gevo-10q_20150930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended September 30, 2015

or

¨

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

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

(303) 858-8358

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

area code, of registrant’s principal executive offices)

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

Non-accelerated filer

 

 

x  (Do not check if a smaller reporting company)

  

 

Smaller reporting company

 

¨

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

As of October 28, 2015, 16,948,932 shares of the registrant’s common stock were outstanding.

 

 

 

 

 


GEVO, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

INDEX

 

 

 

 

Page

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

3

 

 

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

3

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (unaudited)

4

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited)

5

 

 

Notes to Unaudited Consolidated Financial Statements

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

39

Item 4.

 

Controls and Procedures

39

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

41

Item 1A.

 

Risk Factors

42

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

70

Item 3.

 

Defaults Upon Senior Securities

70

Item 4.

 

Mine Safety Disclosures

70

Item 5.

 

Other Information

70

Item 6.

 

Exhibits

71

 

 

Signatures

74

 

 

 

2


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

GEVO, INC.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

(unaudited)

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,203

 

 

$

6,359

 

Accounts receivable

 

 

1,134

 

 

 

2,361

 

Inventories

 

 

2,703

 

 

 

4,292

 

Prepaid expenses and other current assets

 

 

618

 

 

 

732

 

Total current assets

 

 

20,658

 

 

 

13,744

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

76,505

 

 

 

81,240

 

Debt issue costs, net

 

 

376

 

 

 

530

 

Restricted deposits

 

 

2,611

 

 

 

2,611

 

Deposits and other assets

 

 

803

 

 

 

803

 

Total assets

 

$

100,953

 

 

$

98,928

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

6,811

 

 

$

8,588

 

Current portion of secured debt, net of $20 and $31 discount at September 30, 2015 and

   December 31, 2014, respectively

 

 

320

 

 

 

288

 

Derivative warrant liability

 

 

3,395

 

 

 

3,114

 

Other current liabilities

 

 

-

 

 

 

35

 

Total current liabilities

 

 

10,526

 

 

 

12,025

 

Long-term portion of secured debt, net of $4 and $18 discount at September 30, 2015 and

   December 31, 2014, respectively

 

 

241

 

 

 

485

 

2017 Notes recorded at fair value

 

 

21,879

 

 

 

25,460

 

2022 Notes, net

 

 

15,242

 

 

 

13,679

 

Other long-term liabilities

 

 

147

 

 

 

315

 

Total liabilities

 

 

48,035

 

 

 

51,964

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (see note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value per share; 250,000,000 authorized; 16,947,088 and

   6,641,870 shares issued and outstanding at September 30, 2015 and

   December 31, 2014, respectively

 

 

169

 

 

 

66

 

Additional paid-in capital

 

 

384,279

 

 

 

350,196

 

Deficit accumulated

 

 

(331,530

)

 

 

(303,298

)

Total stockholders' equity

 

 

52,918

 

 

 

46,964

 

Total liabilities and stockholders' equity

 

$

100,953

 

 

$

98,928

 

 

See notes to unaudited consolidated financial statements.

 

 

 

3


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,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenue and cost of goods sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ethanol sales and related products, net

$

7,551

 

 

$

9,197

 

 

$

20,604

 

 

$

14,719

 

Hydrocarbon revenue

 

192

 

 

 

778

 

 

 

1,449

 

 

 

3,426

 

Grant and other revenue

 

274

 

 

 

166

 

 

 

787

 

 

 

620

 

Total revenues

 

8,017

 

 

 

10,141

 

 

 

22,840

 

 

 

18,765

 

Cost of goods sold

 

10,629

 

 

 

11,760

 

 

 

29,761

 

 

 

24,709

 

Gross loss

 

(2,612

)

 

 

(1,619

)

 

 

(6,921

)

 

 

(5,944

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

1,527

 

 

 

3,723

 

 

 

5,014

 

 

 

11,414

 

Selling, general and administrative expense

 

5,135

 

 

 

3,570

 

 

 

13,406

 

 

 

13,508

 

Total operating expenses

 

6,662

 

 

 

7,293

 

 

 

18,420

 

 

 

24,922

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(9,274

)

 

 

(8,912

)

 

 

(25,341

)

 

 

(30,866

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,121

)

 

 

(2,017

)

 

 

(6,186

)

 

 

(6,227

)

Interest expense - debt issue costs

 

-

 

 

 

(581

)

 

 

-

 

 

 

(3,766

)

Gain on conversion of debt

 

-

 

 

 

-

 

 

 

285

 

 

 

-

 

Gain on extinguishment of warrant liability

 

-

 

 

 

-

 

 

 

1,775

 

 

 

-

 

Gain from change in fair value of embedded derivatives of the 2022 Notes

 

-

 

 

 

726

 

 

 

-

 

 

 

3,470

 

Gain from change in fair value of the 2017 Notes

 

157

 

 

 

5,673

 

 

 

3,582

 

 

 

544

 

Gain (loss) from change in fair value of derivative

   warrant liability

 

4,719

 

 

 

4,173

 

 

 

(2,361

)

 

 

6,772

 

Other income

 

-

 

 

 

-

 

 

 

14

 

 

 

7

 

Total other income (expense)

 

2,755

 

 

 

7,974

 

 

 

(2,891

)

 

 

800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(6,519

)

 

 

(938

)

 

 

(28,232

)

 

 

(30,066

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share  - basic and diluted

$

(0.39

)

 

$

(0.01

)

 

$

(2.22

)

 

$

(0.40

)

Weighted-average number of common shares

   outstanding - basic and diluted

 

16,688,632

 

 

 

5,808,079

 

 

 

12,700,844

 

 

 

4,956,994

 

 

See notes to unaudited consolidated financial statements.

 

 

 

4


GEVO, INC.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

 

2015

 

 

2014

 

Operating Activities

 

 

 

 

 

 

 

Net loss

$

(28,232

)

 

$

(30,066

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

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

 

2,361

 

 

 

(6,772

)

Gain from change in fair value of embedded derivative of the 2022 Notes

 

-

 

 

 

(3,470

)

Gain from change in fair value of the 2017 Notes

 

(3,582

)

 

 

(544

)

Gain on conversion of debt

 

(285

)

 

 

-

 

Gain on extinguishment of warrant liability

 

(1,775

)

 

 

-

 

Stock-based compensation

 

1,953

 

 

 

2,362

 

Depreciation and amortization

 

4,897

 

 

 

3,214

 

Non-cash interest expense

 

2,740

 

 

 

6,374

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

1,227

 

 

 

(685

)

Inventories

 

1,589

 

 

 

(446

)

Prepaid expenses and other current assets

 

114

 

 

 

302

 

Accounts payable, accrued expenses, and long-term liabilities

 

(2,019

)

 

 

(2,875

)

Net cash used in operating activities

 

(21,012

)

 

 

(32,606

)

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Acquisitions of property, plant and equipment

 

(271

)

 

 

(4,553

)

Proceeds from sales tax refund for property, plant and equipment

 

144

 

 

 

-

 

Restricted certificate of deposit

 

-

 

 

 

(2,611

)

Net cash used in investing activities

 

(127

)

 

 

(7,164

)

 

See notes to unaudited consolidated financial statements.

