The Gevo, Inc. Q1 2019 earnings conference call. My name is Cheryl, and I will 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. If you have a question, you can press star then one on your touchtone phone. Please note that this conference call is being recorded. I would now like to call over to Geoffrey T. Williams, Jr. Sir, you may begin.
Good afternoon, everyone. Thank you for joining Gevo's first quarter 2019 earnings conference call. I would like to start today by introducing the participants from the company. With us today is Patrick Gruber, Gevo's Chief Executive Officer, and Bradford Towne, Gevo's 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, 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, 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 2019 and beyond.
These forward-looking statements are based on management's current beliefs, expectations, assumptions, are subject to significant risks and uncertainties, including those disclosed in Gevo's Form 10-K for the year ended December 31, 2018, was filed with the U.S. Securities and Exchange Commission, or SEC, on or about March 27, 2019, 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, 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. Bradford will review Gevo's financial results for the first quarter of 2019.
Following the presentation, we will open up the call for questions. I'll now turn the call over to Pat.
Thank you, Jeff. Thank you all for joining us today. I believe we are at or near a tipping point. We finalized several agreements that I'll touch on shortly. We have turned our balance sheet around, which enabled our auditors to remove the going concern qualification in our audit report at the end of March. We've been making overall very good progress. In terms of the balance sheet, as of today, we have approximately $33 million of cash on hand and less than $14 million of debt. The improved capitalization of the company, of course, should make a difference going forward. As of today, we don't have any current plans to raise equity. Instead, we are focused on debt. Our projects and products appear to be financeable, more along the lines of project financing. We'll keep you updated as we make progress.
We are actively working on projects to decarbonize or defossilize the energy used at our Luverne facility. The intent is to lower our carbon score or the measure of fossil greenhouse gas emissions at Luverne. Of course, it leverages into isobutanol and hydrocarbon production as well. We are working on renewable electricity and renewable natural gas. We expect that accomplishing these projects should make Luverne profitable, even just selling low-carbon ethanol. When we combined the margin uplift from defossilization with the margin uplift from the value-added feed products we are in the midst of producing using the Shockwave dry fractionation we expect that Gevo as a whole could possibly become profitable within the next 18 months, depending upon the overall market dynamics, how much we're spending on the commercialization of isobutanol jet fuel, and the rest.
Production of low-carbon ethanol for the California market combined with animal feed is something we are doing simply to make money. Our growth, in the long run, is all about the isobutanol, the jet fuel, and very importantly, the isooctane for gasoline. We continue to develop the enormous markets for these products. Today, we announced that the City of Seattle's fleet vehicles began utilizing a blend of Gevo's renewable isobutanol with conventional gasoline in its pilot program to reduce the carbon intensity, the CI levels, of its fuels. Additionally, Gevo will collaborate with the city to supply a renewable drop-in gasoline to further reduce the carbon intensity of the fleet. The City of Seattle has the potential to lead the way in showing what is possible in breaking away from fossil-based fuels and related pollution.
We see that the Pacific Northwest, with its abundance of wood resources, has great potential for the development and commercialization for fossil-free fuel production plants. We'll have to take a look at the opportunities for production in that region. Imagine replacing the whole gallon of gasoline with a low carbon renewable gasoline that has high performance, yet it really does reduce pollution. Potential is to use the low carbon clean fuels to get off the fossil-based fuels and all their pollution, including the particulates, and to establish new business systems that creates jobs. In that region, it would cut across sectors from forestry to bioprocessing to refining. In April, we signed a binding definitive construction license agreement with Praj Industries to commercialize the production of renewable isobutanol with sugary based feedstock such as juice, syrup, molasses, made from sugarcane or sugar beets.
This is important for a couple reasons. First, that we could actually complete a complicated set of license agreements. That's a big deal in and of itself, even though it doesn't seem like it. Second, this agreement is set up so we are truly licensors rather than being capital providers. It's other people's money putting our technology to work. That's the intent. As the market demand takes off, we need to be in a position where the licensing is fully baked and ready to go. This was a great first step in getting that done. In addition to the construction license agreement, we also signed a memorandum of understanding with Praj to commercialize our renewable hydrocarbon technology and products in India, including our renewable alcohol to jet fuel and renewable isooctane derived from renewable isobutanol.
