Gevo, Inc.
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Welcome to the Gevo Q3 2013 Earnings Conference Call. My name is Adriane and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mike Willis, Chief Financial Officer. Mike Willis, you may begin.

[Mark Willis:]

Good afternoon and thank you for joining Gevo’s third quarter 2013 conference call. I’m Mike Willis Gevo’s CFO. With me today are Pat Gruber, our CEO and Brett Lund, our Chief Licensing Officer and General Counsel. Earlier this afternoon, we issued a Press Release which outlines the topics that we plan to discuss today. A copy of this release is available on our website at www.gevo.com I would like to remind our listeners that this conference call is open to the media and we are providing a simultaneous webcast of this call to the public. A replay of the discussion will be available on our website later today. On the call today and on this webcast, you will hear discussions of 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, which is posted on our website. We will also provide certain forward-looking statements about events and circumstances that have not yet occurred, including projections of Gevo’s operating activities for 2013 and beyond. These statements are based on management’s current beliefs, expectations and assumptions and are subject to significant risks and uncertainty, including those disclosed in Gevo’s most recent Annual Report on Form 10-K as amended, which was filed with the SEC on March 26, 2013, and in subsequent reports and other filings made with the SEC by Gevo. 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 result of new information, future events or otherwise. Please refer to Gevo’s SEC filings for detailed discussions of the relevant risks and uncertainties. On today’s call, Pat Gruber, our CEO will begin with a review of our recent developments. I will then review our financial results for the third quarter of 2013. Following the presentation, we’ll open the call up for questions. Brett will also be available for the Q&A section of today’s call. I will now turn the call over to Pat Gruber, Gevo’s CEO. Pat Gruber Thank you, Mike, and thanks everyone for taking the time to listen to our quarterly call. I’m excited about the progress we’ve made, both [indiscernible] and across our business. That’s a great quarter. I will start with Luverne first and then I will talk more broadly about the business. You may recall that last year we paused isobutanol production because we have faced with infections that we haven’t seen before. Now in order to eliminate the issues we had last year, we spent a lot of time and effort modifying our equipment, our fermentation conditions and our operating procedures at Luverne. And of last quarter, we proved that we can run the plant, produce isobutanol and control infections. We did this using dextrose as a feedstock, in what we call single train and dual train mode. The purpose was to learn about our equipment and the technology. In each of these we proved our biocatalyst works well at full scale as well as our GIFT system. The technology works well and we learned that we can manage infection. Encouraged by what we learned, we moved on to our commercial feedstock [indiscernible] that is corn mash. We installed new equipment to help us manage infections that come with corn mash and we are in the midst of commissioning that but we’re already seeing the results in our ability to control infections and in fact in the last few weeks we’ve proven that we can make clean corn mash that meets a sterility requirements needed for isobutanol production. Our yeast grows and produces isobutanol using corn mash feedstock at full scale. Our GIFT system run [indiscernible] and that’s a great result that reflects what we have marked previously at our St. Joe demonstration plant. My team is doing an excellent job of safely working through the mechanical and operational issues, as we commission the new