Management Comment
“We achieved several key milestones this quarter including a major inflection point in the financing of NZ1 by being invited into the full formal diligence and term sheet negotiation process for the DOE loan,” said Dr. Patrick Gruber CEO. “The preliminary diligence process was highly selective and validates the hard work we have put into our proprietary Net-Zero plant designs and business model. We expect that the DOE process could take up to 12 months to be finalized, given all the consultants and complexities that they need to work through as part of their normal diligence, but this is a very exciting breakthrough for Gevo and our shareholders.”
“Along with the progress on NZ1, I would also highlight that our RNG business is on target. As we continue to ramp up production, this quarter we achieved impressive year one performance against design capacity, with on-stream injection of 97% and uptime of 91%, demonstrating operating efficiency objectives. We also hit another milestone at Verity by launching a carbon tracking application for farmers to count CI scores on their fields and we have successfully tracked differences field by field, which is key for accurate CI tracking and validation in documenting credits. We have a deep bench of proprietary technology across several areas at Gevo including ETO technology and we also received our first licensing payment from LG Chem, demonstrating the potential of this technology in the Gevo portfolio.”
Dr. Gruber concluded, “Gevo is a company with deep IP and know-how and I am excited to see the progress continuing and milestones met. Our evolution to a model focused on developing and licensing, in addition to investing is giving us a more optimized pathway to profitability as it reduces our need for our capital and enables accelerated growth without hindering our ability to invest directly in projects of our choosing. I believe we are at the convergence point of our technology portfolio and strong market tailwinds, giving our shareholders a unique seat at the table to leverage high-growth markets like sustainable aviation fuel (“SAF”), RNG, and CI tracking.”
Second Quarter 2023 Financial Results
Operating revenue. During the three months ended June 30, 2023, operating revenue increased $4.1 million compared to the three months ended June 30, 2022, primarily due sales of RNG and environmental attributes from our RNG Project. Sales under our RNG Project commenced in the third quarter of 2022. During the three months ended June 30, 2023, we sold 77,789 MMBtu of RNG from our RNG Project, resulting in revenue realized of $2.9 million. Additionally, we recognized $1.3 million of licensing and development revenue from the ETO Technology agreement with LG Chem.
Cost of production. Cost of production remained flat during the three months ended June 30, 2023, compared to the three months ended June 30, 2022. Production costs in 2023 are related to RNG production and sales, and lower costs from minimal production at our facility in Luverne, Minnesota (the “Luverne Facility”) compared to the three months ended June 30, 2022, before it was put into care and maintenance.
Depreciation and amortization. Depreciation and amortization increased $3.3 million during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to additional depreciation for RNG assets placed into service in 2022 and accelerated depreciation on Agri-Energy segment assets due to shorter lives stemming from the impairment assessment during the third quarter of 2022.
Research and development expense. Research and development expense remained flat during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to an increase in patent and personnel related costs, as well as lab work and supplies related to our ETO and other technologies, which was offset by a reduction of consulting expenses.
General and administrative expense. General and administrative expense increased $1.9 million during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to increases in professional consulting fees and personnel costs related to the hiring of highly qualified and skilled professionals for our strategic projects, including Net-Zero Projects, as well as the Verity and DOE programs.
Project development costs. Project development costs are related to our future Net-Zero Projects and Verity which consist primarily of employee expenses, preliminary engineering and technical consulting costs. Project development costs increased $0.7 million during the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily due to increases in personnel costs and consulting fees.
Facility idling costs. Facility idling costs of $1.0 million for the three months ended June 30, 2023, are due to the care and maintenance of our Luverne Facility. We plan to utilize the Luverne Facility as a development scale plant to advance our technology