 

 

 

5


GEVO, INC.

Consolidated Statements of Cash Flows - Continued

(in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

 

2015

 

 

2014

 

Financing Activities

 

 

 

 

 

 

 

Payments on secured debt

 

(236

)

 

 

(9,720

)

Debt and equity offering costs

 

(2,785

)

 

 

(5,051

)

Proceeds from issuance of common stock upon exercise of stock options and

   employee stock purchase plan

 

3

 

 

 

19

 

Proceeds from issuance of common stock and common stock units

 

23,850

 

 

 

18,000

 

Proceeds from the exercise of warrants

 

10,151

 

 

 

-

 

Proceeds from issuance of convertible debt, net

 

-

 

 

 

25,907

 

Net cash provided by financing activities

 

30,983

 

 

 

29,155

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

9,844

 

 

 

(10,615

)

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

Beginning of period

 

6,359

 

 

 

24,625

 

Ending of period

$

16,203

 

 

$

14,010

 

 

See notes to unaudited consolidated financial statements.

 

 

 

6


GEVO, INC.  

Consolidated Statements of Cash Flows - Continued

(in thousands)

(unaudited)

 

Supplemental disclosures of cash and non-cash investing

Nine Months Ended September 30,

 

and financing transactions

2015

 

 

2014

 

Cash paid for interest, net of interest capitalized

$

3,449

 

 

$

3,697

 

Capitalization of interest, from term to 2017 convertible notes

$

-

 

 

$

201

 

Non-cash purchase of property, plant and equipment

$

131

 

 

$

99

 

Conversion of convertible debt to common stock

$

2,000

 

 

$

-

 

2015 Series A Warrant issuance

$

1,437

 

 

$

-

 

2015 Series B Warrant issuance

$

2,528

 

 

$

-

 

2015 Series C Warrant issuance

$

1,299

 

 

$

-

 

Issuance of 2014 Warrants

$

-

 

 

$

2,400

 

 

 

 

 

 

 

 

 

 

See notes to unaudited consolidated financial statements.

 

 

 

7


GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

 

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 renewable chemicals and next generation biofuels company focused on the development and commercialization of alternatives to petroleum-based products based primarily on isobutanol produced from renewable feedstocks. Gevo, Inc. was incorporated in Delaware on June 9, 2005. Gevo, Inc. formed Gevo Development, LLC (“Gevo Development”) in September 2009 to finance and develop biorefineries either through joint venture, licensing arrangements, tolling arrangements or direct acquisition (see Note 9). Gevo Development became a wholly owned subsidiary of the Company in September 2010. Gevo Development purchased Agri-Energy, LLC (“Agri-Energy”) in September 2010. Through May 2012, Agri-Energy, a wholly owned subsidiary of Gevo Development, was engaged in the business of producing and selling ethanol and related products produced at its plant located in Luverne, Minnesota (the “Agri-Energy Facility”). The Company commenced the retrofit of the Agri-Energy Facility in 2011 and commenced initial startup operations for the production of isobutanol at this facility in May 2012. In September 2012, the Company made the strategic decision to pause isobutanol production at the Agri-Energy Facility to focus on optimizing specific parts of the process to further enhance isobutanol production rates. In 2013, the Company modified the Agri-Energy Facility in order to increase the isobutanol production rate. In June 2013, the Company resumed the limited production of isobutanol, operating one fermenter and one Gevo Integrated Fermentation Technology® (“GIFT®”) separation system in order to (i) verify that the modifications had significantly reduced the previously identified infections, (ii) demonstrate that its biocatalyst performs in the one million liter fermenters at the Agri-Energy Facility, and (iii) confirm GIFT® efficacy at commercial scale at the Agri-Energy Facility. In August 2013, the Company expanded production capacity at the Agri-Energy Facility by adding a second fermenter and second GIFT® system to further verify its results with a second configuration of equipment. In October 2013, the Company began commissioning the Agri-Energy Facility on corn mash to test isobutanol production run rates and to optimize biocatalyst production, fermentation separation and water management systems. In March 2014, the Company decided to leverage the flexibility of its GIFT® technology and further modify the Agri-Energy Facility to enable the simultaneous production of isobutanol and ethanol. In July 2014, the Company began more consistent co-production of isobutanol and ethanol at the Agri-Energy Facility, with one fermenter utilized for isobutanol production and three fermenters utilized for ethanol production.   In line with the Company’s strategy to maximize asset utilization and site cash flows, this configuration of the plant should allow the Company to continue to optimize its isobutanol technology at a commercial scale, while taking advantage of potentially favorable ethanol contribution margins. Also with a view to maximizing site cash flows, over certain periods of time, the Company may and has operated the plant for the sole production of ethanol across all four fermenters.

As of  September 30, 2015, the Company continues to conduct research and development, business development, business and financial planning, establishing its facilities including retrofitting the Agri-Energy Facility, initial startup operations for isobutanol production at the Agri-Energy Facility and raising capital. Ultimately, the Company believes that the attainment of profitable operations is dependent upon future events, including completion of its development activities resulting in commercial production and sales of isobutanol or isobutanol-derived products and/or technology, obtaining adequate financing to complete its development activities and build out further isobutanol production capacity, gaining market acceptance and demand for its products and services, and attracting and retaining qualified personnel.

The Company has primarily derived revenue from the sale of ethanol, distiller’s grains and other related products produced as part of the ethanol production process at the Agri-Energy Facility. The production of ethanol alone is not the Company’s intended business and its future strategy is expected to depend on its ability to produce and market isobutanol and products derived from isobutanol. Given that the production of ethanol alone is not the Company’s intended business, and the Company is only beginning to  achieve more consistent production and revenue from the sale of isobutanol, the historical operating results of Agri-Energy may not be indicative of future operating results for Agri-Energy or Gevo.

