Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used anywhere in this Report, the words “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. These statements relate to future events or our future financial or operational performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements may include, but are not limited to, risks and uncertainties related to our ability to successfully implement our "low-carbon" fuel strategy, our ability to sell our products, our ability to expand or continue production of ethanol and isobutanol at our Luverne Facility (as defined below), our ability to meet our production, financial and operational guidance, our ability and plans to construct a large-scale commercial hydrocarbon facility to produce renewable alcohol-to-jet fuel (“ATJ”) and isooctane, our ability to raise additional funds to continue operations and/or expand the Luverne Facility, our ability to produce ethanol and isobutanol on a commercial level and at a profit, achievement of advances in our technology platform, the success of our retrofit production model, commodity prices, the availability of suitable and cost-competitive feedstocks, our ability to gain market acceptance for our products, the expected cost-competitiveness and relative performance attributes of our ethanol and isobutanol and the products derived from ethanol and isobutanol, additional competition and changes in economic conditions, the future price and volatility of petroleum and products derived from petroleum, and those risks described in documents we have filed with the U.S. Securities Exchange Commission (the “SEC”), including this Report in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” our Annual Report on Form 10-K for the year ended December 31, 2017 (our “Annual Report”), and other reports that we have filed with the SEC. All forward-looking statements in this Report are qualified entirely by the cautionary statements included in this Report and such other filings. These risks and uncertainties could cause actual results to differ materially from results expressed or implied by forward-looking statements contained in this Report. These forward-looking statements speak only as of the date of this Report. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Unless the context requires otherwise, in this Report the terms “we,” “us,” “our” and the “Company” refer to Gevo, Inc. and its subsidiaries.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes and other financial information appearing elsewhere in this Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including, without limitation, the disclosures in our Annual Report.
Reverse Stock Split
On June 1, 2018, we effected a reverse stock split of the outstanding shares of our common stock by a ratio of one-for-twenty (the “Reverse Stock Split”) and our common stock began trading on the Nasdaq Capital Market on a Reverse Stock Split-basis on June 4, 2018. Unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth herein have, where applicable, been adjusted retroactively to reflect the Reverse Stock Split.
Company Overview
We are a next generation “low-carbon” fuel company focused on the development and commercialization of renewable alternatives to petroleum-based products. Low-carbon fuels reduce the carbon intensity, or the level of greenhouse gas emissions, compared to standard fossil-based fuels across their lifecycle. The most common low-carbon fuels are renewable fuels. We are focused on the development and production of mainstream fuels like gasoline and jet fuel using renewable feedstocks, that have the potential to lower greenhouse gas emissions at a meaningful scale and enhance agricultural production, including food and other related products. In addition to serving the low-carbon fuel markets, through our technology, we can also serve markets for the production of chemical intermediate products for solvents, plastics, and building block chemicals.
Our proven production technologies target what we believe to be large potential markets of renewable fuels and related chemicals that can compete directly against petrochemical products depending on the price of oil and the value of carbon intensity. Renewable fuels are one of the few fuel products where the value for renewable carbon has already been established, particularly in the United States and the European Union. We believe that the demand for low-carbon fuels and renewable chemicals will continue to grow in the future.
Decarbonization
We believe that we have the technology and production platform to produce renewable fuels that reduce the emission of additional greenhouse gases into the atmosphere as compared to the burning of fossil-based carbon fuels, and to do so profitably. Low-carbon fuels can best be produced by (i) replacing fossil-based carbon with renewable carbon, and (ii) replacing some or most of the fossil-based energy sources needed for heat and electricity during the fuel production process. Renewable carbon comes from growing plants and crops. Growing plants efficiently provides the opportunity to capture carbon in the soil and generate protein, further lowering the carbon intensity of fuels produced from these renewable feedstocks. Eliminating or reducing fossil-based carbon is referred to as “decarbonization,” and the products resulting from such a decarbonization process are rewarded with a lower carbon intensity (“C.I.”) score, which increases the market value of certain products. In addition to the U.S. Renewable Fuel Standard policy (RFS) that rewards low-carbon fuels, certain markets in North America such as California, Oregon, Washington and Canada and countries such as Japan, China, India, and other Asian countries are ascribing extra economic value on decarbonization. In Europe, the European Parliament has adopted the Renewable Energy Directive to promote the use of energy from renewable sources. An amendment to the Renewable Energy Directive (REDII) covering the period 2020-2030 is expected to be approved by the European Parliament in 2018. We believe that decarbonization is an emerging market opportunity, and that we have the technologies, products and a base production facility to take advantage of this opportunity.
The State of California is a leader in the push for decarbonization with its Low Carbon Fuel Standard (LCFS), which is a market-based cap and trade approach to lowering the greenhouse gas emissions from petroleum-based transportation fuels. We believe that the LCFS approach to reducing greenhouse gases will be implemented by Canada and other states in the United States (Oregon and Washington, as examples) and eventually could be implemented at the Federal level, which should create more demand for low-carbon fuel products. The demand and value for low-carbon fuel products in California has sharpened our focus on low C.I. ethanol. Our current production plant is small enough and specialized enough so that, with certain process optimizations, we could reduce our demand for fossil-based energy required in the production process. By doing this, we would increase the value of our ethanol because it would carry a lower C.I. score, which should translate into increased revenues for us as a result of the credits associated with our renewable fuels under LCFS and/or RFS. . Certain improvements we make to produce low-carbon ethanol, are also expected to benefit any other low-carbon products we produce, such as our renewable isobutanol, jet fuel and isooctane (gasoline).
