Gevo, Inc. - Quarter Report: 2019 September (Form 10-Q)

 

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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FORM 10-Q

 

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☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

 

Commission File Number 001-35073

 

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GEVO, INC.

(Exact name of registrant as specified in its charter)

 

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Delaware		87-0747704
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

345 Inverness Drive South, Building C, Suite 310 Englewood, CO		80112
(Address of principal executive offices)		(Zip Code)

 

(303) 858-8358

(Registrant’s

telephone number, including

area code)

 

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Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	GEVO	Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☒
				Emerging growth company		☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of November 1, 2019, 13,545,859 shares of the registrant’s common stock were outstanding.

 

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GEVO, INC.

 

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

TABLE OF CONTENTS

 

		Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
	Signatures	37

 

 

 

 

		September 30, 2019 (unaudited)				December 31, 2018
Assets
Current assets:
Cash and cash equivalents		$	20,944			$	33,734
Accounts receivable			378				526
Inventories			2,962				3,166
Prepaid expenses and other current assets			1,558				1,284
Total current assets			25,842				38,710
Property, plant and equipment, net			67,148				67,036
Investment in Juhl			1,500				—
Deposits and other assets			978				1,289
Total assets		$	95,468			$	107,035
Liabilities
Current liabilities:
Accounts payable and accrued liabilities		$	4,434			$	4,874
2020 Notes (current), net			13,643				—
2020 Notes embedded derivative liability			—				394
Derivative warrant liability			21				22
Total current liabilities			18,098				5,290
2020 Notes (long-term), net			—				12,554
Other long-term liabilities			450				404
Total liabilities			18,548				18,248
Commitments and Contingencies (see Note 12)
Stockholders' Equity
Common stock, $0.01 par value per share; 250,000,000 authorized; 13,369,001 and 8,640,583 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively			133				86
Additional paid-in capital			527,958				518,027
Accumulated deficit			(451,171	)			(429,326	)
Total stockholders' equity			76,920				88,787
Total liabilities and stockholders' equity		$	95,468			$	107,035

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2019				2018				2019				2018
Revenue
Ethanol sales and related products, net		$	5,554			$	8,071			$	16,184			$	25,102
Hydrocarbon revenue			550				504				1,381				1,111
Grant and other revenue			6				—				34				25
Total revenues			6,110				8,575				17,599				26,238
Cost of goods sold			9,893				10,628				27,306				31,904
Gross loss			(3,783	)			(2,053	)			(9,707	)			(5,666	)
Operating expenses
Research and development expense			1,789				1,865				3,712				4,123
Selling, general and administrative expense			2,431				2,190				6,705				5,697
Total operating expenses			4,220				4,055				10,417				9,820
Loss from operations			(8,003	)			(6,108	)			(20,124	)			(15,486	)
Other (expense) income
Interest expense			(605	)			(767	)			(2,127	)			(2,496	)
Loss on exchange of debt			—				—				—				(2,202	)
Gain (loss) from change in fair value of derivative warrant liability			(2	)			5				1				(3,035	)
Gain (loss) from change in fair value of 2020 Notes embedded derivative			—				(7	)			394				2,340
Other income (expense)			(9	)			(3	)			11				5
Total other expense, net			(616	)			(772	)			(1,721	)			(5,388	)
Net loss		$	(8,619	)		$	(6,880	)		$	(21,845	)		$	(20,874	)
Net loss per share - basic and diluted		$	(0.66	)		$	(0.85	)		$	(1.87	)		$	(5.75	)
Weighted-average number of common shares outstanding - basic and diluted			12,968,265				8,087,397				11,679,530				3,629,370

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		Common Stock								Paid-In				Accumulated				Stockholders'
		Shares				Amount				Capital				Deficit				Equity
Balance, December 31, 2018			8,640,583			$	86			$	518,027			$	(429,326	)		$	88,787
Issuance of common stock, net of issuance costs			3,244,941				33				9,611				—				9,644
Non-cash stock-based compensation			—				—				234				—				234
Net loss			—				—				—				(6,136	)			(6,136	)
Balance, March 31, 2019			11,885,524				119				527,872				(435,462	)			92,529
Issuance of common stock, net of issuance costs			—				—				(14	)			—				(14	)
Non-cash stock-based compensation			—				—				172				—				172
Net loss			—				—				—				(7,090	)			(7,090	)
Balance, June 30, 2019			11,885,524				119				528,030				(442,552	)			85,597
Issuance of common stock, net of issuance costs			—				—				(161	)			—				(161	)
Non-cash stock-based compensation			—				—				304				—				304
Issuance of common stock under stock plans, net of taxes			1,483,477				14				(215	)			—				(201	)
Net loss			—				—				—				(8,619	)			(8,619	)
Balance, September 30, 2019			13,369,001			$	133			$	527,958			$	(451,171	)		$	76,920