 

 

8


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

Financial Condition. For the nine months ended September 30, 2015, the Company incurred a consolidated net loss of $28.2 million and had an accumulated deficit of $331.5 million. The Company’s cash and cash equivalents at September 30, 2015 totaled $16.2 million which is primarily being used for the following: (i) operating activities of the Agri-Energy Facility; (ii) operating activities at its corporate headquarters in Colorado, including research and development work; (iii) capital improvements primarily associated with its Agri-Energy Facility; (iv) costs associated with optimizing isobutanol production technology; and (v) debt service obligations. The Company expects to incur future net losses as it continues to fund the development and commercialization of its product candidates. The Company’s transition to profitability is dependent upon, among other things, the successful development and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability or positive cash flows, and unless and until it does, the Company will continue to need to raise additional cash. Management intends to fund future operations through additional private and/or public offerings of debt or equity securities. In addition, the Company may seek additional capital through arrangements with strategic partners or from other sources, it may seek to restructure its debt and it will continue to address its cost structure. Notwithstanding, there can be no assurance that the Company will be able to raise additional funds, or achieve or sustain profitability or positive cash flows from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.   

Basis of Presentation. The unaudited consolidated financial statements of the Company (which include the accounts of its wholly-owned subsidiaries Gevo Development and Agri-Energy) have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the U.S. 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, 2015 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 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, 2014, as amended (the “Annual Report”).

On April 15, 2015, the Board of Directors of the Company approved a reverse split of the Company’s common stock, par value $0.01, at a ratio of one-for-fifteen.   This reverse stock split became effective on April 20, 2015 and, unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split.

Recent Accounting Pronouncements.  In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014‑09”). The objective of ASU 2014-09 is to outline a new, single comprehensive model to use in accounting for revenue arising from contracts with customers. The new revenue recognition model provides a five-step analysis for determining when and how revenue is recognized, depicting the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. ASU 201409 is effective for fiscal years and interim periods within those years beginning after December 15, 2016.  Early adoption is not permitted. On July 9, 2015, the FASB Board voted to delay the implementation of ASU 2014-09 by one year to December 15, 2017.  The Company is currently evaluating the impact of adopting ASU 2014‑09.  

In April 2015, the FASB issued authoritative guidance intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt liabilities, consistent with the presentation of debt discounts. This will result in the elimination of debt issuance costs as an asset and will reduce the carrying value of our debt liabilities. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the potential impact of this guidance.

 

 

 

2. Earnings per Share

Basic net loss per share is computed by dividing the net loss attributable to Gevo, Inc. common stockholders for the period by the weighted-average number of common shares outstanding during the period. Diluted earnings per share (“EPS”) includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Diluted EPS for the nine months ended September 30, 2015 and 2014 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share.

9


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

The following table sets forth securities outstanding that could potentially dilute the calculation of diluted earnings per share.

 

 

As of September 30,

 

 

2015

 

 

2014

 

Warrants to purchase common stock

 

3,913,718

 

 

 

2,504,237

 

2017 Notes

 

1,502,532

 

 

 

1,502,532

 

2022 Notes

 

291,611

 

 

 

315,034

 

Outstanding options to purchase common stock

 

433,371

 

 

 

249,410

 

Unvested restricted common stock

 

36,713

 

 

 

67,348

 

Total

 

6,177,945

 

 

 

4,638,561

 

 

 

3. Inventories

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

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Raw materials

 

 

 

 

 

 

 

Corn

$

142

 

 

$

1,369

 

Enzymes and other inputs

 

209

 

 

 

344

 

Finished goods

 

389

 

 

 

525

 

Work in process

 

610

 

 

 

610

 

Spare parts

 

1,353

 

 

 

1,444

 

Total inventories

$

2,703

 

 

$

4,292

 

 

 

4. Property, Plant and Equipment

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

 

 

Useful

 

September 30,

 

 

December 31,

 

 

Life

 

2015

 

 

2014

 

Construction in progress

-

 

$

181

 

 

$

440

 

Plant machinery and equipment

10 years

 

 

13,840

 

 

 

13,367

 

Site improvements

10 years

 

 

7,039

 

 

 

7,015

 

Retrofit asset

20 years

 

 

65,457

 

 

 

65,601

 

Lab equipment, furniture and fixtures and vehicles

5 years

 

 

6,394

 

 

 

6,385

 

Demonstration plant

2 years

 

 

3,597

 

 

 

3,597

 

Buildings

10 years

 

 

2,543

 

 

 

2,543

 

Computer, office equipment and software

3 years

 

 

1,550

 

 

 

1,490

 

Leasehold improvements, pilot plant, land and support equipment

2 - 5 years

 

 

2,143

 

 

 

2,144

 

Total property, plant and equipment

 

 

 

102,744

 

 

 

102,582

 

Less accumulated depreciation and amortization

 

 

 

(26,239

)

 

 

(21,342

)

Property, plant and equipment, net

 

 

$

76,505

 

 

$

81,240

 

 

Included in cost of goods sold is depreciation of $1.4 million during the three months ended September 30, 2015 and 2014, and $4.3 million and $2.5 million during the nine months ended September 30, 2015 and 2014, respectively.

Included in operating expenses is depreciation of $0.2 million and $0.3 million during the three months ended September 30, 2015 and 2014, respectively, and $0.6 million and $0.8 million during the nine months ended September 30, 2015 and 2014, respectively.

 

 

10


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

5. Embedded Derivatives

Convertible 2022 Notes

In July 2012, the Company issued 7.5% convertible senior notes due 2022 (the “2022 Notes”) which contain the following embedded derivatives: (i) rights to convert into shares of the Company’s common stock, including upon a Fundamental Change (as defined in the indenture governing the 2022 Notes (the “Indenture”)); and (ii) a Coupon Make-Whole Payment (as defined in the Indenture) in the event of a conversion by the holders of the 2022 Notes prior to July 1, 2017. Embedded derivatives are separated from the host contract, the 2022 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 the embedded derivatives within the 2022 Notes meet these criteria and, as such, must be valued separate and apart from the 2022 Notes as one embedded derivative and recorded at fair value each reporting period.

The Company used a binomial lattice model in order to estimate the fair value of the embedded derivative in the 2022 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 2022 Notes would be converted, called or held at each decision point. Within the lattice model, the following assumptions are made: (i) the 2022 Notes will be converted early if the conversion value is greater than the holding value; or (ii) the 2022 Notes will be called if the holding value is greater than both (a) the Redemption Price (as defined in the Indenture) and (b) the conversion value plus the Coupon Make-Whole Payment at the time. If the 2022 Notes are called, then the holders will maximize their value by finding the optimal decision between (1) redeeming at the Redemption Price and (2) converting the 2022 Notes.

