Gevo, Inc. (NASDAQ:GEVO)
Q2 2016 Earnings Conference Call
August 9, 2016 16:30 ET
Geoffrey Williams - General Counsel & Secretary
Patrick Gruber - CEO
Mike Willis - CFO
Jeff Osborne - Cowen & Company
Welcome to the Gevo Incorporated Q2 2016 Earnings Conference Call. My name is Adrian and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will be conduct a question-and-answer session. Please note that this conference is being recorded.
I'll now turn the call over to Geoff Williams. Geoff Williams, you may begin.
Good afternoon everyone and thank you for joining Gevo's second quarter 2016 conference call. I'd like to start by introducing today's participants from the Company. With us today is Pat Gruber, Gevo's Chief Executive Officer; and Mike Willis, Gevo's Chief Financial Officer. Earlier today we issued a press release which outlines the topics that we plan to discuss today. A copy of this press release is available on our Web site 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 unavailable on Gevo's Web site.
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 Web site. 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 2016 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 which was filed with the U.S Securities and Exchange Commission or SEC on March 30, 2016 and in subsequent reports and other filings 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 obligation 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 review of Gevo's recent business developments. Mike will then view Gevo's financial results for the second quarter 2016. Following the presentation we will open up the call for questions.
I'll now turn the call over to Pat.
Thank you, Geoff. I would like to start by giving you a brief update on the burn, and our operational production status and progresses after which I will provide you an update on our efforts in the jet fuel market followed by an update on the specialty fuels market and then add some comments about our new partner Clariant. Mike will then provide a detailed financial review for the quarter and we will open it up for Q&A.
So first, the distillation system is complete in Luverne, and the entire pressure process is operating. The technology is working across the whole process. The fermentation at Luverne is going well and we are particularly pleased with that progress. In fact, we have seen one of our batches exceed the upper hand of our production range of 20,000 gallons and that's a great result.
On the cost side we remain on track to hit all of our targets. Now the distillation system as I mentioned last quarter was, we were just in the midst of starting it up and working with optimizing it. It did give us some trouble. It's now working and producing product on spec.
After starting up that distillation system in March as we integrate the process streams with whole plant, we found that some impurities didn't go where we thought they would. At least in the quantities that we thought they would and instead some of them went to our product. In order to make the isobutanol in spec we had to reprocess using our distillation system.
It slowed us down because we had to use the fermenter to have the whole tank for the reprocessing as we didn't have another tank to use. I guess the penny pinched too much in that case. This meant that we were unable to start a new batch while we reprocess the prior batch. To fix the issues, we had to move some pipes, add some other equipment. However, there were delays in the delivery of some of that equipment.
Certain pump in particular and that slowed us down. The good news is that we are no longer reprocessing. We can make product in a single spec in a single pass with no reprocessing the way the system was designed to work. It's important to note that we have only been running this completed system for a short period of time and at a very practical level we are still going to run it well.
We still have work to do to ramp up production. We believe it to be mostly learning curve type issues though to work through. So for example, we want to reduce the cycle times between batches. That's a straight forward learning curve and it takes practice; another example, learning to start and stop the distillation system, well that takes practice.
Each month we expect to improve leading us to higher run rates. It's worth noting that in the last 70 days or so we produced about 70,000 gallons of isobutanol. Whereas in the 30 days prior to that we produced about 30,000 gallons so we are learning. All of that said we can already tell from the testing the unit operations at the plant, from the unit operations at the plant they should be able to achieve the design capacities of 1.5 million gallons per year run-rate.
But we still have to do a lot of work to become truly excellent at running these unit operations and do them all together. The work around at Luverne process is of course focused on optimization, as we work through optimizations we are looking at what works well with the scale we are at and in particular we are looking at what works well with a view to great expanding Luverne. We are starting to turn our attention to expanding Luverne.
We also plan on occasionally testing equipment at Luverne that will aid us in the design of Luverne for a second plant and we might, as we do that work we might occasionally skip batches. And when we skip batches we are running fewer gallons of isobutanol. Because of the market interest in hydrocarbons jet and isooctane, we see that there are opportunities that closely integrate the hydrocarbon process and the isobutanol process.
Doing so to reduce cost from CapEx or OpEx perspective in a full scale hydrocarbon operation. We want to make sure that we understand this whole process as best we can. Therefore we are planning on optimizing isobutanol production specification and grade specifically for isooctane and jet fuel. If and when we work on a grade of isobutanol hydrocarbon production, we may have occasionally have to skip batches of isobutanol and that of course will cause to produce fewer gallons in a given month.