		Common Stock								Paid-In				Accumulated				Stockholders'
		Shares				Amount				Capital				Deficit				Equity
Balance, December 31, 2017			1,090,553			$	11			$	464,870			$	(401,350	)		$	63,531
Issuance of common stock under stock plans, net			30				—				—				—				—
Issuance of common stock, net of issue costs and warrants			5,208				—				(107	)			—				(107	)
Non-cash stock-based compensation			—				—				98				—				98
Issuance of common stock upon exchange of debt			39,016				—				528				—				528
Net loss			—				—				—				(2,502	)			(2,502	)
Balance, March 31, 2018			1,134,807				11				465,389				(403,852	)			61,548
Shares issued upon reverse stock split			12,261				—				—				—				—
Issuance of common stock under stock plans, net			19				—				—				—				—
Issuance of common stock, net of issue costs and warrants			6,281,409				63				36,230				—				36,293
Non-cash stock-based compensation			—				—				61				—				61
Issuance of common stock upon exercise of warrants			300,761				3				6,164				—				6,167
Issuance of common stock upon exchange of debt			260,793				3				7,015				—				7,018
Net loss			—				—				—				(11,492	)			(11,492	)
Balance, June 30, 2018			7,990,050				80				514,859				(415,344	)			99,595
Issuance of common stock under stock plans, net			70				—				—				—				—
Issuance of common stock, net of issue costs and warrants			105,000				1				339				—				340
Non-cash stock-based compensation			—				—				169				—				169
Net loss			—				—				—				(6,880	)			(6,880	)
Balance, September 30, 2018			8,095,120			$	81			$	515,367			$	(422,224	)		$	93,224

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		Nine Months Ended September 30,
		2019				2018
Operating Activities
Net loss		$	(21,845	)		$	(20,874	)
Adjustments to reconcile net loss to net cash used in operating activities:
(Gain) loss from change in fair value of derivative warrant liability			(1	)			3,035
(Gain) from change in fair value of 2020 Notes embedded derivative			(394	)			(2,340	)
(Gain) on sale of property, plant and equipment			(19	)			—
Loss on exchange of debt			—				2,202
Stock-based compensation			938				320
Depreciation and amortization			4,849				4,903
Non-cash interest expense			1,089				1,307
Other non-cash expense			1				6
Changes in operating assets and liabilities:
Accounts receivable			148				417
Inventories			204				1,061
Prepaid expenses and other current assets, deposits and other assets			(23	)			(295	)
Accounts payable, accrued expenses and long-term liabilities			255				104
Net cash used in operating activities			(14,798	)			(10,154	)
Investing Activities
Acquisitions of property, plant and equipment			(5,779	)			(933	)
Proceeds from sale of property, plant and equipment			19				—
Investment in Juhl			(1,500	)			—
Net cash used in investing activities			(7,260	)			(933	)
Financing Activities
Proceeds from issuance of common stock			9,647				36,952
Proceeds from exercise of common stock warrants			—				1,263
Net settlement of common stock under stock plans			(201	)			—
Debt and equity offering costs			(178	)			(365	)
Net cash provided by financing activities			9,268				37,850
Net (decrease) increase in cash and cash equivalents			(12,790	)			26,763
Cash, cash equivalent and restricted cash
Beginning of period			33,734				11,553
End of period		$	20,944			$	38,316

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Supplemental disclosures of cash and non-cash investing and financing transactions		Nine Months Ended September 30,
		2019				2018
Cash paid for interest		$	1,038			$	1,261
Non-cash purchase of property, plant and equipment		$	41			$	440
Exchange of convertible debt into common stock		$	—			$	3,701
Fair value of 2020 Notes embedded derivative liability upon conversion into common stock		$	—			$	2,193
Fair value of warrants at issuance and upon exercise, net		$	—			$	4,905

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1. Nature of Business, Financial Condition and Basis of Presentation

 

Nature of Business. Gevo, Inc. (“Gevo” or the “Company,” which, unless otherwise indicated, refers to Gevo, Inc. and its subsidiaries) is a next-generation, low-carbon fuel company focused on the development and commercialization of renewable biofuel alternatives to fossil-based products. Low-carbon fuels reduce the carbon intensity, or the level of greenhouse gas emissions (“GHG”), compared to standard petroleum, fossil-based, fuels across their lifecycle. The most common low-carbon fuels are renewable fuels. Gevo is focused on the development and production of mainstream fuels like jet fuel and gasoline, using renewable feedstocks to produce sustainable aviation fuel and renewable gasoline that have the potential to lower GHG at a meaningful scale and enhance sustainable agricultural, including food and other related products. In addition to serving the low-carbon fuel markets, through Gevo's technology, Gevo can also serve markets for the production of intermediate chemical products for solvents, plastics and building-block chemicals using our technologies.

 

In addition to its ethanol production capabilities, the Company developed proprietary technology that uses a combination of synthetic biology, metabolic engineering, chemistry and chemical engineering to make isobutanol and hydrocarbon products from isobutanol that can displace petrochemical incumbent products. The Company has been able to genetically engineer yeast, whereby the yeast produces isobutanol from carbohydrates. The Company’s technology converts its renewable isobutanol to alcohol-to-jet (“ATJ”), isooctane, isooctene and para-xylene (building block for polyester) at its hydrocarbons demonstration plant located at South Hampton Resources, Inc’s facility in Silsbee, Texas (the “South Hampton Facility”). In addition, the Company’s production facility located in Luverne, Minnesota (the “Luverne Facility”) has production capacity of about 20 million gallons per year of ethanol, 45-50 kilotons of animal feed and 3 million pounds of corn oil.

