Gevo, Inc. (NASDAQ: GEVO)
Before we get into this interview, I'd like to extend a special thanks to my friend Joey who both set up the interview with Pat, wrote the questions, and got this information for all of you to see! Thank you Joey! I'm sure I speak for the entire GEVO investing community!
Joey, I appreciate the opportunity to do this interview with you today.
Before we kick things off with the Q&A, I would like to address many of the questions and comments we’ve been receiving of late, related to equity offerings, debt restructuring and reverse splits, and to provide a brief view on Gevo’s future prospects.
I would like to remind folks that over the last 3-4 years, we have consistently had liquidity challenges, and only nine months ago, we had approximately $50 million of debt on the books that was potentially coming due in 2017 and we were very low on cash. It is important to note that management and our Board of Directors have fiduciary duties that require us to protect stockholders and avoid bankruptcy because we believe that if Gevo was forced to seek the protection of the courts, stockholders would have had their equity positions wiped out by such proceedings.
As a result, we have been focused on trying to improve our cash position by raising funds through equity offerings, and we have pursued strategies to shrink our debt, including exchanging over $21 million of our unsecured notes for equity over the past 6 months. This issuance of stock has put our stock price under pressure, which ultimately required us to pursue a reverse stock split. We would have preferred not to effect a reverse stock split, however the repercussions of not doing so would have been a delisting from NASDAQ Capital Market, which: would have constituted a fundamental change under the indentures governing both of our convertible notes, which would allow the note holders to immediately demand repayment of their debt (for which we didn’t have sufficient cash to pay off), and would have significantly decreased the marketability and liquidity of our common stock, which generally only decreases the value of a company’s shares
So we believe that the delisting of Gevo’s stock from Nasdaq would not have been in the best interests of stockholders because it may have put us at risk of bankruptcy and would have negatively impacted the value of our shares.
It is important to highlight that following the most recent equity raise we closed on February 17, we now have more cash on our balance sheet than debt than we have had in the last several years. While we still need to finalize a longer-term solution for our senior debt, we believe we have good visibility to making this happen. Our senior lender has been a good partner and has already showed flexibility in providing us a short-term extension on their debt. Of course we will announce the deal once it is complete.
We believe that a strengthened balance sheet is the key piece of the puzzle to providing a solid platform for growth here at Gevo. In 2015, we finally settled the lawsuit with Butamax which had significantly drained our resources and caused significant confusion for customers and partners. In 2016, we were finally able to demonstrate that our technology works at scale in a repeatable fashion. And in 2017, we expect to finalize the restructuring of our debt.
Each of these issues has been an impediment to signing up strategic partnerships and customer contracts. With these issues behind us, we expect to be able to finally get our partners to commit to Gevo and our growth. In particular, we would anticipate these types of deals to provide the support necessary to underpin our next phase of growth, namely the expansion of our isobutanol and hydrocarbon production levels, likely at Luverne, which we believe should make us profitable as a company. Until we are able to complete such an expansion, we won’t be profitable-- the bulk of our current production capacity is geared towards ethanol, and unfortunately, it is difficult to see how ethanol margins will be able to carry the company. In the near term, our capacities of isobutanol and hydrocarbons, I mean ATJ and isooctane, are not at a scale large enough to generate enough margin to make us profitable. So we are focused on selling products to develop the markets. This initial phase of market development is meant to build the commercial market demand necessary for when we producing our products at much larger volumes. Now this production expansion will require additional capital to build out, however we would hope that with the support of our partners and customers, this capital could be raised at a lower cost than via straight equity offerings.
So I do believe we are at an inflection point in Gevo’s history, and I believe that there are some good things on the horizon for our story. I would also like to thank our stockholders for their support and patience.
Lastly, I need to point out that we are currently in a quiet period in advance of filing our Form 10-K for 2016 and doing our Q4’16 earnings call. So please recognize that in answering your questions we need to comply with SEC regulations. This will limit my ability to provide specific updates on partners, customers, etc., and I will need to keep to what is already in the public domain. We do anticipate releasing our Q4’16 earnings sometime in mid-to-late March.
