Gevo, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Gevo is a development-stage renewable chemicals and biofuels company seeking to commercialize isobutanol from renewable feedstocks. Its Luverne, Minnesota facility began producing ethanol and isobutanol simultaneously in May 2014; the filing reports no isobutanol sales in the first half of 2014.
Financial performance and position
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $7.721 | $1.859 | $8.624 | $5.402 |
| Gross loss | $(0.548) | $(1.757) | $(4.325) | $(2.717) |
| Operating expenses | $8.484 | $12.107 | $17.629 | $24.033 |
| Operating loss | $(9.032) | $(13.864) | $(21.954) | $(26.750) |
| Net loss | $(17.156) | $(15.222) | $(29.128) | $(33.592) |
| Basic and diluted loss per share | $(0.25) | $(0.35) | $(0.43) | $(0.80) |
| Cash used in operating activities | Not provided for quarter | Not provided for quarter | $(25.220) | $(19.187) |
- Revenue growth reflected ethanol and related-product sales of $5.522 million in the first half, versus none in the comparable 2013 period, and higher hydrocarbon revenue. The filing separately attributes $4.6 million to sales of 2.1 million gallons of ethanol in the first half.
- Q2 gross loss narrowed year over year, but first-half gross loss increased as cost of goods sold rose to $12.949 million. Lower R&D and selling, general and administrative expenses reduced the operating loss.
- Net loss increased in Q2 despite improved operating results, reflecting financing and fair-value items, including a $5.129 million loss on the 2017 Notes and $3.185 million of debt issuance-cost expense.
- At June 30, cash and cash equivalents were $5.908 million, down from $24.625 million at year-end. Current assets were $14.171 million and current liabilities $13.150 million; $2.611 million was held in restricted deposits.
- Total assets were $101.972 million and stockholders’ equity was $43.636 million. The balance sheet carried approximately $45.1 million of 2017 and 2022 note obligations and secured debt, including fair-value and discount accounting. Principal outstanding included $26.1 million of 2017 Notes, $26.9 million of 2022 Notes and approximately $1.0 million of TriplePoint debt.
Material changes and financing
- In May, Gevo obtained a $25.9 million Whitebox term-loan advance, then exchanged the outstanding principal and accrued paid-in-kind interest for 10% convertible senior secured notes due March 2017. The notes are convertible at an initial $1.1584 per share, carry interest payable 5% in cash and, in certain circumstances, 5% in kind, and are secured by substantially all company and subsidiary assets.
- Gevo repaid $9.6 million of TriplePoint principal in May; approximately $1.0 million remained under the amended facility at June 30.
- Investing cash outflow was $6.448 million, including $3.837 million of capital expenditures and $2.611 million placed in restricted deposits. Financing provided $12.951 million during the half-year.
- On August 5, 2014, after quarter-end, Gevo completed an offering of 30 million common shares and warrants for 15 million additional shares at $0.85 per share. Gross proceeds were approximately $18 million, excluding any warrant exercise proceeds. Management said the proceeds, together with planned expense reductions, were expected to fund operations into 2015 without additional sources of cash.
Outlook, risks and unusual items
- Going concern and funding: Management stated that June 30 working capital was insufficient to fund planned operations through December 31, 2014 without additional cash, raising substantial doubt about Gevo’s ability to continue as a going concern. Gevo expects future losses and may require further debt or equity financing; the August offering provided additional capital but also creates dilution risk.
- Commercialization: Gevo’s strategy depends on achieving reliable, cost-effective commercial isobutanol production, customer acceptance and sufficient sales. The company was still optimizing production; one fermenter was used for isobutanol and three for ethanol, with plans to ramp up using the fourth fermenter. Historical ethanol results may not predict future performance.
- Litigation: Ongoing patent litigation with Butamax creates potentially significant costs and operational uncertainty. A key trial was stayed in July 2014 pending developments concerning Gevo’s Supreme Court petition; other litigation was scheduled for 2015. Gevo said potential losses could not be reasonably estimated.
- Debt and dilution: Debt is secured by substantially all assets, including intellectual property, and includes covenants and potential repayment obligations. Convertible notes and warrants could result in substantial share issuance. The filing also reports a Nasdaq bid-price deficiency notice dated June 30, 2014, with a compliance period extending to December 29, 2014.
- Other matters: The Sasol distribution agreement expired in July 2014. The filing provides no specific financial guidance; management’s outlook is conditional on production progress, financing, market acceptance and cost reductions. Management reported disclosure controls were effective at June 30, 2014.
Key facts investors should verify
- Whether the August offering’s net proceeds and subsequent cash use support the stated runway into 2015, and what further financing may be needed.
- Actual isobutanol output, production yields and costs, progress in using the fourth fermenter, and any commercial isobutanol sales.
- Terms, fair-value accounting, interest obligations, collateral and potential dilution associated with the 2017 and 2022 Notes and outstanding warrants.
- Developments in the Butamax patent cases, including any court rulings, settlement, estimated exposure or effect on commercialization.
- Nasdaq listing compliance and whether the expired Sasol agreement was replaced or otherwise affected distribution plans.