Because the installation and the startup of the modified distillation system was delayed by six weeks and because we plan on occasionally skipping batch cycles while we work on the hydrocarbon grade or because we are doing testing and equipment aimed at reducing capital cost and operating cost for expanding Luverne operation, we are adjusting our guidance for overall gallons produced in 2016 to a range of 500,000 to 650,000 gallons.
Moving forward, we continue to stay optimized on the production systems to increase the isobutanol production volume while simultaneously working towards decreasing our production cost and improving the robustness and consistency of the production process. Again, we have a strong view to much larger capacity for isobutanol and hydrocarbons built at Luverne.
For the third quarter, we want to turn around more batches in a given amount of time with the ultimate goal of producing a full batch of isobutanol every 5 to 6 days. We have seen enough in the operation of the new equipment that we expect to hit a revised production goals. At the end of the day we expect to have the most efficient, lowest cost, commercial source of isobutanol in production. I would now like to move on and speak a bit about a couple of key corporate highlights for this quarter.
That's for the jet fuel market. Now I know many of you have questions about the commercial flights with our partner Alaska Airlines, first off remember this wasn't a test flight. The testing had been done with the SDM over a period of about the previous six years. I had a pleasure of being at the airport for the joint press conference. I met the passengers and joined them on the first commercial flight using our ATJ i.e. the Alcohol to Jet Fuel.
As a reminder the first flight departed from Seattle and flew to San Francisco. It is extremely pleasing to see the response from other passengers on that flight. When it -- when it was announced but again the flight was using renewable fuels people actually applauded and cheered. While I applaud I was approached by many passengers who had questions or want to shake my hand, it is really a lot of fun. Because it took so many years to get to this point, designing a viable technology with the economics and the potential to make it mainstream actually flying on it, was very gratifying yet humbling. It was a -- is a very fine achievement.
As you know it, same day Alaska Airlines also flew from Seattle to Washington DC with our ATJ, first commercial flight was certainly a high profile milestone in Gevo's history. And we are thrilled that we agreed to support strategic point in our company's history. We believe the airline is industry is rapidly moving to self-regulate their missions, and renewable jet fuel is expected to be a major part of that initiative. Greenhouse gases from airlines have not yet been regulated, now because the airline cross so many geographies, it would be a regulatory disaster for airline, each geography set its own greenhouse gas requirements and forced the airlines to comply.
The airline industry has widely decided to take on themselves self-regulate Greenhouse gas emissions, with the intent of avoiding a patchwork quilt of regulation even though the airline industry is pursuing self-regulation. It is also likely to feel more regulatory pressure despite its efforts, for example near the end of July ETA [ph] finally publicly announced that aircraft emissions contribute to climate change and endanger public health and the environment, these guys are under pressure. So we see significant interest in our jet fuel and were having several construct this question with multiple potential partners in the aviation industry. These discussions with potential customers and partners are focused on how we get from our 1.5 billion gallon plant scale for isobutanol to a very large scale plant that produced isobutanol and then converts that isobutanol into jet fuel.
We continue to believe we have the most scalable and economic technology to produce jet fuel. I think our customers see that. We're working on getting octane customers to support larger plant. And we have begun planning for that plant at Luverne. Next I'll turn my attention to especially fuel markets for gasoline blend stock markets. Give you an update on marine and off-road.
Now we continue to see an increased interest in our products, as they become more established in the market. As you all know, the national marine manufacturers association has endorsed the use of isobutanol in the marine fuel market and the off-road market because of its many superior properties. Not only did the isobutanol product prevent moisture absorption and base separation, it also reduces engine corrosion while providing a higher energy content with a high octane rating. This basically means that there is less wear and tear of marine engines, small engines isobutanol containing gasoline when compared to ethanol. Less wear and tear on the small high performance engines means that they last longer and require less maintenance, that's up from the customer values.
Leading to see future development as customers get used to our products and the experience in the in the many benefit hands-on. It's an interesting market for Gevo isobutanol is properties are valued. And we look forward to seeing what this market has to offer short term as we continue to work on ramping up production at Luverne.
During this quarter we signed a supply agreement with the national fuel distributor Musket Corporation in mid-July. The supply agreements for isobutanol blended gasoline for Marina and off-road markets and we're very excited to have Musket as a partner to further expand isobutanol and get our blended gasoline directly available at the pumps. Initial targets for Musket our retail pumps they can't pursue in Arizona followed by other large marine market such as Lake Palau and Lake Minn [ph], and there will be other targets too that we'll announce in the future. The support to have our products available directly at the pumps it is easier for customers to buy and is it more than the promise at Marina's. Customers are looking for a bio based product with high octane but don't want the problems associated with ethanol blended gasoline.