Using this lattice, the Company valued the embedded derivative using a “with-and-without method,” where the value of the 2022 Notes including the embedded derivative, is defined as the “with”, and the value of the 2022 Notes excluding the embedded derivative, is defined as the “without”. This method estimates the value of the embedded derivative by looking at the difference in the values between the 2022 Notes with the embedded derivative and the value of the 2022 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 Indenture); (iii) Conversion Price (as defined in the Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated stock volatility; and (vii) estimated credit spread for the Company.

The following table sets forth the inputs to the lattice model that were used to value the embedded derivative.

 

 

 

 

December 31,

 

 

 

 

2014

 

Stock price

 

 

$

4.80

 

Conversion Rate

 

 

 

11.7113

 

Conversion Price

 

 

$

85.39

 

Maturity date

 

 

July 1, 2022

 

Risk-free interest rate

 

 

 

2.00

%

Estimated stock volatility

 

 

 

87

%

Estimated credit spread

 

 

 

20

%

 

Inputs used to estimate the value of the embedded derivative as of September 30, 2015 were substantially similar to those used as of the period ended June 30, 2015. Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the embedded derivatives. For example, the estimated fair value of the embedded derivatives will generally decrease with; (i) a decline in the stock price; (ii) a decrease in the estimated stock volatility; and (iii) a decrease in the estimated credit spread.

 

11


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

Derivative Warrant Liability

 

In December 2013, the Company sold 1,420,250 shares of the Company’s common stock and warrants to purchase an additional1,420,250 shares of the Company’s common stock (the “2013 Warrants”). In August 2014, the Company sold 2,000,000 shares of common stock and warrants to purchase an additional 1,000,000 shares of common stock (the “2014 Warrants”). In February 2015, the Company sold 2,216,667 shares of the Company’s common stock, Series A warrants to purchase an additional 2,216,667 shares of the Company’s common stock (the “2015 Series A Warrants”), and Series B warrants to purchase an additional 2,216,667 shares of the Company’s common stock (the “2015 Series B Warrants”). In May 2015, the Company sold 4,300,000 shares of the Company’s common stock and Series C warrants to purchase an additional 430,000 shares of the Company’s common stock (the “2015 Series C Warrants” and together with the 2015 Series A Warrants and the 2015 Series B Warrants, the “2015 Warrants”).

 

 

 

Issuance

Date

 

Expiration

Date

 

Exercise

Price

 

 

Shares

Underlying

Warrants on

Issuance Date

 

 

Shares Issued

upon Warrant

Exercises as of

September 30,

2015

 

 

Shares

Underlying

Warrants

Outstanding as of

September 30,

2015

 

2013 Warrants

 

12/16/2013

 

12/16/2018

 

$

12.65

 

 

 

1,420,250

 

 

 

304,771

 

 

 

1,115,479

 

2014 Warrants

 

8/5/2014

 

8/5/2019

 

$

8.30

 

 

 

1,000,000

 

 

 

610,765

 

 

 

389,235

 

2015 Series A Warrants

 

2/3/2015

 

2/3/2020

 

$

3.75

 

 

 

2,216,667

 

 

 

321,665

 

 

 

1,895,000

 

2015 Series B Warrants

 

2/3/2015

 

8/3/2015

 

$

3.00

 

 

 

2,216,667

 

 

 

1,907,773

 

 

 

-

 

2015 Series C Warrants

 

5/19/2015

 

5/19/2020

 

$

5.50

 

 

 

430,000

 

 

 

-

 

 

 

430,000

 

 

 

 

 

 

 

 

 

 

 

 

7,283,584

 

 

 

3,144,974

 

 

 

3,829,714

 

 

 

The agreements governing the above warrants include the following terms:

 

·

the 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

 

·

in the event of an extraordinary transaction (as 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 warrant 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, 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.

 

·

Additionally, the agreement governing the 2015 Series B Warrants included the following additional term(s):

 

·

if, commencing on the 30th day after the 2015 Series B Warrants are issued and continuing through the expiration date of the 2015 Series B Warrants, the adjusted market price (as defined in the warrant agreement governing the terms of the 2015 Series B Warrants) of a share of the Company’s common stock was less than $3.00 (as adjusted for stock splits, stock dividends, recapitalization and other similar events), then the holders of the 2015 Series B Warrants could have exercised the 2015 Series B Warrants in a cashless exercise. This cashless exercise provision would have, subject to certain limitations set forth in the warrant agreement, permitted holders of such 2015 Series B Warrants to obtain a number of shares of the Company’s common stock equal to 100% of (i) the aggregate dollar amount of 2015 Series B

12


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

 

Warrants being exercised divided by the market price less (ii) the number of shares into which such 2015 Series B Warrants would then be exercised on a cash basis.  The Series B Warrants expired on August 3, 2015.

Based on these terms, the Company has determined that the 2013 Warrants, the 2014 Warrants, and the 2015 Warrants (together, the “Warrants”) qualify as derivatives and, as such, are presented as derivative warrant liability on the consolidated balance sheets and recorded at fair value each reporting period. The fair value of the Warrants was estimated to be $3.4 million and $3.1 million as of September 30, 2015 and December 31, 2014, respectively. The increase in the estimated fair value of the Warrants represents an unrealized loss which has been recorded as a loss from the change in fair value of derivative warrant liability in the consolidated statements of operations.

During the nine months ended September 30, 2015, Common Stock was issued as a result of exercise of Warrants as described below:

 

 

 

Nine Months Ended September 30, 2015

 

 

Common Stock Issued

 

 

Proceeds

 

2013 Warrants

 

304,756

 

 

$

1,057,010

 

2014 Warrants

 

610,765

 

 

 

2,204,540

 

2015 Series A Warrants

 

321,665

 

 

 

1,302,750

 

2015 Series B Warrants

 

1,907,773

 

 

 

5,586,564

 

2015 Series C Warrants

 

-

 

 

 

-

 

 

 

3,144,960

 

 

$

10,150,863

 

 

In May 2015, certain holders of the 2013 Warrants agreed to exercise some or all of their 2013 Warrants for cash, at the then-current exercise price of $15.30 per share. As an inducement to exercise the 2013 Warrants, the Company agreed to pay each such holder a cash inducement fee in an amount equal to $11.55 for each share of common stock issued upon such exercise, which resulted in net proceeds to the Company of $3.75 per share. In addition, certain holders of the 2014 Warrants agreed to exercise some or all of their 2014 Warrants for cash, at the then-current exercise price of $9.60 per share. As an inducement to exercise the 2014 Warrants, the Company agreed to pay each such holder a cash inducement fee in an amount equal to $5.85 for each share of common stock issued upon such exercise, which resulted in net proceeds to the Company of $3.75 per share. The Company received aggregate proceeds, net of inducement fees, of approximately $3.43 million from the exercises of the 2013 Warrants and 2014 Warrants described above.