Low-Carbon Ethanol Opportunity
Our specialty production facility in Luverne, Minnesota (the “Luverne Facility”) has an annual production capacity of approximately 20 million gallons per year ("MGPY") of ethanol, 45-50 kilotons of animal feed, and 3 million pounds of corn oil.
The Luverne Facility has the capability, with certain capital improvements, to produce low-carbon ethanol side-by-side with low-carbon isobutanol, in addition to renewable jet fuel and isooctane and other related products that can be made from isobutanol. By focusing on low-carbon ethanol in the near term, debottlenecking production, while adapting and optimizing the Luverne Facility’s energy and equipment infrastructure to reduce the reliance on fossil-based energy sources, we believe that by approximately the end of 2021 we can increase revenues to make the Luverne Facility profitable on a non-GAAP Cash EBITDA basis. Non-GAAP Cash EBITDA is a non-GAAP financial measure and is calculated by adding depreciation and non-cash stock compensation to GAAP loss/income from operations. See "Non-GAAP Financial Information" below for additional information regarding non-GAAP Cash EBITDA.
In addition, by undertaking further capital investments to improve our Luverne Facility, we believe we may be able to generate sufficient profits at the Luverne Facility to make the Company profitable on a consolidated non-GAAP Cash EBITDA basis, independent from the production and sales of isobutanol, jet fuel, isooctane and related technologies. Such capital investments could include: (i) improvements at the Luverne Facility to further lower the C.I. score of our fuel products; and (ii) installing fractionation technologies at the Luverne Facility to produce value added protein feed products, food grade corn oil, as well products using the fiber fraction of corn. Concurrently, while focusing on low-carbon ethanol, we plan on expanding hydrocarbon production either at our hydrocarbons demonstration plant located at South Hampton Resources located in Silsbee, Texas (the “Silsbee Facility”) or, subject to securing adequate financing, by constructing a new larger production facility at the Luverne Facility for specialty hydrocarbon fuels, which may add additional positive cash flow on a non-GAAP Cash EBITDA basis.
The future improvements that we are planning for the Luverne Facility will lower the carbon intensity of the Luverne Facility and should benefit both ethanol and isobutanol production. The smaller size of our Luverne Facility compared to other ethanol production facilities means that the Luverne Facility offers opportunities to lower carbon intensity that other larger scale plants might not possess. For example, we could install small cogeneration units or make certain changes to unit operations to improve water removal efficiency given the lower power demands for steam and electricity which would result in lower ongoing capital expenditures. We believe that smaller, specialized biofuel production facilities aimed at low-carbon specialty fuels, related specialty protein products, and food oils, will have an advantage over large scale ethanol plants that, out of necessity, have to focus on commodity products for industrial markets. In other words, as these low C.I. markets further develop, tracking carbon lifecycles will be important. Tracking carbon means knowing the supply of feedstock and how it is grown. We believe a smaller production facility like our Luverne Facility will be well positioned to source responsibly grown feedstocks.
Low-Carbon Renewable Isobutanol, Jet Fuel, Gasoline and Related Products
We believe that renewable isobutanol is a potentially valuable commercial product because of its versatility to address large markets either as a product directly or as a key intermediate for producing renewable carbon alternatives to mainstream fuels such as jet fuel, gasoline, plastics such as polyethylene terephthalate (“PET”), and various other chemical products and materials. Isobutanol is a four-carbon alcohol that can be sold directly for use as a specialty chemical in the production of solvents, paints and coatings, or more importantly from a market size and performance value-added point of view, as a gasoline blendstock. Because isobutanol can be readily converted to hydrocarbon products such hydrocarbon fuels, including isooctane, isooctene and ATJ, lubricants, polyester, rubber, plastics, fibers and other polymers, we believe that the addressable markets are large, potentially being able to reach 40% of the global petrochemicals markets depending on the price of oil and the market value of renewable carbon.
We also have proven that our renewable isobutanol can be readily converted to hydrocarbon products that address large markets, such as jet fuel and isooctane. Specifically, our renewable ATJ has been certified for use in commercial aviation and used multiple times for commercial flights.
Our renewable isobutanol is being used as a gasoline blendstock in the Houston area for on-road vehicles as an ethanol-free fuel option for consumers and off-road uses in vehicles, boats and small engines.
Our renewable isooctane meets the performance and specification requirements for use in fuels and related chemicals. It is currently being used in the European Union as a fuel for Formula One race cars, as well as other applications. As a result of the commercial traction that we have already achieved, we believe that there is large potential to grow our business, through a combination of (i) directly producing and selling our renewable isobutanol and related hydrocarbon products and (ii) licensing our technology.
Our Strategy
Our strategy to grow our business is to become profitable by investing capital to upgrade the Luverne Facility to primarily produce low-carbon ethanol for the California market. We plan to use low-carbon ethanol to achieve positive cash flows, which should provide us the time to execute on our ultimate business goal of producing and selling into the isobutanol and its derivative hydrocarbon product markets such as ATJ and isooctane. Key elements of our strategy include:
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Undertake process improvements to lower energy consumption and implement lower-carbon process energy options at the Luverne Facility.