Question: With Gevo Being one of the only certified fuels it seems odd they are one of the least talked about. Why is it in your opinion that companies with less achieved have A) better shareholder relationships, and B) also are landing and releasing deals?
I don’t know specifically to which companies you are referring, however given the reference to certification, I assume you are talking about other renewable jet fuel providers.
We believe that the “deals” or transactions that some of the other biofuel companies have “landed” recently are not true transactions in the sense that most of the biofuel companies in question have not fully developed their technologies, have not proven that their technologies can be scaled up to work at commercial scale, have not produced commercial quantities of their product or have not obtained the required certifications and approvals necessary to sell their products. As such, we believe that it is likely that many of those “deals” or transactions will never actually result in the production of those biofuels or the sale of those biofuels. We have been told directly from some of the airlines we are speaking to that some of the companies who have announced jet contracts promising to deliver bio-jet at the same price of petro-jet, yet they haven’t even scaled up or completed development of the technology.
In the case of Gevo, our standard approach to signing contracts is to agree upon key terms first, especially pricing and volumes. We do this because we don’t want to spend a lot of money on legal fees for definitive agreements until we have high confidence the important stuff has been agreed upon. Our deals are near term, with a better line of sight, and we (and our customers) believe have a high probability of happening—so the stakes are higher.
Many of the companies pursuing jet fuel have not developed their technology. Their technologies have never been proven to work at commercial scale, or they do not operate commercial scale productions facilities as Gevo does. In order for those companies to grow and deliver they will need to raise significant capital, just to prove out their technology.
Lastly most of the new generation of biofuel companies are private, so it isn’t clear what the relationships with shareholders actually are.
Question: It seems as if Gevo is in a chicken and the egg situation. With debt, no deals, with no deals, no further movement towards being profitable. The books seem like they are at the best they have been, how does Gevo look to get past this hump?
This is great question. We believe that our debt has been an issue for striking deals with partners and customers. We do believe that we will have a longer-term solution to our 2017 Notes before June 23, 2017, which is the new maturity date for the 2017 Notes that we recently obtained.. We hope that with a much cleaner balance sheet, that this will remove a key barrier to getting deals done.
(Grouped questions) Question: Is there any reason for Gevo being so off on their timeframes? I understand many people invest here that should not, but in the end Gevo's Luft talk was way off. Shareholders were told Lufthansa would be a few months, and now many, many months later there is nothing. Question: How Much Longer until Lufthansa Deal in complete now that debt is looking much better?
Pat Gruber: At the time we entered into and announced the Heads of Agreement (HOA) with Lufthansa, we did believe that a definitive contract was only a few months away. Unfortunately, it has taken longer and we do not have the ability to make Lufthansa move as quickly as we would like to enter into the definitive agreement contemplated by the HOA. Recently, we disclosed many of, what we believe are, the reasons for the delay in reaching a binding, definitive agreement with Lufthansa, specifically that Lufthansa’s is looking to gain better clarity around: (i) our expected timing for commencing the expansion of our production facility in Luverne, Minnesota to produce the ATJ contemplated by the HOA; (ii) the ultimate production mix to be produced at the expanded Agri-Energy Facility, as well as the other customers who will offtake such production; (iii) completion of the repayment or restructuring of our debt obligations; and (iv) the supply chain specifics to enable the delivery of ATJ from the Agri-Energy Facility to the wing of an airplane at an airport.
We are still working with Lufthansa to come to a definitive agreement, and we hope we will be able to satisfy Lufthansa concerns in the near future so that we move our partnership to the next level.
(Grouped questions) Question: What is the timing of luverne buildout? how is that to be financed? Is it by 3rd party financing with down payment by installment from Lufthansa? by PO? what? Question: Does Gevo have an estimated date on buildout? or a Cost on the buildout?
Pat Gruber: I can’t give specific clarity on this right now. We hope to provide more color on all of these things when we file our 10-K and in future filings and announcements
Question: Does Gevo intend to proceed with Redfield once Luverne reaches specified quantities?
Pat Gruber: The joint venture with Redfield is still in place. We may choose to proceed with the transaction contemplated by the joint venture agreement with Redfield in the future if we believe it is in the best interest of stockholders and the development of the business. That said, we believe that there are likely other projects to build out isobutanol and hydrocarbon capacity beyond Luverne which may provide better returns to Gevo. We want to move forward with projects that ultimately yield the highest returns for the company and our shareholders.
