Gevo, Inc. (GEVO) Q1 2019 Earnings Report, Transcript and Summary

Hello, and welcome to the Gevo, Incorporated Q1 2019 Earnings Conference Call. My name is Sheryl, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Geoffrey T. Williams, Jr. Sir, you may begin.

Good afternoon, everyone, and thank you for joining Gevo's first quarter 2019 earnings conference call. I would like to start today by introducing the participants from the company. With us today is Patrick Gruber, Gevo's Chief Executive Officer, and Bradford Towne, Gevo's Chief Accounting Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss today. 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 that 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 and on this webcast, 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 2019 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 Form 10-K for the year ended December 31, 2018, which will be filed with the U.S Securities and Exchange Commission or SEC on or about March 27, 2019, and in subsequent reports and other filing made with the SEC by Gevo, including Gevo's 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 a discussion of Gevo's business developments. Brad will then review Gevo's financial results for the first quarter of 2019. Following the presentation, we'll open up the call for questions. I'll now turn the call over to Pat.

Thank you, Jeff. And thank you all for joining us today. I believe we are at or near tipping point. We finalized several agreements that I will touch on shortly. We’ve turned our balance sheet around, which enabled our auditors to remove the going concern qualification in our audit report at the end of March. And we’re making overall very good progress. In terms of the balance sheet, as of today, we’ve approximately $33 million of cash on hand and less than $14 million of debt. The improved capitalization of the company, of course should make a difference going forward. As of today, we don’t have any current plans to raise equity. Instead we are focused on debt. Our projects and products appear to be financeable, more along the lines of project financing. We will keep you updated as we make progress. We are actively working on projects to decarbonize or defossilize the energy used at our Luverne facility. The intent is to lower our carbon score or the measure of fossil greenhouse gas emissions at Luverne. Of course, it leverages into isobutanol and hydrocarbon production as well. We're working on renewable electricity and renewable natural gas. We expect at accomplishing these projects should make Luverne profitable even just selling low carbon ethanol. When we combined the margin uplift from defossilization with the margin uplift from the value added feed products and we're in the midst of producing using the shockwave dry fractionation technology. We expect that Gevo as a whole could possibly become profitable in the next 18 months, depending upon the overall market dynamics, how much we're spending on the commercialization of isobutanol jet fuel and the rest. Production of low carbon ethanol for the California market combined with animal feed is something we're doing simply to make money. Our growth in the long run is all about the isobutanol, the jet fuel and very importantly the isooctane for gasoline. We continue to develop the enormous markets for these products. Today we announced that the City of Seattle's fleet vehicles began utilizing a blend of Gevo's renewable isobutanol with conventional gasoline. In this pilot program to reduce the carbon intensity, the CI level of fuels. Additionally, Gevo will collaborate with the city to supply a renewable drop in gasoline to further reduce the carbon intensity of the fleet. The City of Seattle has the potential to lead the way in showing what is possible in breaking away from fossil-based fuels and related pollution. We see Pacific Northwest with its abundance of wood resources has great potential for the development and commercialization for fossil free fuel production plants. We will have to take a look at the opportunities for production in that region. Now imagine replacing the whole gallon of gasoline with a low carbon renewable gasoline that has high-performance, yet it really does reduce pollution. The potential was use the low carbon cleaning fuels to get off the fossil-based fuels and other pollution, including the particulates and to establish new business systems that create jobs and in that region it would cut across sectors from forestry to bioprocessing, to refining. In April, we signed a binding definitive construction license agreement with Praj Industries to commercialize the production of renewable isobutanol with sugary-based feedstock such as juice, syrup, molasses made from sugarcane or sugar beets. And this is important for a couple of reasons. First, that we