 

 

6. 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,

 

 

2015

 

 

2014

 

Accounts payable - trade

$

3,287

 

 

$

2,639

 

Accrued legal-related fees

 

1,201

 

 

 

2,944

 

Accrued employee compensation

 

587

 

 

 

801

 

Accrued interest

 

467

 

 

 

1,009

 

Other accrued liabilities *

 

1,269

 

 

 

1,195

 

Total accounts payable and accrued liabilities

$

6,811

 

 

$

8,588

 

 

* Other accrued liabilities consists of franchise taxes, property taxes, short term capital lease, audit fees, and a variety of other expenses including software, legal fees, etc. none of which individually represent greater than 5% of total current liabilities.

 

 

13


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

7. Senior Secured Debt, Secured Debt and 2022 Notes

Senior Secured Debt

In May 2014, the Company entered into a term loan agreement (the “Loan Agreement”) with the lenders party thereto from time to time (each, a “Lender” and collectively, the “Lenders”) and Whitebox Advisors, LLC, as administrative agent for the Lenders (“Whitebox”), with a maturity date of March 15, 2017, pursuant to which the Lenders committed to provide one or more senior secured term loans to the Company in an aggregate amount of up to approximately $31.1 million on the terms and conditions set forth in the Loan Agreement (collectively, the “Term Loan”). The first advance of the Term Loan in the amount of $22.8 million (the “First Advance”), net of discounts and issue costs of $1.6 million and $1.5 million, respectively, was made to the Company in May 2014. Also in May 2014, the Company and its subsidiaries entered into an Exchange and Purchase Agreement (the “Exchange and Purchase Agreement”) with WB Gevo, Ltd. and the other Lenders party thereto from time to time and Whitebox, in its capacity as administrative agent for the Lenders. Pursuant to the terms of the Exchange and Purchase Agreement, the Lenders were given the right, subject to certain conditions, to exchange all or a portion of the outstanding principal amount of the Term Loan for the Company’s 2017 Notes (as defined below), which are convertible into shares of the Company’s common stock.  While outstanding, the Term Loan bore an interest rate equal to 15% per annum, of which 5% was payable in cash and 10% was payable in kind and capitalized and added to the principal amount of the Term Loan.

In June 2014, the Lenders exchanged all $25.9 million of outstanding principal amount of Term Loan provided in the First Advance for 10% convertible senior secured notes due 2017 (the “2017 Notes” and, together with the 2022 Notes, the “Convertible Notes”), together with accrued paid-in-kind interest of $0.2 million. The terms of the 2017 Notes are set forth in an indenture by and among the Company, its subsidiaries in their capacity as guarantors, and Wilmington Savings Fund Society, FSB, as trustee (the “2017 Notes Indenture”). The 2017 Notes will mature on March 15, 2017. The 2017 Notes have a conversion price (the “Conversion Price”) equal to $17.38 per share or 0.0576 shares per $1 principal amount of 2017 Notes. Optional prepayment of the 2017 Notes will not be permitted. The 2017 Notes bear interest at a rate equal to 10% per annum, which is payable 5% in cash and, under certain circumstances, 5% in kind and capitalized and added to the principal amount of the 2017 Notes. While the 2017 Notes are outstanding, the Company is required to maintain an interest reserve in an amount equal to 10% of the aggregate outstanding principal amount, to be adjusted on an annual basis. As of September 30, 2015, there was a balance of $2.6 million in the interest reserve account. This amount is classified as restricted deposits.

The 2017 Notes Indenture contains customary affirmative and negative covenants for agreements of this type and events of default, including, restrictions on disposing of certain assets, granting or otherwise allowing the imposition of a lien against certain assets, incurring certain amounts of additional indebtedness, making investments, acquiring or merging with another entity, and making dividends and other restricted payments, unless the Company receives the prior approval of the required holders. The 2017 Notes Indenture also contains limitations on the ability of the holder to assign or otherwise transfer its interest in the 2017 Notes.  The 2017 Notes are secured by a lien on substantially all of the assets of the Company and is guaranteed by Agri-Energy and Gevo Development (together, the “Guarantor Subsidiaries” or “Guarantors”). On June 6, 2014, in connection with the issuance of the 2017 Notes, the Company and the Guarantor Subsidiaries entered into a pledge and security agreement in favor of the collateral trustee. The collateral pledged includes substantially all of the assets of the Company and the Guarantor Subsidiaries, including intellectual property and real property.  Agri-Energy has also entered into a mortgage with respect to the real property located in Luverne Minnesota.

The holders of the 2017 Notes may, at any time until the close of business on the business day immediately preceding the maturity date, convert the principal amount of the 2017 Notes, or any portion of such principal amount which is at least $1,000, into shares of the Company’s common stock. Upon conversion of the 2017 Notes, the Company will deliver shares of common stock at a conversion rate of 0.0576 shares of common stock per $1.00 principal amount of the 2017 Notes (equivalent to a conversion price of approximately $17.38 per share of common stock). Such conversion rate is subject to adjustment in certain circumstances, including in the event that there is a dividend or distribution paid on shares of the common stock or a subdivision, combination or reclassification of the common stock. The Company also has the right to increase the conversion rate (i) by any amount for a period of at least 20 business days if the Company’s board of directors determines that such increase would be in the Company’s best interest or (ii) to avoid or diminish any income tax to holders of shares of common stock or rights to purchase shares of common stock in connection with any dividend or distribution. In addition, subject to certain conditions described herein, each holder who exercises its option to voluntarily convert its 2017 Notes will receive a make-whole payment in an amount equal to any unpaid interest that would otherwise have been payable on such 2017 Notes through the maturity date (a “Voluntary Conversion Make-Whole Payment”). Subject to certain limitations, the Company may pay any Voluntary Conversion Make-Whole Payments either in cash or in shares of common stock, at its election.

The Company has the right to require holders of the 2017 Notes to convert all or part of the 2017 Notes into shares of its common stock if the last reported sales price of the common stock over any 10 consecutive trading days equals or exceeds 150% of

14


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

the applicable conversion price (a “Mandatory Conversion”). Each holder whose 2017 Notes are converted in a Mandatory Conversion will receive a make-whole payment for the converted notes in an amount equal to any unpaid interest that would have otherwise been payable on such 2017 Notes through the maturity date (a “Mandatory Conversion Make-Whole Payment”). Subject to certain limitations, the Company may pay any Mandatory Conversion Make-Whole Payments either in cash or in shares of common stock, at its election. The Company did not require any holders to convert in 2014 and has not required any holders to convert through the nine months ended September 30, 2015.