 

As of September 30, 2019, the Company continues to engage in research and development, business development, business and financial planning, optimizing operations for low-carbon ethanol, isobutanol and related hydrocarbons production, and raising capital to fund future expansion of its Luverne Facility. Ultimately, the Company believes that the attainment of profitable operations is dependent upon future events, including (i) completing certain capital improvements at the Luverne Facility to produce low-carbon ethanol side-by-side with low-carbon isobutanol; (ii) completing the Company’s development activities resulting in commercial production and sales of low-carbon ethanol, isobutanol, or isobutanol derived products and/or technology; (iii) obtaining adequate financing to complete the Company’s development activities, including the build out of low-carbon ethanol capacity and further isobutanol and hydrocarbon capacity; (iv) gaining market acceptance and demand for the Company’s products and services; (v) attracting and retaining qualified personnel; and (vi) the achievement of a level of revenues adequate to support the Company’s cost structure.

 

Financial Condition. For the nine months ended September 30, 2019 and 2018, the Company incurred a consolidated net loss of $21.8 million and $20.9 million, respectively, and had an accumulated deficit of $451.2 million at September 30, 2019. The Company’s cash and cash equivalents at September 30, 2019 totaled $20.9 million and are expected to be used for the following purposes: (i) operating activities of the Luverne Facility; (ii) operating activities at the Company’s corporate headquarters in Colorado, including research and development work; (iii) capital expenditures primarily associated with the Luverne Facility, including capital expenditures to “de-carbonize” the Luverne Facility; (iv) exploration of strategic alternatives and new financings; and (v) debt service and repayment obligations. The Company is actively working on refinancing its 2020 Notes (as defined below) that mature on March 15, 2020.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The Company expects to incur future net losses as it continues to fund the development and commercialization of its product candidates. To date, the Company has financed its operations primarily with proceeds from multiple sales of equity and debt securities, borrowings under debt facilities and product sales. The Company’s transition to profitability is dependent upon, among other things, the successful development and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability or positive cash flows, and unless and until it does, the Company will continue to need to raise additional cash. Management intends to fund future operations through additional private and/or public offerings of debt or equity securities. In addition, the Company may seek additional capital through arrangements with strategic partners or from other sources. The Company may seek to restructure its debt and will continue to address its cost structure. Notwithstanding, there can be no assurance that the Company will be able to raise additional funds or achieve or sustain profitability or positive cash flows from operations.

 

At-the-Market Offering Program. In February 2018, the Company commenced an at-the-market offering program, which allows it to sell and issue shares of its common stock from time-to-time. The at-the-market offering program was amended multiple times during 2018 to increase the available capacity under the at-the-market offering program by an aggregate of approximately $84.9 million. In August 2019, the at-the-market offering was amended to increase the available capacity under the at-the-market offering program by $10.7 million. During the nine months ended September 30, 2019, the Company issued 3,244,941 shares of common stock under the at-the-market offering program for gross proceeds of $9.9 million. The Company paid commissions and incurred other offering related expenses totaling $0.4 million during the nine months ended September 30, 2019. There were no sales under the at-the-market offering program during the third quarter of 2019. As of September 30, 2019, the Company had the capacity to issue up to approximately $10.7 million of common stock under the at-the-market offering program.

 

From October 1, 2019 to November 11, 2019, the Company issued 322,899 shares of common stock under the at-the-market offering program for gross proceeds of $0.9 million, net of $0.03 million of commissions and offering related expenses.

 

Basis of Presentation. The unaudited consolidated financial statements of the Company (which include the accounts of its wholly-owned subsidiaries Gevo Development, LLC (“Gevo Development”) and Agri-Energy, LLC (“Agri-Energy”)) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company at September 30, 2019 and are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included under the heading “Financial Statements and Supplementary Data” in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

          Investment in Juhl. In September 2019, Agri-Energy purchased 1.5 million shares of Series A preferred stock of Juhl Clean Energy Assets, Inc. ("Juhl") for a purchase price of $1.00 per share in connection with the development of wind electrical energy generating facility project near the Luverne Facility. An affiliate of Juhl will construct, own and operate the wind project, and Agri-Energy will purchase the electricity directly from the City of Luverne. The investment in Juhl is accounted for under the cost method.

Income Taxes. There is no provision for income taxes because the Company has incurred operating losses since inception.

 

Concentration of Business Risk. As of September 30, 2019, two customers, Coryton Advanced Fuels Ltd ("Coryton") and Eco-Energy, LLC ("Eco-Energy"), comprised 56% and 15% of accounts receivable, respectively. At December 31, 2018, two customers, Eco-Energy and Purina Animal Nutrition, LLC ("Purina") comprised 66% and 29% of trade accounts receivable, respectively.

 

For the three months ended September 30, 2019 and 2018, sales to Eco-Energy represented approximately 73% and 72% of the Company's consolidated revenue and sales to Purina represented approximately 16% and 18% of the Company's consolidated revenue, respectively. For the nine months ended September 30, 2019 and 2018, sales to Eco-Energy represented approximately 72% and 72% of the Company's consolidated revenue and sales to Purina represented approximately 17% and 21% of the Company's consolidated revenue, respectively.