equipment and operate, integrate the entire plant using the corn mash feedstock. It is exciting to see that the Gevo proprietary yeast biocatalyst and the GIFT system is performing in line with our expectations. Our technology is working. Now we will continue to work through the commissioning of Luverne in the fourth quarter and learn how to run this plant. As we produce isobutanol, we will use it to seed our supply chain in markets. Our focus will be on selling into the specialty fuels markets as well as the specialty chemical markets. In specialty fuels we’ll target isobutanol as a specialty blend back into gasoline and we’ll also convert our isobutanol into hydrocarbon fuels and chemicals. To make hydrocarbons, we are sending our isobutanol to South Hampton Resources. They’re a great partner and that’s where our hydrocarbon demonstration plant in located. There we’ll make more jet and aviation fuels for the airports, army and navy. Now in this last quarter we also started up a paraxylene demonstration plant. It too is at South Hampton Resources. Recall that paraxylene is a building block for making [indiscernible] at least report that we already have achieved our goal of 92% selectivity for paraxylene in the single pass. That’s a great result. It is in contrast to traditional paraxylene production routes, which gives a mixture with many other chemicals. I think the Coca-Cola Company, Toray South Hampton Resources for supporting the work to transform isobutanol into polyester. We’ve signed a supply agreement to the U.S. Coast Guard for up to 80,000 plus gallons of finished 16% renewable isobutanol-blended gasoline. The Coast Guard is using our fuel as part of a 12 month long durability study on marine engines and the study is being performed under [indiscernible] between the U.S. Coast Guard, Honda and Mercury. The Coast Guard and the marine industry are interested in isobutanol because it isn’t a very soluble on water. Isobutanol leads to a fuel with more consistent properties of performance. ASTM International, that’s the agency that sets out standards, has certified isobutanol for automobile engines. This is important because it sets the standard for isobutanol blend and gasoline increase the global framework for the use of isobutanol as a gasoline blend stock. Gevo led this ASTM certification effort, procured the ASTM butanol task force which is made up of representatives from the petroleum refining industry, ethanol industry, major automobile OEMs and other industry experts from around the world. We have also begun selling fully renewable isooctane or octane made from our isobutanol. This is another hydrocarbon and this one is going into racing fuel applications. This will be fun to see as it develops. Alcohol-to-jet, otherwise known as ATJ, continues to make progress. Isobutanol, our alcohol it’s readily converted into standard jet fuels via chemistry. We’re producing ATJ in South Hampton Resources. This past quarter we signed a supply agreement with the U.S. Navy to supply them with up to 90,000 gallons of ATJ-5 jet fuel. We also have contracts with U.S. Air Force for up to 56,000 gallons and U.S. Army with 16,000 plus gallons of ATJ fuel. We’ve begun to work on our licensing business. I am pleased that our technology is at the point where we can credibly do this. We have signed our first letter of intent to commercially license our GIFT technology. This LOI is with IGPC Ethanol. IGPC is a farmer owned co-op that owns a 150 million liter plant in Ontario, Canada and has been producing ethanol since 2008. So summarizing then, we’ve made great progress. Our technology both with the biocatalyst and GIFT it works well and mesh and our team is doing great job of bringing our new equipment up and working out the production procedures. Our markets look good. Our overall plans remain unchanged. We’ll supply to the chemical and specialty fuels markets. I will now turn the call over to Mike Willis to review the numbers.