This is a potentially big deal in that rice straw residues are a problem in India. The straw is simply burned to get rid of it and creates a lot of smog and pollution. It's a problem. A better use would be to convert it into fuels. Praj reports that they have four rice straw to ethanol plants under construction in India. Praj is undertaking the effort to adapt the rice straw to fermentable sugar conversion technology for the production of isobutanol and jet fuel and isooctane. I think it's going to be a good opportunity in India for these hydrocarbons. The isooctane and gasoline markets are continuing to develop. We've expanded our capacity at Silsbee to produce more isooctane and jet fuel. Haltermann Carless and AB Fuels are purchasing the product produced at Silsbee.
We have a project on the table to expand the hydrocarbon capacity and order of magnitude to about 1 million gallons per year. This would be up at Luverne, Minnesota. We already have contracts in place that would make this a profitable exercise. We expect to line up debt financing to get this capacity built. We also have roughly 50% of our planned Luverne expansion for the isobutanol, jet fuel, and isooctane committed to customers who are under contract. Tim Cesarek, our Chief Commercial Officer, is making progress. We still need to work out the balancing act of how much jet fuel to produce compared to isooctane. Isooctane, of course, is expected to carry more margin that is being more valuable in the marketplace than jet fuel. We're in the midst of sorting through the opportunities in our contract terms.
They're confident we'll get them finished, they'll be good enough so we can use them to do project financing for the full build-out. Speaking of that, we have modified our plans. I've mentioned it before, but it's worth restating. We plan on making the Luverne facility profitable with low-carbon ethanol and value-added animal feed. In the future, assuming the plant is in fact profitable, as we expect, we would keep running it. We wouldn't shut off the ethanol and the animal feed. That would make no sense. It would be, at that point, a cash cow. We'd want to add additional capacity, additional grind, so that we can produce isobutanol and hydrocarbons. We do this in two steps. First, we'd add some equipment for isobutanol and hydrocarbons at Luverne so that we could produce hydrocarbons at Luverne.
Two, build out a large capacity for isobutanol and hydrocarbons at Luverne, about 18 million gallons of isobutanol and 8 million-10 million gallons of hydrocarbons. The isobutanol expansions are expected to be done side by side. In other words, I don't plan on shutting down that low-carbon ethanol plant. It would be making money, we expect. I want the ethanol to sell to California and other places where the defossilization is valuable, and I want that ethanol as a raw material to make other products in the future, because our chemistry translates across alcohols. Here's a summary of what to expect going forth in the rest of 2019. Expect more announcements for customers in the marketplace development of isobutanol, isooctane, and jet fuel. Expect us to announce more commercial agreements. This, again, is going to be about jet fuel, isooctane, and isobutanol.
We would announce the progress and milestones of the other projects beyond the Luverne facility. Currently, we have six licensing development projects in discussion. Two have MOUs in place with diligence and planning underway. We would be announcing the details of our wind and renewable natural gas products as we get those going, and we can speak publicly about it. Then, of course, I do expect to be announcing the various financing for our projects, and I expect them to be debt-oriented. We are on a crusade to defossilize liquid transportation fuels. We know that our technologies work. We're keen to enter the market correctly with the right customer mix and financing structures. I expect us to continue to make a lot of progress throughout this year. I'll turn the call over to Bradford, who will take us through the financials. Bradford?
Thank you, Pat. Gevo reported revenue in the first quarter of 2019 of $6.4 million as compared to $8.2 million in the same period in 2018. Cost of goods sold was $9.0 million in the first quarter of 2019 versus $10.6 million in the same period in 2018. Cost of goods sold included approximately $7.4 million associated with the production of ethanol, isobutanol and related products, and approximately $1.6 million in depreciation expense. Gross loss was $2.6 million for the first quarter of 2019 versus $2.3 million for the first quarter of 2018. Research and development expense increased by $0.2 million during the first quarter of 2019 compared with the same period in 2018, due primarily to consulting expenses.
