Gevo, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 30, 2015; unaudited. The cash-flow statement covers the six months ended June 30, 2015. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Gevo develops renewable chemicals and biofuels, primarily targeting commercial production of isobutanol using its GIFT fermentation and separation technology. At its Luverne, Minnesota facility, the company produced ethanol and isobutanol simultaneously, generally using one fermenter for isobutanol and three for ethanol; it also sometimes ran the facility solely for ethanol. Management described continued progress against isobutanol fermentation targets, but commercial production remained limited and ethanol was the principal source of sales.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $8.924m | $7.721m | $14.823m | $8.624m |
| Cost of goods sold | $9.898m | $8.269m | $19.132m | $12.949m |
| Gross loss (margin) | $(0.974)m (-10.9%) | $(0.548)m (-7.1%) | $(4.309)m (-29.1%) | $(4.325)m (-50.2%) |
| Operating expenses | $5.557m | $8.484m | $11.758m | $17.629m |
| Loss from operations | $(6.531)m | $(9.032)m | $(16.067)m | $(21.954)m |
| Net loss | $(14.370)m | $(17.156)m | $(21.713)m | $(29.128)m |
| Net loss per share, basic and diluted | $(1.10) | $(3.79) | $(2.03) | $(6.44) |
Q2 revenue included $7.955m from ethanol and related products, $0.740m of hydrocarbon revenue, and $0.229m of grant and other revenue. Ethanol and related-product sales were associated with 4.1 million gallons in Q2 and 7.0 million gallons in the first half. Hydrocarbon revenue fell year over year, partly because Q2 2014 included a $1.5m bio-PX shipment to Toray.
- Cash and liquidity: Cash and cash equivalents were $22.528m at June 30, up from $6.359m at December 31, 2014. Current assets were $28.320m and current liabilities $15.037m.
- Cash flow, first half: Operating activities used $14.885m; investing activities used $0.031m; financing activities provided $31.085m. Financing included public equity offerings and warrant exercises.
- Debt: Reported carrying values included $22.035m for the 2017 Notes, $14.312m for the 2022 Notes, and $0.634m net secured debt. Principal outstanding was approximately $26.1m, $24.9m, and $0.7m, respectively. Contractual principal payments totaled $51.674m, with $26.441m scheduled within one to three years and $24.9m after five years.
- Other balance-sheet items: Derivative warrant liability rose to $8.114m from $3.114m at year-end. Net property, plant and equipment was $77.899m; accumulated deficit was $325.011m.
Changes versus prior comparable periods
- Q2 revenue increased 16% year over year, mainly from higher ethanol sales; cost of goods sold rose faster than revenue, widening the quarterly gross loss.
- First-half revenue increased $6.199m, largely from ethanol sales, while gross loss was nearly unchanged. Research and development expense declined $4.204m and selling, general and administrative expense declined $1.667m, contributing to a smaller operating loss.
- Net losses improved in both comparison periods, but results included substantial fair-value movements. The first half recorded a $7.080m loss from changes in derivative warrant fair value, partly offset by a $3.425m gain on the 2017 Notes’ fair value. These noncash valuation effects make reported net loss less reflective of operating performance.
- Shares outstanding increased to 16,499,378 at June 30 from 6,641,870 at December 31, 2014, following capital raises and warrant exercises. A one-for-fifteen reverse stock split took effect April 20, 2015; share and per-share data were adjusted retroactively.
Outlook, risks and unusual items
- Management expected further losses and stated that profitability depended on successful development and commercialization, adequate revenue, and additional financing. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern; no assurance was given that additional funds could be raised or that positive cash flow would be achieved.
- Gevo raised gross proceeds of approximately $6.7m in a February 2015 offering and $17.2m in a May 2015 offering; it also received proceeds from warrant exercises. Further debt or equity financing, strategic arrangements, debt restructuring, or cost reductions may be needed. Additional equity and warrant-related issuances could dilute shareholders.
- Butamax patent litigation remained a major expense and business risk. Trials were scheduled for August 2015 and April 2016; the company said the possible loss or range of loss could not be reasonably estimated. Adverse outcomes could require changes to products, operations, or strategy. The filing describes favorable summary-judgment rulings on some claims but unresolved disputes remained.
- Commercial-scale isobutanol production, market acceptance, product specifications, regulatory approvals, and economic performance had not been established. The filing notes past contamination and production challenges, and says the Agri-Energy plant had not reached nameplate production. Isobutanol sales were described as marginal; no isobutanol sales revenue was recorded for the first half.
- Commodity and market exposure included corn, natural gas, ethanol, and petroleum prices. Management stated that weak margins could lead it to reduce or suspend facility production. No material change in market-risk exposure was reported for the first half.
- Alaska Airlines agreed to purchase an initial quantity of renewable jet fuel once ASTM D7655 certification is secured; the agreement would terminate after December 31, 2015 absent certification or an extension. Gevo reported its final shipment of biojet fuel under Defense Logistics Agency contracts in July 2015.
- Disclosure controls were deemed ineffective at June 30 because of a continuing material weakness in accounting for non-routine transactions related to the August 2014 offering. Management said remediation was underway and expected during 2015, while asserting the financial statements fairly presented the company’s financial position and results.
- The filing reports the court’s summary-judgment rulings in the Butamax cases with inconsistent dates in different sections (July 3 and August 3, 2015); verify the actual order and timing.
Most important facts for investors to verify
- Cash runway, forecast operating cash burn, and the timing, amount, and terms of required additional financing.
- Actual isobutanol output, yields, cost per unit, commercial sales, and progress toward product and regulatory certifications.
- Current status and potential financial and operational effects of the Butamax litigation, including the rulings and scheduled trials.
- Debt service and covenant requirements, including convertible-note terms, collateral liens, and any restrictions on refinancing or cash payments.
- Potential dilution from outstanding warrants, convertible notes, and future fundraising; also confirm the post-split share counts and warrant adjustments.
- Remediation of the material weakness in internal controls and whether disclosure controls become effective.