By investing additional capital at the Luverne Facility, we believe that we can lower the carbon intensity (i.e. lower the carbon dioxide emissions from the plant) creating additional profit margin opportunities in low-carbon markets such as California under LCFS and in Europe under RED for our ethanol, as well as for our isobutanol and derivative hydrocarbon products produced from isobutanol.
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Implement fractionation technology at the Luverne Facility.
We have chosen an innovative corn fractionation technology to deploy at the Luverne Facility in order to generate additional revenue from incremental volumes of alcohol, distiller grains and corn oil, as well as generate new revenue opportunities from the production and sale of corn fiber-based feed products.
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Expand hydrocarbon production at the Silsbee Facility.
Along with our production partner, South Hampton Resources, we plan to expand and reconfigure the Silsbee Facility in order to generate greater revenues and better profit margins, while enabling customers to further develop markets for ATJ and isooctane which will help us transition these customers to long-term off-take agreements for greater volumes of products.
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Enter into supply agreements for isobutanol and its derivative hydrocarbon products with customers to support capacity growth using project financing or other less expensive and less dilutive forms of capital.
We intend to build on our existing customer contracts, such as our isooctane supply agreements with HCS Holding GmbH, to obtain additional binding off-take agreements that would economically support converting the Luverne Facility primarily to the production of isobutanol and its derivative hydrocarbon products. If we are able to obtain sufficient new supply agreements, we expect to be able to raise capital to fund such conversion of the Luverne Facility using project financing or other less expensive and less dilutive forms of capital as compared to the equity offerings that we are conducting hereby and have used in the past.
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Subject to receipt of financing, we plan to scale up the Luverne Facility for the production of isobutanol and its derivative products.
Upon, and subject to, securing adequate financing, we plan to build out the Luverne Facility to enable the production of isobutanol and its derivative products at levels sufficient to supply our initial larger scale off-take agreements with our customers.
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Expand the global production capacity of isobutanol and its derivative hydrocarbon products via licensing
. We have proven that the isobutanol production process works in full scale fermenter systems at the Luverne Facility, and we have also proven that our renewable isobutanol can be readily converted to hydrocarbon products at the Silsbee Facility. We intend to expand the global production of isobutanol and its derivative hydrocarbon products beyond the Luverne Facility through a low-cost, high-margin licensing model, in collaboration with partners such as Praj Industries, with whom we have previously announced a joint development agreement.
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Lates
t Highlights and Developments
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On October 3, 2018, we announced that Professor Frances Arnold of the California Institute of Technology has been awarded the 2018 Nobel Prize for Chemistry for her work on “the directed evolution of enzymes. As a co-founder of Gevo, Professor Arnold with her research group, developed some of the critical enzymes needed for Gevo’s biological pathway to produce renewable resource-based isobutanol. Professor Arnold’s work helped to establish Gevo as a leader in renewable resource based chemicals and fuels.
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On September 12, 2018, we announced that Gevo and Virgin Australia Airlines, with the support of the Queensland Government, have accomplished another industry first by being the first to supply renewable jet fuel into a commercial airport infrastructure in Australia. Like the Fly Green Day at Chicago O’Hare International Airport in 2017, Gevo’s renewable jet fuel was supplied using the general fuel system at Brisbane Airport. Gevo’s renewable jet was used to fuel approximately 195 domestic and international flights departing from the Brisbane Airport since delivery.
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On August 14, 2018, we announced that we entered into two separate operating leases and service agreements with Shockwave LLC to install Shockwave’s Thermodynamic Corn Fractionation Process as well as related technology and equipment (collectively the “Shockwave Process”) at the Luverne Facility. The Shockwave Process is expected to improve profitability of the Luverne Facility by lowering the cost of ethanol and i
sobutanol production, increasing the number and value of feed and protein products, producing corn oil for food use, and helping to lower the overall carbon footprint for the facility. The Shockwave Process is expected to be operational during the first half of 2019.
The deployment of the Shockwave Process is an important step of our previously announced strategy to deploy capital at the Luverne Facility, and to use lower amounts of fossil-based energy sources to improve the C.I. score of our products.
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Market Development, Sales and Production Strategy for 2018
In 2018, we intend to continue to develop the markets for our isobutanol, jet fuel, isooctane, and other products made from isobutanol and ethanol. Ultimately, our primary target is to enter into binding supply contracts for isobutanol and related hydrocarbon products that represent the majority of the production volumes to be produced at the expanded Luverne Facility that we plan to construct (the “Luverne Facility Expansion”). The focus for market development continues to be:
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Isobutanol for the ethanol free gasoline market, primarily in reformulated gasoline or RFG areas. We plan to increase our distribution network, and add additional regions, broadening our distribution footprint. We intend to use isobutanol in our inventory in part to develop these sales.
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Isooctane for gasoline and chemicals are expected to continue to be a priority. We expect the vast majority of sales to ship to the European Union. We expect that the demand for this product will continue to grow, and we may expand or modify the hydrocarbon demonstration plant at South Hampton Resources in Silsbee, Texas to increase capacity for isooctane. We intend to use renewable isobutanol in our inventory for the feedstock for this product. We expect to continue to work on securing a set of offtake contracts that would support the Luverne Facility Expansion.
