should be a nice attractive project that what we're going – we're working it is to make sure that we have people on the hook for real on these offtake agreements, you've seen too many other companies where they had offtake agreements and the customer bailed out at a critical moment, we just saw that in a case like BioAmber last year. So we're not up for that sort of a game, we need people to buy our product. Now remember, when we sell our – when we make our products we always have an underlying value of it because it is jet fuel or it is isooctane and gasoline, we haven't had a low-carbon attribute that also, we can monetize as well on a spot basis, but we're out to get our projects financed, right? And that takes those offtake agreements.

Right. So this call that you indicated that you might do, will this potentially happen before the third quarter call?

Yes. I'll probably do it in the next – I have to talk to Shawn Severson from EnergyTech Investors and we'll get it scheduled here shortly. So I would hope to do it in the next week or two.

And the agenda for this is just to give investors more of an update on how things are progressing, et cetera?

Yes. It'd be about low – we'll be talking about low-carbon ethanol, address some general question as well, but it'd be primarily focused on what we're doing at Luverne and make it more clear for people. Because what it is – we have – remember now we got $41 million on the balance sheet as of July, and we'd taken down our debt, that funds us really well. And so we can execute plans for Luverne already, that benefit low-carbon ethanol but benefit us doing low-carbon isobutanol, isooctane and jet fuel as well. And we can do it with relatively low capital. So one of the interesting things is that you know that you've seen our burn rate go down over the last year, and our base burn rate still has gotten down, so now we're going to be super careful when we add back to these projects, they're going to be focused on things that generate profit. That's just the mentality what we're doing. And so it makes it for very interesting in that we're no longer in the game of having to take what's available to us, we're pretty well funded.

All right. I appreciate the color on these things, Pat. That’s all I have for now. Thank you so much.

Okay. All right, with that, we don't see any other questions. Appreciate you're taking the time to dial in. I wish, everyone, a great evening. Bye-bye.

Thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for participating. You may now disconnect.