Gevo, Inc. Q1 FY2021 Earnings Call

Hello and welcome to Gevo's First Quarter 2021 Earnings Conference Call. My name is Towanda, 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 conducting a question-and-answer session. Please note that this conference is being recorded. I would now turn the call over to Geoff Williams, Gevo’s Vice President, General Counsel and Secretary. Please go ahead, Mr. Williams.

Good afternoon everyone and thank you for joining Gevo’s first quarter 2021 earnings conference call. I would like to start by introducing today’s participants from the company. With us today is Patrick Gruber, Gevo’s Chief Executive Officer; and Carolyn Romero, Chief Accounting Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss today. A copy of this press release is available on our website at www.gevo.com. I would like to remind our listeners that this conference call is open to the media and that we are providing a simultaneous webcast of this call to the public. A replay of today’s call will be available on Gevo’s website. On the call today and on this webcast, you will hear discussions of certain non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in accordance with GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is contained in the press release distributed today, which is posted on our website. We will also make certain forward-looking statements about events and circumstances that have not yet occurred, including, but not limited to, projections about Gevo’s operating activities for the remainder of 2021 and beyond. These forward-looking statements are based on management’s current beliefs, expectations, and assumptions, and are subject to significant risks and uncertainties, including those disclosed in Gevo’s Form 10-K for the year ended December 31, 2020, which was filed with the US Securities and Exchange Commission, 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 discussion of Gevo’s business developments, Carolyn will then review Gevo’s financial results for the first quarter of 2021. And following the presentation, we'll open up the call for questions. I’ll now turn the call over to Pat.

Thanks Geoff. Well, we're on track to accomplish our goals for this year. The engineering of Net-Zero 1 is on track. The debt solution with Citi to finance Net-Zero 1 is actually ahead of schedule. We still have a lot of work to do, but so far the Net-Zero 1 project is looking very good. We broke ground on RNG project; it should come online next year. This project is targeting production of 355,000 million BTUs per year and should generate free cash flow for Gevo of approximately $9 million to $16 million on an annualized basis, beginning in late 2022. Tim Cesarek, our Chief Commercial Officer has managed to increase our customer contract pipeline by several fold. We now are discussing and negotiating upwards of $10 billion of take-or-pay offtake agreements on a revenue basis. Recall that for each 45 million gallons of contracted product sales, which is the current approximate design capacity of our net zero plans, the sum of the anticipated product sales revenue during the expected take-or-pay contract terms of six to seven years should be about $1.5 billion. It's real money, real business. So if we were able to ink several other contracts in our pipeline, it would mean several more additional plants will be needed to be built. These take-or-pay contracts are sure we’ve to obtain because they require the customer to back it with their balance sheet or some other credit support method. We expect to announce the customers and volumes when we can after the contracts are signed. I think it's likely that we could have more than one net-zero plant being built at the same time in the coming years. Based on our current modeling assumptions, we believe that the EBITDA for a net-zero plant should be more than $100 million per year once operating. We believe that subsequent net-zero plants would likewise model out to be in that same range, as we get more plants booked with take-or-pay contracts will be interesting to see how strategic investors in Wall Street view this. We would hope that the increased visibility into more potential cash flow streams will result in better recognition of value for Gevo and its shareholders. Now with strategic investors, it's a slightly different perspective. As the tangible demand in the form of take-or-pay becomes bigger, then it becomes even more undeniable, adding to the potential for our business. The more take-or-pay contracts make the more net-zero plants we will need and the more attractive we should become to strategic investors. Next, I want to address questions from several investors about our proposals in our definitive proxy statement for our annual meeting of shareholders to be held on June 9th, 2021. The questions are specifically on proposal number four, which is an amendment to our amended and restated Certificate of Incorporation to increase the total number of authorized shares of common stock. This proposal seems to have created confusion for some stockholders, namely a reaction that this proposal means that there would be immediate dilution to current stockholders. Proposal number four is asking stockholders to approve an amendment to the company's Certificate of Incorporation to increase the number of authorized shares of common stock from 250 million to 500 million. This increase doesn't mean we are issuing these new shares immediately. I want to be clear that we're not asking shareholders to approve an offering of common stock at this time. That's not what we're doing here. It's important to remember that Gevo has used most of its existing authorized shares of common stock over the years. The Board of Directors believes it is in the best interest of the company to increase the number of authorized shares of common stock in order to give us greater flexibility considering planning for future potential business needs, including but not limited to potential strategic transactions, strategic partnerships, business combinations, of course, financing, the construction of up to three production facilities as well as other general corporate transactions. Now, I will turn the call over to Carolyn, who will take us through the financials.

