gevo20190630_10q.htm
 

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 


 

GEVO, INC.

(Exact name of registrant as specified in its charter)

 


 

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)

 


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.

 



 

 

 

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

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

GEVO, INC.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

   

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  

 

See the accompanying Notes to the Consolidated Financial Statements.

 

 

 

GEVO, INC.

Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

 

   

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  

 

See the accompanying Notes to the Consolidated Financial Statements.

 

 

 

GEVO, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

 

   

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      

 

See the accompanying Notes to the Consolidated Financial Statements.

 

 

 

GEVO, INC.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   

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  

 

See the accompanying Notes to the Consolidated Financial Statements.

 

 

GEVO, INC. 

Consolidated Statements of Cash Flows - Continued

(in thousands)

(unaudited)

 

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  

 

See the accompanying Notes to the Consolidated Financial Statements.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

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:

 

   

Three and Nine Months Ended September 30,

 
    2019     2018  

Warrants to purchase common stock - liability classified (see Note 7)

    54,989       58,902  

Warrant to purchase common stock - equity classified

          6  

2020 Notes

    997,914       1,094,282  

Outstanding options to purchase common stock (see Note 11)

    1,564       813  

Stock appreciation rights

    132,566       132,559  

Unvested restricted common stock

          290,300  

Total

    1,187,033       1,576,862  

 

 

 

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):

 

   

Three Months Ended September 30, 2019

 

Major Goods/Service Line

 

Revenues from

Contracts with

Customers

   

Other Revenues

   

Total

 

Ethanol sales and related products, net

  $ 5,554     $     $ 5,554  

Hydrocarbon revenue

    550             550  

Grant and other revenue

          6       6  
    $ 6,104     $ 6     $ 6,110  

Timing of Revenue Recognition

                       

Goods transferred at a point in time

  $ 6,104     $     $ 6,104  

Services transferred over time

          6       6  
    $ 6,104     $ 6     $ 6,110  

 

   

Three Months Ended September 30, 2018

 

Major Goods/Service Line

 

Revenues from

Contracts with

Customers

   

Other Revenues

   

Total

 

Ethanol sales and related products, net

  $ 8,071     $     $ 8,071  

Hydrocarbon revenue

    504             504  

Grant and other revenue

                 
    $ 8,575     $     $ 8,575  

Timing of Revenue Recognition

                       

Goods transferred at a point in time

  $ 8,575     $     $ 8,575  

Services transferred over time

                 
    $ 8,575     $     $ 8,575  

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

   

Nine Months Ended September 30, 2019

 

Major Goods/Service Line

 

Revenues from

Contracts with

Customers

   

Other Revenues

   

Total

 

Ethanol sales and related products, net

  $ 16,184     $     $ 16,184  

Hydrocarbon revenue

    1,381             1,381  

Grant and other revenue

          34       34  
    $ 17,565     $ 34     $ 17,599  

Timing of Revenue Recognition

                       

Goods transferred at a point in time

  $ 17,565     $     $ 17,565  

Services transferred over time

          34       34  
    $ 17,565     $ 34     $ 17,599  

 

   

Nine Months Ended September 30, 2018

 

Major Goods/Service Line

 

Revenues from

Contracts with

Customers

   

Other Revenues

   

Total

 

Ethanol sales and related products, net

  $ 25,102           $ 25,102  

Hydrocarbon revenue

    1,111             1,111  

Grant and other revenue

    25             25  
    $ 26,238     $     $ 26,238  

Timing of Revenue Recognition

                       

Goods transferred at a point in time

  $ 26,213     $     $ 26,213  

Services transferred over time

    25             25  
    $ 26,238     $     $ 26,238  

 

 

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:

 

   

Three Months

Ended

   

Nine Months

Ended

 
   

September 30, 2019

   

September 30, 2019

 

Lease Cost

               

Operating lease cost

  $ 435     $ 1,166  

Short-Term lease cost

    18       50  

Total lease cost

  $ 453     $ 1,216  
                 

Other Information

               

Cash paid for the measurement of lease liabilities

               

Operating cash flows from operating leases

          $ 1,166  

Weighted-average remaining lease term, operating leases (months)

            22.0  

Weighted-average discount rate - operating leases

            12

%

 

 

 

 

5. Inventories

 

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

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Raw materials

               

Corn

  $ 64     $ 29  

Enzymes and other inputs

    287       204  

Finished goods

               

Ethanol

    102       182  

Isobutanol

    245       549  

Jet Fuels, Isooctane and Isooctene

    607       394  

Distiller's grains

    9       54  

Work in process - Agri-Energy

    9       214  

Work in process - Gevo

    124       89  

Spare parts

    1,515       1,451  

Total inventories

  $ 2,962     $ 3,166  

 

