Business context and reporting period
Gevo, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company was a development-stage renewable chemicals and advanced biofuels business focused on commercializing isobutanol. Reported product revenue was from ethanol and related products at its acquired Agri-Energy facility; Gevo had not yet generated isobutanol sales.
Financial performance and liquidity
| Metric | Three months ended September 30, 2011 | Nine months ended September 30, 2011 |
|---|---|---|
| Total revenue | $17.506 million | $47.320 million |
| Gross margin | $1.274 million | $2.258 million |
| Operating loss | $11.524 million | $31.569 million |
| Net loss | $12.305 million | $34.054 million |
| Net loss per share, basic and diluted | $(0.48) | $(1.61) |
For the quarter, revenue was up from $1.496 million a year earlier, primarily because of the Agri-Energy acquisition; gross margin increased from $0.640 million. The quarterly net loss narrowed from $17.308 million. For the nine-month period, revenue rose from $2.288 million, but the operating loss increased from $29.114 million and net loss was broadly unchanged from $33.768 million. Comparisons are substantially affected by Agri-Energy being acquired in September 2010. Nine-month research and development expense was $13.815 million, up 21%; selling, general and administrative expense was $20.001 million, up 5%.
Cash and cash equivalents were $97.605 million at September 30, versus $15.274 million at December 31, 2010. Current assets were $107.985 million and current liabilities $11.966 million. Stockholders’ equity was $103.295 million; accumulated deficit was $120.475 million. Nine-month cash used in operations was $25.760 million, cash used in investing was $3.540 million, and financing provided $111.631 million, principally reflecting the February IPO. Management said cash on hand was expected to fund operations, planned capital expenditures and working capital for at least 12 months.
Secured debt had a carrying value of $19.418 million, including current debt; principal plus final/end-of-term payments totaled $20.637 million. The company reported compliance with its debt covenants at quarter-end. The filing reports no separate operating margin measure.
Material changes, outlook and risks
- Commercialization and investment: Gevo expected commercial isobutanol production at Luverne, Minnesota, in the first half of 2012. It estimated $22 million for the Agri-Energy retrofit, plus approximately $10 million for an enhanced yeast seed train. Its stated goal of producing and selling more than 350 million gallons in 2015 would require additional funding.
- Subsequent financing: In October 2011, Agri-Energy arranged up to $15 million of additional TriplePoint term loans, with a possible further $5 million subject to approval, and borrowed $10 million on October 20. Gevo guaranteed the obligations; collateral and other security arrangements apply. The new loan carries interest at prime plus 7.75%, subject to a 3.25% floor, and an end-of-term payment.
- Commercial arrangements: Agreements with Sasol, LANXESS and Mansfield concerned future isobutanol distribution or supply, but no amounts had been recorded under those arrangements as of September 30. A U.S. Air Force contract covered up to 11,000 gallons of alcohol-to-jet fuel for testing, with a potential value of up to $649,000; no revenue had been recognized by quarter-end.
- Principal risks and contingencies: Commercial-scale production, retrofit cost and timing, technical performance, feedstock and commodity prices, regulatory approvals and market adoption remain uncertain. The company warned that it would need additional capital to meet expansion goals and might not obtain it on acceptable terms. Butamax alleged infringement of two patents; Gevo denied the allegations and asserted patent-infringement counterclaims. The possible loss or range of loss could not be reasonably estimated.
- Unusual accounting and financing items: The IPO generated reported net proceeds of approximately $110.4 million and converted preferred shares into common shares. Preferred-stock warrant liabilities were reclassified to equity upon conversion at the IPO, ending subsequent fair-value remeasurement. Nine-month cash flow also included $4.897 million of stock-based compensation and a $1.414 million gain from changes in derivatives. Management identified no material change in internal control over financial reporting and judged disclosure controls effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether the Luverne retrofit and enhanced yeast seed train remain on schedule and within the stated cost estimates, and whether commercial-scale production meets targeted performance.
- Actual cash burn and available liquidity relative to the stated 12-month funding outlook, planned capital spending and further financing needs.
- Full terms, draws, covenants, guarantees and collateral under the October TriplePoint facility, including the effect of the additional $10 million borrowing.
- Whether commercial customers finalize binding agreements, and the production volumes, shortfall obligations, pricing and regulatory conditions they require.
- Developments in the Butamax litigation, including any change in the currently unestimable potential loss.