 

Recent Accounting Pronouncements

 

Financial Instruments - Credit Losses. Measurement of Credit Losses on Financial Instruments. In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses Measurement of Credits Losses on Financial Instruments (“ASU 2016-13”), which replaces accounting for credit losses for most financial assets, including trade accounts receivable, and certain other instruments that are not measured at fair value through income. ASU 2016-13 replaces the current “incurred loss” model, in which losses are recognized when a loss is incurred as of the date of the balance sheet, to an “expected credit loss” model, which includes a broader range of information to estimate expected credit losses over the lifetime of the financial asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. It is expected that the adoption of this standard will primarily apply to the valuation of the Company’s trade accounts receivables. The Company sells primarily to a small quantity of large customers with significant balance sheets and those financial assets are often settled within one-to-two weeks after the completion of the corresponding sales transaction. The Company does not anticipate that the adoption of this standard will have a material impact on the Company’s consolidated financial statements.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Adoption of New Accounting Pronouncements. 

 

Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 requires most contracts which convey over a period of time the right to use or control the use of an asset to be recognized on a company’s financial statements. The objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard required using the modified retrospective transition method and applying ASU 2016-02 either at the (i) latter of the earliest comparative period presented in the financial statements or commencement date of the lease, or (ii) beginning of the period of adoption. The Company adopted the standard effective January 1, 2019 with no retrospective adjustment to prior periods presented in the financial statements. There was no impact to the opening balance of retained earnings as of January 1, 2019 as a result of the adoption of this standard. 

 

As a result of adopting ASU 2016-02, the Company recognized $1.2 million in right-to-use assets and related lease liabilities at January 1, 2019. The Company elected both (i) the short term lease scope exception for leases with original terms of twelve months or less and (ii) the package of practical expedients, which included the ability to classify leases as operating, for those leases existing prior to January 1, 2019 that were previously classified as operating under Accounting Standards Codification ("ASC") 840, Leases, the superseded accounting standard for the accounting for leases.

 

Derivatives and Hedging. Accounting for Certain Financial Instruments with Down Round Provisions. In July 2017, the FASB issued ASU No. 2017-11, Derivatives and Hedging Accounting for Certain Financial Instruments with Down Round Provisions (“ASU 2017-11”), which was effective for fiscal years beginning after December 15, 2018. The standard simplifies the accounting for certain equity-linked financial instruments and embedded features with down round features that reduce the exercise price when the pricing of a future round of financing is lower. Currently, the existence of such features requires classification outside of equity and recognition of changes in the fair value of the instrument in earnings each reporting period. This standard eliminates the need to remeasure the instruments at fair value and allows classification within equity. The adoption of this standard has not materially impacted the Company’s accounting, as current liability classified financial instruments and embedded derivatives that require separation from the host instrument have features other than down-round provisions that require current accounting and classification.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

2. Earnings Per Share

 

Basic earnings (loss) per share ("EPS") is computed by dividing the net income (loss) for the period by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Diluted EPS for the three and nine months ended September 30, 2019 and 2018 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive or would decrease the reported loss per share.

 

The following table sets forth securities outstanding that could potentially dilute the calculation of diluted EPS:

 

 

 

 

3. Revenues from Contracts with Customers; Other Revenues

 

The Company’s current and historical revenues have consisted of the following: (a) ethanol sales and related products revenue, net; (b) hydrocarbon revenue; and (c) grant and other revenue, which primarily has historically consisted of revenues from governmental and cooperative research grants.

 

Ethanol sales and related products revenues. Ethanol sales and related products revenues are sold to customers on a “free-on-board, shipping point” basis. Each transaction occurs independent of any other sale, and once sold, there are no future obligations on the part of the Company to provide post-sale support or promises to deliver future goods or services.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Hydrocarbon revenue. Hydrocarbon revenue includes sales of ATJ, isooctene and isooctane and is sold mostly on a “free-on-board, shipping point” basis. Each transaction occurs independent of any other sale, and once sold, there are no future obligations on the part of the Company to provide post-sale support or promises to deliver future goods or services.

 

Grant and other revenues. Grant revenues have historically consisted of governmental and cooperative research grants. Other revenues have historically included occasional short-term (less than one-year) consulting services and leases of certain storage facilities located at the Luverne Facility.

 

The following table sets forth the components of the Company’s revenues between those generated from contracts with customers and those generated from arrangements that do not constitute a contract with a customer (in thousands):

 

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Goods transferred at a point-in-time. For the three and nine months ended September 30, 2019 and 2018, there were no contracts with customers for which consideration was variable or for which there were multiple performance obligations for any given contract. Accordingly, the entire transaction price is allocated to the goods transferred. As of September 30, 2019 and December 31, 2018, there were no remaining unfulfilled or partially fulfilled performance obligations.

 

All goods transferred are tested to ensure product sold satisfies contractual product specifications prior to transfer. The customer obtains control of the goods when title and risk of loss for the goods has transferred, which in most cases is “free-on-board, shipping point". All material contracts have payment terms of between one to three months and there are no return or refund rights.

 

Services transferred over time. For the three and nine months ended September 30, 2019 and 2018, there were no contracts for which consideration was variable or for which there were multiple performance obligations for any given contract. Accordingly, the entire transaction price is allocated to the individual service performance obligation. As of September 30, 2019 and December 31, 2018, there were no material unfulfilled or partially fulfilled performance obligations.

 

For the three and nine months ended September 30, 2019 and 2018, revenues were recognized ratably over time, as the performance obligation was satisfied and benefit to the customer was transferred on a ratable basis over time.