Question: Why isn't GEVO talking to other airlines and talking to European entities about the product and its economical benefits and qty of scale over other methods.
Pat Gruber: We are having discussions with many airlines around the world regarding our ATJ, including potential offtake agreements and other business development transactions. We have given many presentations regarding our ATJ which includes comparisons with other routes for alternative jet fuel. We believe that the scalability and fundamental economics will make Gevo’s route to jet fuel advantaged over the long run. That said, many of the meaningful discussions we are having with other airlines are subject to confidentiality agreements, and we can’t disclose details of those discussions until both parties agree to make these public. We hope to be in a position to be able to make announcements about such other partners in the near future.
Question: CEO stated in Interview (juan Costello 27-JAN) (~5:28 in) " our fermenters are doing it [1 Million liters] in 5 days. Was this statement true?
Pat Gruber: The size of our fermenters are 265K gallons (>1M L) and we have been completing our fermentation cycle from start through fermentation, through cleaning, and ready to start again in 5 days. We discussed this progress in a press release in January where we discussed the progress of the plant.
Question: Can we speak about an update on Praj/Porta?
Pat Gruber: Praj has our technology working in India in their laboratories using molasses as a feedstock, as we planned. The next step will be to figure out the commercialization plan with them. Their focus is many small plants making isobutanol. I wouldn’t be surprised if jet is important too, we’ll see.
Porta has been making progress as well. Their focus has been to miniaturize the isobutanol technology using corn as a feedstock. They are running fermentations with our GIFT system. We’ll get together with them sometime this year to discuss the commercialization plan.
Question: WHEN do you foresee nailing all the details down about supply of fuel to SEATAC.
I’m not sure to what you are referring. While our ATJ has powered commercial flights with Alaska Airlines out of SEATAC. We have not disclosed anything else regarding supply of fuel to SEATAC.
Question: WHEN is HCS expected to be in a situation to give a purchase order contract for phase 1 of the ISOOCTANE deal to be fulfilled by Silsbee.
Pat Gruber: We can’t provide any more details about our deal with HCS Holdings at this stage. We issued a press release earlier in February which disclosed the key elements of our letter of intent with them. We would expect to provide more details regarding both phase 1 and phase 2 in the near future.
Question: When is the MIL-SPEC to be ready to go, what's left to do in order to get certified? why hasn't it been done by now. It's very important to the company bottom line.
Pat Gruber: From what we understand the last engine to be tested is for the F135. Once that testing is done, then we would be in a position to get the MIL-SPEC. I can’t provide any more details about timing at this time. But I would like to point out that the government has apparently had to allocate significant funds to pay for this testing. In this fund-constrained environment, this suggests that getting a potentially new source of renewable jet fuel is strategically important to them.
Question: Supply-side facility-to-wing logistics. Strategy? Provisions established and yet to be established? COGS impact?
Pat Gruber: We are currently working through these details. It’s a unique supply chain to get fuel to a wing of a commercial airplane. So we are working with players across the entire value chain to determine the most cost-efficient way to get our ATJ to our future customers. As already mentioned, this is one of the things that Lufthansa s looking to get more clarity on before signing a definitive agreement with us.
Question: What's the cost to produce 1 gallon of isooctane and what is the going rate for GEVO?
Pat Gruber: We have not disclosed the economics of producing our isooctane. Currently our isooctane is selling at a very hefty premium from our demo facility in Silsbee, TX. The reason we can command this premium pricing is that we appear to be one of the only companies producing renewable isooctane in meaningful quantities. Over time, we would expect pricing to come down, but we believe that this will be in line with us bringing our cost of production down. We think that this will be a meaningfully profitable product line for Gevo.
Question: Does an extension seem likely to the left over 2017 notes?
Pat Gruber: I addressed this question in my introductory statement. We do expect to be able to announce a longer-term solution before the new June 23rd maturity date.
Question: Has Gevo put an application for the one spot on the DOE military grant?