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):

 

 

 

Useful Life

 

 

September 30,

 

 

December 31,

 

 

 

(in years)

 

 

2019

 

 

2018

 

Luverne retrofit asset

 

 

20

 

 

 

$

70,820     $                                                     70,842

 

Plant machinery and equipment

 

 

10

 

 

 

 

17,431  

 

 

16,285

 

Site improvements

 

 

10

 

 

 

 

7,062  

 

 

7,055

 

Lab equipment, furniture and fixtures and vehicles

 

 

5

 

 

 

 

6,479  

 

 

                                                      6,574  

Demonstration plant

 

 

2

 

 

 

 

3,597  

 

 

                                                      3,597  

Leasehold improvements, pilot plant, land and support equipment

 

2

to

5

 

 

 

2,558  

 

 

                                                      2,542  

Buildings

 

 

10

 

 

 

 

2,543  

 

 

2,543

 

Computer, office equipment and software

 

 

3

 

 

 

 

1,507  

 

 

1,848

 

Construction in progress

 

 

   

 

 

 

7,230  

 

 

                                                      3,478  
 

 

 

 

 

 

 

 

119,227  

 

 

114,764

 

Less accumulated depreciation and amortization

 

 

 

 

 

 

 

(52,079 )

 

 

(47,728

)

Property, plant and equipment, net

 

 

 

 

 

 

$

67,148  

 

$

67,036

 

 

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:

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Stock price

  $ 3.35     $ 1.96  

Conversion Rate per $1,000

    67.95       67.95  

Conversion Price

  $ 14.72     $ 14.72  

Maturity date

    March 15, 2020       March 15, 2020  

Risk-free interest rate

    1.82

%

    2.57

%

Estimated stock volatility

    57

%

    150

%

Estimated credit spread

    28

%

    31

%

 

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:

 

 

 

Issuance

Date

 

Expiration

Date

 

Exercise

Price as of

September 30,

2019

 

 

Shares

Underlying

Warrants on

Issuance Date

 

 

Shares Issued

upon Warrant

Exercises as of

September 30, 2019

 

 

Shares

Underlying

Warrants

Outstanding as of

September 30,

2019

 

Series A Warrants

 

02/03/2015

 

02/03/2020

 

$

3.80

 

 

 

5,542

 

 

 

5,222

 

 

 

320

 

Series C Warrants

 

05/19/2015

 

05/19/2020

 

$

53.43

 

 

 

1,075

 

 

 

 

 

 

1,075

 

Series D Warrants

 

12/11/2015

 

12/11/2020

 

$

40.00

 

 

 

25,125

 

 

 

25,078

 

 

 

47

 

Series F Warrants

 

04/01/2016

 

04/01/2021

 

$

40.00

 

 

 

25,733

 

 

 

11,692

 

 

 

14,041

 

Series I Warrants

 

09/13/2016

 

09/13/2021

 

$

220.00

 

 

 

35,650

 

 

 

 

 

 

35,650

 

Series K Warrants

 

02/17/2017

 

02/17/2022

 

$

3.80

 

 

 

312,516

 

 

 

308,660

 

 

 

3,856

 

 

 

 

 

 

 

 

 

 

 

 

405,641

 

 

 

350,652

 

 

 

54,989

 

 

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):

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 

Accounts payable - trade

  $ 1,481     $ 1,944  

Accrued legal-related fees

    220       206  

Accrued employee compensation

    1,526       1,648  

Accrued production fees

    383       255  

Accrued utilities and supplies payable

    156       344  

Accrued taxes payable

    165       101  

Current lease obligations

    296        

Other accrued liabilities 

    207       376  

Total accounts payable and accrued liabilities

  $ 4,434     $ 4,874  

 

 

 

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):

 

   

Principal

Amount

of 2020 Notes

   

Debt

Discount

   

Debt Issue

Costs

   

Total 2020

Notes

   

2020 Notes

Embedded

Derivative

   

Total 2020

Notes and 2020

Notes

Embedded

Derivative

 

Balance - December 31, 2018

  $ 13,775     $ (979

)

  $ (242

)

  $ 12,554     $ 394     $ 12,948  

Amortization of debt discount

          704             704             704  

Amortization of debt issue costs

                177       177             177  

Paid-in-kind interest

    208                   208             208  

Change in fair value of 2020 Notes embedded derivative

                            (394

)

    (394

)

Balance - September 30, 2019

  $ 13,983     $ (275

)

  $ (65

)

  $ 13,643     $     $ 13,643  

 

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):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Stock options and employee stock purchase plan awards

                               

Research and development

  $     $ 3     $     $ 21  

Selling, general and administrative

     —       7             48  
                                 

Restricted stock

                               