Selling, general, and administrative expense increased by $0.2 million during the first quarter of 2019 compared with the same period in 2018, due primarily to an increase in employee-related expenses and consulting expenses. Within total operating expenses for the first quarter of 2019, we reported approximately $0.2 million for non-cash stock-based compensation. For the first quarter of 2019, we reported a loss from operations of $5.6 million, compared to $5.0 million for the same period in 2018. In the first quarter of 2019, cash EBITDA loss, a non-GAAP measure, which is calculated by adding back depreciation and non-cash stock-based compensation to GAAP loss from operations, was $3.8 million, compared with $3.3 million in the same quarter of 2018. Interest expense for the first quarter of 2019 was $0.8 million, a slight decrease compared to the same period in 2018.
For the first quarter of 2019, we reported a net loss of $6.2 million, or a loss of $0.60 a share, based on a weighted average share outstanding of 10,153,873. This compares to a loss of $2.5 million in the first quarter of 2018, or a loss of $2.22 per share. In the first quarter of 2019, Gevo recognized net non-cash gains totaling $0.2 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 gains resulted in a non-GAAP adjusted net loss of $6.4 million in the first quarter of 2019, or a non-GAAP adjusted net loss per share of $0.63. This compares to a non-GAAP adjusted net loss of $5.8 million in the first quarter of 2018, or a non-GAAP adjusted net loss per share of $5.16.
Having a stronger balance sheet is important to moving our business forward, developing our business and growing our business. With that, I would like to thank all of our shareholders for their continued interest and support in Gevo. Let's open up the call for questions. Operator?
Thank you. We will now begin the question and answer session. If you have a question, please star then one on your touchtone phone. If you are using a speakerphone, you need to pick up your handset first before pressing any numbers. Once again, if you have a question, please press star then one on your touchtone phone. Standing by for questions. Our first question comes from Amit Dayal from H.C. Wainwright. Your line is open.
Thank you. Good afternoon, Pat.
Hey, Amit. How are you doing?
Good.
Good.
In regards to the Praj agreements and milestones, are there any specific sort of events that could translate into revenues for the company in the next few quarters, or is this a little bit more longer term?
To get anything organized where it translates to revenue, something would have to get built. That of course translates to a little bit longer time. What I do expect to have happen, and I think I alluded to it or I said it in my comments, is that we have several of these discussions underway for licensing. We now are up to a half dozen of them. They use feedstocks of different types from various places around the world, and we have to progress those and make them happen. I think we've seen a shift of how people think about where we are and what's being done. Where Praj is very interesting is because of the molasses, of course, and some of the work that they've done on straw. I think that the straw thing is quite interesting, and they also have done bagasse.
Those types of things, I think will lead to meaningful milestones, and we're in the midst of figuring out economically what makes sense in what location, because each place is quite different. Each location is quite different.
Understood. With respect to the Seattle announcement today.
Are you delivering to.
Yes.
That municipality, or is this going to come in the next few quarters?
No, it's already been done. It's already underway. One of the things that's interesting is that there is a very, let's say, accelerated interest in the last month where people have been talking about greenhouse gases and the importance. A lot of folk are tired of waiting around for the federal government to do something. They're figuring out how to lower their carbon scores by themselves. As you see, here's an effort by Seattle to put in higher performing fuels and get on a trajectory to lower the carbon intensity. It starts off with isobutanol, but eventually we'll get it to the whole gallon of gasoline.
When you think about that model, it's kind of interesting because these are municipalities basically proving it out so that they can say, "Well, this is the direction we're going to go in the long run," and move to larger volumes. I expect this will probably translate to other municipalities as well.
Understood. Just maybe one final one from me. On the cash burn front, how are we situated over the next 12 months? I know you're talking about potentially hitting profitability in the next 18 months. How will this play out in terms of your progress towards that goal?
Well, I think our burn is going to be relatively modest over the course of this year. We'll spend some millions on capital, but not huge amounts. Because even though we're doing the biogas and the wind, these are things that we'll be using. Other people's money will be put up for that. We become a customer, at least of the wind, and well, the biogas too. I don't want to give exact numbers because things can change, but our burn should be relatively in line with what we've talked about before.
Okay. All right.
Yeah.
Understood. That's all I have time for now. I will follow up with you after the call. Thank you.
Yeah, you bet.
Our next question comes from Sameer Joshi from H.C. Wainwright.
Yeah. Hey, thanks Pat, for taking my call. Just following up on Amit’s questions. I know you mentioned that you will continue to operate the ethanol, what level of revenues or what level of capacity do you expect to utilize over the next eight to nine months?
