by Debra Fiakas CFA
The last time renewable chemicals developer Gevo (GEVO: Nasdaq) was featured in this forum in August 2014, the stock was looking quite oversold around $0.50 per share. The stock had recently taken a tumble after management sold 30 million shares of the company’s common stock at $0.60 a share at the end of July 2014. The plan was to use the $19 million in new capital to upgrade a production plant in Minnesota to better produce renewable isobutanol along with ethanol fuel.
Isobutanol is a popular solvent used widely in industrial applications. It is most commonly produced from by-products of refined crude oil and users are keen to get their hands on renewable sources to reduce their carbon footprints. At the time Gevo out raising capital the company was aiming to get to a goal of one million gallons in annual isobutanol production by the end of 2014, and then ramping to three million gallons in annual production in 2015. The plant in Minnesota had already been producing eighteen million gallons of ethanol each year.
Today GEVO appears even more oversold, having slipped to $0.29 per share. Directly after the common stock sales, the company raised another $26.1 million through the sale of a note to single creditor. By the end of September 2014, only $14.0 million in cash remained. If Gevo continued using cash to support operations and capital spending at the same rate it had been spending in the first nine months of the year, I estimate they used another $11.0 million in cash by the end of December 2014.
If I am correct in my back of the envelope bank account balance, things cannot be very comfortable at Gevo. The company is still not selling either its ethanol fuel or isobutanol in bulk despite new customer relationships such as Brenntag Canada, which is buying Gevo’s renewable isobutanol for use in a range of solvents and specialty chemicals. There are apparently no minimum purchase commitments and the company was tight lipped about order quantities except to say the orders can be filled with ‘truckloads’ of isobutanol.
Last week Gevo management issued a press release detailing its plans to improve cash flow at the company. There will be a headcount reduction by 40%. That will eventually save some hard cash in the coming quarters. Gevo’s CEO is taking 25% of his pay in stock rather than cash, a move which in the end is probably more symbolic than anything.
Of course, the press release is also embroidered with the usual Gevo-style promises of new technologies to use ethanol for various end-products. As part of the plan to save in operations, the company is planning to shift to ethanol-only production in all four of the fermenters in its Laverne, Minnesota plant. Here is apparently where the new technologies figure into the picture. The company claims to have already filed patent applications to cover new technologies for the use of ethanol as feed stock for hydrocarbons, renewable hydrogen and other chemical intermediates. Gevo appears poised to capitalize on the dearth of renewable hydrogen for fuel cells and renewable polyprolylene for packaging and automotive components.
The CFO claims they can bring the monthly use of cash for operations down to $1.5 million to $1.8 million, compared to $2.8 million in 2014. This figure of $2.8 million per month in cash usage in 2014, differs from my calculation of $3.6 million in cash usage noted in the paragraph above because I was using cash flow from operations in the first nine months of 2014 as my gauge of how much cash the company was spending each month to keep the doors open.
When Gevo was out raising new capital in the summer of 2014, management had promised to achieve breakeven by the end of the year. That goal may not have been realized. However in the recent company update, management lays claim to having reached its production goal for isobutanol of 75,000 gallons per month. Now that seems to be a bit short of the one million annual product capacity as that implies 83,333 gallons per month. Most investors will probably not quibble over the 8,000 gallon shortfall if the company could produce more sales – even sales by the truckload!
GEVO still looks more like a lottery ticket than a stock as we noted in our last article on the company. What is worse, the balance sheet now looks stressed. The company has let a number of people go and along with them they have probably lost some important process knowledge that at times can be even more vital for a company than its patented technologies.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.