Research and development

    68       23       129       57  

Selling, general and administrative

    236       136       581       194  
                                 

Stock appreciation rights

                               

Research and development

    132             114        

Selling, general and administrative

    132       112       114       198  

Total stock-based compensation

  $ 568     $ 281     $ 938     $ 518  

 

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:

 

   

Number of Options

 

Options outstanding at December 31, 2018

    2,313  

Granted

     

Canceled or forfeited

    (749 )

Exercised

     

Options outstanding at September 30, 2019

    1,564  

Weighted-average remaining contractual life (in years)

    5.7  

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:

 

   

Shares

   

Weighted -Average Grant

Date Fair Value

 

Unvested RSAs at December 31, 2018

    290,300     $ 3.45  

Granted

    1,308,613     $ 1.91  

Vested

    (254,500 )   $ 3.45  

Canceled or forfeited

    (35,800 )   $ 3.45  

Unvested RSAs at September 30, 2019

    1,308,613     $ 1.91  

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):

 

   

Short-Term

Leases

   

Operating

Leases

 

2019 (remaining)

  $ 163     $ 105  

2020

    242       425  

2021

    3       215  

2022 and thereafter

           

Total

  $ 408     $ 745  

 

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):

 

           

Fair Value Measurements at September 30, 2019

(In thousands)

 
   

Fair Value at

September 30,

2019

   

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

   

Significant Other

Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs (Level 3)

 

Recurring:

                               
    Derivative warrant liability   $ 21      
     
    $ 21  

Total Recurring Fair Value Measurements

  $ 21     $     $     $ 21  
                                 
                                 

Nonrecurring

                               

Corn and finished goods inventory

  $ 714     $ 64     $ 650     $  

Total Non-Recurring Fair Value Measurements

  $ 714     $ 64     $ 650     $  

 

           

Fair Value Measurements at December 31, 2018

(In thousands)

 
   

Fair Value at

December 31,

2018

   

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

   

Significant Other

Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs (Level 3)

 

Recurring:

                               

Derivative warrant liability

  $ 22     $     $     $ 22  

2020 embedded derivative liability

    394                   394  

Total Recurring Fair Value Measurements

  $ 416     $     $     $ 416  
                                 
                                 

Nonrecurring

                               

Corn and finished goods inventory

  $ 1,047     $ 29     $ 1,018     $  

Total Non-Recurring Fair Value Measurements

  $ 1,047     $ 29     $ 1,018     $  

 

 

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:

 

   

Fair Value Measurements Using Significant Unobservable Inputs

                 
   

Derivative Warrant

Liability

   

2020 Notes Embedded

Derivative

 

Opening Balance

  $ 22     $ 394  

Total (gains) or losses for the period included in earnings

    (1 )     (394 )

Purchases

           

Closing balance

  $ 21     $  

 

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.

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenues:

                               

Gevo

  $ 550     $ 504     $ 1,381     $ 1,136  

Gevo Development / Agri-Energy

    5,560       8,071       16,218       25,102  

Consolidated

  $ 6,110     $ 8,575     $ 17,599     $ 26,238  
                                 

Loss from operations:

                               

Gevo

  $ (3,830 )   $ (3,375 )   $ (9,463 )   $ (8,166 )

Gevo Development / Agri-Energy

    (4,173 )     (2,733 )     (10,661 )     (7,320 )

Consolidated

  $ (8,003 )   $ (6,108 )   $ (20,124 )   $ (15,486 )
                                 

Interest expense:

                               

Gevo

  $ 605     $ 767     $ 2,127     $ 2,496  

Gevo Development / Agri-Energy

                       

Consolidated

  $ 605     $ 767     $ 2,127     $ 2,496  
                                 

Depreciation and amortization expense:

                               

Gevo

  $ 50     $ 54     $ 152     $ 214  

Gevo Development / Agri-Energy

    1,578       1,564       4,697       4,689  

Consolidated

  $ 1,628     $ 1,618     $ 4,849     $ 4,903  
                                 

Acquisitions of plant, property and equipment:

                               

Gevo

  $     $ 14     $ 62     $ 16  

Gevo Development / Agri-Energy

    781       1,207       4,862       1,328  

Consolidated

  $ 781     $ 1,221     $ 4,924     $ 1,344  
                                 
Revenue by geographic area:                                
United States   $ 5,560     $ 8,071     $ 16,218     $ 25,127  
Other     550       504       1,381       1,111  
Consolidated   $ 6,110     $ 8,575     $ 17,599     $ 26,238  

 

 

    September 30,     December 31,  
   

2019

   

2018

 

Total assets:

               

Gevo

  $ 94,955     $ 105,379  

Gevo Development / Agri-Energy

    143,255       140,982  

Intercompany eliminations

    (142,742 )     (139,326 )