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We plan to sell ATJ for market development purposes and demonstrations. In certain niche markets, we have begun commercial sales that can be supported from the hydrocarbon demonstration plant at South Hampton Resources in Silsbee, Texas. We expect to continue to work on securing additional offtake contracts that would support the Luverne Facility Expansion.
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In 2018, we expect to sell approximately 19 million gallons or more of ethanol, and approximately 56 thousand tons of its animal feed product. As previously announced, in 2018, we expect to improve the cash flow out of the Luverne Facility by optimizing the ethanol production processes, developing value added products for ethanol, animal feed, and corn oil produced at the Luverne Facility plant and further reducing the cost of the Luverne Facility’s carbohydrates.
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We expect to use our inventory of isobutanol to meet our market development needs in 2018. In 2017, we increased our on-hand inventory of isobutanol. During the production runs at the Luverne Facility in 2017, we also met our variable cost production targets for isobutanol. As previously disclosed, running isobutanol at a scale of 1.5 MGPY, the current capacity of the Luverne Facility, increases cash burn because not all of the fixed costs are covered given the low run rate relative to the design of certain isobutanol unit operations. We are prepared to ramp-up isobutanol production in response to positive demand and price appreciation. We continue to be focused on developing markets and generating cash using the current inventory. We expect to sell isobutanol into the gasoline blendstock market, as well as selling isooctane, jet fuel and other products made from inventoried isobutanol.
Luverne Facility Update
As previously announced, we are undertaking several initiatives to improve the profitability of the Luverne Facility. Specifically, we are adapting and optimizing the Luverne Facility’s energy and equipment infrastructure to use lower amounts of lower fossil-based energy sources to lower the C.I. score of our products. Currently, we are in the process of installing the Shockwave Process. The Shockwave Process is expected to be operational during the first half of 2019. In addition, we are currently evaluating the implementation of one or more of the following systems or technologies to further lower our use of fossil-based energy sources at the Luverne Facility: combined heat and power systems; manure biogas, wind power and certain expansion and energy reduction technologies. We expect that by approximately the end of 2020 we will have completed certain projects at our Luverne Facility to improve the C.I. score of our products that will increase the value of our ethanol and related products and that should translate into increased revenues for us as a result of the credits associated with our renewable fuels under LCFS and/or RFS.
As previously disclosed, during 2017, we hired a third-party engineering firm to test the structural integrity of two carbon steel fermentation vessels. The results of the testing indicate that one of these fermentation vessels had at least one more year of life before needing repair, and the other one had approximately two months of life remaining.
Recently, we decided to repair the two carbon steel fermentation vessels. Repairs are expected to be completed by the first quarter of 2019 at the latest, at an estimated cost of approximately $0.6 million. After the repairs, the estimated useful life of the vessels is expected to be twenty-years.
Path to Profitability
We believe that there are two paths by which we can become profitable. First, as described above, we believe that by optimizing the Luverne Facility's ethanol production processes to produce low-carbon ethanol, developing value-added products including higher value-add animal feed, and further reducing the cost of the Luverne Facility's carbohydrate feedstock, the Luverne Facility could become profitable (on a non-GAAP Cash EBITDA basis as described above) by approximately the end of 2021. Any profit generated would offset amounts required to develop our isobutanol and related hydrocarbon products business. Achievement of this goal is dependent on a number of factors and assumptions, including the timing of the completion of the decarbonization projects necessary to lower our CI score and the value of credits under LCFS in the future.
Secondly, we believe that the Company could become profitable if we are able to obtain binding off-take agreements for our isobutanol and related hydrocarbon products that justify the Luverne Facility Expansion. We believe that there is the potential to build a very large business around our isobutanol and related hydrocarbon products. We expect that the Luverne Facility Expansion would be the first step that could lead to multiple production facilities around the world producing our isobutanol and related hydrocarbon products. Achievement of this goal is dependent on a number of factors and assumptions, including obtaining offtake agreements and adequate financing for such expansion of our business.
Financial Condition
For the three months ended
September
30, 2018 and 2017, we incurred a consolidated net loss of $6.9 million and $4.2 million, respectively, and for the
nine
months ended September 30, 2018 and 2017, we incurred a consolidated net loss of $20.9 million and $20.2 million, respectively, and we had an accumulated deficit of $422.2 million at September 30, 2018. Our cash and cash equivalents at September 30, 2018 totaled $38.3 million
which is primarily being used for the following: (i) operating activities of our Luverne Facility; (ii) operating activities at our corporate headquarters in Colorado, including research and development work; (iii) capital improvements primarily associated with the Luverne Facility; (iv) exploration of strategic alternatives and new financings; and (v) debt service and repayment obligations.
We expect to incur future net losses as we continue to fund the development of our business. We have primarily relied on raising capital to fund our operations and debt service obligations by issuing common stock and warrants in underwritten public offerings. Those issuances have caused significant dilution to our existing stockholders. While we have sought, and will continue to seek, other, less dilutive forms of financing to fund our operations and debt service obligations, there is no assurance that we will be successful in doing so.
Based on our current operating plan, existing working capital at December 31, 2017 was not sufficient to meet the cash requirements to fund planned operations through the period that is one year after the date our 2017 financial statements were issued unless we are able to raise additional capital to fund operations. Our audited financial statements for the year ended December 31, 2017, were prepared under the assumption that we would continue our operations as a going concern. Our independent registered public accounting firm for the year ended December 31, 2017 included a “going concern” emphasis of matter paragraph in its report on our financial statements as of, and for the year ended, December 31, 2017. These conditions raise substantial doubt about our ability to continue as a going concern. Our inability to continue as a going concern may potentially affect our rights and obligations under our debt obligations.
