Gevo, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial amounts below are in U.S. dollars; statement amounts are generally shown in millions for readability.
Business context
Gevo is a development-stage renewable chemicals and biofuels company seeking to commercialize isobutanol made from renewable feedstocks. Its strategy centers on retrofitting existing ethanol plants with its fermentation technology. Isobutanol production at the Agri-Energy facility in Minnesota had been paused since September 2012 while Gevo worked to improve production rates. The company reported no ethanol or isobutanol shipments in Q1 2013; it sold excess corn inventory and recorded grant, research-program and other revenue.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $3.543 million | $14.872 million |
| Gross loss | $0.960 million | $0.138 million |
| Operating expenses | $11.926 million | $18.082 million |
| Operating loss | $12.886 million | $18.220 million |
| Net loss | $18.370 million | $19.307 million |
| Net loss per share, basic and diluted | $0.45 | $0.74 |
| Cash used in operating activities | $9.006 million | $16.897 million |
| Cash used in investing activities | $1.997 million | $8.094 million |
Revenue fell about 76%, mainly because ethanol and related-product sales ceased; Q1 2013 revenue included $2.419 million from corn sales and $1.124 million from grants, research programs and other revenue. Gross margin was approximately negative 27% in Q1 2013, compared with approximately negative 1% in Q1 2012.
Cash and cash equivalents were $54.102 million at March 31, down from $66.744 million at December 31, 2012. Current assets were $61.283 million and current liabilities $18.661 million, or working capital of approximately $42.622 million. Total assets were $142.220 million; total liabilities were $54.524 million.
At quarter-end, secured debt had $23.958 million principal outstanding and a $22.560 million carrying value net of discounts. Convertible notes had $35.790 million principal outstanding and a $22.469 million carrying value. The notes bear 7.5% interest and mature in 2022, subject to earlier conversion, redemption or repurchase provisions. Q1 interest expense was $3.276 million.
Changes and notable items
- Operating loss narrowed by $5.334 million year over year, principally as selling, general and administrative expense declined by $6.177 million. Net loss improved by $0.937 million, despite higher interest expense and new derivative and debt-extinguishment charges.
- Q1 2013 included a $1.330 million loss from the change in fair value of embedded derivatives and a $0.926 million loss on extinguishment of debt.
- Holders converted $9.2 million of convertible-note principal. Gevo issued 1,617,910 shares for principal and 1,540,451 shares for $2.7 million of coupon make-whole payments. Common shares outstanding rose to 43,966,309 at March 31, from 39,606,668 at year-end.
- Gevo issued 250,000 shares to Cargill to satisfy a $0.5 million license fee. The board authorized a stock repurchase program of up to $15 million over one year; no shares had been repurchased through March 31.
Outlook, risks and contingencies
Management expected limited commercial-scale isobutanol production to resume at Agri-Energy during 2013, following technology optimization. It estimated that cash on hand at March 31 would fund operations, planned capital expenditures and working capital for at least 12 months, while noting that additional financing could be needed in 2014 or sooner. Management also said further financing would be required for additional production capacity, including the Redfield facility retrofit. These are expectations, not assurances; Gevo reported that it had not generated significant isobutanol revenue and expected continued losses.
Agri-Energy retrofit costs were approximately $57.9 million through March 31, including about $23.4 million for additional design features and related costs. Q1 capital spending was lower than the prior-year period. The filing identifies production scale-up, retrofit costs and timing, access to financing, market acceptance, feedstock and energy prices, regulation, and competition as material business risks.
Gevo and Butamax were involved in extensive patent litigation. After the quarter, on April 10, 2013, a judgment of no infringement was entered for Gevo in the litigation concerning two Butamax patents; Butamax appealed on April 19. Other trials were scheduled for August 2013, July 2014 and August 2015. Gevo said the possible loss or range of loss could not be reasonably estimated and expected significant legal costs to continue.
The company reported compliance with its secured-debt covenants at March 31 and effective disclosure controls. It recorded no environmental liabilities. The filing also describes a potential $1.0 million refund to Toray if a specified minimum quantity of bio-PX is not produced and delivered by December 31, 2013.
Important facts for investors to verify
- Whether optimization is completed and limited isobutanol production resumes on the stated 2013 timetable, and at what rate, yield, cost and product quality.
- Whether management’s 12-month cash sufficiency estimate holds; monitor operating cash burn, capital spending, litigation costs and the timing and terms of any new financing.
- Progress on the Butamax appeal and other patent cases, including outcomes, potential restrictions and legal expense; the filing provides no estimable loss range.
- Debt service and refinancing capacity, including the secured-loan covenants and convertible-note conversion, make-whole and repurchase provisions.
- Whether Gevo meets the Toray delivery commitment and avoids the potential $1.0 million refund, and whether its commercial distribution and supply arrangements translate into binding volumes and revenue.