Gevo, Inc. - Quarter Report: 2019 March (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 March 31, 2019

 

or

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

 

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

(303) 858-8358

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

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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, 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 ☒

 

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

 

As of April 30, 2019, 11,885,524 shares of the registrant’s common stock were outstanding.

 

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GEVO, INC.

 

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

TABLE OF CONTENTS

 

		Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	3
	Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
	Signatures	35

 

 

 

		March 31, 2019 (unaudited)				December 31, 2018
Assets
Current assets:
Cash and cash equivalents		$	35,466			$	33,734
Accounts receivable			1,125				526
Inventories			3,187				3,166
Prepaid expenses and other current assets			1,902				1,284
Total current assets			41,680				38,710
Property, plant and equipment, net			68,045				67,036
Deposits and other assets			1,738				1,289
Total assets		$	111,463			$	107,035
Liabilities
Current liabilities:
Accounts payable and accrued liabilities		$	5,147			$	4,874
2020 Notes (current), net			12,964				–
2020 Notes embedded derivative liability			148				394
Derivative warrant liability			21				22
Total current liabilities			18,280				5,290
2020 Notes (long-term), net			–				12,554
Other long-term liabilities			654				404
Total liabilities			18,934				18,248
Commitments and Contingencies (see Note 11)
Stockholders' Equity
Common stock, $0.01 par value per share; 250,000,000 authorized; 11,885,524 and 8,640,583 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively.			119				86
Additional paid-in capital			527,872				518,027
Accumulated deficit			(435,462	)			(429,326	)
Total stockholders' equity			92,529				88,787
Total liabilities and stockholders' equity		$	111,463			$	107,035

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		Three Months Ended March 31,
		2019				2018
Revenue
Ethanol sales and related products, net		$	5,664			$	8,218
Hydrocarbon revenue			739				–
Grant and other revenue			–				25
Total revenues			6,403				8,243
Cost of goods sold			8,961				10,583
Gross loss			(2,558	)			(2,340	)
Operating expenses
Research and development expense			978				789
Selling, general and administrative expense			2,092				1,870
Total operating expenses			3,070				2,659
Loss from operations			(5,628	)			(4,999	)
Other (expense) income
Interest expense			(755	)			(825	)
(Loss) on exchange of debt			–				(21	)
Gain from change in fair value of derivative warrant liability			1				477
Gain from change in fair value of 2020 Notes embedded derivative			246				2,858
Other income			–				8
Total other expense, net			(508	)			2,497
Net loss		$	(6,136)			$	(2,502	)
Net loss per share - basic and diluted		$	(0.60)			$	(2.22	)
Weighted-average number of common shares outstanding - basic and diluted			10,153,873				1,126,737

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		Three Months Ended March 31,
		2019				2018
Operating Activities
Net loss		$	(6,136	)		$	(2,502	)
Adjustments to reconcile net loss to net cash used in operating activities:
(Gain) from change in fair value of derivative warrant liability			(1	)			(477	)
(Gain) from change in fair value of 2020 Notes embedded derivative			(246	)			(2,858	)
Loss on exchange of debt			—				21
Stock-based compensation			234				98
Depreciation and amortization			1,612				1,646
Non-cash interest expense			410				402
Changes in operating assets and liabilities:
Accounts receivable			(599	)			(234	)
Inventories			(21	)			7
Prepaid expenses and other current assets			157				78
Accounts payable, accrued expenses, and long-term liabilities			(1,118	)			(531	)
Net cash used in operating activities			(5,708	)			(4,350	)
Investing Activities
Acquisitions of property, plant and equipment			(2,204	)			(67	)
Net cash used in investing activities			(2,204	)			(67	)
Financing Activities
Proceeds from issuance of common stock and common stock warrants, net			9,644				(107	)
Net cash (used in)/provided by financing activities			9,644				(107	)
Net increase (decrease) in cash and cash equivalents			1,732				(4,524	)
Cash, cash equivalents, and restricted cash
Beginning of period			33,734				11,553
End of period		$	35,466			$	7,029

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Supplemental disclosures of cash and non-cash investing and financing transactions		Three Months Ended March 31,
		2019				2018
Cash paid for interest, net of interest capitalized		$	–			$	434
Non-cash purchase of property, plant and equipment		$	1,316			$	1
Exchange of convertible debt into common stock		$	–			$	515
Fair value of right-to-use asset and related lease liability upon adoption of Topic 842 - Leases		$	1,244				–

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1. Nature of Business, Financial Condition, Basis of Presentation and Reverse Stock Split

 

Nature of Business. Gevo, Inc. (“Gevo” or the “Company,” which, unless otherwise indicated, refers to Gevo, Inc. and its subsidiaries) is a renewable chemicals and next generation “low-carbon” fuel company focused on the development and commercialization of renewable alternatives to petroleum-based products. Low-carbon fuels reduce the carbon intensity, or the level of greenhouse gas emissions (“GHG”), compared to standard 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 gasoline and jet fuel using renewable feedstocks that have the potential to lower GHG at a meaningful scale and enhance agricultural production, 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 chemical intermediate products for solvents, plastics and building block chemicals.