Musket and the others are focused on having isobutanol available directly at the pumps and it's gratifying to see that customers actually want the product it's in demand. So we're pleased with our collaboration with Musket and I am happy to share that Musket is an excellent partner and we're moving along rather quickly. We ship our first real cart to them and they're moving through the distribution channel, we are also hopeful that Musket will take more and more product and production stop, we expect them to take more. And I speak on gasoline becomes more established the marketplace. Musket is very active with our product, I hope to be able to tell you a lot more about what you're doing the near future, exciting.
Next I would like to speak to you about our new partner for this quarter, Clariant. In May we announced an agreement with Clariant Corporation one of the world's leading specialty chemical companies to team up to further develop catalyst for a technology that converts ethanol to olefins, things like propylene. But we've mentioned as a previous calls.
As reminder, Gevo's ETO technology, that's the Ethanol to Olefin Technology, uses ethanol as a feedstock to produce tailored mixes of propylene or SB-lene [ph] along with totally renewable hydrogen. This is a valuable standalone molecules or as feedstocks to produce other products such as diesel fuel or commodity plastics, maybe exact drops of replacements for their fossil-based equivalent excepts for these who have renewable contents. Clariant is the catalyst company in that capability and know how to scale up our developmental program and customize the catalyst to better enable commercialization, we're going to make the catalyst work and -- we're going to take our catalyst and develop it into a commercial catalyst.
We're pleased that they stepped up for this and I put the resources behind it, would believe it to be a validation of the potential of the technology since they did commit the resources to make it happen, it also means this technology can continue to scale up. While we focus our efforts at Gevo at our core business of producing isobutanol in hydrocarbon products like jet fuel octane.
Now on May 31, 2016 we announced that we commit to review a strategic alternatives. The board of directors and its advisors have established a process for outreach engagement with current creditors in and interested strategic financial parties. The process is ongoing and we expect to update the market with our progress in the near future although we were able to raise a significant amount of cash in this quarter to warn exercises and the common stock offering. We still need to solve for the nearly $50 million of debt outstanding, represented by the 2017 and 2022 notes, before March of 2017.
So in summary, we are very pleased with the progress we've made this quarter across all of our key markets. Even though we lowered our 2016 production guides for isobutenol, Luverne. We feel that we're still on track with the new systems, slightly delayed for the reasons I already mentioned. 2015 is an incredibly important inflection point for people that want to thank all over stockholders for their continued support. With the progress we hope to make it Luverne by year end, especially fuel market providing short term commercial opportunities. And increase traction we're seeing in jet fuel market. I believe that we are well on our way to executing our strategic plan in enhancing shareholder value.
With that I would like to turn it over to Mike. Mike.
Thank you, Pat. Gevo reported revenue in the second quarter of 2016 of $8.1million compared to $8.9 million in the same period in 2015. The decrease in revenue during 2016 is primarily result the production and sale of approximately $7.2 million of ethanol, isobutanol and distillers grains at the Luverne plant as compared to $8 million in the second quarter of 2015. This change was principally a result of lower ethanol production, ethanol prices, and the distiller's grains prices in the second quarter of 2016 versus the same period in 2015.
During the second quarter 2016 hydrocarbon revenues were $0.7 million basically flat compared to the same period in 2015. Gevo also generated grant revenue of $0.2 million during the second quarter of 2016, which was also flat as compared to the same period in 2015. Cost of goods sold was $10 million in the second quarter of 2016 versus $9.9 million in the same period in 2015. Cost of goods sold included approximately $8.5 million associated with production of ethanol isobutanol and related products and approximately $1.5 million in depreciation expense.
Gross loss was $1.9 million for the second quarter of 2016 versus $1 million for the second quarter of 2015. R&D expense was $1.5 million in the second quarter of 2016 compared to $1.8 million reported in the second quarter of 2015. R&D expense decreased in the second quarter 2016 compared with the same period in 2015, due primarily to a reduction in employee related expense. SG&A for the second quarter 2016 decreased to $2.1 million compared $3.8 million for the comparable quarter 2015. SG&A expense decreased in the second quarter 2016 compared to same period 2015 due primarily to a decrease of $1.3 million in litigation legal expenses.