 

Contract Assets and Trade Receivables. As of September 30, 2019 and December 31, 2018, there were no contract assets or liabilities as all customer amounts owed to the Company are unconditional and the Company does not receive payment in advance for its products. Accordingly, amounts owed by customers are classified as account receivables on the Company’s consolidated balance sheets. In addition, due to the nature of the Company’s contracts, there are no costs incurred or to be paid in the future that qualify for asset recognition as a cost to fulfill or obtain a contract. The Company did not incur any impairment losses on any receivables as all amounts owed were paid or current as of September 30, 2019 and December 31, 2018. 

 

 

 

4. Leases, Right-to-Use Assets and Related Liabilities

 

The Company enters into various arrangements which constitute a lease as defined by ASC 842, Leases, as part of its ongoing business activities and operations. Leases represent a contract or part of a contract that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. Such contracts result in both (a) right-to-use assets, which represent the Company’s right to use an underlying asset for the term of the contract; and (b) a corresponding lease liability which represents the Company’s obligation to make the lease payments arising from the contract, measured on a discounted basis.

 

The contracts for the Company are comprised of facility, equipment and transportation leases necessary to conduct the Company’s day-to-day operations for which the Company maintains control of right-to-use assets and incurs the related liabilities.

 

The Company elected to adopt both the (a) short-term lease exemption for those leases with initial terms of twelve months or less; and (b) the practical expedient to not separate lease components from non-lease components, if applicable. Leases which qualify for the short-term scope exception consist of certain residential rents for executive apartments, certain of the Company’s railcar leases and other equipment leases. There were no leases containing variable lease payments and none of the Company’s leases contained extension or termination options which were necessary in determining the value of the right-to-use asset and related liabilities. The Company assumed a 12.0% discount rate, which is consistent with the stated rate on the Company’s 2020 Notes and represents the best approximation of the rate implicit in the Company’s leases.

 

Upon adoption of ASC 842, Leases, which was effective January 1, 2019, the Company recognized a total of $1.2 million of right-to-use assets and related lease liabilities. Within the unaudited consolidated balance sheet at September 30, 2019, (i) $0.4 million of right-to-use assets with a remaining term exceeding twelve months are included in "Deposits and other assets", and for the related lease liabilities, (ii) $0.3 million are included in "Accounts payable and accrued liabilities" for the current portion, and (iii) $0.2 million are included in "Other long-term liabilities" for the non-current portion.

 

There are two contractual agreements related to equipment improvements at the Luverne Facility that were not recognized as of September 30, 2019 as a result of operating contingencies which must be satisfied before the Company is obligated under the terms of the contract. The total estimated fair value of unrecognized right-to-use assets and related lease liabilities relating to these contracts was approximately $3.0 million as of September 30, 2019.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The following table presents the (a) costs by lease category and (b) other quantitative information relating to the Company’s leases:

 

 

 

 

 

5. Inventories

 

The following table sets forth the components of the Company’s inventory balances (in thousands):

 

 

Work in process inventory includes unfinished jet fuel, isooctane and isooctene inventory.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

6. Property, Plant and Equipment

 

The following table sets forth the Company’s property, plant and equipment by classification (in thousands):

 

 

Included in cost of goods sold is depreciation of $1.6 million during the three months ended September 30, 2019 and 2018; and $4.7 million during the nine months ended September 30, 2019 and 2018.

 

Included in operating expenses is depreciation of $0.03 million and $0.1 million during the three months ended September 30, 2019 and 2018, respectively; and $0.1 million and $0.2 million during the nine months ended September 30, 2019 and 2018, respectively.

 

 

 

7. Embedded Derivatives and Derivative Warrant Liabilities 

 

2020 Notes Embedded Derivative

 

In June 2017, the Company issued 12% convertible senior secured notes due 2020 (the “2020 Notes”) in exchange for its 12.0% convertible senior secured notes due 2017 (the “2017 Notes”). The 2020 Notes contain the following embedded derivatives: (i) a Make-Whole Payment (as defined in the indenture governing the 2020 Notes (the “2020 Notes Indenture”)) upon either conversion or redemption; (ii) right to redeem the outstanding principal upon a Fundamental Change (as defined in the 2020 Notes Indenture); (iii) issuer rights to convert into a limited number of shares in any given three month period commencing nine months from the issuance date and dependent on the stock price exceeding 150% of the then in-effect conversion price over a ten-business day period; and (iv) holder rights to convert into either shares of the Company’s common stock or pre-funded warrants upon the election of the holders of the 2020 Notes.

 

Embedded derivatives are separated from the host contract and the 2020 Notes and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. The Company has concluded that certain embedded derivatives within the 2020 Notes meet these criteria and, as such, must be valued separate and apart from the 2020 Notes as one embedded derivative and recorded at fair value each reporting period.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 The Company used a binomial lattice model in order to estimate the fair value of the embedded derivative in the 2020 Notes. A binomial lattice model generates two probable outcomes, whether up or down, arising at each point in time, starting from the date of valuation until the maturity date. A lattice was initially used to determine if the 2020 Notes would be converted by the holder, called by the issuer, or held at each decision point. Within the lattice model, the following assumptions are made: (i) the 2020 Notes will be converted by the holder if the conversion value plus the holder’s Make-Whole Payment is greater than the holding value; or (ii) the 2020 Notes will be called by the issuer if (a) the stock price exceeds 150% of the then in-effect conversion price over a ten-business day period and (b) if the holding value is greater than the conversion value plus the Make-Whole Payment at the time.

