Gevo, Inc. — Q3 2015 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2015. Gevo develops renewable chemicals and fuels, primarily isobutanol. Its Luverne, Minnesota facility continued producing mostly ethanol, with limited isobutanol production; ethanol remained the principal source of revenue. The financial statements are unaudited.
Financial performance and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $8.0 | $10.1 | $22.8 | $18.8 |
| Gross loss | $(2.6) | $(1.6) | $(6.9) | $(5.9) |
| Gross margin | (32.6%) | (16.0%) | (30.3%) | (31.7%) |
| Operating expenses | $6.7 | $7.3 | $18.4 | $24.9 |
| Operating loss | $(9.3) | $(8.9) | $(25.3) | $(30.9) |
| Net loss | $(6.5) | $(0.9) | $(28.2) | $(30.1) |
| Net loss per share | $(0.39) | $(0.01) | $(2.22) | $(0.40) |
- Q3 revenue comprised $7.6 million from ethanol and related products, $0.2 million in hydrocarbon revenue, and $0.3 million in grants and other revenue. Nine-month ethanol and related product revenue rose to $20.6 million from $14.7 million, while hydrocarbon revenue fell to $1.4 million from $3.4 million.
- At September 30, cash and cash equivalents were $16.2 million, up from $6.4 million at December 31, 2014. Current assets were $20.7 million and current liabilities $10.5 million; restricted deposits of $2.6 million were not unrestricted cash.
- For the first nine months, operating cash use was $21.0 million, investing cash use $0.1 million, and financing cash provided $31.0 million. Financing included public equity offerings and warrant exercises. Capital expenditures were $0.3 million.
- Debt at quarter-end included $26.1 million principal of 2017 Notes, $24.9 million principal of 2022 Notes, and $0.6 million secured debt. The 2017 Notes were carried at fair value of $21.9 million and the 2022 Notes at $15.2 million net; carrying values differ from principal. Contractual obligations totaled $73.2 million, including principal, interest, leases, and software commitments.
Changes versus comparable periods
- Q3 revenue declined $2.1 million year over year, primarily from lower ethanol sales and lower hydrocarbon revenue. Cost of goods sold also declined, but not enough to prevent gross loss from widening by $1.0 million.
- Q3 R&D expense fell $2.2 million, while SG&A rose $1.6 million, largely due to $1.3 million of legal expenses for trial preparation. Q3 net loss increased by $5.6 million, with the comparison affected by a much smaller fair-value gain on the 2017 Notes in 2015.
- Nine-month revenue increased $4.1 million, but cost of goods sold rose $5.1 million as ethanol production increased; gross loss widened by $1.0 million. Lower R&D reduced operating expenses overall, improving operating loss by $5.5 million.
- Nine-month net loss improved by $1.8 million. Results included non-cash fair-value movements: a $3.6 million gain on the 2017 Notes and a $2.4 million loss on derivative warrant liabilities. These items can materially affect reported net income without corresponding operating cash flows.
- Common shares outstanding increased from 6.6 million at year-end 2014 to 16.9 million at September 30, 2015, reflecting financing and warrant exercises. The one-for-fifteen reverse split took effect April 20, 2015; reported share and per-share data reflect the split.
Outlook, developments, and risks
- Funding and going concern: Management expects continuing losses and negative cash flows and says additional capital will be needed. The filing states these conditions raise substantial doubt about Gevo’s ability to continue as a going concern; there is no assurance that financing will be available on acceptable terms or at all. No specific financial guidance is provided.
- Operations: Management’s strategy is to optimize isobutanol production while using ethanol production to support facility cash flows when economics warrant. The company has not demonstrated nameplate isobutanol production and identifies production yields, contamination, customer specifications, costs, and market adoption as key uncertainties.
- Commercial and regulatory milestones: The final biojet shipment under Defense Logistics Agency contracts was made in July 2015. Alaska Airlines agreed to buy an initial quantity of renewable jet fuel after ASTM D7655 certification; the agreement would terminate if certification was not obtained by December 31, 2015 unless extended in writing. The filing does not report that certification had been secured.
- Butamax settlement and license: On August 22, 2015, Gevo settled the patent disputes with Butamax, DuPont, and BP and entered a patent cross-license. The agreement assigns primary customer-facing roles by market, includes royalty provisions and sales-volume allowances, and imposes milestones. The settlement resolved the identified litigation, subject to continuing permitted activities and contractual terms.
- Debt and dilution risks: The 2017 Notes mature in March 2017 and are secured by substantially all company assets; the 2022 Notes bear 7.5% interest and have holder repurchase rights in specified circumstances. Convertible notes and outstanding warrants could add dilution; equity financing has already substantially increased shares outstanding. Gevo reported compliance with TriplePoint debt covenants at September 30, 2015.
- Controls and reporting: Management concluded disclosure controls were not effective at September 30, 2015 due to deficiencies in accounting for non-routine transactions, including a continuing material weakness related to the August 2014 offering. Remediation was underway, with completion anticipated by year-end 2015. Management nevertheless said the reported financial statements fairly present the company’s position and results in all material respects.
- Other subsequent event: On November 2, 2015, Gevo agreed that its Chief Legal Officer would leave effective November 13, 2015, following resolution of the Butamax litigation.
Investor facts to verify
- Cash runway and the timing, amount, and terms of any additional financing; assess the going-concern uncertainty against current cash needs.
- Progress toward sustained commercial isobutanol production, including output, yields, contamination control, product specifications, and unit economics.
- Status of ASTM certification and the Alaska Airlines agreement, as well as conversion of customer interest into binding, material-volume contracts.
- Debt service and refinancing capacity, including the 2017 Notes maturity, secured collateral, covenant terms, and potential repurchase obligations.
- Potential dilution from outstanding warrants and convertible notes, and the status of the material-weakness remediation and disclosure-control effectiveness.