Within total operating expenses for the second quarter 2016 we reported approximately $0.2 million for non-cash stock based compensation. For the second order 2016 report a loss from operations of $5.5 million down $1 million from a loss from operations $6.5 million in the second quarter of 2015. In the second quarter 2016 cash EBITDA loss and non-GAAP measure which is calculated by adding back depreciation in non-cash stock based compensation to GAAP loss from operations, with $3.6 million compared with $4.6 million in the same quarter 2015 representing a decrease of $1 million from the same period last year. Recall that last September we reported that we were targeting an average quarterly EBITDA loss of $3.5 to $4.5 million per quarter in 2016. And we're in the bottom half of this range in the second order 2016.
Interest expense for the second quarter 2016 was $2.2 million which was an increase of $0.2 million over the same quarter last year. During the three months ended June 30, 2016 we reported a loss of $10.6 million from a change in the fair value of the derivative warrants liability. We also recognize a $0.9 million loss as a result of changing the exercise price of certain our warrants during the period.
During the second quarter 2016 we incur non-cash loss $0.9 million due to the quarterly market-to-market valuation of the 2017 notes. There was no change in the value of the embedded relatives in the 2022 notes as the derivatives had no meaningful values since the third quarter 2014. No older than Gevos net converted or exchange any notes during the quarter. During the three months ended June 30, 2016 we report $1.5 million loss associated with the April equity issuance primarily as a result of the estimated share value to common stock and warrants. Issue being greater than the consideration received in exchange.
For the second quarter 2016 reported a net loss of $21.5 million or loss of $0.44 per share based on a weighted average shares outstanding $49,850,638 this compared to a loss of $14.4 million in the second quarter 2015 or a loss of $1.10 per share. In the second quarter 2015, Gevo recognized non-cash losses totaling $14 million due to changes in the fair value of certain or financial instrument, such as warrants convertible debt and embedded derivatives. Adding back the non-cash losses resulted in non-GAAP adjusted net losses of $7.5 million in the second quarter of 2016. Or non-GAAP adjusted net loss per share of $0.15. This compares to a non-GAAP adjusted net loss of $8.6 million in the second order 2015 or non-GAAP adjusted net loss per share of $0.66.
Over the quarter we raised gross proceeds totaling approximately $23.8 million through public offerings, a common stock and warrants as well as through the exercise warrants. In June the closed our best efforts public offering of 21 million 80.456 shares of common stock at $0.45 per share. We receive gross proceeds from this offering approximately $9.5 million. In April we completed detailed 3,721,429 Series-C units and 6,571,429 Series-D units pursuant to an underwritten public offering.
Gevo received gross proceeds of approximately $3.5 million. Also during the quarter Gevo received proceeds of approximately $10.8 million through the exercise of warrants. Approximately 36.3 million shares were issued her the exercise. As a result our quarter end cash-on-hand was $22.6 million. And we had 89,234,771 shares outstanding.
Lastly on July 26, 2016 the NASDAQ stock market granted Gevo an additional 180 counter days until January 23, 2017 to regain compliance with the one dollar per share minimum required for continued listing on the NASDAQ capital market. The NASDAQ determination to grant the second compliance period was based on Gevo meeting continued listing requirement for market value publicly held shares, and all other applicable requirements for initial listing on the NASDAQ capital market, with the exception of the bid price requirement. In a written notice of intention to cure the deficiency during the second compliance period by affecting a reverse stock split if necessary.
With that I'm now turn the call back to Pat.
Thanks, Mike. I would like to thank you all for your continued interest and support Gevo let's open up the call for questions, operator.
[Operator instruction] And our first question comes from Jeff Osborne please go ahead.
Good afternoon, guys, thanks for taking questions. I might have missed it but it could you give us what the total gallon produced of ethanol, as well as isobutenol in the quarter.
On the ethanol side we sold just under 4 million gallons. Recorder and then on the isobutenol side we sold or produced 80,000 gallons.
80,000, okay. Then how do we think about the ramp you gave some metrics of runs and you know kind of a gradual ramp up there Pat in the prepared remarks which is very helpful but at how do we think about gallons expectations for the third quarter versus the fourth quarter, I assume it's a pretty back in loaded you're with the revised guidance.
Since the beginning of Q3 with our efforts 70,000 gallons, so over the first you know got a month and you know few days here in August. So though there will be a ramp where you know we would anticipate Q4 having more gallons than Q3.
One of the things that mentioned on the call but it is -- the prepared remarks was that the capacity -- you can see that unit operation themselves have the capacity that we intended, so it's all good you just have to get -- you will be short right now we're at about 7 days cycle between batches working our way downward. And or run it, it does run better when we are closer badges.