 

 Using this lattice model, the Company valued the embedded derivative using a “with-and-without method”, where the value of the 2020 Notes including the embedded derivative is defined as the “with” and the value of the 2020 Notes excluding the embedded derivative is defined as the “without”. This method estimates the value of the embedded derivative by comparing the difference in the values between the 2020 Notes with the embedded derivative and the value of the 2020 Notes without the embedded derivative. The lattice model requires the following inputs: (i) price of Gevo common stock; (ii) Conversion Rate (as defined in the 2020 Notes Indenture); (iii) Conversion Price (as defined in the 2020 Notes Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated stock volatility; and (vii) estimated credit spread for the Company.

 

As of September 30, 2019, the estimated fair value of the embedded derivatives was $0. Any change in the estimated fair value of the embedded derivatives represents an unrealized gain which has been recorded as $0 and $0.4 million gain from the change in fair value of embedded derivatives in the consolidated statements of operations for the three and nine months ended September 30, 2019, respectively.

The following table sets forth the inputs to the lattice model that were used to value the embedded derivatives:

 

Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the embedded featured within the 2020 Notes. For example, the estimated fair value will generally decrease with: (1) a decline in the stock price; (2) decreases in the estimated stock volatility; and (3) a decrease in the estimated credit spread.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Derivative Warrant Liability

 

The following table sets forth information pertaining to shares issued upon the exercise of such warrants as of September 30, 2019:

 

 

The agreements governing the above warrants include the following terms:

 

•

certain warrants have exercise prices which are subject to adjustment for certain events, including the issuance of stock dividends on the Company’s common stock and, in certain instances, the issuance of the Company’s common stock or instruments convertible into the Company’s common stock at a price per share less than the exercise price of the respective warrants;

 

•

warrant holders may exercise the warrants through a cashless exercise if, and only if, the Company does not have an effective registration statement then available for the issuance of the shares of its common stock. If an effective registration statement is available for the issuance of its common stock a holder may only exercise the warrants through a cash exercise;

 

•

the exercise price and the number and type of securities purchasable upon exercise of the warrants are subject to adjustment upon certain corporate events, including certain combinations, consolidations, liquidations, mergers, recapitalizations, reclassifications, reorganizations, stock dividends and stock splits, a sale of all or substantially all of the Company’s assets and certain other events; and

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

•

in the event of an “extraordinary transaction” or a “fundamental transaction” (as such terms are defined in the respective warrant agreements), generally including any merger with or into another entity, sale of all or substantially all of the Company’s assets, tender offer or exchange offer, or reclassification of its common stock, in which the successor entity (as defined in the respective warrant agreements) that assumes the successor entity is not a publicly traded company, the Company or any successor entity will pay the warrant holder, at such holder’s option, exercisable at any time concurrently with or within 30 days after the consummation of the extraordinary transaction or fundamental transaction, an amount of cash equal to the value of such holder’s warrants as determined in accordance with the Black-Scholes option pricing model and the terms of the respective warrant agreement. In some circumstances, the Company or successor entity may be obligated to make such payments regardless of whether the successor entity that assumes the warrants is a publicly traded company.

 

There were no warrants exercised during the nine months ended September 30, 2019.

 

 

 

8. Accounts Payable and Accrued Liabilities

 

The following table sets forth the components of the Company’s accounts payable and accrued liabilities in the consolidated balance sheets (in thousands):

 

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

9. Debt

 

2020 Notes 

 

The following table sets forth information pertaining to the 2020 Notes which is included in the Company’s consolidated balance sheets (in thousands):

 

 

On April 19, 2017, the Company entered into an Exchange and Purchase Agreement (the “Purchase Agreement”) with WB Gevo, LTD, (the “Holder”), the holder of the 2017 Notes, and Whitebox Advisors LLC, in its capacity as representative of the Holder (“Whitebox”). Pursuant to the terms of the Purchase Agreement, the Holder agreed to exchange all of the outstanding principal amount of the 2017 Notes for an equal principal amount of the 2020 Notes, plus an amount in cash equal to the accrued and unpaid interest (other than interest paid in kind) on the 2017 Notes. On June 20, 2017, the Company cancelled the 2017 Notes. 

 

The 2020 Notes will mature on March 15, 2020 and are secured by a first lien on substantially all of the Company’s assets. The 2020 Notes bear interest at 12% per annum (with 2% potentially payable as PIK Interest (as defined and described below) at the Company’s option), payable on March 31, June 30, September 30 and December 31 of each year. Under certain circumstances, the Company has the option to pay a portion of the interest due on the 2020 Notes by either (a) increasing the principal amount of the 2020 Notes by the amount of interest then due or (b) issuing additional 2020 Notes with a principal amount equal to the amount of interest then due (interest paid in the manner set forth in (a) or (b) being referred to as “PIK Interest”). In the event the Company pays any portion of the interest due on the 2020 Notes as PIK Interest, the maximum aggregate principal amount of 2020 Notes that could be convertible into shares of the Company’s common stock will be increased. Additional shares of the Company’s common stock may also become issuable pursuant to the 2020 Notes in the event the Company is required to make certain make-whole payments as provided in the 2020 Notes Indenture.