[Mike Willis:]

Thank you, Pat. With our operations focus continuing to be on starting production at Luverne we reported revenue in the third quarter of 2013 of $1.1 million, which was made up of sales of bio-based jet fuel to the U.S. Military totaling $0.4 million and those revenue under our research agreement with Coca-Cola and revenue from other ongoing research agreements. Revenue in the third quarter of 2012 was $0.6 million, based primarily on revenue from Coca-Cola and other research agreements. R&D expense was $5.5 million in the third quarter of 2013, compared to $5.4 million reported in the third quarter of 2012. Our R&D activities in the third quarter of 2013 were directed to the startup operations at Luverne and the optimization of specific parts of our technology to further enhance isobutanol production rates, as well as our work on bio-jet and bio-paraxylene at our hydrocarbons demo plant in Texas. The increase in R&D expense in the third quarter of 2013 as compared to last year was due to costs related to the production of bio based jet fuel at our facility in Texas as well as investment in equipment for the bio-paraxylene plant at the same facility. Recall our bio-jet demo facility is indirectly funded through product revenue from the U.S. Air Force, the U.S. Army and now with our most recent contract the U.S. Navy. Also recall last year Toray Industries contributed funding for the constructing of the bio-paraxylene plant in anticipation of this project. Excluding costs associated with the Texas facility, our R&D expenditures were down $1.3 million in the third quarter of 2013 versus the same quarter last year. This was a result of our ongoing cost control measures that have been in place since the second half of 2012. SG&A expense for the third quarter of 2013 decreased to $6.7 million, compared to $13.5 million for the comparable quarter in 2012. Our third quarter 2013 results continue to show the benefit from cost savings actions taken in the second half of 2012 to reduce ongoing litigation and legal cost, competition cost and outside services expenses. The reduction in SG&A expense primarily resulted from decreases of $3.7 million in legal related expenses including expenses in support of our ongoing litigation of Butamax, $1.7 million in salary and compensation related expenses and $1.3 million in other G&A costs including travel, consulting and public company related expenses. Within total operating expenses for the third quarter of 2013, we reported approximately $1 million for non-cash stock based compensation. Interest expense for the third quarter of 2013 was $1.7 million, compared to $2.6 million in the third quarter of 2012. The reduction was primarily a result of decreases associated with the decline in the outstanding principle balance of convertible notes and the decline in the outstanding principle of our debt with TriplePoint Capital given the scheduled payments on those notes. We also reported a non-cash gain of $1.6 million related to changes in the fair value of embedded derivatives contained in the convertible notes. These derivatives result from the rights that holders of the convertible notes have upon conversion and as we commented previously will result in non-cash amounts being recorded in our statements of operations or changes in fair value in each reporting period while the convertible notes remain outstanding. During the third quarter there were no conversions of the convertible notes, and we had 47,184,896 shares outstanding as of September 30, 2014. For the third quarter of 2013, we reported a net loss of $15.9 million or a loss of $0.34 per share based on weighted average shares outstanding of 46,520,867. This compared to a net loss of $12.1 million in the third quarter of 2012 or a loss of $0.31 per share. Cash on hand at quarter end was $25.7 million. With this level of cash and the actions we have taken to manage our operating cash burn, we continue to be positioned pursue our business strategies into next year. To support future growth we will work to enhance our balance sheet, including working to restructure our secured debt on the plant. And with the shelf in place we are positioned at opportunistically on financing. We believe that through progress at Luverne to advance the commercialization of renewable isobutanol, we better position Gevo for future funding. I will now turn call back to Pat Gruber.

[Pat Gruber:]

Thank you Mike. And I think with that we should turn it to questions.

[Operator:]

(Operator Instructions). And we have Mike Ritzenthaler from Piper Jaffray online with a question. Please go head.

[Mike Ritzenthaler:]

Congrats on getting mash back into the plant. How are you currently thinking about the ramp in production into next year, say between now as you complete the commissioning here in 4Q and maybe six months into the year?

[Pat Gruber:]

Well, the way to think about is this is we’re not a position where we can give real specific guidance on production volumes out of Luverne in the fourth quarter because our focus right now is completing the commissioning and the startup of the plant plan. And the balance of this quarter, we’re going to use it to learn how to operate and optimize the plant, increase the product volumes and decrease the cost and improve the product quality. Now, in the meantime, we still are going to be producing enough volume to facilitate existing contracts, first for the jet for the military as well some other isobutanol to seed other markets and we’ll be shipping stock to Sasol. And in fact, we will be using the isobutanol. We’re going to be in a position to give more granular guidance on production early in 2014. I’ll have a better view of it once we’re through the commissioning process.

[Mike Ritzenthaler:]

Okay that makes senses. On the licensing agreement, I thought this was kind of interesting. Maybe you don’t want to comment too specifically about this particular LOI, but generally speaking, how does that work mechanistically; Gevo would deliver the design package and some operational expertise, license or would pony up the capital for either retrofit or brown field, can you just kind of walk us through the thought process there?

[Pat Gruber:]

Sure. This is one is interesting because it’s actually a true license. This will be – we outright license the technology, the idea -- and we haven’t -- without talking about the specifics of this particular deal but the concept is upfront feed what’s been as royalties, provide the technology package and operating expertise and teach the folks how to do it.

[Operator:]

And we have John Quealy from Canaccord on line with a question. Please go ahead.