could actually complete a complicated set of license agreements. That's a big deal in of itself even though it doesn’t seem like it. And second, this agreement is set up, so we are actually licensors rather than being capital providers. It's other people's money putting our technology to work. That's the intent. As the market demand takes off, we need to be in a position although licensing is fully baked to ready to go. This was a great first step in getting that done. In addition to the construction license agreement, we also signed a memorandum of understanding with Praj to commercialize our renewable hydrocarbon technology and products in India, including our renewable alcohol-to-jet fuel and renewable isooctane, derived from renewable isobutanol. Now this is a potentially big deal and that rice straw residues are a problem in India. The straw is simply burned to get rid of it and creates a lot of smog and pollution. It's a problem. A better use would be to convert it into fuels. Praj reports that they have four rice straw to ethanol plants under construction in India. Praj has undertaken the effort to adapt the rice straw to fermentable sugar conversion technology for the production of isobutanol and jet fuel isooctane. I think it's going to be a good opportunity in India for these hydrocarbons. The isooctane and gasoline markets are continuing to develop. We had expanded our capacity at Silsbee to produce more isooctane and jet fuel. Haltermann Carless and Avfuel are purchasing the product produced at Silsbee. We’ve a project on the table to expand the hydrocarbon capacity in order of magnitude to about 1 million gallons per year. This will be up at Luverne, Minnesota. We already have contracts in place that will make this profitable exercise. We expect to line up debt financing to get this capacity built. We also have roughly 50% of our planned Luverne expansion for the isobutanol jet fuel and isooctane committed to customers who are under contract. Tim Cesarek, our Chief Commercial Officer is making progress. We still need to work out the balancing act of how much jet fuel to produce compared to isooctane. Isooctane, of course, is expected to carry more margin that is being more valuable in the marketplace than jet fuel. Now we're in the midst to sorting through the opportunities in our contract terms, are confident we will get them finished. And they will be good enough so we can use them to the project financing for the full build out. Now speaking to that, we have modified our plans. I've mentioned it before, but it's worth restating. We plan of making the Luverne facility profitable with low carbon ethanol and value-added animal feed. In the future, assuming the plant is in fact profitable, as we expect, we would keep running it. We wouldn’t shut off the ethanol and the animal feed that would make no sense. So it will be that point a cash cow. And we'd want to add additional capacity, additional grind, so that we can produce isobutanol hydrocarbons. We do this in two steps. First, we'd add some equipment for isobutanol hydrocarbons at Luverne so that we could produce hydrocarbons at Luverne. And two, build on a large capacity for isobutanol hydrocarbons at Luverne about 80 million gallons of isobutanol and 8 to 10 million gallons of hydrocarbons. The isobutanol expansions are expected to be done side-by-side. In other words, I don’t plan on shutting down that low carbon ethanol plant, it would be making money we expect. I want the ethanol in Southern California and other places where the defossilization is valuable. And I want that ethanol as a raw material to make other products in the future, because our chemistry translates across alcohols. So here's what a summary of what to expect going forth in the rest of 2019. Expect more announcements for customers and marketplace development of isobutanol isooctane and jet fuel, expect us to announce more commercial agreements. So again, it's going to be about jet fuel, isooctane and isobutanol. We would announce the progress and milestones of the other projects beyond the Luverne facility. Currently we have six licensing development projects in discussion, two have them are used in place with diligence and planning underway. We would be announcing the details of our wind renewable natural gas products as we get those going and we can speak publicly about it. And then, of course, I do expect to be announcing the various financing for our projects and I expect them to be debt oriented. We're on a crusade to defossilized liquid transportation fuels we know there are technologies work. We are keen to enter the market correctly with the right customer mix and financing structures. I expect us to continue to make a lot of progress throughout this year. Now I will turn the call over to Bradford, who will take us through the financials. Bradford?