 

The 2020 Notes are convertible into shares of the Company’s common stock, subject to certain terms and conditions. The initial conversion price of the 2020 Notes is $14.72 per share of common stock, or 0.0679 shares of common stock per $1 principal amount of 2020 Notes (the “Conversion Price”).

 

Each Holder has agreed not to convert its 2020 Notes into shares of the Company's common stock to the extent that, after giving effect to such conversion, the number of shares of common stock beneficially owned by such Holder and its affiliates would exceed 4.99% of the Company's common stock outstanding at the time of such conversion (the “4.99% Ownership Limitation”); provided that a Holder may, at its option and upon sixty-one (61) days’ prior notice to the Company, increase such threshold to 9.99% (the “9.99% Ownership Limitation”). If a conversion of 2020 Notes by Whitebox would exceed the 4.99% Ownership Limitation or the 9.99% Ownership Limitation, as applicable, the Purchase Agreement contains a provision granting the holder a fully funded prepaid warrant for such common stock with a term of nine months, subject to a six month extension, which it can draw down from time to time.

 

The 2020 Notes do not contain any anti-dilution adjustments for future equity issuances that are below the Conversion Price, and adjustments to the Conversion Price will only generally be made in the event that there is a dividend or distribution paid on shares of the Company’s common stock, a subdivision, combination or reclassification of the Company’s common stock, or at the discretion of the Board of Directors of the Company in limited circumstances and subject to certain conditions.

 

Under certain circumstances, the Company may file one or more registration statements on Form S-3 or amend filings in order to register shares of common stock for sale or resale, as necessary, in connection with the 2020 Notes.

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

10. Equity Incentive Plans

 

2010 Stock Incentive Plan. In February 2011, the Company’s stockholders approved the Gevo, Inc. 2010 Stock Incentive Plan (as amended and restated, the "2010 Plan"). The 2010 Plan provides for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units and other equity awards to employees and directors of the Company. On June 10, 2019, the 2010 Plan was amended and restated, which increased the number of shares of common stock reserved for issuance to 3,266,661 shares. In July 2019, the Company issued 254,500 shares of common stock in relation to restricted stock awards granted on August 9, 2018. In July 2019, the Company also issued 1,283,032 shares of common stock in relation to restricted stock awards granted on June 24, 2019 and 25,581 shares of common stock in relation to restricted stock awards granted on August 8, 2019, in each case vesting over two years, to its employees and directors. In August 2019, the Company withheld 79,790 shares of common stock to settle income taxes related to the vested restricted stock awards for certain employees. At September 30, 2019, an additional 1,804,891 shares were available for issuance upon the exercise of outstanding stock option awards or the grant of stock appreciation rights and restricted stock awards under the 2010 Plan.

 

Employee Stock Purchase Plan. In February 2011, the Company’s stockholders approved the Employee Stock Purchase Plan (the "ESPP"). The offering periods for the ESPP are from January 1 to June 30 and from July 1 to December 31 of each calendar year. The Company has reserved 190 shares of common stock for issuance under the ESPP, of which 190 shares as of September 30, 2019 are available for future issuance. The purchase price of the common stock under the ESPP is 85% of the lower of the fair market value of a share of common stock on the first or last day of the purchase period. There were no purchases of common stock under the ESPP during the three and nine months ended September 30, 2019.

 

 

 

11. Stock-Based Compensation

 

The Company records stock-based compensation expense during the requisite service period for share-based payment awards granted to employees and non-employees.

 

The following table sets forth the Company’s stock-based compensation expense (reversal) for the periods indicated (in thousands):

 

 

Determining the Fair Value of Share-Based Payment Awards

 

The Company uses the Black-Scholes option pricing model for determining the fair value for stock options granted. There were no stock options granted during the three and nine months ended September 30, 2019 and 2018.

 

An annual forfeiture rate is estimated at the time of grant for all stock-based payment awards, and revised if necessary, in subsequent periods if the actual forfeiture rate differs from the Company's estimate. Forfeitures have been estimated by the Company based on historical and expected forfeiture experience. Estimated forfeiture rates used for the periods presented were from 0% to 5%.

 

Stock Option Activity

 

Stock option activity during the nine months ended September 30, 2019 was as follows:

 

As of September 30, 2019, the Company had no unrecognized share-based compensation related to unvested stock option. 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

Restricted Stock

 

The Company grants service-condition restricted stock awards ("RSAs"). RSA activity during the nine months ended September 30, 2019 was as follows:

 

As of September 30, 2019, unrecognized share-based compensation for RSAs was $2.2 million, which is expected to amortize over a remaining average period of 1.74 years. The value of RSAs vested during the nine months ended September 30, 2019 totaled $0.9 million.

 

 

12. Commitments and Contingencies

 

Legal Matters. From time to time, the Company has been, and may again become, involved in legal proceedings arising in the ordinary course of its business. The Company is not presently a party to any litigation that it believes to be material and is not aware of any pending or threatened litigation against the Company that it believes could have a material adverse effect on its business, operating results, financial condition or cash flows.

 

Leases. Upon adoption of ASU 2016-02, the Company identified three lease agreements that qualify as “operating” based on the terms and conditions at the commencement date for each lease. These include the lease for the Company’s office and research facility in Englewood, Colorado, with a term expiring in July 2021 a lease of plant equipment with a term expiring in January 2021 used by Agri-Energy at the Luverne Facility and a lease of transportation equipment with a term expiring in June 2020 used by Agri-Energy at the Luverne Facility.