Thank you, Pat. Gevo reported revenue in the first quarter of 2021 of $0.1 million as compared to $3.8 million in the same period in 2020. During the first quarter of 2021, there were no hydrocarbon revenue compared with $0.1 million in the same period in 2020. Hydrocarbon sales decreased because of lower production volumes at the South Hampton Resources Inc. facility in Silsbee, Texas. During the first quarter of 2021, no revenue was derived at the Luverne Facility from ethanol sales and related products, compared with $3.7 million during the same period in 2020. As a result of the unfavorable commodity environment during the three months ended March 31, 2020, we terminated our production of ethanol and distillers grains, which resulted in no sales over the current period. Cost of goods sold was $2.0 million in the first quarter of 2021 versus $8.1 million in the same period in 2020. Cost of goods sold included approximately $0.9 million associated with the maintenance of the Luverne Facility and approximately $1.1 million in depreciation expense. Gross loss was $1.9 million for the first quarter of 2021 versus $4.3 million for the first quarter of 2020. Research and development expense increased by $0.8 million during the first quarter of 2021 compared with the same period in 2020 due primarily to an increase in personnel and consulting expenses. Selling, general, and administrative expense increased by $1.2 million during the first quarter of 2021 compared with the same period in 2020 due primarily to an increase in personnel and consulting expenses. Preliminary state project costs increased by $2.6 million during the three months ended March 31, 2021 compared with the same period in 2020 due primarily to increased consulting and research and development expenses related to our R&D and net-zero projects. Within total operating expenses for the first quarter of 2021, we reported approximately $0.8 million of non-cash stock-based compensation. For the first quarter of 2021, we reported a loss from operations of $9.9 million, compared to $8.0 million for the same period in 2020. In the first quarter of 2021, cash EBITDA loss, a non-GAAP measure that is calculated by adding back depreciation and non-cash stock-based compensation to GAAP loss from operations, was $7.8 million compared with $6.2 million in the same quarter of 2020. There's no interest expense for the three months ended March 31, 2021, a decrease of $0.5 million as compared to the same period in 2020 due to the conversion of all of our 12% convertible senior notes, due 2020, 2021 to common stock during 2020. For the first quarter of 2021, we reported a net loss of $10.1 million, or a loss of $0.05 per share on a weighted average shares outstanding of 183,566,524. This compares to a loss of $9.3 million in the first quarter of 2020, or a loss of $0.64 per share based on a weighted average shares outstanding of 14,472,798. In the first quarter of 2021, Gevo recognized a net non-cash loss totaling $0.1 million, due to changes in the fair value of certain of our financial instruments, such as warrants and embedded derivatives. Adding back these non-cash losses resulted in a non-GAAP adjusted net loss of $10.0 million in the first quarter of 2021, while the non-GAAP adjusted net loss per share of $0.05. This compares to a non-GAAP adjusted net loss of $8.5 million in the first quarter of 2020, or a non-GAAP adjusted net loss per share of $0.59. Now, I will turn the call back over to Pat to wrap things up.

Thanks, Carolyn. So that overall things are on track and looking good. We have the catalysts that are coming up between the off-take agreements and such. I'm pretty pleased with where we are. Let's open up this call for questions. Operator?

Thank you. Our first question comes from Amit Dayal with H.C. Wainwright. Your line is open.

Thank you. Good afternoon, everyone. I appreciate you taking my questions. Pat, did you say that you are pursuing $10 billion worth of off-take agreements?

We're actively working on and negotiating various off-take agreements, which represent a three-fold increase for us. This is a significant opportunity given our past position and current initiatives. People are starting to recognize that we have a viable solution. It's an exciting time as we prepare to supply products to multiple plants aiming for meaningful outcomes. We've successfully implemented a standardized greenfield plant design, which has been a fortunate yet well-executed decision by my team. The space we're operating in is truly exciting, although I'm uncertain about when we'll finalize these agreements. Many of these deals involve a few major customers and will take some time, but we are making progress with multiple net-zero plant projects. It's definitely an exciting time for us.

Are these agreements with potential partners in the airline industry or with companies in the middle of the value chain? Who are these agreements being negotiated with?

I can't provide specifics about these matters as we are bound to confidentiality. I understand everyone is curious about the details, but we're unable to disclose that information. However, I can say that it involves a mix of various parties.

Okay.

So, if you could just ask me about it's a mix.

Okay. And then, I guess, I’ll ask the obligatory feedstock-related question. As you are getting visibility into the size of these opportunities, how are you thinking about managing feedstock requirements, et cetera?