Consolidated

  $ 95,468     $ 107,035  

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used anywhere in this Report, the words “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. These statements relate to future events or our future financial or operational performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. These forward-looking statements include, among other things, statements about: risks and uncertainties related to our ability to sell our products, our ability to expand or continue production of ethanol and isobutanol at our production facility in Luverne, Minnesota (the “Luverne Facility”), our ability to meet our production, financial and operational guidance, our strategy to pursue low-carbon ethanol for sale into California, our ability to replace our fossil-based energy sources with renewable energy sources at the Luverne Facility, our ability and plans to construct a commercial hydrocarbon facility to produce alcohol-to-jet fuel (“ATJ”), our ability to raise additional funds to continue operations and/or expand the Luverne Facility, our ability to produce ethanol and isobutanol on a commercial level and at a profit, achievement of advances in our technology platform, the success of our retrofit production model, the availability of suitable and cost-competitive feedstocks, our ability to gain market acceptance for our products, the expected cost-competitiveness and relative performance attributes of our ethanol and isobutanol and the products derived from isobutanol, additional competition and changes in economic conditions and the future price and volatility of petroleum and products derived from petroleum. Important factors could cause actual results to differ materially from those indicated or implied by forward-looking statements such as those contained in documents, we have filed with the U.S. Securities and Exchange Commission (the “SEC”), included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2018 (our “Annual Report”), and subsequent reports on Form 10-Q in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations". All forward-looking statements in this Report are qualified entirely by the cautionary statements included in this Report and such other filings. These risks and uncertainties could cause actual results to differ materially from results expressed or implied by forward-looking statements contained in this Report. These forward-looking statements speak only as of the date of this Report. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and readers should not rely on the forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of this Report.

 

Unless the context requires otherwise, in this Report the terms “we,” “us,” “our” and the “Company” refer to Gevo, Inc. and its subsidiaries.

 

The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes and other financial information appearing elsewhere in this Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including, without limitation, the disclosures in our Annual Report.

 

Company Overview

 

We are commercializing the next generation of gasoline, jet fuel and diesel fuel with the potential to achieve zero carbon emissions, addressing the market need of reducing greenhouse gas emissions with sustainable alternatives. We use low-carbon renewable resource based carbohydrates as raw materials, and are developing renewable electricity and renewable natural gas for the energy of production processes resulting in low-carbon fuels with reduced carbon intensity (the level of greenhouse gas emissions compared to standard petroleum) fossil-based fuels across their lifecycle. Our products deliver the technical performance expected of traditional fossil-based fuels in infrastructure and engines, but significantly reduce greenhouse gas emissions. In addition to addressing the problems of fuels, our technology also enables certain plastics, such as polyester, to be made with more sustainable ingredients. Our ability to penetrate the growing low-carbon fuels  market depends on the price of oil and the value of abating carbon emissions, that would otherwise increase greenhouse gas emissions. We believe that because of our ability to use a variety of low-carbon, sustainably produced feedstocks and our proven technology resulting in the economical production of the main components of gasoline, jet fuel, and diesel fuel using a very low carbon footprint, we have the potential to generate returns that justify the build-out of a multi-billion dollar business. 

 

We believe that the fossil-based carbon emissions caused by using fossil-based liquid fuels will continue to come under increased regulation intent on reducing emissions. California's Low Carbon Fuel Standard Program (the "LCFS), the European Union's Renewable Energy Directive and other similar policies are causing the value of reducing fossil-based greenhouse gas emissions to become clearer and to be more attractive of a component of value to financiers.

 

To achieve the goal of becoming a multi-billion dollar business, we need to establish the low-carbon infrastructure for the Luverne Facility, secure additional take-or-pay offtake agreements that enable lower cost project financing, then build out large capacity for jet fuel, isooctane and diesel fuel and other productions sites around the world.

 

 

Financial Condition

 

For the nine months ended September 30, 2019 and 2018, we 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. Our cash and cash equivalents at September 30, 2019 totaled $20.9 million which is primarily being used for the following: (i) operating activities of our Luverne Facility; (ii) operating activities at our corporate headquarters in Colorado, including research, engineering and development work; (iii) engineering, development and capital expenditures primarily associated with the Luverne Facility, including engineering, development and capital expenditures to “de-carbonize” the Luverne Facility; (iv) exploration of strategic alternatives and new financings; and (v) debt service and repayment obligations. We are actively working on refinancing our 2020 Notes (as defined below) that mature on March 15, 2020.

 

The continued operation of our business is dependent upon raising additional capital through future public and private equity offerings, debt financings or through other alternative financing arrangements. In addition, successful completion of our research and development programs and the attainment of profitable operations are dependent upon future events, including our ability to raise sufficient capital to expand our commercial production facility, completion of our development activities resulting in sales of isobutanol or isobutanol-derived products and/or technology, achieving market acceptance and demand for our products and services and attracting and retaining qualified personnel.

