Gevo, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports fourth-quarter results. Filed March 30, 2015. Unless otherwise stated, amounts below are in U.S. dollars.
Business context and reporting period
Gevo is developing renewable isobutanol and related fuels and chemicals using its GIFT fermentation and separation technology, with a strategy of retrofitting existing ethanol plants. Its main operating asset is the Agri-Energy facility in Luverne, Minnesota. In July 2014, the facility began more consistent co-production using one fermenter for isobutanol and three for ethanol; at times, all four fermenters operated for ethanol. Isobutanol production remained limited and focused on optimizing the process and supplying demonstration and testing uses.
Financial and operating metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $28.3 million | $8.2 million |
| Gross loss | $7.3 million | $9.7 million |
| Operating expenses | $32.5 million | $45.8 million |
| Loss from operations | $39.8 million | $55.5 million |
| Net loss | $41.1 million | $66.8 million |
| Net loss per share, basic and diluted | $0.51 | $1.48 |
| Cash used in operating activities | $39.0 million | $47.0 million |
| Cash and cash equivalents at year-end | $6.4 million | $24.6 million |
- FY 2014 revenue included $23.5 million from ethanol and related products, $3.9 million in hydrocarbon revenue, and $0.8 million in grants and other revenue. The company reported sales of 10.3 million gallons of ethanol and related products. Ethanol and related products represented approximately 83% of consolidated revenue.
- Cost of goods sold was $35.6 million, producing a negative gross margin of approximately 26%. Operating expenses included $14.1 million of research and development, down from $20.2 million in 2013.
- Fourth-quarter 2014 revenue was $9.5 million, gross loss was $1.4 million, operating loss was $8.9 million, and net loss was $11.1 million. Fourth-quarter 2013 revenue was $1.7 million and net loss was $17.3 million.
- At December 31, 2014, current assets were $13.7 million and current liabilities were $12.0 million. The balance sheet showed total assets of $98.9 million, total liabilities of $52.0 million, and stockholders’ equity of $47.0 million. The company reported $2.6 million of restricted deposits for its 2017 Notes interest reserve.
- Cash used in investing activities was $7.5 million; capital expenditures were $4.9 million. Cash provided by financing activities was $28.2 million. Cash declined by $18.3 million during the year.
- Debt included $26.1 million principal amount of 10% convertible senior secured 2017 Notes, $26.9 million principal amount of 7.5% 2022 Notes, and $0.8 million principal under the amended TriplePoint facility. The notes’ balance-sheet carrying values differ from face principal because of fair-value accounting and debt discounts. The 2017 Notes are secured by substantially all company assets, including intellectual property.
- Gevo had incurred approximately $65.6 million in capital costs on the Agri-Energy retrofit. Management concluded the facility was not impaired at year-end, based on estimated undiscounted cash flows.
Material changes versus prior periods
- Revenue rose by $20.0 million from 2013, primarily because ethanol production and sales resumed in 2014; 2013 had no ethanol sales. Hydrocarbon revenue increased by $1.8 million, including shipment of bio-PX to Toray. Grant and other revenue declined by $2.0 million, and 2013’s one-time corn inventory sales did not recur.
- Operating expenses fell by $13.4 million, reflecting lower research and development spending and reductions in compensation and legal costs. Net loss narrowed by $25.7 million; however, results included noncash fair-value gains on warrants, embedded derivatives and 2017 Notes. These gains do not represent operating cash generation.
- Operating cash use improved by $8.1 million year over year, but year-end cash fell substantially. The company raised capital through an August 2014 stock-and-warrant offering and a Whitebox financing that was exchanged for 2017 Notes.
- Weighted-average shares outstanding increased to 80.5 million from 45.1 million in 2013. The company reported 99.6 million shares outstanding at year-end and 138.1 million as of February 28, 2015.
Outlook, management commentary, risks and unusual items
- Going concern and funding: The auditor included a going-concern explanatory paragraph. Management stated that year-end working capital was insufficient to fund planned operations through December 31, 2015 without additional cash; substantial doubt exists about Gevo’s ability to continue as a going concern. The company expects further losses and negative operating cash flow and depends on additional financing, commercialization, and market acceptance.
- Subsequent financing and dilution: On February 3, 2015, Gevo sold 33.25 million common-stock units for approximately $6.7 million gross proceeds, each unit including one share and two warrants. The filing also describes anti-dilution adjustments to earlier warrants following this offering. Additional shares may be issued upon conversion of notes or exercise of warrants.
- Debt and liquidity risks: The 2017 Notes mature March 15, 2017 and carry 10% interest. A conversion-forbearance period began January 29, 2015 while Gevo addressed the availability of sufficient authorized shares for conversion. Failure to meet the indenture’s share-reservation condition by June 27, 2015 could trigger an event of default and accelerate principal and accrued interest. Debt covenants and liens over substantially all assets may constrain financing and operations.
- Technology and commercialization: Management cited progress in fermentation and co-production and progress toward breakeven EBITDA at Agri-Energy, but the plant had not demonstrated nameplate isobutanol production. Production rates, contamination, product specifications, retrofit costs, feedstock and energy costs, and customer uptake remain material uncertainties. The Redfield 50-million-gallon-per-year plant retrofit had not begun and would require additional capital.
- Litigation: Butamax patent litigation remained ongoing, with trials scheduled for August 2015 and April 2016. The Supreme Court’s January 2015 ruling led to a remand favorable to Gevo on appellate review standards, but did not resolve the remaining disputes. Gevo said it could not reasonably estimate a possible loss or range of loss and expected significant litigation costs.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of a material weakness involving accounting for offering costs and warrants in the August 2014 offering. Adjustments were reflected in the 2014 statements and did not affect prior periods; management was implementing remediation. The auditor did not audit internal control effectiveness.
- Listing and market risk: After failing to meet Nasdaq’s minimum bid-price requirement, Gevo transferred to the Nasdaq Capital Market effective January 5, 2015 and had until June 29, 2015 to regain compliance. Delisting could impair liquidity and, under the notes’ terms, could trigger repurchase rights. The stock price fell to $0.25 during fourth-quarter 2014.
- Other risks: Results and prospects are exposed to oil, corn, natural gas, ethanol and co-product price volatility; changing renewable-fuel policies and regulatory approvals; competition; dependence on ICM and other partners; and risks to intellectual property. Gevo reported no material environmental liabilities at year-end.
Most important facts for investors to verify
- Current liquidity, subsequent financing proceeds, cash runway and whether additional capital was raised on terms that allow operations to continue.
- Actual isobutanol production volumes, yields, uptime, product quality, unit economics and progress toward commercial-scale production, distinct from ethanol revenue and demonstration shipments.
- Debt principal, interest and covenant status, the 2017 Notes share-reservation condition, and potential dilution from notes, warrants and subsequent offerings.
- Developments and potential financial exposure in the Butamax litigation, including trial outcomes and ongoing legal costs.
- Progress in remediating the material weakness, any later control findings, and continued Nasdaq listing compliance.