It's interesting because these feedstocks are carbohydrates that are incredibly abundant. For instance, last year, the corn supply in the US was about 14.2 billion bushels and it's on the rise. We utilize the carbohydrate portion and separate out the protein. A billion gallons requires just a small percentage of the corn supply, although that's not an entirely accurate figure since we're separating out all the protein that accompanies it. There is a robust availability of feedstock, especially when compared to other renewable feedstocks. Globally, we don't rely solely on corn; in Germany we use different materials, and in India, molasses is common. As we expand into South America, we will also employ molasses and various other products. Carbohydrates serve as an excellent feedstock due to their widespread availability in large quantities, especially when compared to oil fields and similar resources.

So just to you know, so these net-zero plants don't essentially have to be in the US, they could be in other geographies.

Sure, they can. It's a concept. We are building plants and developing the renewable energy infrastructure that supports them. Due to our processing methods, we can incorporate input from water treatment plants to produce bio gas that meets the thermal demands of the plant, thereby displacing fossil-based natural gas. Our goal is to use renewable electricity, which significantly contributes to our carbon footprint, as is true for all energy sources. When we work to reduce greenhouse gas emissions, the role of electricity is often overlooked by many. The same applies to natural gas, which is fossil-based as well. In this country, approximately 60% of electricity comes from fossil fuels, and globally, the figure is similar. There is a vast amount of work ahead of us. We view each net-zero plant as a step towards renewable energy. Our company is actively developing renewable natural gas, as demonstrated by our previous project, and we plan to undertake another round of net-zero plants. We will remain committed to renewable energy, and we approach the challenge of reducing greenhouse gas emissions with a mindset that seeks to solve these issues while also making a profit.

The green bonds for the RNG that you issued, is that allowing you to pay a lower interest rate versus in regular bonds, I guess?

Hey, Lynn. Are you on the line Lynn?

There's an interest rate. And I thought we published it. It's been public stuff. So it's there.

Okay, I'll check that. I’ll look at that.

Yeah.

No problem. I guess my other question was how much we need to consider regarding the interest burden related to this. But I can look that up too. You mentioned that the payments on this will start in the second quarter of 2021, correct?

What will happen is that you should call Lynn to get more details. I'm focused on getting this plant built and completed by the end of the year, aiming for it to be operational in the first quarter of next year to complete all necessary qualifications for certification. This is crucial for generating cash, and I want to see that money coming in by the end of the third or fourth quarter next year, depending on the timing. We are talking about $9 to $16 million in cash, which may seem small to some, but it's significant for us after covering debt service and other expenses. We want it.

What's the Delta? What accounts for the delta between the $9 million to $16 million in the range, like what could be the difference between your coming in at $9 million or $16 million?

We need to go through the certification process in California, where they review our operations and evaluate them. To be cautious, we're estimating $9 million as a worst-case scenario, although we believe it’s more like $16 million. We're providing a range for our projections to ensure we set realistic expectations. The certification process is standard, as we need their approval to confirm our plans are valid. The outcome depends on their assessment at that time. Thus, we are planning for $9 million but are optimistic about reaching $16 million. From a revenue perspective, this translates to expected revenues between $23 million and $28 million.

Okay. So this will get narrowed down once you get the certification basically.

That's it? Well, we would know. If they do what they have done in the past, it's the high side.

Okay. Understood. And, I guess, my last question was around, what the expected cash levels would be as you exit 2021? I don't know if Lynn is online, but I can follow-up with him, if he's not available.

Yes, I follow up and we might have some long lead time items. I think we discussed before that we may need to put down money for equipment for Net-Zero plants, which could tie up around $20 million. But I'm not sure, we need to ask him. Also, we should monitor the site as we progress. Lynn, you’re here.

Yes. I'm sorry. I was dropped. So back. What was the question?

The question was, where do you expect to be with your cash position as you exit 2021?

Ballpark?

Yes.

About $490 million.

Okay. Understood.

Okay. Now, everyone has a significant level of uncertainty. It depends on whether we invest in long lead equipment and cover the costs. Don't consider that finalized. It really hinges on our actions.

Yes, the question I understood was about expectations, which to me are based on the development costs we incur while developing Net-Zero 1. It relies on several factors, particularly long lead equipment deposits to expedite the construction schedule. That is the major uncertainty. Therefore, there is some margin for error, but this is the point estimate.

Yes, there you go.

Thank you for that. Just one last one, I guess, the amendment with Scandinavian Airlines back was this related to volume or pricing or something else?

Volume.

Okay.

It was volume that came back for more. And I think we'll see more of that in the future and from others.

