Gevo, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter ended September 30, 2013; filed November 5, 2013. Financial statements are unaudited. Unless stated otherwise, amounts below are in U.S. dollars.
Business context and operating progress
Gevo is a development-stage renewable chemicals and biofuels company seeking to commercialize isobutanol made from renewable feedstocks using its GIFT fermentation and separation technology. Its Agri-Energy facility in Luverne, Minnesota, was retrofitted from ethanol production. After pausing isobutanol production in 2012 because of low production rates and microbial contamination, Gevo resumed limited production in June 2013 and added a second production train in August. In October, after quarter-end, it commissioned the facility on corn mash for integrated production. Gevo planned to test run rates through the rest of 2013 and ramp toward nameplate capacity in 2014. Commercial-scale production at nameplate capacity had not been demonstrated.
Key financial metrics
| Metric | Three months ended September 30, 2013 | Three months ended September 30, 2012 | Nine months ended September 30, 2013 | Nine months ended September 30, 2012 |
|---|---|---|---|---|
| Total revenue | $1.127 million | $0.562 million | $6.529 million | $22.461 million |
| Gross loss | $3.619 million | $5.517 million | $6.336 million | $7.138 million |
| Operating expenses | $12.144 million | $18.909 million | $36.177 million | $51.254 million |
| Operating loss | $15.763 million | $24.426 million | $42.513 million | $58.392 million |
| Net loss | $15.885 million | $12.051 million | $49.477 million | $47.535 million |
| Net loss per share | $0.34 | $0.31 | $1.14 | $1.56 |
Q3 revenue consisted mainly of grants, research and development program revenue, and other revenue; it included $0.4 million from biojet fuel shipments. Gevo reported no ethanol sales in Q3. Nine-month revenue included $3.345 million of excess corn sales, $3.184 million of grant, research and development, and other revenue, and no ethanol sales. The filing reports no significant commercial isobutanol sales.
- Cash flow, first nine months: Operating cash use was $31.720 million, investing cash use was $2.628 million, and financing cash use was $6.735 million. Cash declined $41.083 million to $25.661 million.
- Liquidity at September 30: Cash and cash equivalents were $25.661 million; current assets were $32.088 million and current liabilities $29.706 million. Accounts payable and accrued liabilities rose to $19.218 million from $8.244 million at year-end 2012.
- Debt: Secured debt principal was $18.883 million ($17.909 million net of discounts on the balance sheet); $10.477 million of secured debt was classified current. Convertible-note principal was $26.9 million, down from $45.0 million at issuance; its balance-sheet carrying amount, net of discounts and including embedded derivatives, was $14.815 million.
- Assets and equity: Total assets were $117.129 million, versus $156.111 million at December 31, 2012; stockholders’ equity was $64.763 million, versus $97.831 million. Accumulated deficit was $244.824 million.
- Share count: 47,184,896 common shares were outstanding at September 30, compared with 39,606,668 at year-end 2012. Note conversions and related make-whole payments issued 6,137,383 shares during the first nine months.
Material changes versus comparable periods
- Nine-month revenue fell $15.932 million, principally because ethanol and related-product sales of $19.908 million in 2012 did not recur; 2013 included excess corn sales and higher grant, research and development, and other revenue.
- Nine-month operating loss narrowed by $15.879 million, largely as operating expenses declined $15.077 million, including lower selling, general and administrative costs. Research and development expense increased $1.201 million, primarily reflecting pilot-plant, biojet-fuel, and bio-PX work.
- Nine-month net loss increased $1.942 million despite the narrower operating loss. The 2012 period included a $15.0 million gain from a decrease in the fair value of convertible-note embedded derivatives; the comparable 2013 gain was $2.280 million. 2013 also included a $2.038 million debt-extinguishment loss and higher interest expense.
- Q3 net loss increased $3.834 million year over year, chiefly because the embedded-derivative gain was $1.587 million versus $15.0 million in Q3 2012, partly offset by lower operating expenses and interest expense.
- Cash used in operations improved to $31.720 million from $47.312 million in the first nine months of 2012. Investing cash use fell to $2.628 million from $51.543 million, as the prior-year period included substantial retrofit spending. Financing shifted from $96.627 million provided in 2012, including public offerings, to $6.735 million used in 2013, largely for secured-debt principal payments.
Outlook, risks, and unusual items
- Management said September-end cash was expected to fund planned operations through the remainder of 2013, including $3.6 million of fourth-quarter principal payments, and that the company had resources to operate into Q1 2014. It was pursuing additional capital before the end of Q1 2014; additional funding was required to support operations beyond then and planned capacity expansion. No assurance of financing was given.
- Gevo continued to expect future losses and negative operating cash flow. Its outlook depended on improving production rates, controlling contamination, meeting product specifications, commercializing isobutanol, and obtaining financing. The company noted that additional spending could be constrained by reducing R&D or delaying capital improvements.
- Butamax patent litigation remained a major contingency. A court entered a no-infringement judgment for Gevo on certain Butamax patents in April 2013; Butamax appealed, with oral argument scheduled for November 7, 2013. Gevo also lost counterclaims involving two of its patents, including a finding that one patent was invalid. Other proceedings remained pending, with trials scheduled for 2014 and 2015. Gevo said the possible loss or range of loss could not be reasonably estimated and expected significant legal costs.
- Gevo had received $1.0 million from Toray for a bio-PX pilot-plant project. If it failed to deliver a minimum quantity by April 30, 2014, it was required to refund the amount by May 31, 2014.
- Convertible-note conversions reduced principal by $18.1 million but resulted in issuance of 3,179,608 shares for principal and 2,957,775 shares for $4.9 million of coupon make-whole payments. Cash make-whole payments were restricted while TriplePoint debt remained outstanding.
- The company reported compliance with secured-debt covenants at September 30, 2013. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Gevo secured additional capital before its stated Q1 2014 funding need, and on what terms and dilution impact.
- Whether corn-mash integrated production achieved sustained rates, yields, product quality, and economics, and whether the planned 2014 ramp was realized.
- Cash burn, debt-service requirements, and the timing and amount of secured-debt and convertible-note obligations.
- Developments and outcomes in Butamax litigation, related costs, and any effect on Gevo’s ability to produce or sell products.
- Whether Gevo met the Toray bio-PX delivery condition by April 30, 2014, avoiding the $1.0 million refund obligation.
- Further dilution from convertible-note conversions, make-whole shares, options, and other equity awards.