 

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 March 31, 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 three months ended March 31, 2019 and 2018, the Company incurred a consolidated net loss of $6.1 million and $2.5 million, respectively, and had an accumulated deficit of $435.5 million at March 31, 2019. The Company’s cash and cash equivalents at March 31, 2019 totaled $35.5 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.

 

 

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, it may seek to restructure its debt and it 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. During the three months ended March 31, 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 to its sales agent of approximately $0.2 million and incurred other offering related expenses of $0.01 million during the three months ended March 31, 2019.

 

As of March 31, 2019, the Company had remaining capacity to issue and sell up to approximately $34.7 million of additional shares of common stock under the at-the-market offering program. However, pursuant to Instruction I.B.6 to Form S-3, because the Company’s market capitalization was below $75.0 million as of March 27, 2019, the date the Company filed its Annual Report on Form 10-K for the year ended December 31, 2018, the Company may only sell securities via Form S-3 if the aggregate market value of the securities sold by or on behalf of the Company during the twelve-month period immediately prior to and including the date of the sale is no more than one-third of all common voting and nonvoting equity held by non-affiliates of the Company.  Given the amount of common stock sold by the Company under the at-the-market offering program in 2018, the Company is currently unable to issue and sell additional shares of common stock under the at-the-market offering program.

 

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 U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) 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 March 31, 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.

 

Reverse Stock Split. On June 1, 2018, the Company effected a reverse stock split of the outstanding shares of its common stock by a ratio of one-for-twenty (the “Reverse Stock Split”), and its common stock began trading on the Nasdaq Capital Market on a Reverse Stock Split-basis on June 4, 2018. Unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying unaudited consolidated financial statements have, where applicable, been adjusted retroactively to reflect this Reverse Stock Split.

 

Recent Accounting Pronouncements

 

Financial Instruments - Credit Losses (Topic 326). Measurement of Credit Losses on Financial Instruments. In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) 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. 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. While the Company is in the process of evaluating the impact, if any, that the adoption of this standard will have on the Company’s financial statements, it does not currently anticipate that this 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 (Topic 842). In February 2016, the FASB issued ASU No. 2016-02, Topic 842 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 apply 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 to both (i) elect 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 under the new standard, ASU 2016-02, for those leases existing prior to January 1, 2019 that were previously classified as operating under Topic 840 - Leases, the superseded accounting standard for the accounting for leases.

 

Derivatives and Hedging (Topic 815). Accounting for Certain Financial Instruments with Down Round Provisions. In July 2017, the FASB issued Accounting Standards Update No. 2017-11, Derivatives and Hedging (Topic 815) Accounting for Certain Financial Instruments with Down Round Provisions (“ASU 2017-11”), which was effective for fiscal years beginning after December 15, 2018, 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 require 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 is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share (“EPS”) 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 months ended March 31, 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 earnings per share.

 

 

 

 

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 revenues include 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 and other revenues primarily have historically consisted of governmental and cooperative research grants, of which the Northwest Advanced Renewables Alliance grant, funded by the United States Department of Agriculture, comprised the majority of those revenues since 2014. After reviewing this arrangement, the Company has concluded that this grant consists of a non-reciprocal arrangement, and therefore, does not qualify as a contract pursuant to Topic 606 “Revenues from Contracts with Customers”. Other revenues have included historically occasional short-term (less than one-year) consulting services and leases of certain storage facilities located at the Company's 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)

 

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

 

For the three months ended March 31, 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 March 31, 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 March 31, 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 Topic 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. Those 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 12.00% discount rate based, which is consistent with the stated rate on the Company’s 2020 Notes (as defined below) and best approximation of the rate implicit in the Company’s leases.