The continued operation of our business is dependent upon raising additional capital through future public and private equity offerings, debt financings or through other alternative financing arrangements. In addition, the attainment of profitable operations are dependent upon future events, including (i) completing certain capital improvements at the Luverne Facility to produce low-carbon ethanol side-by-side with low-carbon isobutanol; (ii) completing our development activities resulting in commercial production and sales of low-carbon ethanol, isobutanol or isobutanol-derived products and/or technology, (iii) obtaining adequate financing to complete our development activities, including the build out of low-carbon ethanol capacity and further isobutanol and hydrocarbon production capacity, (iv) gaining market acceptance and demand for its products and services, (v) attracting and retaining qualified personnel; and (vi) the achievement of a level of revenues adequate to support our cost structure.
We may never achieve profitability or generate positive cash flows, and unless and until we do, we will continue to need to raise additional cash. We intend to fund future operations through additional private and/or public offerings. In addition, we may seek additional capital through arrangements with strategic partners or from other sources, may seek to restructure our debts and we will continue to address our cost structure. Such additional capital may not be available to us on acceptable terms or at all. Such additional capital may not be available to us on acceptable terms or at all. Notwithstanding, there can be no assurance that we will raise additional funds, or achieve or sustain profitability or positive flows from operations.
Non-GAAP Financial Information
Non-GAAP Cash EBITDA is a non-GAAP measure and is calculated by adding depreciation and non-cash stock compensation to GAAP loss/income from operations. Management believes that non-GAAP Cash EBITDA is useful to supplement to the Company’s GAAP financial statements because management uses such information internally for its operating, budgeting and financial planning purposes. This non-GAAP financial measure also facilitates management's internal comparisons to Gevo’s historical performance as well as comparisons to the operating results of other companies. In addition, Gevo believes this non-GAAP financial measure is useful to investors because it allows for greater transparency into the indicators used by management as a basis for its financial and operational decision making. Our measure of non-GAAP Cash EBITDA is not necessarily comparable to similarly titled captions of other companies due to different methods of calculation. Non-GAAP information is not prepared under a comprehensive set of accounting rules and therefore, should only be read in conjunction with financial information reported under U.S. GAAP when understanding Gevo’s operating performance.
Results of Operations
Comparison of the Three Months Ended September
30, 2018 and 2017
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|
Three Months Ended
September
30,
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(in thousands)
|
|
2018
|
|
|
2017
|
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|
Change
|
|
Revenue and cost of goods sold
|
|
|
|
|
|
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|
|
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Ethanol sales and related products, net
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|
$
|
8,071
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|
|
$
|
7,376
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|
$
|
695
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|
Hydrocarbon revenue
|
|
|
504
|
|
|
|
235
|
|
|
|
269
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|
Grant and other revenue
|
|
|
-
|
|
|
|
88
|
|
|
|
(88
|
)
|
Total revenues
|
|
|
8,575
|
|
|
|
7,699
|
|
|
|
876
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
10,628
|
|
|
|
9,709
|
|
|
|
919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(2,053
|
)
|
|
|
(2,010
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)
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|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
1,865
|
|
|
|
1,210
|
|
|
|
655
|
|
Selling, general and administrative expense
|
|
|
2,190
|
|
|
|
1,893
|
|
|
|
297
|
|
Total operating expenses
|
|
|
4,055
|
|
|
|
3,103
|
|
|
|
952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,108
|
)
|
|
|
(5,113
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)
|
|
|
(995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(767
|
)
|
|
|
(811
|
)
|
|
|
44
|
|
Gain/(Loss) from change in fair value of derivative warrant liability
|
|
|
5
|
|
|
|
(413
|
)
|
|
|
418
|
|
(Loss)/Gain from change in fair value of 2020 Notes embedded derivative
|
|
|
(7
|
)
|
|
|
2,184
|
|
|
|
(2,191
|
)
|
Other expense
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
Total other expense, net
|
|
|
(772
|
)
|
|
|
960
|
|
|
|
(1,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,880
|
)
|
|
$
|
(4,153
|
)
|
|
$
|
(2,727
|
)
|
Revenues.
Ethanol sales and related products, net for the three months ended September 30, 2018 was $8.1 million, an increase of $0.7 million compared to the three months ended September 30, 2017. This increase was primarily a result of increased ethanol and distiller grain sales. During the three months ended September 30, 2018, we sold 5.1 million gallons of ethanol compared to 4.2 million gallons of ethanol sold during the three months ended September 30, 2017. Hydrocarbon revenue, comprised of ATJ, isooctane and isooctene sales, increased by $0.3 million during the three months ended September 30, 2018, compared to the three months ended September 30, 2017, as a result of an increase in shipments of finished products from our demonstration plant located at the South Hampton Resources, Inc. facility in Silsbee, Texas (the “South Hampton Facility”).
Cost of goods sold.
Cost of goods sold was $10.6 million during the three months ended September 30, 2018, compared to $9.7 million during the three months ended September 30, 2017, an increase of $0.9 million. Cost of goods sold included approximately $9.0 million associated with the production of ethanol and related products and approximately $1.6 million in depreciation expense.