Understood. That's all I have. Thank you so much.

Thank you. Our next question comes from the line of Shawn Severson with Water Tower Research. Your line is open.

Thanks. Hi, Pat, I'm trying to understand when you mention $10 billion, specifically, when would the pipeline want to start. Some might indicate they want to begin delivery in 2027 or 2030. Are you suggesting that you could potentially build multiple plants in parallel to expedite the process?

It's coming soon. There's a strong demand for quicker results, especially regarding gasoline, alco-jet, and jet fuel. We're working as quickly as we can, and we need to go through the process carefully. The Net-Zero 2 plant is expected to overlap with Net-Zero 1, and potentially Net-Zero 3 could be finished at the same time. It will depend on how quickly we can finalize contracts, which will make things interesting. We also need to consider how to handle larger projects simultaneously, as this is a significant aspect of our pipeline. There's increasing urgency for these products. We're aiming for Net-Zero 1 to be operational in the first part of 2024, and we're exploring the possibility of getting Net-Zero 2 and maybe even Net-Zero 3 up and running in the same year. This is our thought process and the reason we're putting so much effort into the engineering to ensure we can replicate these projects efficiently.

Are you seeing any interest or inclination in that pipeline? Will they want you to work with those strategic, or are you basically operating fine on your own? Obviously, signing off take agreements, you're operating fine on your own. But I was trying to understand if there's a nuance there that they're saying, hey, we want the big partners in this, or just the mentality of these customers.

No. They understand that we are an interesting and unique company, as we develop our own renewable energy. We have expertise in fermentation chemistry and have managed large processes in the past. Others recognize our capabilities and express interest in investing. There will be opportunities for project investment, and we've also received inquiries about corporate investments. We need to determine the right timing for these opportunities. While execution presents challenges, we have the knowledge through the engineering firms we collaborate with, as well as our excellent project managers and leaders. We've navigated similar situations before, so we're not inexperienced in this field. People within the company see our self-sufficiency. It's important to note that we differ from most companies because we produce specific products like jet fuel and octane without requiring a refinery. We can adjust our output simply by changing conditions rather than modifying the plant. In that way, we function similarly to a chemical plant, which is a significant distinction that highlights our competitive advantage in the marketplace.

I would like to ask another question regarding the diversity of the pipeline. You mentioned there are some large projects included, but how diverse is this group overall? For modeling purposes, should we assume that most of the plants and the offtake agreements have similar economics?

Yes. We view each Net-Zero plant with a capacity of 45 million gallons as generating an EBITDA stream of over $100 million. That’s our internal perspective. To break it down, considering a contract length of about six to seven years, approximately 6.5 years would yield around $1.5 billion in revenue. When you divide this by 45 million gallons, it comes out to about $5, translating to roughly $0.10 to $0.15 per gallon.

There is significant variation in these contracts. When we sign them, as they start to fill up, we should apply similar economics for all of them.

Yes, we do. Yes. And we found a sweet spot on pricing, where it works for everybody. It works well, keeps the customers incentivized to work with us, because they get some of the green value. It's interesting.

Just to clarify the diversity in that pipeline?

Yeah, the diversity of the pipeline, so what do you mean in diversity? Like?

Is this 30 or three that are in there? You know, trying to say these smaller?

There's probably over $10 billion. I think it's like I'm going to call it $15 billion to $20 billion.

Got it. Okay. That's helpful. Thank you.

Thank you. Our next question comes from the line of Craig Irwin with ROTH Capital Partners. Your line is open.

Good evening, and thanks for taking my questions. So Pat, I understand the enthusiasm your customers out there. Jet fuel is the one fuel that really has the least environmental compliance of all the liquid fuels, its high sulfur, high emissions, high particulars and really one of the best opportunities for environmental remediation with Clean Fuels. Can you maybe talk a little bit about what you're seeing as one of the leaders in this industry on the regulatory front? Now, I think many of the customers out there are asking today in anticipation of regulatory action. What do you see as possibilities on the horizon that could bring the rest of the industry along with the thought leaders that have already signed up as your customers?

There are several important developments taking place. The industry needs to improve jet fuel, as sustainability is essential for reaching their goals. The push is on to increase the blend of sustainable aviation fuel from 50% to 100%. This requires collaboration among various players, including our company, which can produce many of the necessary components. It's essential to focus on low carbon emissions; the lower the carbon, the better the outcome. How we measure progress is crucial, and it needs to be done fairly to avoid unproductive practices. There are also proposed bills, such as tax credits for producers, which could offer about $1.50 per gallon for jet fuel manufactured in the U.S., helping to improve the economics of sustainability. The airline industry is resistant to paying a premium for these fuels, but our sales model allows them to benefit from the environmental advantages. This positions us differently from others and is a reason for our successful contracts.