 

We expect to incur future net losses as we continue to fund the development and commercialization of our products and product candidates. We have primarily relied on raising capital to fund our operations and debt service obligations by issuing common stock and warrants in underwritten public offerings. Those issuances have caused significant dilution to our existing stockholders. While we have sought, and will continue to seek, other, less dilutive forms of financing to fund our operations and debt service obligations, there is no assurance that we will be successful in doing so.

 

Our transition to profitability is dependent upon, among other things, the successful development and commercialization of our products and product candidates, the achievement of a level of revenues adequate to support our cost structure and securing sufficient financing for the build-out and Retrofit of the Luverne Facility or a facility at another suitable location. We may never achieve profitability or generate positive cash flows, and unless and until we do, we will continue to need to raise additional cash. We intend to fund future operations through additional private and/or public offerings of debt or equity securities. In addition, we may seek additional capital through arrangements with strategic partners or from other sources, may seek to restructure our debt and we will continue to address our cost structure. Notwithstanding, there can be no assurance that we will be able to raise additional funds or achieve or sustain profitability or positive cash flows from operations.

 

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2019 and 2018

 

   

Three Months Ended September 30,

         

(in thousands)

 

2019

   

2018

   

Change

 

Revenue and cost of goods sold

                       

Ethanol sales and related products, net

  $ 5,554     $ 8,071     $ (2,517 )

Hydrocarbon revenue

    550       504       46  

Grant and other revenue

    6             6  

Total revenues

    6,110       8,575       (2,465 )
                         

Cost of goods sold

    9,893       10,628       (735 )
                         

Gross loss

    (3,783 )     (2,053 )     (1,730 )
                         

Operating expenses

                       

Research and development expense

    1,789       1,865       (76 )

Selling, general and administrative expense

    2,431       2,190       241  

Total operating expenses

    4,220       4,055       165  
                         

Loss from operations

    (8,003 )     (6,108 )     (1,895 )
                         

Other (expense) income

                       

Interest expense

    (605 )     (767 )     162  

Gain (loss) from change in fair value of derivative warrant liability

    (2 )     5       (7 )

Gain (loss) from change in fair value of 2020 Notes embedded derivative

          (7 )     7  

Other income (expense)

    (9 )     (3 )     (6 )

Total other expense, net

    (616 )
 
  (772 )     156  
                         

Net loss

  $ (8,619 )
 
$ (6,880 )   $ (1,739 )

 

 

Revenue. Revenue from the sale of ethanol, isobutanol and related products for the three months ended September 30, 2019 was $5.6 million, a decrease of $2.5 million from the three months ended September 30, 2018. As a result of an unfavorable commodity environment during the three months ended September 30, 2019 compared with the same period ended September 30, 2018, we reduced our production of ethanol and distiller grains which resulted in lower sales for the period. During the three months ended September 30, 2019, we sold 3.4 million gallons of ethanol compared to 5.1 million gallons of ethanol sold in the three months ended September 30, 2018. 

 

Hydrocarbon revenues are comprised of ATJ, isooctane and isooctene sales. Hydrocarbon sales increased because of higher production volumes at the South Hampton Facility. During the three months ended September 30, 2018, we reduced production at the South Hampton Facility to upgrade the facility and double the production capacity.

 

Cost of goods sold. Cost of goods sold was $9.9 million during the three months ended September 30, 2019 compared with $10.6 million during the three months ended September 30, 2018. The decrease of approximately $0.7 million was primarily the result of decreased production at the Luverne Facility for the three months ended September 30, 2019 compared to September 30, 2018. Production was decreased due to an unfavorable commodity environment, largely the result of greater corn costs as compared to national markets than the region has historically experienced. Cost of goods sold included approximately $8.3 million associated with the production of ethanol and related products and approximately $1.6 million in depreciation expense during the three months ended September 30, 2019.

 

Research and development expense. Research and development expense decreased by $0.1 million during the three months ended September 30, 2019 compared with the three months ended September 30, 2018, due primarily to a decrease in costs associated with the South Hampton Facility offset by an increase in personnel and consulting expenses.

 

Selling, general and administrative expense. Selling, general and administrative expense increased by approximately $0.2 million during the three months ended September 30, 2019 compared with the three months ended September 30, 2018, due primarily to an increase in personnel, consulting and investor relations costs, partially offset by a decrease in professional fees.

 

Interest expense. Interest expense during the three months ended September 30, 2019 was $0.6 million, a decrease of $0.2 million compared to the three months ended September 30, 2018, due to a decrease in the outstanding principal amount of the 12% convertible senior secured notes due 2020 (the “2020 Notes”) as of September 30, 2019 from the exchange of approximately $3.2 million of our 2020 Notes for our common stock during 2018.

