Gevo, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited consolidated results. Gevo develops renewable chemicals and biofuels, principally isobutanol; operations at its Luverne, Minnesota facility included ethanol production alongside ongoing isobutanol optimization.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $10.1 million | $1.1 million | $18.8 million | $6.5 million |
| Gross loss | $1.6 million | $3.6 million | $5.9 million | $6.3 million |
| Gross margin | Approximately (16%) | Approximately (321%) | Approximately (32%) | Approximately (97%) |
| Operating loss | $8.9 million | $15.8 million | $30.9 million | $42.5 million |
| Net loss | $0.9 million | $15.9 million | $30.1 million | $49.5 million |
Q3 2014 revenue included $9.2 million from ethanol and related products, associated with sales of 4.1 million gallons; nine-month ethanol revenue was $14.7 million on 6.2 million gallons. Isobutanol-related hydrocarbon revenue was $0.8 million in Q3 and $3.4 million year to date, including biojet fuel and bio-PX shipments. The company continued to report gross losses.
For the nine months, operating cash use was $32.6 million, investing cash use was $7.2 million, and financing provided $29.2 million. Cash and cash equivalents declined to $14.0 million from $24.6 million at December 31, 2013. Current assets were $20.9 million and current liabilities $10.6 million. The company said its current operating plan would fund planned operations into 2015 without additional cash, but identified substantial doubt about its ability to continue as a going concern and expects to need additional financing.
At September 30, total liabilities were $50.0 million. Debt included $26.1 million principal of 10% secured convertible notes due 2017, $26.9 million principal of 7.5% convertible notes due 2022, and approximately $0.9 million principal of TriplePoint secured debt. Reported carrying amounts were approximately $25.6 million, $12.9 million, and $0.8 million, respectively. The company had $2.6 million in restricted cash for the 2017-note interest reserve. Contractual obligations totaled $84.5 million, including principal, interest and operating leases.
Material changes and financing
- Revenue rose substantially year over year, mainly because ethanol production and sales resumed; 2013 comparables included no ethanol sales in Q3 or the first nine months.
- Operating expenses fell to $7.3 million from $12.1 million in Q3 and to $24.9 million from $36.2 million year to date, reflecting lower research, compensation and legal costs. Net loss improvement also reflected noncash fair-value gains on warrants and notes, not solely operating performance.
- In August, Gevo sold 30 million shares and warrants for 15 million additional shares at $0.60 per unit, raising $18 million gross. Shares outstanding were approximately 99.6 million at quarter end. The December 2013 warrants’ exercise price was adjusted to $1.43 following financing-related anti-dilution provisions.
- In May and June, a $25.9 million Whitebox term loan was exchanged for 2017 secured convertible notes. The notes carry 10% interest, are secured by substantially all company assets, and include covenants and conversion provisions. The company also repaid $9.6 million of TriplePoint principal.
Outlook, risks and unusual items
- Gevo reported more consistent co-production beginning in July, using one fermenter for isobutanol and three for ethanol. Management said this configuration supports continued isobutanol optimization while taking advantage of ethanol contribution margins. The filing reports progress toward breakeven EBITDA at the facility but provides no numerical forecast or timeline.
- Management expects continued net losses and says profitability depends on successful commercialization, adequate revenue and additional funding. It stated that cash was expected to support planned operations into 2015, while warning that financing might not be available on acceptable terms or at all.
- Butamax patent litigation remains a significant expense and risk. Trials were scheduled for August 2015 and April 2016; Gevo said the possible loss or range of loss could not be reasonably estimated. Management believes the claims are without merit. It warned that insufficient funding or adverse rulings could force a change in business strategy.
- Commercial-scale isobutanol production remains unproven at nameplate capacity; contamination, yields, product specifications, customer acceptance, regulatory approvals, feedstock and energy costs, and further retrofit funding are material uncertainties. The Redfield retrofit was not yet underway and would require additional capital.
- Noncash fair-value gains on derivative warrants and convertible notes materially reduced reported Q3 net loss. The August equity offering also led to a disclosed material weakness in controls over accounting for offering costs and warrants. Management said adjustments were recorded in the quarter, the financial statements were fairly presented, and remediation was underway.
- Gevo disclosed a NASDAQ minimum-bid-price deficiency notice, with a compliance deadline of December 29, 2014. Failure to regain compliance could risk delisting and could trigger note repurchase obligations.
Key facts for investors to verify
- Whether cash, financing access and operating cash needs support the stated plan through 2015, given the going-concern warning.
- Whether the Luverne facility can scale isobutanol production economically and meet customer specifications while maintaining ethanol co-production.
- Current status, costs and outcomes of Butamax litigation, including trial schedules and any resulting business restrictions.
- Debt service capacity, collateral and covenant compliance, plus potential dilution from convertible notes, warrants and future financing.
- Progress in remediating the offering-accounting control weakness and in meeting NASDAQ listing requirements.