If a fundamental change of the Company occurs, the holders of 2017 Notes may require the Company to repurchase all or a portion of the 2017 Notes at a cash repurchase price equal to 100% of the principal amount of such 2017 Notes, plus accrued and unpaid interest, if any, through, but excluding, the repurchase date, plus a cash make-whole payment for the repurchased 2017 Notes in an amount equal to any unpaid interest that would otherwise have been payable on such convertible 2017 Notes through the maturity date. A fundamental change includes, among other things, the Company’s common stock ceasing to be listed on a national securities exchange.

On July 31, 2014, January 28, 2015 and May 13, 2015, the Company entered into amendments to the 2017 Notes Indenture to, among other things, permit the offering and issuance of additional warrants and the incurrence of indebtedness by the Company under such additional warrants.

On June 1, 2015, the Company entered into further amendments to the 2017 Notes Indenture to, among other things, permit (i) the execution, delivery, and performance of the FCStone Agreements (as defined below) and the related Guaranty (as defined below), (ii) the incurrence of indebtedness by the Company and Agri-Energy pursuant thereto and (iii) the making of the investments by the Company and Agri-Energy thereunder.

On August 22, 2015, the Company entered into further amendments to the 2017 Notes Indenture to, among other things, permit (i) the execution, delivery, and performance of the License Agreement (as defined below) and (ii) the exchange of all or any portion of the 2022 Notes for common stock issued by the Company.

In connection with the transactions described above, the Company also entered into a Registration Rights Agreement, dated May 9, 2014 (the “Registration Rights Agreement”), pursuant to which the Company filed a registration statement on Form S-3 registering the resale of approximately 1.2 million shares of the Company’s common stock which are issuable under the 2017 Notes. This registration statement was declared effective on July 25, 2014.

The Company has elected the fair value option for accounting of the Term Loan and 2017 Notes in order for management to mitigate income statement volatility caused by measurement basis differences between the embedded instruments or to eliminate complexities of applying certain accounting models. Accordingly, the principal amount of 2017 Notes outstanding at September 30, 2015 of $26.1 million has been recorded at its estimated fair value of $21.9 million and is included in the 2017 Notes recorded at fair value on the consolidated balance sheets at September 30, 2015. Debt issuance costs of $1.5 million were expensed at issuance and a gain of $4.2 million has been recognized in subsequent periods in connection with the election of the fair value option.  Change in the estimated fair value of the 2017 Notes represents an unrealized gain included in gain (loss) from change in fair value of 2017 Notes in the consolidated statements of operations. The fair value of the 2017 Notes at the issuance date were equal to the net proceeds from the loan.  During the nine months ended September 30, 2015, the Company incurred cash interest expense of $1.3 million.

The following table sets forth the inputs to the lattice model that were used to value the Term Loan and 2017 Notes for which the fair value option was elected.  

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Stock price

$

1.72

 

 

$

4.80

 

Conversion Rate

 

57.6

 

 

 

57.6

 

Conversion Price

$

17.38

 

 

$

17.38

 

Maturity date

March 15, 2017

 

 

March 15, 2017

 

Risk-free interest rate

 

0.47

%

 

 

0.80

%

Estimated stock volatility

 

130.0

%

 

 

87.0

%

Estimated credit spread

 

27.0

%

 

 

15.0

%

 

15


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

The following table sets forth information pertaining to the Term Loan and 2017 Notes which is included in the Company’s consolidated balance sheets (in thousands).

 

 

Principal Amount of Term Loans

 

 

Principal Amount of 2017 Notes

 

 

Change in Estimated Fair Value

 

 

Total

 

Balance - December 31, 2013

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Issuance of Term Loan

 

25,907

 

 

 

-

 

 

 

-

 

 

 

25,907

 

Exchange of Term Loan for 2017 Notes

 

(25,907

)

 

 

25,907

 

 

 

-

 

 

 

-

 

Non-cash paid-in-kind interest expense

 

-

 

 

 

201

 

 

 

-

 

 

 

201

 

Gain from change in fair value of debt

 

-

 

 

 

-

 

 

 

(648

)

 

 

(648

)

Balance - December 31, 2014

$

-

 

 

$

26,108

 

 

$

(648

)

 

$

25,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain from change in fair value of debt

 

-

 

 

 

-

 

 

 

(3,582

)

 

 

(3,582

)

Balance - September 30, 2015

$

-

 

 

$

26,108

 

 

$

(4,230

)

 

$

21,878

 

 

Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the 2017 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. The change in the estimated fair value of the 2017 Notes during the nine months ended September 30, 2015, represents an unrealized gain which has been recorded as gain from change in fair value of 2017 Notes in the consolidated statements of operations.

Secured Debt

The following table sets forth information pertaining to the Company’s secured debt issued to TriplePoint Capital LLC (“TriplePoint”) which is included in the Company’s consolidated balance sheets (in thousands).

 

 

September 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Secured debt

 

 

 

 

 

 

 

TriplePoint - May 2014 Advance

$

561

 

 

$

822

 

Total secured debt

 

561

 

 

 

822

 

Less:

 

 

 

 

 

 

 

Unamortized debt discounts

 

-

 

 

 

(49

)

 

 

561

 

 

 

773

 

Less current portion of debt

 

(320

)

 

 

(288

)

Long-term portion of debt

$

241

 

 

$

485

 

 

Debt discounts associated with the issuance of the Company’s secured debt and convertible notes are recorded in the consolidated balance sheets as a reduction to related debt balances. The Company amortizes debt discount to interest expense over the term of the debt or expected life of the debt using the effective interest method.

Amended Agri-Energy Loan Agreement. In October 2011, the loan and security agreement with TriplePoint was amended and restated (the “Amended Agri-Energy Loan Agreement”) to provide Agri-Energy with additional term loan facilities of up to $15.0 million to pay a portion of the costs, expenses, and other amounts associated with the retrofit of the Agri-Energy Facility to produce isobutanol. In October 2011, Agri-Energy borrowed $10.0 million under the additional term loan facilities which bore interest at a rate equal to 11%. In January 2012, Agri-Energy borrowed an additional $5.0 million under the additional term loan facilities, bringing the total borrowed under the additional term loan facilities to $15.0 million.