Thank you. Pat. Gevo reported revenue in the first quarter of 2019 of $6.4 million as compared to $8.2 million in the same period in 2018. Cost of goods sold was $9.0 million in the first quarter of 2019 versus $10.6 million in the same period in 2018. Cost of goods sold included approximately $7.4 million associated with the production of ethanol, isobutanol and related products and approximately $1.6 million in depreciation expense. Gross loss was $2.6 million for the first quarter of 2019 versus $2.3 million for the first quarter of 2018. Research and development expense increased by $0.2 million during the first quarter of 2019 compared with the same period in 2018, due primarily to consulting expenses. Selling, general and administrative expense increased by $0.2 million during the first quarter of 2019 compared with the same period in 2018, due primarily to an increase in employee related expenses and consulting expenses. Within total operating expenses for the first quarter of 2019, we reported approximately $0.2 million for non-cash stock-based compensation. For the first quarter of 2019, we reported a loss from operations of $5.6 million compared to $5.0 million for the same period in 2018. In the first quarter of 2019, cash EBITDA loss, a non-GAAP measure, which is calculated by adding back depreciation and non-cash stock-based compensation to GAAP loss from operations was $3.8 million compared with $3.3 million in the same quarter of 2018. Interest expense for the first quarter of 2019 was $0.8 million, a slight decrease compared to the same period in 2018. For the first quarter of 2019, we reported a net loss of $6.2 million or a loss of $0.60 a share based on a weighted average shares outstanding of 10,153,873. This compares to a loss of $2.5 million in the first quarter of 2018 or a loss of $2.22 per share. In the first quarter of 2019, Gevo recognized net non-cash gains totaling $0.2 million due to changes in the fair value of certain of our financial instruments, such as warrants and embedded derivatives. Adding back these non-cash gains resulted in a non-GAAP adjusted net loss of $6.4 million in the first quarter of 2019 or a non-GAAP adjusted net loss per share of $0.63. This compares to a non-GAAP adjusted net loss of $5.8 million in the first quarter of 2018 or a non-GAAP adjusted net loss per share of $5.16. Having a stronger balance sheet is important to moving our business forward, developing our business and growing our business. With that, I'd like to thank all of our shareholders for their continued interest and support in Gevo. Let's open up the call for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from Amit Dayal from H.C. Wainwright. Your line is open.

Thank you. Good afternoon, Pat.

Yes, Amit, how are you doing?

Good, good.

Good.

In regards to the Praj agreements and milestones, are there any specific sort of events that could translate into revenues for the company in the next few quarters or is this a little bit more longer-term?

It's to getting things organized will translate to revenue, something we would have to get built. And so that of course translates a little bit longer time. What I do expect to have happen and I think I alluded to or I said it in comments is that we have several of these discussions underway for licensing. We now are up to a half-dozen of them. They used feedstocks of different types from various places around the world and we’ve to progress those and make them happen. I think we've seen a shift of how people think about where we are and what's being done. So where Praj is very interesting is because of the molasses, of course. And some of the work they’ve done on straw, I think that the straw thing is quite interesting and they also have done the gas. So it's those types of things I think will lead to meaningful milestones and we are in the midst of figuring out economically what makes sense in what location because each place is quite different, each location is quite different.

Then in with respect to the Seattle announcement today, are you delivering to the municipality or is this going to come in the next few quarters?

No, it's already been done. So it's already underway. And it's a -- one of the things that’s interesting is that there is a very, let's say accelerated interest in the last month where people have been talking about greenhouse gases and the importance and a lot of folk are tired of waiting around for the federal government to do something. And so they’re figuring at -- figuring out how to lower their carbon scores by themselves. And so what you see here is an effort by Seattle to put in higher performing fuels and move -- to get on a trajectory to lower the carbon index. It starts off with isobutanol, but eventually we will get into the whole gallon of gasoline. And so when you think about that model, it's kind of interesting because these are municipalities basically thinking -- proving it out, so that they can say, well, this is the direction we’re going to go in a long run and moves larger volumes. So I expect this would probably translate all the municipalities as well.

Understood. And just maybe one final one for me. On the cash burn front, how are we situated over the next 12 months? I know you’re talking about potentially hitting profitability in the next 18 months. How will this play out in terms of progress towards that goal?

Well, I think we will -- our burn is going to be relatively modest in long -- over this course of this year, we will spend some million fund capital, but not huge amounts. And because even we are doing the biogas and the wind, these are things that we will be using -- other people's money will be put up for that. And we become a customer at least of the wind and well at the biogas too. So I don't want to give exact numbers, because things can change, but our burn was -- our burn should be roughly in line to what we talked about before.

Okay. All right.

Yes.

That’s all I have, Pat, for now. I will follow-up with you after the call. Thank you.

Yes, you bet.

Our next question comes from Sameer Joshi from H.C. Wain (sic) [Wainwright] is open.

Yes. Hey, thanks, Pat, for taking my call. Just following up on Amit's questions, in terms of -- I know you mentioned that you will continue to operate the ethanol, but what level of revenues or what level of capacity do you expect to utilize on the next 8 to 9 months?