[Unidentified Analyst:]

Hey thanks folks it’s Chip for John. Back to the license agreement, can you talk about if you’re pursuing additional license agreements and what sort of pipeline of potential opportunity is there and what it takes to move forward?

[Mike Willis:]

No, I have been leading the charges related to a lot of these discussions. So this was the first one that we could announce. We are talking to folks globally who are interested in the technology, folks in South America, folks in Europe, folks in Asia. Actually folks in the U.S. as well although, I think we’re still figuring out what’s the blend of owning versus licensing here domestically. And I really I think obviously it all plays into the success at Luverne. So the reason why IDBC was interested in signing up with us is obviously they could take a deeper dive into the technology as it stands right now. They’re seeing the improvements at Luverne. So that to me is the key inflexion point to really kick off these discussions kind of to a high level and get them to a more detailed level.

[Unidentified Analyst:]

Okay that’s helpful. And then on litigation, I think you’ve talked about, I might have missed, the 3.7 million lower year-over-year; is that sort of sustainable run rate her and just bring us up to date on the latest out of the courts?

[Brett Lund:]

This is Brett Lund. I think the new rate that we’re at is sustainable going forward. So going forward we have the Federal appeal in November, November 7th than the next set of cases is July 2014 and then August of 2015.

[Operator:]

And we have Pavel Molchanov from Raymond James online with a question. Please go head.

[Unidentified Analyst:]

Hi guys, this is actually Justin on for Pavel. Just real quick since we already touched on production at Luverne for 2014. Any idea on how high utilization needs to get for growth margin to turn positive there?

[Pat Gruber:]

That’s an interesting question and you know what our focus is, is making that plant EBITDA positive as soon as possible. And I think the middle part of the year is where we’re thinking about.

[Unidentified Analyst:]

Okay, middle part of the year.

[Pat Gruber:]

I try and get away from being so specific on the volumes because there is lots of ways we can do this and actually we all care about being EBITDA positive, that’s our focus.

[Unidentified Analyst:]

And then just real quick, cash is actually getting seemingly somewhat low. Do you envision raising any capital here in Q4? Can we wait until sometime next year?

[Mike Willis:]

So we currently project having cash to operate into the first quarter of 2014. So basically this means that we’re likely to be raising capital either in Q4 or Q1 of next year.

[Operator:]

And we have James Medvedeff from Cowen & Company online with a question. Please go ahead.

[James Medvedeff:]

So, a couple of questions here. Most of mine have been answered actually. But I wanted to ask, were there any corn sales in the quarter or was it all pure funded R&D?

[Mike Willis:]

There was just very modest corn sales right at the beginning of the quarter which was basically the tail-end of the exercise that we’re doing over Q1 and Q2 of this year. Otherwise we actually built the corn inventory.

[James Medvedeff:]

Right. That was the second part of my question was….

[Mike Willis:]

I was going to say obviously with the view to building inventory to run on mash on integrated basis as we’ve reported.

[James Medvedeff:]

So when I look at cost of goods sold, if the revenue was mainly generated by the army or the military contracts and some of the other funded R&D programs, I’m trying to get my -- and depreciation was about $900,000. I am trying to get my arms around what the $4 million of COGS is all about?

[Mike Willis:]

The cost of goods sold actually represents cost of Luverne. The cost of goods sold, as we think about it for jet contracts actually appear in R&D expense because the production is deemed to be demonstration scale versus commercial scale. We defiantly, from a gas perspective place that in R&D expense versus COGS.

[James Medvedeff:]

Understood. So if you have on the order of $1 million plus or minus of funded R&D, I’m trying to understand why there is $4 million of cost in COGS associated with that?

[Mike Willis:]

So the cost of goods sold would be representative of most of the costs at Luverne. So we obviously have fixed cost there and charge labor. So we experience that, utilities but we did actually -- so it’s basically Luverne oriented cost. They all sit in, for the most part, sit in cost of goods sold versus some are in G&A.

[James Medvedeff:]

So the military fuel that you’ve been selling is at cost or now below cost?