In May 2014, the Company and its subsidiaries entered into a Consent Under and Third Amendment to Amended and Restated Plain English Growth Capital Loan and Security Agreement and Omnibus Amendment to Loan Documents (the “2014 Amendment”) pursuant to which TriplePoint amended its agreements with the Company and its subsidiaries and consented to (a) the execution, delivery, and performance of the Loan Agreement, the Exchange and Purchase Agreement, the Registration Rights Agreement, the 2017 Notes Indenture, the 2017 Notes, and the other documents related thereto (collectively the “Senior Loan Documents”); (b) the incurrence of the Term Loan with Whitebox and any other indebtedness under the Senior Loan Documents (collectively, the “Senior

16


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

Indebtedness”); (c) the consummation of the exchange of the Term Loan for the 2017 Notes; (d) the offering, issuance and sale of the 2017 Notes to Whitebox and the conversion of any 2017 Notes into the common stock of the Company pursuant to the terms of the 2017 Notes Indenture; (e) the guaranty of the Senior Indebtedness provided by the Guarantors; (f) the liens granted by each of the Company and the Guarantors to secure the Senior Indebtedness and the other obligations under the Senior Loan Documents; (g) the consummation of any transactions contemplated by, and the terms of, the Senior Loan Documents by the Company and the Guarantors; and (h) the payment and performance of any of the obligations under the Senior Loan Documents by the Company and the Guarantors, including the making of dividends and distributions by the Guarantors to the Company for the purpose of enabling the Company to make any payments under the Senior Loan Documents.

As part of the 2014 Amendment, the Company repaid $9.6 million in principal payments due under the foregoing loan agreements with TriplePoint and entered into an amended Loan Agreement with TriplePoint. At September 30, 2015, the amended loan agreement had a principal balance of $0.6 million, which amortizes over 36 months and bears interest at a rate equal to 9% per annum and matures in May of 2017. There were no additional concessions or terms of the agreement which would require recognition of a gain or loss due to this amended agreement. As of September 30, 2015, Agri-Energy has granted TriplePoint a junior security interest in all of its assets as security for its obligations under the Amended Agri-Energy Loan Agreement.

 

On July 31, 2014, January 28, 2015, and May 13, 2015, the Company entered into further amendments to the Amended Agri-Energy Loan Agreement and the Gevo Security Agreement to, among other things, permit the offering and issuance of additional warrants and the incurrence of indebtedness by the Company under such additional warrants.

At September 30, 2015, we were in compliance with the debt covenants under the Amended Agri-Energy Loan Agreement. As of September 30, 2015, Agri-Energy has granted TriplePoint a junior security interest in, and a lien upon, all of its assets as security for its obligations under the Amended Agri-Energy Loan Agreement. Gevo, Inc. has also guaranteed Agri-Energy’s obligations under the Amended Agri-Energy Loan Agreement. As additional security, concurrently with the execution of the Amended Agri-Energy Loan Agreement, (i) Gevo Development entered into a limited recourse continuing guaranty in favor of TriplePoint, (ii) Gevo Development entered into an amended and restated limited recourse membership interest pledge agreement in favor of TriplePoint, pursuant to which it pledged the membership interests of Agri-Energy as collateral to secure the obligations under its guaranty and (iii) Gevo, Inc. entered into a security agreement which secured its guarantee of Agri-Energy’s obligations under the Amended Agri-Energy Loan Agreement.  Under the terms of the Amended Agri-Energy Loan Agreement, subject to certain limited exceptions, Agri-Energy is only permitted to pay dividends if the following conditions are satisfied: (i) the Retrofit of the Agri-Energy Facility is complete and the facility is producing commercial volumes of isobutanol, (ii) its net worth is greater than or equal to $10.0 million, and (iii) no event of default has occurred and is continuing under the agreement.

2022 Notes

The following table sets forth information pertaining to the 2022 Notes which is included in the Company’s consolidated balance sheets (in thousands).  

 

 

Embedded

Derivatives

 

 

Principal

Amount

of 2022 Notes

 

 

Debt

Discount

 

 

Total

 

Balance - December 31, 2013

$

3,470

 

 

$

26,900

 

 

$

(15,869

)

 

$

14,501

 

Amortization of debt discount

 

-

 

 

 

-

 

 

 

2,648

 

 

 

2,648

 

Gain from change in fair value of embedded derivatives

 

(3,470

)

 

 

-

 

 

 

-

 

 

 

(3,470

)

Balance - December 31, 2014

$

-

 

 

$

26,900

 

 

$

(13,221

)

 

$

13,679

 

Amortization of debt discount

 

-

 

 

 

-

 

 

 

3,563

 

 

 

3,563

 

Conversion

 

-

 

 

 

(2,000

)

 

 

-

 

 

 

(2,000

)

Balance - September 30, 2015

$

-

 

 

$

24,900

 

 

$

(9,658

)

 

$

15,242

 

 

In July 2012, the Company sold $45.0 million in aggregate principal amount of 2022 Notes, with net proceeds of $40.9 million, after accounting for $2.7 million and $1.4 million of discounts and issue costs, respectively. The 2022 Notes bear interest at 7.5% which is to be paid semi-annually in arrears on January 1 and July 1 of each year. The 2022 Notes will mature on July 1, 2022, unless earlier repurchased, redeemed or converted. During the nine months ended September 30, 2015, the Company recorded $1.7 million of expense related to the amortization of debt discounts and issue costs and $1.0 million of expense related to the conversion of debt and recorded $0.9 million of interest expense related to the 2022 Notes. The amortization of debt issue costs and debt discounts and cash interest are included as a component of interest expense in the consolidated statements of operations. The Company amortizes

17


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

debt discounts and debt issue costs associated with the 2022 Notes using an effective interest rate of 40% from the issuance date through July 1, 2017, a five-year period, which represents the date the holders can require the Company to repurchase the 2022 Notes.

The 2022 Notes are convertible at conversion rate of 11.7113 shares of the Company’s common stock per $1,000 principal amount of 2022 Notes, subject to adjustment in certain circumstances as described in the Indenture. This is equivalent to a conversion price of approximately $85.39 per share of common stock. Holders may convert the 2022 Notes at any time prior to the close of business on the third business day immediately preceding the maturity date of July 1, 2022.

If a holder elects to convert its 2022 Notes prior to July 1, 2017, such holder shall be entitled to receive, in addition to the consideration upon conversion, a Coupon Make-Whole Payment. The Coupon Make-Whole Payment is equal to the sum of the present values of the number of semi-annual interest payments that would have been payable on the 2022 Notes that a holder has elected to convert from the last day through which interest was paid up to but excluding July 1, 2017, computed using a discount rate of 2%. The Company may pay any Coupon Make-Whole Payment either in cash or in shares of common stock at its election. Under the Amended Agri-Energy Loan Agreement with TriplePoint, the Company is prohibited from making any Coupon Make-Whole Payments in cash prior to the payment in full of all remaining outstanding obligations under the Amended Agri-Energy Loan Agreement. If the Company elects to pay in common stock, the stock will be valued at 90% of the average of the daily volume weighted average prices of the Company’s common stock for the 10 trading days preceding the date of conversion. During the nine months ended September 30, 2015, no holders of the 2022 Notes elected to convert notes.

