(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Gevo (NASDAQ:GEVO), a renewable chemicals and energy company, declined significantly on December 11th after announcing a unit offering at $1.35/unit. It is significant since Gevo had only 47.2 million outstanding shares before the offering and now they will be adding 18.525 million shares or an extra 39% to their outstanding shares. It is especially large since the units also allow purchasers to buy another share of stock for $1.85 and expire on December 16, 2018. The underwriter can also purchase an additional 2,778,750 shares and/or warrants to cover over-allotments for an additional 30 days.
Gevo absolutely needed to do an additional stock offering and they will receive approximately $25 million in gross proceeds. The proceeds from any exercise of the warrants will bring even more funds into the company. Some of the directors and officers of Gevo have also expressed interest in personally buying part of the offering and insider buying is always a nice sign of confidence in the company.
The funds will be used to repay $5.1 million in outstanding long-term debt, leaving approximately $19 million for working capital and startup production at the Luverne, Minnesota plant. This will almost double the cash and cash equivalents on record as of September 30, 2013.
Unfortunately, there are consequences for every action and assuming full participation of the offering there will be over 65 million shares outstanding. Without addressing any cash burn since the quarter ending September 30, 2013, Gevo will have approximately $51 million in current assets and $47 million in total liabilities. Gevo barely passes the current-ratio test and fails the acid-test ratio which excludes selling inventory to cover liabilities.
Current Ratio = current assets ($51 million) / current liabilities ($47 million) = 1.085
Acid Ratio = cash+accounts receivable+short term investments (46.5 million) / current liabilities ($47 million) = 0.99
Any company with a ratio less than 1 will have difficulty paying their current liabilities and should be viewed with caution. Gevo almost fails both tests and if cash burn is included they will obviously fail even after the unit offering funds are added.
I love the renewable energy business and try to support clean energy in order to help our planet. That doesn't mean I'll invest in a company that is on the wrong side of the fence. Gevo is producing products that are not really in high demand. Total revenues were only $1.127 million in the last quarter while cost of goods sold were $4.730 million. Obviously, when costs exceed price you are in a losing business. Negative margin almost always means future stock offerings and diluted shares. When operating expenses are added in Gevo turns into a cash burning machine with a net loss of $15.885 million in the last quarter alone.
Gevo specifically and the biofuels industry in general is facing increased pressure from the surge of oil and natural gas discoveries. The United States is the world's largest producer of oil and natural gas after surpassing Russia. So much is being produced that the U.S. will be exporting them in the future. This only applies downward pricing pressure to all energy supplies and especially to biofuels. The EPA has even lowered the biofuel standard for the first time from 18.15 billion gallons to 15.21 billion gallons in 2014.
There is also opposition to biofuels due to increases in food prices. Biofuels are produced from crops like corn and wheat and shifting the food supply to biofuels will raise food prices. When supplies of corn and wheat are low due to natural disasters, weather, or crop diseases, the natural result will be a competition between food vs. fuel.
Gevo has too many forces working against them. The government is lowering biofuel demand, energy companies are making record discoveries, and Gevo continues to have costs of goods sold higher than their revenues. I can only see dilution of shares from future stock offerings and continued cash burn until the company goes bankrupt or is sold for parts.