Research and development expense.
Research and development expense increased by approximately $0.7 million during the three months ended September 30, 2018, compared to the three months ended September 30, 2017, due primarily to the ongoing expansion of the South Hampton Facility.
Selling, general and administrative expense.
Selling, general and administrative expense increased by approximately $0.3 million during the three months ended September 30, 2018, compared to the three months ended September 30, 2017 due primarily to an increase in employee related expenses.
Interest expense
. Interest expense for the three months ended September 30, 2018 was $0.8 million, a decrease of less than $0.1 million compared to the three months ended September 30, 2017, due to an decrease in the outstanding principal of the 2020 Notes.
(Loss)/Gain from change in fair value of derivative warrant liability.
During the three months ended September 30, 2018 we incurred a $5,000 non-cash gain on changes in the fair value of the derivative warrant liability, due to a decrease in the price of our common stock combined with a decline in the remaining term of the agreements.
(Loss)/Gain from change in fair value of the 2020 Notes embedded derivative.
During the three months ended September 30, 2018, the estimated fair value of the 2020 Notes embedded derivative liability decreased, resulting in a non-cash loss of $7,000 primarily due to the increase of the principal balance of the 2020 Notes as a result of the increased principal balance due to our decision to pay a portion of the interest due at September 30, 2018 in the form of paid-in-kind interest.
Comparison of the Nine
Months Ended
September
30, 2018 and 2017
|
|
Nine Months Ended
September
30,
|
|
|
|
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Revenue and cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol sales and related products, net
|
|
$
|
25,102
|
|
|
$
|
19,709
|
|
|
$
|
5,393
|
|
Hydrocarbon revenue
|
|
|
1,111
|
|
|
|
984
|
|
|
|
127
|
|
Grant and other revenue
|
|
|
25
|
|
|
|
163
|
|
|
|
(138
|
)
|
Total revenues
|
|
|
26,238
|
|
|
|
20,856
|
|
|
|
5,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
31,904
|
|
|
|
28.822
|
|
|
|
3,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(5,666
|
)
|
|
|
(7,966
|
)
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
4,123
|
|
|
|
4,318
|
|
|
|
(195
|
)
|
Selling, general and administrative expense
|
|
|
5,697
|
|
|
|
6,190
|
|
|
|
(493
|
)
|
Total operating expenses
|
|
|
9,820
|
|
|
|
10,508
|
|
|
|
(688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(15,486
|
)
|
|
|
(18,474
|
)
|
|
|
2,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,496
|
)
|
|
|
(2,152
|
)
|
|
|
(344
|
)
|
(Loss) on exchange or conversion of debt
|
|
|
(2,202
|
)
|
|
|
(4,933
|
)
|
|
|
2,731
|
|
(Loss) from change in fair value of the 2017 Notes
|
|
|
-
|
|
|
|
(339
|
)
|
|
|
339
|
|
(Loss)/Gain from change in fair value of derivative warrant liability
|
|
|
(3,035
|
)
|
|
|
5,106
|
|
|
|
(8,141
|
)
|
Gain from change in fair value of 2020 Notes embedded derivative
|
|
|
2,340
|
|
|
|
522
|
|
|
|
1,818
|
|
Other income
|
|
|
5
|
|
|
|
26
|
|
|
|
(21
|
)
|
Total other expense, net
|
|
|
(5,388
|
)
|
|
|
(1,770
|
)
|
|
|
(3,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(20,874
|
)
|
|
$
|
(20,244
|
)
|
|
$
|
630
|
|
Revenues.
Ethanol sales and related products, net for the nine months ended September 30, 2018 was $25.1 million, an increase of $5.4 million from the nine months ended September 30, 2017. This increase was primarily a result of greater ethanol and distiller grain sales. During the nine months ended September 30, 2018, we sold 14.9 million gallons of ethanol compared to 11.5 million gallons of ethanol sold during the nine months ended September 30, 2017. Hydrocarbon revenue, comprised of ATJ, isooctane, and isooctene sales, increased during the nine months ended September 30, 2018 primarily as a result of an increase in shipments of finished products from our South Hampton Facility. Grant and other revenue was $25,000 during the nine months ended September 30, 2018, a decrease of $0.1 million as compared to the nine months ended September 30, 2017, primarily as a result of the Company’s activities from the Northwest Advanced Renewables Alliances ending in the third quarter of 2017.
Cost of goods sold.
Cost of goods sold was $31.9 million during the nine months ended September 30, 2018, compared with $28.8 during the nine months ended June 30, 2017. Cost of goods sold in the 2018 period included approximately $27.2 million associated with the production of ethanol, isobutanol and related products and approximately $4.7 million in depreciation expense.
Research and development expense.
Research and development expense decreased by approximately $0.2 million during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, due primarily to a decrease in employee related expenses, offset by expenses related to the current expansion of the South Hampton Facility.
Selling, general and administrative expense.
Selling, general and administrative expense decreased by approximately $0.5 million during the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017, due primarily to an decrease in employee related expenses.
Interest expense
. Interest expense for the nine months ended September 30, 2018 was $2.5 million, which was an increase of $0.3 million compared to the nine months ended September 30, 2017, due to an increase in the interest rate on our outstanding debt obligations as a result of the September 20, 2017 exchange of the 2020 Notes.
(Loss) on exchange or conversion of debt.