Pat Gruber: We are very aware of the DPA Title III grant and it is an interesting program. We don’t disclose Gevo’s applications for such grants until they are made public. However, we do believe that this particular program may be a good fit for Gevo.
Question: Please ask how management can justify the repeated reverse split on their company. when doing so completely wipes out previous investors investments. I as a shareholder cannot just simply invest and wait when management does this. I don't have a problem with waiting. it's waiting and having my hard earned capital pissed away by this company thinking that they can just do it with no recourse. This is CRIMINAL. The Lufthansa deal has misled a lot of people on its timing. A few months has turned into a year or even more or even not at all. They would have certainly not received investment had true time estimates been relayed.
Pat Gruber: I believe that I addressed much of this question in my preamble, in terms of the rationale for our equity raises and the reverse split. I also already addressed Lufthansa and the delays in getting to a definitive agreement. We are still working to get Lufthansa to sign up to a definitive agreement.
Question: Pat Gruber's salary is $1,000,000 a year? ask him to please justify that figure when the company is bleeding out like it is.
Pat Gruber: As disclosed in last year’s Proxy Statement for Gevo’s Annual Meeting, my salary is $500,000 per year. I have not received a raise since 2010. My target annual cash bonus is $250,000. My bonus is paid out based on performance judged by Gevo’s independent Board of Directors. While I have an annual target of receiving $850k of stock and options in my contract, in 2015 because of our reduced pool I received a small allocation, and in 2016, again because our pool is small, I was not granted any equity. My stock holdings have been diluted like other shareholders, and I don’t like the impact of the reverse split either, but the reverse splits are better than being delisted, as discussed above. The payment of the annual cash bonuses and the annual awards of equity are subject to review, adjustment and approval of Gevo’s Board of Directors. The Board believes that my compensation is appropriate when compared to amounts paid to CEO’s using peer group and market and survey data.
Question: Why isn’t management cutting salaries and expenses to become profitable instead of further dilution?
Pat Gruber: We are continuously looking for ways to minimize costs and maximize balance sheet dollars to advance our business. Specifically, we have reduced expenses dramatically over the past few years. We have reduced expenses across the board, including reducing salaries of some employees and eliminating certain positions. Since 2013, we have cut our operating burn by approximately 2/3rds. That said, the amount that could reasonably be saved from further reductions will not be enough to make Gevo profitable. As I said earlier, until we are able to expand our production of isobutanol and hydrocarbons and sell the products, we won’t be profitable as a company. We believe that further reducing salaries of current employees or their positions would not be in the best interest of stockholders since if we lose key personnel it would likely have a material adverse effect on Gevo’s business.
Our business is complex and we are targeting a variety of markets. Therefore, it is critical that our management team and employee workforce are knowledgeable in the areas in which we operate. The loss of any key members of our management, including our named executive officers could prevent us from developing and commercializing our products for our target markets and entering into partnerships or licensing arrangements to execute our business strategy.
Question: Can you please ask him to explain further on bankruptcy warning that he put out
Pat Gruber: I’m not sure what bankruptcy warning you are referring to. Earlier, I described that our liquidity position has not been strong for the last 3-4 years. As a result, as fiduciaries to the company and our stakeholders we have consistently provided disclosures in our public filings about the state of our financial position and the risks related to our financial position. That said, it is nice to be able to say for the first time in a few years that we have more cash on our balance sheet than debt.
(Grouped questions) Question: How much with the current burn rate will GEVO have to produce before they operate in the black? What’s the plan to get there Question: Is there a realistic plan to bring GEVO into the black and enhance shareholder value?
Pat Gruber: To become profitable, we believe that we need to expand our production of isobutanol and hydrocarbons. On the last quarterly call, I discussed, at a high level, what we are thinking about doing at Luverne in terms of such an expansion, as well as how definitive supply agreements with airlines and other fuel or chemical companies will help support such an expansion. We expect to provide further color on our plans in this regard in our 10-K, as well as future announcements and public filings.
Question: Wouldn't it be more advantageous to file for bankruptcy so GEVO could restructure, cut expenses and become profitable soon?