 

All other leases qualified for the short-term scope exemption. These consist of corporate apartments in Colorado, which have initial lease terms of less than twelve months, and additional leases of transportation equipment located at both the Luverne Facility and the South Hampton Facility with original lease terms of less than twelve months.

 

Rent expense for the three months ended September 30, 2019 and 2018 was $0.4 million in both periods, and for the nine months ended September 30, 2019 and 2018 was $1.2 million and $1.3 million, respectively.

 

The table below shows the future minimum payments under non-cancelable short-term and operating leases and at September 30, 2019 (in thousands):

 

 

The Company entered into a five-year software licensing agreement on April 2, 2018. Future contractual payment obligations total approximately $0.3 million as of September 30, 2019. This licensing agreement is accounted for as an intangible asset and is out of the scope of ASU 2016-02, Leases. 

 

Indemnifications. In the ordinary course of its business, the Company makes certain indemnities under which it may be required to make payments in relation to certain transactions. As of September 30, 2019 and December 31, 2018, the Company did not have any liabilities associated with indemnities.

 

The Company, as permitted under Delaware law and in accordance with its amended and restated certificate of incorporation and amended and restated bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The duration of these indemnifications, commitments and guarantees varies and, in certain cases, is indefinite. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid. The Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. No such losses have been recorded to date.

 

Environmental Liabilities. The Company’s operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when the Company’s liability is probable, and the costs can be reasonably estimated. No environmental liabilities have been recorded as of September 30, 2019 or December 31, 2018.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

13. Fair Value Measurements

 

Accounting standards define fair value, outline a framework for measuring fair value and detail the required disclosures about fair value measurements. Under these standards, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. Standards establish a hierarchy in determining the fair market value of an asset or liability. The fair value hierarchy has three levels of inputs, both observable and unobservable. Standards require the utilization of the highest possible level of input to determine fair value.

 

Level 1 – inputs include quoted market prices in an active market for identical assets or liabilities.

 

Level 2 – inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market and other observable information that can be corroborated by market data.

 

Level 3 – inputs are unobservable and corroborated by little or no market data.

 

These tables present the carrying value and fair value, by fair value hierarchy, of our financial instruments, excluding cash and cash equivalents, accounts receivable and accounts payable at September 30, 2019 and December 31, 2018, respectively (in thousands):

 

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The following table provides changes to those fair value measurements using Level 3 inputs for the nine months ended September 30, 2019:

 

 

There were no transfers in or out of Level 3 inputs. There were no issuances, purchases, sales or settlements of Level 3 inputs during the nine months ended September 30, 2019.

 

Inventories. The Company records its corn inventory at fair value only when the Company’s cost of corn purchased exceeds the market value for corn. The Company determines the market value of corn and dry distiller’s grain based upon Level 1 inputs using quoted market prices. The Company records its ethanol, isobutanol and hydrocarbon inventory at market using Level 2 inputs.

 

2020 Notes Embedded Derivative. The Company had estimated the fair value of the embedded derivative on a stand-alone basis to be nil at September 30, 2019 and $0.4 million at December 31, 2018 based upon Level 3 inputs. Changes in the fair value of the embedded derivative is recognized each reporting period as a “Change in fair value of 2020 Notes embedded derivative” in the consolidated statements of operations and statements of cash flows. See Note 7, Embedded Derivatives and Derivative Warrant Liabilities, for the fair value inputs used to estimate the fair value of the embedded derivative.

 

Derivative Warrant Liability. The Company valued the Series F Warrants and Series K Warrants using a Monte-Carlo model (Level 3) and other warrants using Black-Scholes models comprised of some inputs requiring the use of Monte-Carlo models (Level 3). The Company has estimated the fair value of the derivative warrant liability to be $0.02 million as of September 30, 2019 and December 31, 2018.

 

Certain of the Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and 2020 Notes for which the carrying value on the Company’s consolidated balance sheets approximates their fair values due to the short maturities.

 

While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

 

 

14. Segments

 

The Company has determined that it has two operating segments: (i) Gevo segment; and (ii) Gevo Development/Agri-Energy segment. The Company organizes its business segments based on the nature of the products and services offered through each of its consolidated legal entities. Transactions between segments are eliminated in consolidation.

 

Gevo Segment. The Gevo segment is responsible for all research and development activities related to the future production of isobutanol, including the development of our proprietary biocatalysts, the production and sale of bio jet fuel, the Company’s retrofit process and the next generation of chemicals and biofuels that will be based on the Company’s isobutanol technology. The Gevo segment also develops, maintains and protects its intellectual property portfolio, develops future markets for its isobutanol and provides corporate oversight services.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Gevo Development/Agri-Energy Segment. The Gevo Development/Agri-Energy segment is currently responsible for the operation of the Luverne Facility and the production of ethanol, isobutanol and related products.

 

The Company's chief operating decision maker is provided with and reviews the financial results of each of the Company's consolidated legal entities, Gevo, Inc., Gevo Development, LLC and Agri-Energy, LLC. The Company organizes its business segments based on the nature of the products and services offered through each of its consolidated legal entities. All revenue is earned, and all assets are held, in the U.S.