 

Upon adoption of Topic 842 - Leases, 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 March 31, 2019, (i) $0.3 million of right-to-use assets with a remaining term of less than twelve months are included in Prepaid and other current assets, (ii) $0.5 million of right-to-use assets with a remaining term of exceeding twelve months are included in Deposits and other assets, and for the related lease liabilities, (iii) $0.6 million are included in Accounts payable and accrued liabilities for the current portion and (iv) $0.3 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 March 31, 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 March 31, 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 and $1.6 million during the three months ended March 31, 2019 and 2018, respectively. 

 

Included in operating expenses is depreciation of $0.1 million and $0.1 million during the three months ended March 31, 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 March 31, 2019, the estimated fair value of the embedded derivatives was $0.1 million. Any change in the estimated fair value of the embedded derivatives represents an unrealized gain which has been recorded as $0.2 million from the change in fair value of embedded derivatives in the consolidated statements of operations for the three months ended March 31, 2019, respectively. The Company recorded the estimated fair value of the embedded derivative with the 2020 Notes, net in the consolidated balance sheets.

 

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 March 31, 2019:

 

 

(1)	This table does not include 6 equity-classified warrants issued between 2008 through 2012, with strike prices of $345 per share.

 

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 three months ended March 31, 2019.

 

As of March 31, 2019, all of the Series B Warrants, Series E Warrants, Series G Warrants, Series H Warrants, Series J Warrants, Series L Warrants and Series M Warrants for which the exercise price had been adjusted were either fully exercised or expired.

 

 

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).

 

 

*	Other accrued liabilities consist of franchise taxes, audit fees, and a variety of other expenses, none of which individually represent greater than five percent of total current liabilities.

 

 

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, which were issued under that certain Indenture dated as of June 6, 2014, by and among the Company, the guarantors party thereto, and Wilmington Savings Fund Society, FSB, as trustee and as collateral trustee (as supplemented, the “2017 Notes Indenture”), and Whitebox Advisors LLC, in its capacity as representative of the Holder (“Whitebox”). Pursuant to the terms of the Purchase Agreement, the Holder, subject to certain conditions, including approval of the transaction by the Company’s stockholders (which was received on June 15, 2017), 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 (the “Exchange”). Pursuant to the Purchase Agreement, the Company also granted the Holder an option (the “Purchase Option”) to purchase up to an additional aggregate principal amount of $5.0 million of 2020 Notes (the “Option Notes”), at a purchase price equal to the aggregate principal amount of such Option Notes purchased, having identical terms (other than with respect to the issue date and restrictions on transfer relating to compliance with applicable securities law) to the 2020 Notes issued, at any time on or within ninety (90) days of the closing of the Exchange. The right to purchase Option Notes expired as of September 30, 2017. On June 20, 2017, the Company completed the Exchange, terminated the 2017 Notes Indenture and cancelled the 2017 Notes. The Company recognized an approximately $4.0 million loss which has been recorded as loss on exchange or conversion of debt within the consolidated statements of operations.

 

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 a rate equal to 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 equal to $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 Company 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 Company 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 6 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. 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 (in thousands) for the periods indicated.

 

 

 

11. 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 and leases of plant equipment and transportation equipment with expiration dates in June 2019 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 both at the Luverne Facility and the South Hampton Facility with original lease terms of less than twelve months.

 

Rent expense for the three months ended March 31, 2019 and 2018 was $0.4 million and $0.4 million, respectively.

 

The table below shows the future minimum payments under non-cancelable short-term and operating leases and at March 31, 2019 (in thousands):

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The Company entered into a five-year software licensing agreement on April 2, 2018 with future contractual payment obligations totaling approximately $0.6 million. 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 March 31, 2019 and December 31, 2018, the Company did not have any liabilities associated with indemnities.

 

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

 

In addition, 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 March 31, 2019 or December 31, 2018.

 

 

12. 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.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 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 March 31, 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 three months ended March 31, 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 $0.1 million at March 31, 2019 and $0.45 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 6, Embedded Derivatives and Derivative Warrant Liabilities, for the fair value inputs used to estimate the fair value of the embedded derivative.

 

Derivative Warrant Liability. Prior to 2017, the Company estimated the fair value of the Series A Warrants, Series F Warrants and Series K Warrants using a Monte- Carlo model (Level 3). For all other warrants the Company valued these using a standard Black-Scholes model (Level 2). However, beginning in the first quarter 2017, 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 March 31, 2019 and  December 31, 2018.

 

 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.

 

 

13. 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 Company’s Luverne Facility and the production of ethanol, isobutanol and related products.

 

 

 

 

14. Subsequent Events

 

None noted for the unaudited consolidated financial statements for the quarter ended March 31, 2019.

 

 

 

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