Gevo, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Gevo is a development-stage renewable chemicals and biofuels company seeking to commercialize isobutanol made from renewable feedstocks. Its strategy centers on retrofitting ethanol plants with its fermentation and separation technology. The Luverne, Minnesota Agri-Energy facility is its first commercial-scale retrofit. Gevo paused isobutanol production in September 2012 after lower-than-planned output and microbial contamination; limited production resumed in June 2013 using one production train. The company reported no material isobutanol sales in the quarter.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1.9 | $7.0 | $5.4 | $21.9 |
| Gross loss | $(1.8) | $(1.5) | $(2.7) | $(1.6) |
| Operating expenses | $12.1 | $14.3 | $24.0 | $32.3 |
| Operating loss | $(13.9) | $(15.7) | $(26.8) | $(34.0) |
| Net loss | $(15.2) | $(16.2) | $(33.6) | $(35.5) |
| Net loss per share | $(0.35) | $(0.62) | $(0.80) | $(1.35) |
Q2 2013 revenue consisted mainly of $0.9 million from excess corn sales and $1.0 million of grant, research-program and other revenue. Six-month revenue fell primarily because ethanol sales ended; 2012 included $19.9 million of ethanol and related-product sales. Gross losses reflect facility operating costs and, in 2013, corn-sale costs. The filing reports losses rather than positive operating or profit margins.
Cash flow and liquidity: Cash and cash equivalents were $40.6 million at June 30, down $26.2 million from year-end 2012. For the first six months, operating cash use was $19.2 million, investing cash use was $2.8 million, and financing cash use was $4.2 million. Current assets were $46.0 million and current liabilities $20.3 million.
Debt: At June 30, secured debt had $21.5 million principal outstanding ($20.3 million net of discounts on the balance sheet); convertible notes had $26.9 million principal outstanding ($15.9 million net carrying value). Total principal was approximately $48.4 million. Six-month note conversions of $18.1 million principal generated 3.18 million common shares, with a further 2.96 million shares issued for $4.9 million of coupon make-whole payments. Gevo reported compliance with TriplePoint debt covenants.
Material changes versus the prior comparable period
- Six-month revenue declined $16.5 million as the company shifted away from ethanol production; limited isobutanol startup activity had not yet produced material sales.
- Six-month operating expenses decreased $8.3 million, led by lower selling, general and administrative costs, partly offset by higher research and development spending.
- Six-month net loss improved by $1.9 million, despite $4.1 million higher interest expense and $2.0 million of debt-extinguishment losses related to note conversions.
- Operating cash use improved by $5.2 million year over year, while investing cash use declined substantially from the prior-year retrofit spending period.
- Common shares outstanding increased from 39.6 million at December 31, 2012 to 46.9 million at June 30, 2013, principally reflecting note conversions and make-whole payments.
Outlook, commentary, risks and unusual items
- Management expected June 30 cash to fund planned operations through the remainder of 2013, including $5.2 million of debt obligations due in the second half. It believed resources would last into Q1 2014, but said additional capital would be needed to fund operations beyond then and further capacity expansion. Financing availability was not assured.
- Management planned to operate the Luverne facility through the rest of 2013, bring additional fermenters and separation systems online in Q3 and Q4, test run rates and ramp production in the second half of 2013 and in 2014. A second production train came online in August 2013, after the reporting date. These plans depend on overcoming contamination, production-rate, cost and product-specification challenges.
- Agri-Energy retrofit construction in progress included $58.5 million at June 30. Management expected remaining retrofit capital expenditures to be significantly below the $49.5 million spent on the project in 2012.
- Patent litigation with Butamax remains a material cost and uncertainty. A court entered judgment for Gevo on non-infringement claims involving the ‘188 and ‘889 patents in April 2013; Butamax appealed. Subsequent to quarter-end, the court entered judgments for Butamax on Gevo’s ‘375 and ‘376 patent claims, including invalidity of the ‘375 patent. Other litigation remained pending, with trials scheduled for July 2014 and August 2015. Gevo said the potential loss or range of loss could not be reasonably estimated.
- Gevo disclosed a $1.0 million Toray advance recorded as a liability; failure to deliver a minimum quantity of bio-PX by December 31, 2013 would require repayment by January 31, 2014. Commercial distribution agreements may also require minimum supply or shortfall payments once commercial sales begin.
- The board authorized a $15.0 million stock repurchase program in January 2013, but no shares had been repurchased through June 30. The company also reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Agri-Energy facility achieves sustained production rates, controls contamination, meets customer specifications and generates commercial isobutanol sales.
- Actual cash usage, capital spending and financing progress relative to management’s stated runway into Q1 2014; also confirm upcoming debt service and covenant status.
- Effects of note conversions, make-whole share issuance and any further equity or debt financing on dilution and debt obligations.
- Developments, costs and potential remedies in the Butamax litigation, including appeals and the adverse post-quarter judgments.
- Whether Gevo meets the Toray bio-PX delivery condition and avoids repayment of the $1.0 million advance, and whether customer agreements create material supply or shortfall obligations.