[Mike Willis:]

It’s at cost currently.

[James Medvedeff:]

I just had one other question, the PP&E is up, some almost $5 million and I’m wondering does that have to do with the new anti-infection equipment that was installed or I noticed there wasn’t any CapEx in the cash flow statement. So could you just kind of fill me in on that?

[Pat Gruber:]

Yes, basically we installed some sterilization equipment. It include steam-lines, cleanup place equipment. All in all, I think across this year we print about 2.5 miles -- replace and/or added for a total of 2.5 mile pipe and this is about making sure the flows are right and so we can manage the process.

[Mike Willis:]

And just to answer the more tactical accounting question, so on the cash flow you basically netted against net that capital of five and change against the payables that are outstanding for that PP&E.

[Operator:]

And the next question comes from Kelly Dortmund from Simons and Company. Please go ahead.

[Kelly Dortmund:]

I was hoping you could maybe discuss, do you have any additional levers that you can possibly pull on the cash flow side where are all the cuts that you could probably get on the R&D side, or SG&A side, are they really baked into the numbers that we saw in Q3?

[Pat Gruber:]

I could only partially hear the question. Did you ask are there any more levers to reduce cash burn?

[Kelly Dortmund:]

Absolutely. That’s the question, Pat.

[Pat Gruber:]

There is.

[Kelly Dortmund:]

Can you detail them any more than that?

[Pat Gruber:]

No, I shouldn’t, especially it’s the usual list, it's the usual list of things as we make progress and we learn what we need and what we don’t. We have to adjust accordingly. It’s in half of our mind all the time.

[Kelly Dortmund:]

So it’s good to hear that you've been running on corn mash. Can you give us any insight into actual volumes of isobutanol which has either been produced or shipped or far?

[Pat Gruber:]

You know what, we’re at a point where we’ve run enough on full scale corn mash, we produced the isobutanol but it’s in crude tanks and so I don’t have specific volumes for you. But here’s a couple of things that are really good. One of the critical success factors is making mash clean and so our new salination equipment works pretty well for that appears that's good. Second thing is that you recall that we grow our own biocatalysts to get fermentation going. So we have a part of the plant which is dedicated to growing yeast and this is by the way the same yeast that we used last year. It actually works quite well and that equipment seems to work pretty good. Now we’re still learning how to do the cleaning place between batches and things like that and having to deal with all the mechanical things, but that's going well. Our bugs like to seem like corn mash and importantly our GIFT system works well in corn mash. Now we expected that to be the case because we did demo the heck out of that down at St. Joe, Missouri but it's very gratifying to see it work at full scale here on corn mash.

[Kelly Dortmund:]

That's good to hear. So I guess we talked about this last quarter when you’d been running on dextrose but last year when you had some consistency issues on these initial batches, you have had using corn mashes to consistency up to where you want it?

[Pat Gruber:]

I'm sorry I could only hear part of the question again, but you were saying last year.

[Kelly Dortmund:]

And so I'm more thinking about the consistency. Is the consistency of the product that you've produced so far with corn mash up to I guess the level that you want it or is it like last year when there some batches were inconsistent and some were okay.

[Pat Gruber:]

Oh I see, no, last year what it was is we had it was very variable, our variability isn’t the same here. Now we're going very disciplined as we go through the plant here and start up the plant and we're learning how to master each part of the production process, for instance, first master mash, master the yeast production, master the fermentation, master the separation, and so we did, we're at the point where we’re in the midst of working the fermentation and what we’ve seen so far is it looks pretty decent in terms of the product quality, the same is what we would expect, and the biocatalysts are performing as we expect and predicted. It reflects what we did on dextrose earlier this year and reflects what we do in the laboratory.

[Operator:]

And we have no further questions.

[Pat Gruber:]

Great thank you everybody for joining us on the call today.

[Operator:]

Thank you ladies and gentlemen, this concludes today's conference, thank you for participating and you may now disconnect.