 

Gain (loss) from change in fair value of derivative warrant liability. During the three months ended September 30, 2019, the fair value of the derivative warrant liability decreased $0.01 million compared to the three months ended September 30, 2018, primarily due to the decrease in the number of warrants outstanding and a decrease in the amount of time until the expiration of the outstanding warrants.

 

 

Comparison of the Nine Months Ended September 30, 2019 and 2018

 

   

Nine Months Ended September 30,

         

(in thousands)

 

2019

   

2018

   

Change

 

Revenue and cost of goods sold

                       

Ethanol sales and related products, net

  $ 16,184     $ 25,102     $ (8,918 )

Hydrocarbon revenue

    1,381       1,111       270  

Grant and other revenue

    34       25       9  

Total revenues

    17,599       26,238       (8,639 )
                         

Cost of goods sold

    27,306       31,904       (4,598 )
                         

Gross loss

    (9,707 )     (5,666 )     (4,041 )
                         

Operating expenses

                       

Research and development expense

    3,712       4,123       (411 )

Selling, general and administrative expense

    6,705       5,697       1,008  

Total operating expenses

    10,417       9,820       597  
                         

Loss from operations

    (20,124 )     (15,486 )     (4,638 )
                         

Other (expense) income

                       

Interest expense

    (2,127 )     (2,496 )     369  

(Loss) on exchange or conversion of debt

          (2,202 )     2,202  

Gain (loss) from change in fair value of derivative warrant liability

    1       (3,035 )     3,036  

Gain from change in fair value of 2020 Notes embedded derivative

    394       2,340       (1,946 )

Other income

    11       5       6  

Total other expense, net

    (1,721 )
 
  (5,388 )     3,667  
                         

Net loss

  $ (21,845 )   $ (20,874 )   $ (971 )

 

Revenue. Revenue from the sale of ethanol, isobutanol and related products for the nine months ended September 30, 2019 was $16.2 million, a decrease of $8.9 million from the nine months ended September 30, 2018. As a result of an unfavorable commodity environment during the nine months ended September 30, 2019 compared with the same period ended September 30, 2018, we reduced our production of ethanol and distiller grains which resulted in decreased sales.  During the nine months ended September 30, 2019, we sold 10.2 million gallons of ethanol compared to 14.9 million gallons of ethanol sold in the nine months ended September 30, 2018. 

 

Hydrocarbon revenues are comprised of ATJ, isooctane and isooctene sales. Hydrocarbon sales increased by $0.3 million during the nine months ended September 30, 2019 as a result of greater shipments of finished products from our South Hampton Facility.

 

Cost of goods sold. Cost of goods sold was $27.3 million during the nine months ended September 30, 2019 compared with $31.9 million during the nine months ended September 30, 2018. The decrease of approximately $4.6 million was primarily the result of decreased production for the nine months ended September 30, 2019 compared to September 30, 2018. Production was decreased due to an unfavorable commodity environment, largely the result of greater corn costs as compared to national markets than the region has historically experienced. Cost of goods sold included approximately $22.6 million associated with the production of ethanol and related products and approximately $4.7 million in depreciation expense during the nine months ended September 30, 2019.

 

Research and development expense. Research and development expense decreased by approximately $0.4 million during the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018, due primarily to a decrease in costs associated with our South Hampton Facility, offset by an increase in personnel expenses.

 

Selling, general and administrative expense. Selling, general and administrative expense increased by approximately $1.0 million during the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018, due primarily to an increase of personnel, consulting, travel, legal and investor relations costs, partially offset by a decrease in professional fees.

 

Interest expense. Interest expense during the nine months ended September 30, 2019 was $2.1 million, a decrease of $0.4 million compared to the nine months ended September 30, 2018,  due to a decrease in the outstanding principal amount of the 2020 Notes as of September 30, 2019 from the exchange of approximately $3.2 million of our 2020 Notes for our common stock during 2018.

 

Gain (loss) from change in fair value of derivative warrant liability. During the nine months ended September 30, 2019, the fair value of the derivative warrant liability decreased $3.0 million compared to the nine months ended September 30, 2018, primarily due to the decrease in the number of warrants outstanding and a decrease in the amount of time until the expiration of the outstanding warrants.

 

Gain from change in fair value of the 2020 Notes embedded derivative. During the nine months ended September 30, 2019, the estimated fair value of the 2020 Notes embedded derivative liability decreased to $0, resulting in a decrease in the non-cash gain of $1.9 million compared to the nine months ended September 30, 2018. The decrease in derivative liability was primarily due to the decrease in the price of our common stock since the June 20, 2017 issuance date and the decrease in estimated stock volatility for the remaining period the 2020 Notes are due.