Right then you mention that you're using the fermentation tank as a holding pattern you can you just give us a sense of the scope of you know; a, how long the plant was it was under-utilized and then you can add duration of period waiting for the at the pumps and equipment to show up.
It's about six weeks away and what happened was that -- yes we started off with running and we were intermittently in speck. But what if you don't have a -- we have one big finished product tank. And as soon as we saw that our product would not in speck we had to divert it. Because you don't want to contaminate the whole big thing. So then what we did the only thing that was big enough at the end are our fermentation tanks so we pumped it back to our fermentation tanks then use that and then re-distill it, so we used a re-distillation equipment, and then confirmed that it was in speck before we put in the final product tank. You know ideally you had a separate intermediate tank, we just didn't have the money to spend on that time.
I understand. And last two questions I had is can you give us update on Praj? And then I appreciated the comments in the prepared remarks on Clariant, but maybe just a sense of expectation or realistic processes of something can potentially be tested and commercialized there?
They are already are able to do the fermentation run -- and give system at their sight so as they continue to make progress and they are learning how to run it on sugar and molasses. So, they have taken the particular bug, they have taken our process and able to replicate our results. That is the first step.
Excellent. And anything on the price side?
That was rush.
Oh that was? I was asking about Clariant. Sorry, I was mixing up the two. I had asked about both and you gave it on the Clariant side.
Yes. Okay, so I just said about Praj that they've been able to take out. Yes, Clariant has been able to scale up the catalyst and they are contributing so that's an integral process, we will go back and forth but yes we are already making progress with it in the past to encourage this thing. And what's cool about this is that in this kind of commercialization, this kind of technology takes very few resources on our part because we already did the fundamental stuff and so, what we need is the commercial catalyst. The sub-catalyst, they are particular formulation of chemistries in other words, they are chemicals that form a catalyst but also has to be put into the right form and I am talking about the shape, the particle. And for it to work on a commercial basis and so that's what Clariant is working on and so we will continue to make progress there. And that technology is interesting because it is one of the few ways that we have seen from anyone that has the ability to make a propylene and be economical to do it.
Makes sense, good to hear. I appreciate all the comments.
And the next question comes from Amit Dayal [ph]. Please go ahead.
Thank you. In terms of the isobutanol shipment, are we shipping everything we are producing or are we holding inventory?
When we get it certified, it gets in the rail cars generally.
Yes. We have been shipping our products either to customers or down to obviously Southampton where we can continue freeze our isooctanes and jet fuel.
Understood, and in regards to, sorry if I missed this, I have been on multiple calls. On the ATJ front, what are the next steps in maybe moving this to slightly higher volumes? Any color on that would be helpful.
Yes. I am glad you asked that. I mentioned it a couple of times in prepared remarks and it is good to amplify it in case it didn't come across that lot of the work we are doing at Luverne is looking to, we will be looking to make sure we understand it well so we can expand Luverne significantly. With the intent of alternatively producing Alcohol to Jet at that site. That is what we would like to be able to do. We see enough of commercial interests on the Alcohol to Jet front so we are working on the customer agreements to make sure that get those buttoned down in order to make it happen. So yes we see that there is a lot of interest and we are working on it and we think the right place to produce that is large scale at Luverne.
And so when we talk about reducing even our run-rate price, there will be times when we are doing particular pieces of work specifically to make sure we understand what an upscale, a big upscale Luverne plant would look like. Now, to get a good breakeven, profitable company we want to see Luverne ultimately switched over to first isobutanol, and then to bring that isobutanol to jet fuel, that's what the future looks like and how we think about it.
Understood. In regards to the dealer distributors, you had signed in the last few months like Musket etcetera, what's the feedback from them in terms of the product you are putting out in the market. Any insight from their side in terms of how you think demand for this product will scale up over the next few quarters. Any color on that would be helpful, thank you.
Yes. What I expect to see is a ramp up. We see interest so we will be able to talk more about it in the future. Musket is private company and they are one of the most, I don't know if people know that, Musket is owned by Love's and I think it is one of the largest companies in the country and they are private. So they like to do things first and tell people about it afterwards rather than, to continue what they are doing. But I can tell you this it's interested, they're interested and it's growing.
Thank you. That's all I have.
And we have no further questions. I will now turn the call over Geoff Williams for final comments.
Okay. Thanks everyone for joining us. Thanks for your interest in Gevo. Have a good evening, bye.
Thank you Ladies and gentlemen. This concludes today's call. Thank you participating and you may now disconnect.
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