Okay. Excellent. So then just, economics or something that's going to be a little bit of a wiggle, as production comes online, and today really everything's based on forecasts, but can you maybe talk us through just the basic process that you see, when you talk to regulators, traditionally, for example, carb starts with production today, and looks at what you can achieve versus that baseline. So, if you start off with, I don't know, whatever it is 600 PPM, probably of sulfur in jet fuel, and you can bring that down to 500 PPM by mixing in 20% clean fuels, that move down and the baseline is where the economic value is uncovered. And that's how much bigger move down in SOx submissions and you're going to get in almost any other investment out there environmentally. I mean are these the things that are factoring into this regulatory considerations out there, and some of the compliance values that will impact the credit values as we look out onto the horizon, because I assume there will be credits at some point for the compliance value of these fields?

That's a great observation. Craig is highlighting the significance of NOx, SOx, and particulate emissions. The sulfur issue is challenging because it's intrinsic to petroleum products, but we can eliminate it, which is definitely a positive aspect. Similarly, we can also eliminate particulates, which often come from aromatic compounds. While these compounds have value, I anticipate increased regulation on them, especially in light of the Clean Air Act. Although the regulations exist, they have yet to be enforced, and it's likely the new administration will push for that, given the delays of nearly a decade. Stricter regulations would benefit companies like ours, even though we usually don't emphasize those advantages. Additionally, our pricing structure is tied to indices like jet fuel and premium gasoline, and we receive a premium for our product's technical characteristics, partly due to its low sulfur and particulate content. We're beginning to see value in these aspects already, which is quite intriguing at this early stage. Our customers are aware of these challenges and are working to address them.

Excellent work on the progress with Net-Zero 1. We're currently in a capital phase, and much of the value will be realized as production begins. What are the best indicators today that we can look at to understand the economics of production for that plant when it starts operating? While comparing it to a tenant scale-up is challenging, are there any examples in a broader context that we can refer to and learn from?

Yeah, you got it. There is. The last time a plant of the scale that was done that was a non-ethanol fermentation. That did a combination of genetically modified yeast and a new fermentation system. And then, had to make it work right to do chemistry was back when we did PLA, plastics at Cargill. So that we genetically engineered the ease of the fermentation plant was giant in fact, at the time, it was the world's biggest fermentation plant, the team I have at Gevo were the leaders of that they did it. They were the guys are still with me at Gevo. This helps us. There's like the lessons we learned about what works, what doesn't with the problems with the pitfalls, this is knowledge, you can't get any other place, because you got to know how to do this stuff at large scale and the subtleties that go with it. Well, my group has been there and done it before. That gives me enormous comfort. And Chris Ryan, my Chief Operating Officer, he led that. Ron Borchardt, my Head Engineer, he's the guy who built those plants. And so, we have them here. And they've been working with it ever since. And that's been on our mind, and the lessons we've learned. And so, it is a in this net-zero plant that we're talking about is on the order of that kind of a plant at that we did back in the day at Cargill. And it'd be a little bit smaller than one of the giant ethanol plants.

Excellent. Well, congratulations on the progress. I look forward to tracking things going forward. And I'll hop back in the queue. Thank you.

Thanks, Craig.

Thank you. I'm not showing any further questions. I will now like to turn the call back over to Pat, for closing remarks.

We have made great progress. I wish I could tell you all the details that I know, you get really, really excited. And I just can't. And it'll be fun to unfold them. And it takes patience for me too. I want to see more of these investments, these contracts with customers done I want to see, they're exciting, and more than one net-zero plant. That's a nice problem to have. And it'll also be interesting to see, as that volume stacks up on take-or-pay contracts. It really does end the debate about what will people pay for this? And are they interested really, if you're sitting on the sidelines watching. So it's going to be fun to see the impact on others around us. And what happens. And then, the engineering, we keep plugging along, and we'll get her done. It takes an enormous quantity of work. We're doing something unusual here integrating renewable energy called, renewable energy, Island into our plant, because remember, we got to do the optimization at the wind. We're going to be making hydrogen. We're having a debate about, how much hydrogen chewy, chewy make. And besides, we think that's the very best way to store some energy from the excess wind we'll have. There's a question of should we sell the stuff? Yeah, we got a lot of things to sort out about, how to conduct the integration. Thank God, the technology itself is solid and worked out. So with that, thanks for joining us. Everybody, have a good evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.