Pat Gruber: It’s important to reiterate that it is Gevo’s management’s and Board of Directors’ fiduciary duty to take actions that are in the best interests of the corporation and its stockholders. We strongly believe that filing for bankruptcy would not be in the best interest of stockholders because it is very likely that a bankruptcy court would eliminate current stockholders equity positions and give 100% of the equity or a restructured Gevo to Gevo’s current debt holders. In other words at this point, we have a duty to do our best to avoid filing for bankruptcy protection.
Question: What is the estimated value of the patents commercially? How about the value of the facilities if sold? Scrap value?
Pat Gruber: I assume that this question is about the potential “liquidation value” of Gevo. We do not have an estimate for the value of our assets that we can share. Generally, the value of these types of assets are dependent on who would be looking to purchase such assets. That said, we believe that Gevo has greater value as an operating entity rather than in a liquidation scenario. I believe that our senior lenders think likewise.
Question: When is management going to help out in starting to fund their own company while it's in its infancy? The idea that investors have "big pockets" that will just accept a continuing bleeding prospect and share price is SO OUT OF REALITY IT IS NOT EVEN FUNNY.
Management’s function is not to provide capital for Gevo to operate. Rather, my role and my senior executives are chiefly responsible for running the day-to-day operations of Gevo and keeping Gevo’s Board of Directors informed of the status of our operations. It’s our role to work though the many issues we have faced, in order to make the business successful
Question: Gevo is in a spot where money is the main Issue. Is there possible thoughts or talks with companies that have deeper pockets. Someone Like a BP or Exxon to maybe merge with or strike a deal. Question: Why hasn't GEVO sought a partnership with a firm(s) that has the required capital and board contacts to get this flying?
We continue to seek investments and partnerships from financial and strategic investors that have “deeper pockets”. We believe that there is interest in partnering up with Gevo, but to date, these types of players have stayed on the sidelines. We have been told that a bunch of the overhangs to the business – litigation, technology, balance sheet – have been barriers to folks pursuing partnerships with us. So hopefully once we achieve a longer-term solution for our 2017 Notes, this will make Gevo more interesting to companies and funds with “deeper pockets”. We shall see.
Question: A $55Million dollar govt. grant award for fuel is supposedly going to be awarded 3/1, does GEVO have a shot at getting that award.
I believe that you may be referring to the DPA Title III program, and as already mentioned, this grant potentially is a good fit for Gevo. That said, the timeframe for this program is applications are due in May, and the award would be made in August, if you are referring to the same program.
Question: How is Gevo Management Aligned with Shareholders?
Fundamentally the key answer is that I truly believe in what we are doing at Gevo. The idea of producing and selling renewable isobutanol, as well as using it as a building block molecule to produce products like jet fuel and isooctane, is something I was looking to do as far back as the 1990’s when I was at Cargill. Yes, it has taken us longer than expected to get to where we are. But we had to fight through several obstacles that we could never have predicted, such as the litigation with Butamax. We are one of the few companies to have worked through the scale up issues and have met our production cost goals that gives us confidence that we can ultimately make money serving the fuels markets. Once we have developed a longer-term answer in respect to the 2017 Notes, I believe that Gevo is very well positioned to execute its business plan. We think that there’s a lot of money to be made over the long term producing and selling isobutanol and hydrocarbons. If we are able to achieve this goal, I would expect that our stockholders and management will be rewarded.
In addition, we believe that our compensation programs, including the mix of short-term and long-term, cash and equity, and fixed and contingent payments have been developed to provide the proper incentives to maximize stockholder value over time. Without our programs in place, we don’t believe that we will be able to competitively attractive the right people to make Gevo successful.
(Grouped questions) Question: What is his plan as the CEO to restore investors’ confidence? Question: What is his message to the ones who have held long positions in this company and seen their investment wiped out? Question: What does Pat feel is their biggest obstacle?
As I said earlier, we have been through a lot over the past several years: litigation with Butamax, technology scale-up challenges, debt overhang. Once we get a longer-term solution for the 2017 Notes, each of these will be behind us. So now our job is to focus on executing our business plan. This is obviously not without its risks, including financing the business and the expansion of the Luverne facility. Gevo, however, is in the best position to meet its challenges than it has been in a long time. So I’m excited by Gevo’s future prospects.
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