During the nine months ended September 30, 2018, we incurred a non-cash loss of $2.2 million due primarily to an increase in the price of our common stock at the time of the conversion.
(Loss)/Gain from change in fair value of derivative warrant liability.
During the nine months ended September 30, 2018, we incurred a non-cash loss of approximately $3.0 million, due primarily to the exercise of 251 Series A Warrants to purchase 251 shares of our common stock, and 300,510 Series K Warrants to purchase 300,510 shares of our common stock. The loss was the result of an increased price of our common stock at the time of exercise of the warrants.
Gain from change in fair value of the 2020 notes embedded derivative.
During the nine months ended September 30, 2018, the estimated fair value of the 2020 Notes embedded derivative liability decreased, resulting in a non-cash gain of $2.3 million primarily due to the increase in the price of our common stock.
Revenues, Cost of Goods Sold and Operating Expenses
Revenues
During the nine months ended September 30, 2018 and 2017, we generated revenue from: (i) the sale of ethanol, isobutanol and related products, net; (ii) hydrocarbon sales consisting primarily of the sale of ATJ fuel, isooctane and isooctene derived from our isobutanol for purposes of certification and testing; and (iii) government grants and research and development programs.
Cost of Goods Sold and Gross Loss
Cost of goods sold during the nine months ended September 30, 2018 and 2017 primarily includes costs directly associated with isobutanol production and ethanol production at the Luverne Facility, such as costs for direct materials, direct labor, depreciation, other operating costs and certain plant overhead costs. Direct materials include corn feedstock, denaturant and process chemicals. Direct labor includes compensation of personnel directly involved in production operations at the Luverne Facility. Other operating costs include utilities and natural gas usage.
Our gross loss is defined as our total revenue less our cost of goods sold.
Research and Development
Our research and development costs consist of expenses incurred to identify, develop and test our technologies for the production of isobutanol and the development of downstream applications thereof. Research and development expenses include personnel costs (including stock-based compensation), consultants and related contract research, facility costs, supplies, depreciation and amortization expense on property, plant and equipment used in product development, license fees paid to third parties for use of their intellectual property and patent rights and other overhead expenses incurred to support our research and development programs. Research and development expenses also include upfront fees and milestone payments made under licensing agreements and payments for sponsored research and university research gifts to support research at academic institutions.
Selling, General and Administrative
Selling, general and administrative expenses consist of personnel costs (including stock-based compensation), consulting and service provider expenses (including patent counsel-related costs), legal fees, marketing costs, corporate insurance costs, occupancy-related costs, depreciation and amortization expenses on property, plant and equipment not used in our product development programs or recorded in cost of goods sold, travel and relocation and hiring expenses.
We also record selling, general and administrative expenses for the operations of the Luverne Facility that include administrative and oversight expenses, certain personnel-related expenses, insurance and other operating expenses.
Liquidity and Capital Resources
Our independent auditor included “going-concern” language in our audited financial statements for the year-ended December 31, 2017. For more information, see “—Financial Condition.”
Since our inception in 2005, we have devoted most of our cash resources to manufacturing, research and development, defense of intellectual property and selling, general and administrative activities related to the commercialization of isobutanol, as well as related products from renewable feedstocks. We have incurred losses since inception and expect to incur losses through at least the remainder of 2018 and likely beyond. To date, we have financed our operations primarily with proceeds from multiple issuances of equity and debt securities, borrowings under debt facilities and product sales.
The continued operation of our business, including the Luverne Facility Expansion, is dependent upon raising additional capital through future public and private equity offerings, debt financings or through other alternative financing arrangements. In addition, successful completion of our research and development programs and the attainment of profitable operations are dependent upon future events, including access to sufficient capital, repayment of our current debt, completion of our development activities resulting in sales of isobutanol or isobutanol-derived products and/or technology, achieving market acceptance and demand for our products and services and attracting and retaining qualified personnel. Such additional capital may not be available to us on acceptable terms or at all.
As of
September
30, 2018, we had an accumulated deficit of $422.2 million with cash and cash equivalents totaling $38.3 million.
The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):
|
|
Nine
Months Ended
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash used in operating activities
|
|
$
|
(10,154
|
)
|
|
$
|
(16,441
|
)
|
Net cash used in investing activities
|
|
$
|
(933
|
)
|
|
$
|
(1,682
|
)
|
Net cash provided by financing activities
|
|
$
|
37,850
|
|
|
$
|
2,388
|
|
Operating Activities
Our primary uses of cash from operating activities are personnel-related expenses, research and development-related expenses, which include costs incurred under development agreements; costs and expenses for the production of ethanol, isobutanol and related products; logistics costs; costs associated with further processing of isobutanol and costs associated with the operation of the South Hampton Facility and debt service payments.
During the nine months ended September 30, 2018, we used $10.2 million in cash from operating activities primarily resulting from a net loss of $20.9 million, a $1.3 million increase in working capital, and $9.4 million in non-cash operating activities.
Investing Activities
During the nine months ended September 30, 2018, we used $0.9 million in cash from investing activities primarily related to capital expenditures at our Luverne Facility.
Financing Activities
During the nine months ended September 30, 2018, we raised $37.9 million from our financing activities, primarily from the $37.8 million in gross proceeds from our at-the-market offering program, $1.3 million raised from the exercise of our Series A Warrant and Series K Warrants, offset by $0.9 million in commissions to our sales agent under the at-the-market offering program and $0.4 million in offering costs related to the at-the-market offering program
At-the-Market Offering Program.
