Gevo, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated financial statements; amounts below are in millions of dollars except per-share data and where otherwise noted.
Business context
Gevo is a development-stage renewable chemicals and biofuels company aiming to produce isobutanol from renewable feedstocks using its GIFT technology and retrofitted ethanol plants. Its Luverne, Minnesota facility began initial isobutanol start-up in May 2012. After production rates came in below plan, Gevo paused isobutanol production during Q3 to optimize technology and planned to make ethanol at the facility in the interim. Gevo reported about 100,000 gallons of isobutanol produced through September 30; it had not made commercial isobutanol shipments.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $0.6 | $17.5 | $22.5 | $47.3 |
| Cost of goods sold | $6.1 | $16.2 | $29.6 | $45.1 |
| Gross profit (loss) | $(5.5) | $1.3 | $(7.1) | $2.3 |
| Operating expenses | $18.9 | $12.8 | $51.3 | $33.8 |
| Operating loss | $(24.4) | $(11.5) | $(58.4) | $(31.6) |
| Net loss | $(12.1) | $(12.3) | $(47.5) | $(34.1) |
| Net loss per share | $(0.31) | $(0.48) | $(1.56) | $(1.61) |
Q3 revenue consisted of $0.6 million of grant and research-program revenue; there were no ethanol sales or commercial isobutanol shipments. Nine-month ethanol and related-product revenue was $19.9 million, alongside $2.6 million of grant and research-program revenue. The filing’s MD&A separately describes approximately $16.0 million from ethanol and $4.1 million from distillers’ grains.
- Cash and liquidity: Cash and cash equivalents were $92.0 million at September 30, down from $94.2 million at December 31, 2011. Current assets were $98.3 million and current liabilities $21.6 million.
- Cash flows, nine months: Operating activities used $47.3 million; investing activities used $51.5 million, largely for the Agri-Energy retrofit; financing activities provided $96.6 million. Cash decreased by $2.2 million.
- Debt: Face-value debt totaled $73.7 million, including $28.7 million of secured debt and $45.0 million of 7.5% convertible senior notes due 2022. Balance-sheet debt was reported net of discounts and the embedded derivative. The notes’ initial conversion price was about $5.69 per share.
- Capital spending: Net property, plant and equipment rose to $76.8 million from $28.8 million at year-end 2011. The filing reported $55.6 million of Agri-Energy retrofit costs through September 30.
- Equity: In July, Gevo issued 12.5 million common shares at $4.95 per share and $45.0 million principal amount of convertible notes. The two offerings generated $98.4 million net proceeds; common shares outstanding were 39.4 million at quarter-end.
Material changes versus prior periods
- Nine-month revenue fell 53%, mainly because ethanol production and sales stopped in May as the facility moved into isobutanol start-up; the company recorded no Q3 ethanol sales.
- Gross margin shifted from profit to loss in both the quarter and year-to-date period, reflecting start-up costs and the lack of Q3 ethanol revenue.
- Nine-month operating expenses increased 52%; selling, general and administrative expense rose 81%, including $9.9 million of legal-related expense and costs associated with executive departures and accelerated equity vesting.
- Nine-month net loss increased by $13.5 million. Q3 net loss was slightly lower year over year, in part because a $15.0 million noncash gain from a decline in the estimated fair value of embedded derivatives offset some operating losses.
- Operating cash use increased from $25.8 million to $47.3 million year over year, and investing cash use increased from $3.5 million to $51.5 million, primarily reflecting retrofit spending.
Outlook, risks and contingencies
- Management said the September 30 cash balance should fund operations, planned capital spending and working capital for at least 12 months. Gevo also said it would need additional funding to pursue its goal of producing and selling approximately 350 million gallons of isobutanol in 2015.
- Gevo anticipated resuming isobutanol production at Agri-Energy in 2013, targeting a run rate of about 1 million gallons per month by year-end 2013 and full production-capacity run rates in 2014. These are forward-looking estimates, not achieved results; the filing highlights technical, scale-up, cost and timing uncertainty.
- The Redfield, South Dakota facility retrofit was still in preliminary engineering and permitting; Gevo had recorded $0.4 million of related planning costs and guaranteed certain subsidiary obligations.
- Gevo and Butamax were involved in extensive patent litigation. A temporary order restricting certain automotive-fuel-market activity was stayed by the Federal Circuit in August 2012. Gevo said potential litigation losses could not be reasonably estimated; it expected significant legal costs, with the earliest trial then scheduled for April 2013.
- Other material risks include reliance on additional financing, uncertain commercial-scale production and market acceptance, corn and natural-gas price volatility, regulatory approvals, customer supply commitments, and potential constraints under secured-debt covenants. Gevo reported compliance with TriplePoint financial covenants at quarter-end.
- Management reported effective disclosure controls as of September 30, 2012 and no material changes in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether isobutanol optimization is completed and production resumes on the stated 2013 timeline, with progress toward the disclosed production-rate targets.
- Whether the company can achieve reliable commercial-scale yields and economics, and what further capital expenditures the Agri-Energy and Redfield projects require.
- Cash burn, remaining liquidity and financing needs relative to management’s at-least-12-month estimate and the stated 2015 production ambition.
- Developments in Butamax litigation, including any rulings, restrictions, damages exposure or changes to expected legal costs.
- Convertible-note terms and secured-debt covenants, including cash obligations, potential dilution, and any restrictions affecting repayment or repurchase rights.