Gevo, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Gevo develops renewable chemicals and biofuels, principally isobutanol. At its Luverne, Minnesota Agri-Energy facility, it was producing ethanol while continuing to optimize isobutanol production; the company’s longer-term strategy depends on commercializing isobutanol and its derivatives. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $5.9 million | $0.9 million |
| Cost of goods sold | $9.2 million | $4.7 million |
| Gross loss | $3.3 million | $3.8 million |
| Operating expenses | $6.2 million | $9.1 million |
| Operating loss | $9.5 million | $12.9 million |
| Net loss | $7.3 million | $12.0 million |
| Basic and diluted loss per share | $0.88 | $2.65 |
| Operating cash used | $9.5 million | $13.0 million |
- Revenue included $5.1 million from ethanol and related products, $0.5 million of hydrocarbon revenue, and $0.3 million of grant and other revenue. The company reported sales of 2.9 million gallons of ethanol and related products.
- Gross loss improved by $0.4 million, despite higher cost of goods sold, as ethanol revenue commenced in the comparable period comparison. Research and development expense declined to $1.7 million from $4.1 million; selling, general and administrative expense declined to $4.5 million from $5.0 million.
- Net loss improved by $4.6 million. Other income included a $3.8 million unrealized gain from the change in fair value of the 2017 Notes and a $0.3 million gain on conversion of debt. These noncash items contributed to reported results.
- Cash and cash equivalents were $4.4 million at March 31, down from $6.4 million at year-end. Investing activities used $0.1 million; financing activities provided $7.6 million, including proceeds from the February stock-unit offering and warrant exercises.
- Working capital was $2.1 million, with current assets of $11.6 million and current liabilities of $13.7 million. The filing states that available working capital was insufficient to fund planned operations through December 31, 2015 without additional cash and that this raised substantial doubt about Gevo’s ability to continue as a going concern.
- Total assets were $95.0 million and total liabilities were $49.6 million. Debt included $26.1 million principal amount of 2017 Notes, $24.9 million principal amount of 2022 Notes, and approximately $0.7 million of secured debt. The 2017 Notes were carried at a fair value of $21.7 million. Restricted deposits included a $2.6 million reserve for 2017 Notes interest.
Changes, financing and outlook
- The revenue increase versus Q1 2014 primarily reflects ethanol sales: Gevo reported no ethanol sales in that prior-year quarter. Hydrocarbon revenue decreased by $0.1 million.
- Gevo said it continued to meet isobutanol fermentation targets and co-produce isobutanol and ethanol, and reported progress toward breakeven EBITDA at the Agri-Energy facility. This was not a company-wide profitability forecast; no numerical guidance was provided.
- In February, Gevo sold 2.2 million common shares with Series A and Series B warrants for gross proceeds of approximately $6.7 million. Series B warrant exercises generated approximately $2.2 million during the quarter. The company expects to need further financing and noted it may pursue debt or equity offerings, strategic funding, debt restructuring, or other sources.
- In the period, holders converted $2.0 million principal amount of 2022 Notes; $24.9 million principal remained at March 31. The 2017 Notes mature in March 2017 and the 2022 Notes in July 2022. Debt and warrant terms create potential cash obligations, dilution, and restrictions on financing and other actions.
- After quarter-end, the board approved a one-for-fifteen reverse stock split, effective April 20, 2015. The filing states share and per-share information was adjusted retroactively where applicable.
Risks, contingencies and unusual items
- Going concern and funding: Gevo expects continuing losses and negative operating cash flow and warned that additional funds are necessary to carry out planned operations. It cautioned that financing may not be available on acceptable terms, or at all.
- Butamax litigation: Patent litigation remained ongoing. Trials were scheduled for August 24, 2015 and April 25, 2016. Gevo expected significant legal costs; it said the possible loss or range of loss could not be reasonably estimated. Adverse outcomes could limit or prevent use of relevant technology or force a change in strategy.
- Commercial execution: Isobutanol output remained limited and below demonstrated commercial nameplate production. Production scale-up, contamination, product specifications, customer acceptance, regulatory approvals, commodity margins, and the cost and financing of facility retrofits remain material uncertainties. The Redfield facility retrofit had not begun.
- Debt, warrants and dilution: Senior secured debt is secured by substantially all company assets, including intellectual property. Convertible notes, warrants and potential future equity financing could cause substantial dilution; some transactions could require cash repurchases or payments that Gevo may not be able to fund.
- Controls: Management concluded disclosure controls were ineffective at March 31, 2015 because of a material weakness involving accounting for non-routine aspects of the August 2014 offering. Gevo said it was implementing enhanced controls and expected to remediate the weakness during 2015; management nevertheless stated the financial statements fairly presented results in all material respects.
- Gevo reported no material change in market-risk exposure during the quarter, no defaults upon senior securities, and no recorded environmental liabilities.
Key facts for investors to verify
- Available cash, subsequent financing, cash burn, and whether funding is sufficient to execute the operating plan and address the going-concern uncertainty.
- Actual isobutanol production volumes, yields, costs, customer shipments, and progress toward commercial-scale operation and facility-level breakeven.
- Current status, expected costs, and potential outcomes of the Butamax cases and scheduled trials.
- Debt service and covenant requirements, warrant exercise and settlement terms, and potential dilution from notes, warrants, and future fundraising.
- Remediation of the disclosed material weakness and effectiveness of financial reporting controls.