The run rate for that plant is about 20 million gallons a year. It actually can be a little higher. When ethanol margins are low, we tend to run the plant slightly slower, then we did shut down for a couple of weeks while we tied in the Shockwave dry frac technology. It’ll be something less than 20 million gallons by the time we’re at the end of the year. It won’t be too far off of that. The revenue numbers, we’d give the same kind of guidance that we gave before, which is that’s in our slide deck on our website.
Right. The other thing I noticed is that the R&D has come down nicely. Should we expect it to remain at this sub-$1 million level going forward, or do you expect to invest more as you have agreements with Praj and other things catching steam?
Nothing major. We may see it go up a little bit here and there as we do projects externally sometimes, and depending upon what we do and how we structure it. Generally, I would expect us to see a relatively low level. I don’t have anything that would cause us to increase millions of dollars or anything like that, or even $1 million. I don’t have anything like that. Our bugs are coming along nicely in terms of optimization. We do have some external contracts that we’re utilizing. A lot of those are milestone payment type things. If people are successfully hit what we want, then we would have to pay them as we commercialize. I think that should be pretty stable. Going forward, if you look at the revenue that we’ve talked about where we have the $34 million-$35 million-ish kind of a range.
Right.
That seems to feel about right. Our burn levels should be relatively consistent with what we talked about. I think this quarter would be relatively typical, and then we'll have to deploy some capital, relatively small amounts for doing the wind and the biogas as we do our equity portions of the project financing. I think we're in pretty good shape.
Understood. Thanks for taking my question.
Yeah.
Once again, if you'd like to ask a question, please press star then one on your touchtone phone. Next question comes from Andrew Marchese. Andrew, your line is open.
Patrick.
Hey, Andrew. Yeah, how you doing?
How are you?
I'm doing well, thanks.
Thank you. Oh, perfect. First of all, congratulations on the recent announcement regarding the development of the rubber product.
Obviously. Just curious, Patrick, just one small question. Is there any potential to develop that out, or where is that going, or can you comment on anything regarding that?
Sure. For everybody's benefit, what Andrew is asking about is the isoprene. This is interesting. One of the things that Gevo has done is develop a series of technologies around the conversion of alcohols into hydrocarbon products. We talk a lot about jet fuel and isooctane from isobutanol, but we've also developed technology to convert ethanol into hydrocarbon products as well that can go into diesel fuel, or it can go into jet fuel, or we can make intermediates for plastics and polymers. This was a development effort that we're already well along the way. The thing that Andrew is asking about specifically is we have developed a technology. It's very highly related to what we did for isobutanol and ethanol. It's to convert fusel oils into isoprene, which is a key constituent of synthetic rubber.
The fusel oils are made as a byproduct of fermentation from the ethanol industry, and there's quite a large amount of them available. I think there's a couple different things we can do related to that. We can take that chemistry, and it literally makes isoprene and high yield. I think from what I've seen, it's in the realm of, if not the best economic system from what we can tell and what our projections are. It's a proprietary catalyst that we use that we've developed and owned. I think we'll see progress on that over the next couple of quarters from what I'm told. The other thing that is possible to do with a variant of that chemistry is to convert some of those kinds of things into flavors and fragrances.
This would be into various, it really is going for that really fine chemical specialty niche, is where that potential lies. We're not going to build out those business per se, in terms of we aren't going to become the marketers and things like that. That we're in the midst of lining up the partnerships. What I'd rather be is a supplier of alcohols, raw materials, the catalyst. Licensing the technology is how we approach it. We just haven't talked about much of this publicly, but that's how we're thinking about it. I think over the next probably two quarters, I'll know which way it's headed, how positive, or if it's going to take longer or what's going on. I hope I have some material in that timeframe.
Okay. Well, Patrick, I just want to say I'm looking forward to these additional announcements forthcoming and the definite successes that you will be having soon. Congratulations. Talk soon.
You bet. Thanks.
Speakers at this time, I show no further questions in queue.
All right. I wish everyone a great day. Thanks for joining us today, and thank you for your interest in Gevo and your support. Bye now.
Thank you, ladies and gentlemen. That concludes today's conference call. Thank you for your participation. You may now disconnect.