Gevo, Inc. annual report, FY2016

Gevo, Inc. — 2016 Form 10-K

Reporting period: Fiscal year ended December 31, 2016. The filing also presents unaudited quarterly results, including fourth quarter. All financial amounts below are in U.S. dollars unless noted. Share and per-share data reflect applicable reverse splits.

Business context

Gevo develops renewable isobutanol and related fuels and chemicals using its GIFT fermentation and separation technology. Its Luverne, Minnesota facility produced ethanol and isobutanol, while the company also processed isobutanol into products including alcohol-to-jet fuel (ATJ), isooctane and isooctene. The business remained dependent primarily on ethanol and related product sales; the company had not established profitable commercial-scale isobutanol production.

Financial performance and condition

Metric	2016	2015
Revenue	$27.2 million	$30.1 million
Cost of goods sold	$37.0 million	$38.8 million
Gross loss	$9.8 million	$8.6 million
Operating expenses	$14.2 million	$23.3 million
Operating loss	$24.0 million	$31.9 million
Net loss	$37.2 million	$36.2 million
Net cash used in operating activities	$20.5 million	$28.2 million
Capital expenditures / cash used in investing	$5.9 million	$1.3 million
Cash from financing activities	$37.3 million	$40.2 million

Gross margin remained negative, approximately 36% of revenue. Revenue declined about 9.7%, while gross loss widened by $1.2 million. Lower operating expenses improved operating loss by $7.9 million, but net loss increased by $1.0 million, in part reflecting noncash debt and warrant fair-value charges.
Revenue comprised $24.6 million from ethanol sales and related products, $1.9 million from hydrocarbons, and $0.7 million from grants and other revenue. Ethanol and related product revenue fell from $27.1 million, primarily due to lower facility production. Hydrocarbon revenue increased from $1.7 million.
Fourth-quarter revenue was $5.8 million, gross loss $2.3 million, operating loss $6.5 million and net loss $2.3 million. Fourth-quarter 2015 revenue was $7.3 million and net loss $8.0 million.
Cash and cash equivalents were $27.9 million at year-end, versus $17.0 million a year earlier. Current assets were $33.3 million and current liabilities $34.7 million. Cash increased through substantial equity and warrant financing, despite operating and investing cash outflows.
At December 31, principal on convertible notes totaled $35.7 million: $26.1 million of 2017 Notes and $9.6 million of 2022 Notes. The 2017 Notes were recorded at fair value of $25.8 million; the 2022 Notes had a net carrying value of $8.2 million. A $2.6 million interest reserve was restricted. The 2017 Notes were secured by substantially all company assets, including intellectual property.
Agri-Energy retrofit capital costs totaled approximately $70.8 million through year-end. The facility produced a record approximately 440,000 gallons of isobutanol in 2016; the company sold the equivalent of approximately 200,000 gallons directly or as renewable hydrocarbons. It reported approximately 200,000 gallons of isobutanol and 40,000 gallons of renewable hydrocarbons in inventory at year-end.

Material changes and notable items

Operating expenses declined $9.1 million, including lower research and development expense and a $7.7 million decline in selling, general and administrative expense, particularly professional and legal fees.
Gevo raised gross proceeds of approximately $28.6 million from 2016 common stock offerings and received $12.3 million from warrant exercises. It also exchanged $12.8 million of 2022 Notes for common shares during 2016, reducing the year-end principal balance to $9.6 million.
In September 2016, Gevo repaid its TriplePoint secured facility; TriplePoint terminated its security interests. The Whitebox 2017 Notes remained outstanding and secured.
ASTM approved use of renewable isobutanol-derived ATJ as a blending component in commercial jet fuel in April 2016. Alaska Airlines conducted commercial flights using Gevo ATJ during the year.
Gevo completed a one-for-twenty reverse stock split effective January 5, 2017. It announced that it regained Nasdaq minimum-bid-price compliance effective January 20, 2017.

Outlook, risks and contingencies

Going concern: The auditor included a going-concern emphasis. Management stated that year-end working capital was insufficient to fund planned operations through one year after issuance of the financial statements without additional funding and/or debt restructuring. The filing says substantial doubt exists about Gevo’s ability to continue as a going concern. The company reported recurring losses and expected future losses.
Debt and financing: In February 2017, the Whitebox maturity was extended from March 15 to June 23, 2017, with the coupon increased to 12% and required principal reductions. Gevo paid $9.6 million on February 23, reducing principal to approximately $16.5 million. It also raised approximately $11.9 million gross in a February 2017 offering. The company continued discussions on a longer-term restructuring; there was no assurance of a definitive agreement or adequate further financing. Failure to fund operations could lead to bankruptcy proceedings.
2022 Notes after year-end: January 2017 exchanges of $8.4 million principal for common shares reduced the 2022 Notes to approximately $1.2 million. These and the February financing and Whitebox payment are subsequent events, not year-end balances.
2017 operating targets: Gevo targeted about 500,000 gallons of isobutanol production, a corporate EBITDA burn rate of $18–$20 million excluding stock-based compensation, debt restructuring, and binding supply contracts covering at least 50% of planned expanded-facility capacity. The company said current co-production configuration would not support consolidated profitability and planned to engineer an expansion toward sole isobutanol production. Capacity and expansion cost estimates were still under development.
Commercial execution: The proposed Lufthansa offtake—up to 8 million gallons of ATJ annually for five years—was nonbinding and dependent on definitive contracts, financing, facility expansion and supply-chain details. Other commercialization plans also depended on customer adoption, production reliability, product specifications and distribution investment. The company planned to limit production to align with demand and noted limited storage capacity.
Key risks: Continued production challenges, contamination, uncertain unit economics, corn and natural-gas price volatility, dependence on commodity margins, customer concentration, competing technologies, regulatory approvals, and reliance on equity financing and partners. C&N represented about 75% of 2016 revenue and Land O’Lakes Purina about 18%.
Other disclosures: No material pending litigation or recorded environmental liabilities were reported. Management concluded disclosure controls and internal control over financial reporting were effective at year-end, with no material weaknesses identified. Certain reported earnings movements reflect noncash fair-value changes in convertible debt and warrants.

Important facts for investors to verify

Whether Gevo completed a durable Whitebox debt restructuring and secured sufficient working capital after the June 23, 2017 maturity extension, and the current principal, interest and collateral terms.
Whether the February 2017 financing and subsequent share and warrant issuances provided adequate runway, and the resulting dilution and fully diluted share count.
Whether the company achieved its 2017 production and EBITDA-burn targets and converted nonbinding customer discussions into binding, economically viable offtake contracts.
The actual capital cost, financing plan, capacity and expected economics of the Luverne facility expansion; these values were not yet clear in the filing.
Whether production costs, product quality, storage and distribution capacity, and customer demand support positive margins at commercial scale.
Customer concentration, contract terms and the company’s ability to diversify revenue beyond ethanol and related products.
Nasdaq listing compliance following the reverse split; the filing reports regained compliance in January 2017 but also gives a March 9 closing price below $1.00.