In February 2018, we commenced an at-the-market offering program, which initially allowed us to sell and issue up to $5.0 million of shares of our common stock. The at-the-market offering program was amended multiple times in June 2018 to increase the available capacity under the at-the-market offering program by an aggregate of approximately $84.9 million
During the nine months ended September 30, 2018, we issued 6,391,617 shares of common stock (after giving effect to the one-for-twenty reverse stock split effected on June 1, 2018) under the at-the-market offering program for gross proceeds of $37.8 million. We paid commissions to our sales agent of approximately $0.9 million and incurred other offering related expenses of $0.4 million during the nine months ended September 30, 2018.
During the three months ended September 30, 2018, we issued 105,000 shares of common stock under the at-the-market offering program for gross proceeds of $0.4 million. We paid commissions to our sales agent of approximately $10,000 and incurred other offering related expenses of approximately $66,000 during the three months ended September 30, 2018.
We sold an additional 545,313 shares of common stock, for gross proceeds of $2.4 million after September 30, 2018. As of September 30, 2018, the Company has remaining capacity to issue up to approximately $52.0 million of additional shares of common stock under the at-the-market offering program. Net proceeds are intended to be used to fund working capital and for other general corporate purposes, which may include repayment of outstanding indebtedness.
2020 Notes
On April 19, 2017, we entered into an Exchange and Purchase Agreement (the “Purchase Agreement”) with WB Gevo, LTD, and Whitebox Advisors LLC, in its capacity as representative of the holder (“Whitebox”). Pursuant to the terms of the Purchase Agreement, the holder, subject to certain conditions, including approval of the transaction by our stockholders (which was received on June 15, 2017), agreed to exchange all of the outstanding principal amount of the 2017 Notes for an equal principal amount of our newly created 2020 Notes, plus an amount in cash equal to the accrued and unpaid interest (other than interest paid in kind) on the 2017 Notes (the “Exchange”). On June 20, 2017, we completed the Exchange, terminated the 2017 Notes Indenture and cancelled the 2017 Notes.
As noted above, in June 2018, the holders of our 2020 Notes converted an aggregate of $3.2 million of outstanding principal and $0.7 million in "make-whole" interest in exchange for an aggregate of 260,793 shares of our common stock. As of September 30, 2018, the outstanding principal on the 2020 Notes, including paid-in-kind interest, was $13.7 million.
The 2020 Notes will mature on March 15, 2020. The 2020 Notes bear interest at a rate equal to 12% per annum (with 2% potentially payable as PIK Interest (as defined and described below) at our option), payable on March 31, June 30, September 30, and December 31 of each year. Under certain circumstances, we have the option to pay a portion of the interest due on the 2020 Notes by either (a) increasing the principal amount of the 2020 Notes by the amount of interest then due or (b) issuing additional 2020 Notes with a principal amount equal to the amount of interest then due (interest paid in the manner set forth in (a) or (b) being referred to as “PIK Interest”).
The 2020 Notes are convertible into shares of our common stock, subject to certain terms and conditions. The current conversion price of the 2020 Notes is equal to $14.72 per share of common stock, or 0.06795 shares of common stock per $1 principal amount of 2020 Notes.
See Note 7,
Debt
, to our consolidated financial statements included herein for further discussion of the 2020 Notes.
Critical Accounting Policies and Estimates
Except for the adoption of ASC 606 “
Revenues from Contracts with Customers”
(see Note 3 for the updated revenue recognition policy in accordance with ASU 2014-09), there have been no significant changes to our critical accounting policies since December 31, 2017. However, see Note 1,
Nature of Business, Financial Condition and Basis of Presentation,
to our consolidated financial statements included herein for a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report.
Contractual Obligations and Commitments
The following summarizes the future commitments arising from our contractual obligations at September 30, 2018 (in thousands).
|
|
Les
s
than 1 year
|
|
|
1 - 3 years
|
|
|
4 - 5 years
|
|
|
5+ Years
|
|
|
Total
|
|
Principal debt payments (1)
|
|
$
|
-
|
|
|
$
|
14,112
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,112
|
|
Interest payments on debt (2)
|
|
|
1,381
|
|
|
|
646
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,027
|
|
Operating leases (3)
|
|
|
1,262
|
|
|
|
755
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,017
|
|
Insurance, maintenance and other
|
|
|
402
|
|
|
|
196
|
|
|
|
208
|
|
|
|
-
|
|
|
|
806
|
|
Total
|
|
$
|
3,045
|
|
|
$
|
15,709
|
|
|
$
|
208
|
|
|
|
-
|
|
|
$
|
18,962
|
|
(1)
|
Represents cash principal payments due to the holders of the 2020 Notes.
|
(2)
|
Represents interest payments due to the holders of the 2020 Notes.
|
(3)
|
Represents commitments for operating leases related to our leased facility in Englewood, Colorado and our lease for rail cars in Luverne, Minnesota for ethanol and isobutanol shipments.
|
The table above reflects only payment obligations that are fixed and determinable as of September 30, 2018.
Off-Balance Sheet Arrangements
As of September 30, 2018, we did not have any material off-balance sheet arrangements, except for operating lease obligations disclosed in our commitment and contingencies table above.