We have -- the jet -- the run rate that plants about 20 million gallons a year. It's actually -- it can be a little higher. When ethanol margins are low, we tend to run the plants slightly slower, and then we did shut down for a couple of weeks, while we tied in the shockwave dry frac technology. So there would be something less than 20 million gallons at -- by the time we are at the end of the year, but it won't be too far off of that. The revenue numbers, we still we give the same kind of guidance that we gave before, just that, that’s in our slide deck on our website.

Right, right. And then the other thing I noticed is that the R&D has come down nicely. So should we expect it to remain at this sub million dollar level going forward or you expect to invest more as you have agreements with Praj and other things catching steam?

Nothing major. We may see it go up a little bit here and there as we might do a -- we do projects externally sometimes and depending upon what we do and how we structure it, but generally I would expect us to see a relatively low level. I don't have anything that would cause us to increase millions of dollars or anything like that or even $1 million. I don't have anything like that. Our bugs are come along nicely in terms of optimization. We do have some external contracts that we're utilizing, but a lot of those are milestone payment type things, if people are successfully hit where we want, then we would have to pay them as we commercialize. So I think that should be pretty stable. So going forward, if you look at the revenue that we’ve talked about, where we have the $34 million, $35 million-ish kind of a range, that seems to feel about right. Our burn levels should be relatively consistent with what we talked about. I think this quarter is -- it would be relatively typical and then we will have deploy some capital relatively small amounts for doing the wind and the biogas as we do our equity portions of the project financing. So I think we are in pretty good shape.

Understood. Thanks for taking my question.

Yes.

[Operator Instructions] Next question comes from Andrew Marchese. Andrew, your line is open.

Patrick?

Hey, Andrew. Yes, how are you doing?

How are you? I’m doing great. Thank you.

I’m doing well. Thank you.

Oh, perfect. So, first of all, congratulations on the recent announcement regarding the development of the rubber product, obviously. Just curious, Patrick, just one small question. Is there any potential to develop that outdoor? Where is that going or is there -- can you comment on anything regarding that?

Sure. For everybody's benefit, what Andrew is asking about is the isoprene. This is interesting. So, one of the things that Gevo has done is develop technology to run the conversion of alcohols and hydrocarbon products. We talk a lot about jet fuel and isooctane from isobutanol, but we’ve also developed technology to convert ethanol into hydrocarbon products as well that can go into the diesel fuel or can go into jet fuel or we can make intermediates for plastics and polymers. This was a development effort that we’ve already -- is well along the way. And the thing, Andrew is asking about specifically is that we have developed the technology. It's very highly related to what we did for isobutanol and ethanol. It's to convert fusel oils into isoprene, which is a key constituent of synthetic rubber. The fusel oils are made as a byproduct of fermentation from the ethanol industry and there's quite a lot of -- quite a large amount of available. So I think as there are several -- there's a couple different things we can do related to that, we have -- we can take that chemistry and it really makes isoprene an high-yield. I think it's the -- from what I’ve seen, it's in the realm of if not the best economic system, from what we can tell and what our projections are. And it's a proprietary catalyst that we use, that we developed and owned. And I think we'll see progress on that over the next couple of quarters from what I've told. The other thing that is possible to do with a variant of that chemistry is to convert some of those kinds of things, hit the flavors and fragrances. And so this would be into various -- it really is going for that really fine chemical specialty niche is where that potential lies. We’ve -- we are not trying to become -- we are not going to build out those business, per se, in terms of we aren't going to become the marketers and things like that. So we are in the midst of lining up the partnerships, what I'd rather be is aspire alcohols, raw materials, catalytic -- the catalysts, licensing the technology is how we approach it. So we just haven't talked about much of this publicly, but that’s how we’re thinking about it. And I think over the next probably two quarters, I will know which way its headed, how positive or if it's going to take longer, what's going on. I hope I have some material in that timeframe.

Okay. Well, Patrick, I just want to say, I’m looking forward to these additional announcements forthcoming and the definite successes that you will be having soon. Congratulations.

You bet. Thanks.

And speakers, at this time, I’m showing no further questions. Thank you.

All right, then, I wish everyone a great day. Thanks for joining us today and thanks for your interest in Gevo and your support. Bye now.

Thank you, ladies and gentlemen. That conclude today's conference call. Thank you for your participation. You may now disconnect.