 

 

Revenue, Cost of Goods Sold and Operating Expenses

 

Revenue

 

During the nine months ended September 30, 2019 and 2018, we generated revenue from: (i) the sale of ethanol, isobutanol and related products; (ii) hydrocarbon sales, consisting primarily of the sale of ATJ fuel, isooctane and isooctene derived from our isobutanol for purposes of certification and testing; and (iii) government grants and research and development programs.

 

Cost of Goods Sold and Gross Loss

 

Cost of goods sold during the nine months ended September 30, 2019 and 2018 primarily includes costs directly associated with isobutanol production and ethanol production at the Luverne Facility, such as costs for direct materials, direct labor, depreciation, other operating costs and certain plant overhead costs. Direct materials include corn feedstock, denaturant and process chemicals. Direct labor includes compensation of personnel directly involved in production operations at the Luverne Facility. Other operating costs include utilities and natural gas usage.

 

Our gross loss is defined as our total revenue less our cost of goods sold.

 

Research and Development

 

Our research and development costs consist of expenses incurred to identify, develop and test our technologies to produce isobutanol and the development of downstream applications thereof. Research and development expenses include personnel costs (including stock-based compensation), consultants and related contract research, facility costs, supplies, depreciation and amortization expense on property, plant and equipment used in product development, license fees paid to third parties for use of their intellectual property and patent rights and other overhead expenses incurred to support our research and development programs. Research and development expenses also include upfront fees and milestone payments made under licensing agreements and payments for sponsored research and university research gifts to support research at academic institutions.

 

Selling, General and Administrative

 

Selling, general and administrative expenses consist of personnel costs (including stock-based compensation), consulting and service provider expenses (including patent counsel-related costs), legal fees, marketing costs, corporate insurance costs, occupancy-related costs, depreciation and amortization expenses on property, plant and equipment not used in our product development programs or recorded in cost of goods sold, travel and relocation and hiring expenses.

 

We also record selling, general and administrative expenses for the operations of the Luverne Facility that include administrative and oversight expenses, certain personnel-related expenses, insurance and other operating expenses.

 

Liquidity and Capital Resources

 

Since our inception in 2005, we have devoted most of our cash resources to manufacturing ethanol, isobutanol and related products, research and development and selling, general and administrative activities related to the commercialization of ethanol, isobutanol, as well as related products from renewable feedstocks. We have incurred losses since inception and expect to incur losses through at least 2020. We have financed our operations primarily with proceeds from multiple sales of equity and debt securities, borrowings under debt facilities and product sales.

 

The continued operation of our business, including any expansion of the Luverne Facility, is dependent upon raising additional capital through future public and private equity offerings, debt financings or through other alternative financing arrangements. In addition, successful completion of our research and development programs and the attainment of profitable operations are dependent upon future events, including access to sufficient capital, repayment of our current debt, completion of our development activities resulting in sales of isobutanol or isobutanol-derived products and/or technology, achieving market acceptance and demand for our products and services and attracting and retaining qualified personnel. Such additional capital may not be available to us on acceptable terms or at all.

 

As of September 30, 2019, we had an accumulated deficit of $451.2 million with cash and cash equivalents totaling $20.9 million. The 2020 Notes mature on March 15, 2020. See discussion below in "2020 Notes".

 

The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):

 

   

Nine Months Ended September 30,

 
   

2019

   

2018

 

Net cash used in operating activities

  $ (14,798 )   $ (10,154 )

Net cash used in investing activities

  $ (7,260 )   $ (933 )

Net cash provided by financing activities

  $ 9,268     $ 37,850  

 

Operating Activities

 

Our primary uses of cash from operating activities are personnel-related expenses, research and development expenses, which include costs incurred under development agreements; costs and expenses for the production of isobutanol, ethanol and related products, logistics costs, costs associated with further processing of isobutanol and costs associated with the operation of the South Hampton Facility and debt service payments.

 

During the nine months ended September 30, 2019, we used $14.8 million in cash from operating activities primarily resulting from a net loss of $21.8 million, a $0.5 million increase in working capital items and approximately $6.5 million in non-cash operating activities.

 

 

Investing Activities

 

During the nine months ended September 30, 2019, we used $7.3 million in cash from investing activities related to an investment of $1.5 million in Juhl and $5.8 primarily for capital expenditures at our Luverne Facility.

 

We are installing equipment to fractionate corn and to dry distiller's grains at the Luverne Facility totaling approximately $3.0 million as of September 30, 2019. The fractionation machine is expected to be operational in the first quarter of 2020.

 

Financing Activities

 

During the nine months ended September 30, 2019, we raised approximately $9.3 million associated with financing activities, which consisted of $9.4 million of net proceeds from sales under our “at-the-market” offering program discussed below offset by $0.2 million net settlement of common stock under stock plans.

 

At-the-Market Offering Program. In February 2018, we commenced an at-the-market offering program, which allows us to sell and issue shares of our 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 program 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, we issued 3,244,941 shares of common stock under the at-the-market offering program for gross proceeds of $9.9 million. We paid commissions and incurred other offering related expenses totaling $0.4 million during the nine months ended September 30, 2019. There were no shares issued during the three months ended September 30, 2019. As of September 30, 2019, we had capacity to issue up to $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.

 

2020 Notes

 

On April 19, 2017, we entered into an Exchange and Purchase Agreement (the “Purchase Agreement”) with WB Gevo, LTD (such holder, the “Holder”), and Whitebox Advisors LLC, in its capacity as representative of the Holder (“Whitebox”), the holder of our 12.0% convertible senior secured notes due 2017, which were cancelled in connection with the issuance of the 2020 Notes. Pursuant to the terms of the Purchase Agreement, the Holder, subject to certain conditions, including approval of the transaction by our 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 our newly created 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”). On June 20, 2017, we cancelled the 2017 Notes. As of September 30, 2019 and December 31, 2018, the outstanding principal on the 2020 Notes, including PIK Interest (as defined and described below), was $13.9 million and $13.8 million, respectively.

 

The 2020 Notes will mature on March 15, 2020. The 2020 Notes bear interest at 12% per annum (with 2% potentially payable as PIK Interest at our option), payable on March 31, June 30, September 30, and December 31 of each year. Under certain circumstances, we have 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”).

 

The 2020 Notes are convertible into shares of our 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.

 

See Note 9, Debt, to our consolidated financial statements included herein for further discussion of the 2020 Notes.

 

Critical Accounting Policies and Estimates

 

Except for the adoption of ASC 842 “Leases” (see Note 4) there have been no significant changes to our critical accounting policies since December 31, 2018. See Note 1, Nature of Business, Financial Condition and Basis of Presentation, to our consolidated financial statements included herein for a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our 2018 Annual Report.

 

 

Off-Balance Sheet Arrangements

 

As of September 30, 2019, we did not have any material off-balance sheet arrangements, except for operating lease obligations disclosed in Note 4, Leases, Right-to-Use Assets and Related Liabilities, and Note 12, Commitments and Contingencies.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not Required.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

 

We conducted an evaluation (pursuant to Rule 13a-15(b)), under the supervision and with the participation of management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable but not absolute assurance that the objectives of the disclosure controls and procedures are met. The design of any disclosure control and procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any litigation that we believe to be material and we are not aware of any pending or threatened litigation against us that we believe could have a material adverse effect on our business, operating results, financial condition or cash flows.

 

Item 1A. Risk Factors.

 

You should carefully consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report, which could materially affect our business, financial condition, cash flows or future results. There have been no material changes in our risk factors included in our Annual Report. The risk factors in our Annual Report are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Issuer Purchases of Equity Securities

 

Period

 

Total Number

of Shares

Purchased

 

Average Price

Paid per Share

 

Total Number

of Shares

Purchased as

Part of Publicly

Announced

Plans or

Programs

 

Maximum

Number of

Shares that

May Yet Be

Purchased

Under the Plans

or Programs

July 1, 2019 - July 31, 2019

      $        

August 1, 2019 - August 31, 2019

    79,790   $ 2.46     79,790    

September 1, 2019 - September 30, 2019

      $        

Total

    79,790   $ 2.46     79,790    

 

(1)  We permit “withhold to cover” as a tax payment method for vesting of restricted stock awards issued under our Amended and Restated 2010 Stock Incentive Plan for our employees, pursuant to which, we withheld from employees the shares noted in the table above to cover tax withholding related to the vesting of their awards. The average prices listed in the above table are averages of the fair market prices at which we valued shares withheld for purposes of calculating the number of shares to be withheld.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not Applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

The exhibits listed below are filed or furnished as part of this report. 

 

Exhibit

Number

 

 

Description

 

Previously Filed

 

Included

Herewith

 

 

 

 

 

Form

 

File No.

 

Filing Date

 

Exhibit

 

 

 

 

 3.1

 

 

Amended and Restated Certificate of Incorporation of Gevo, Inc.

 

 

10-K

 

 

001-35073

 

 

March 29, 2011

 

 

3.1

 

 

 

 

 3.2

 

 

 

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Gevo, Inc.

 

 

8-K

 

 

001-35073

 

 

June 10, 2013

 

 

3.1

 

 

 

 

 3.3

 

 

 

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Gevo, Inc.