If a Make-Whole Fundamental Change (as defined in the Indenture) occurs and a holder elects to convert its 2022 Notes prior to July 1, 2017, the Conversion Rate will increase based upon reference to the table set forth in Schedule A of the Indenture. In no event will the Conversion Rate increase to more than 13.4680 shares of common stock per $1,000 principal amount of 2022 Notes.

If a Fundamental Change (as defined in the Indenture) occurs at any time, then each holder will have the right to require the Company to repurchase all of such holder’s 2022 Notes, or any portion thereof that is an integral multiple of $1,000 principal amount, for cash at a repurchase price of 100% of the principal amount of such 2022 Notes plus any accrued and unpaid interest thereon through, but excluding, the repurchase date. Additionally, on July 1, 2017, each holder will have the right to require the Company to repurchase all of such holder’s 2022 Notes, or any portion thereof that is an integral multiple of $1,000 principal amount, for cash at a repurchase price of 100% of the principal amount of such 2022 Notes plus any accrued and unpaid interest thereon through, but excluding, the repurchase date.

The Company shall have a provisional redemption right (“Provisional Redemption”) to redeem, at its option, all or any part of the 2022 Notes at a price payable in cash, beginning on July 1, 2015 and prior to July 1, 2017, provided that the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the trading day immediately prior to the date of the redemption notice exceeds 150% of the Conversion Price in effect on such trading day. On or after July 1, 2017, the Company shall have an optional redemption right (“Optional Redemption”) to redeem, at its option, all or any part of the 2022 Notes at a price payable in cash. The price payable in cash for the Optional Redemption or Provisional Redemption is equal to 100% of the principal amount of 2022 Notes redeemed plus any accrued and unpaid interest thereon through, but excluding, the repurchase date.

If there is an Event of Default (as defined in the Indenture) under the 2022 Notes, the holders of not less than 25% in principal amount of Outstanding Notes (as defined in the Indenture) by notice to the Company and the trustee may, and the trustee at the request of such holders shall, declare the principal amount of all the Outstanding Notes and accrued and unpaid interest thereon to be due and payable immediately.  There have been no events of default as of September 30, 2015.

 

 

8. Significant Agreements

Off-Take, Distribution and Marketing Agreements   

Off-Take and Marketing Alliance Agreement and Renewable Fuels Supply Chain Agreement with Mansfield Oil Company. In August 2011, the Company entered into a commercial off-take agreement with Mansfield Oil Company (“Mansfield”), to distribute isobutanol-based fuel into the petroleum market. The agreement allows Mansfield to blend the Company’s isobutanol for its own use, and to be a distributor of the Company’s isobutanol for a term of five years. The Company also entered into a three-year supply services agreement, with automatic one-year renewals thereafter, with C&N, a Mansfield subsidiary (“C&N”), which will provide supply chain services including logistics management, customer service support, invoicing and billing services. Since beginning operations of the side-by-side configuration of our plant, the Company has sold marginal amounts of isobutanol, including during the period ended September 30, 2015.  No amounts were recorded for the nine months ended September 30, 2015.    

18


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

Ethanol Marketing Agreement with C&N, a subsidiary of Mansfield Oil Company. Substantially all ethanol sold by Agri-Energy from the date of acquisition through December 31, 2014, and during the nine months ended September 30, 2015 was sold to C&N pursuant to an ethanol purchase and marketing agreement.  The ethanol purchase and marketing agreement with C&N was entered into on April 1, 2009 and automatically renews for subsequent one-year terms unless either party terminates the agreement 60 days before the end of a term. Under the terms of the agreement, C&N will market substantially all of Agri-Energy’s ethanol production from the Agri-Energy Facility and will pay to Agri-Energy the gross sales price paid by the end customer less expenses and a marketing fee.

Jet Fuel Supply Agreements with the Defense Logistics Agency (U.S. Air Force, U.S. Army and U.S. Navy). During September 2011, the Company was awarded a contract for the procurement of up to 11,000 gallons of alcohol-to-jet (ATJ) fuel for the purposes of certification and testing by the U.S. Air Force. The term of the agreement was through December 30, 2012. In September 2012, the Company was awarded an additional contract by the U.S. Air Force for the procurement of up to 45,000 gallons of biojet fuel. In March 2013, the Company entered into a contract with the Defense Logistics Agency to supply the U.S. Army with 3,650 gallons of biojet fuel and in May 2013 this initial order was increased by 12,500 gallons. In September 2013, the Company entered into a contract with the Defense Logistics Agency to supply the U.S. Navy with 20,000 gallons of biojet fuel. During the nine months ended September 30, 2015, the Company recorded $1.0 million of revenue associated with shipments of biojet fuel under these contracts.  In July 2015, the Company made the final shipment of biojet fuel under its contracts with the Defense Logistics Agency.

License Agreements

Patent Cross-License Agreement with Butamax Advanced Biofuels, LLC.  On August 22, 2015, the Company entered into a Patent Cross-License Agreement (the “License Agreement”) with Butamax Advanced Biofuels, LLC (“Butamax”) to license certain patent rights.

Pursuant to the terms of the License Agreement, each party received a non-exclusive license under certain patents and patent applications owned or licensed (and sublicensable) by the other party for the production and use of biocatalysts in the manufacture of isobutanol using certain production process technology for the separation of isobutanol, and to manufacture and sell such isobutanol in any fields relating to the production or use of isobutanol and isobutanol derivatives, subject to the customer-facing field restrictions described below.  Each party also received a non-exclusive license to perform research and development on biocatalysts for the production, recovery and use of isobutanol.

Each party may produce and sell up to thirty million gallons of isobutanol per year in any field on a royalty-free basis.  Butamax will be the primary customer-facing seller of isobutanol in the field of fuel blending (subject to certain exceptions, the “Direct Fuel Blending” field) and the Company will be the primary customer-facing seller of isobutanol in the field of jet fuel for use in aviation gas turbines (the “Jet” field, also subject to certain exceptions).  As such, subject to each party’s right to sell up to thirty million gallons of isobutanol per year in any field on a royalty-free basis, the Company will only sell isobutanol through Butamax in the Direct Fuel Blending field subject to a royalty based on the net sales price for each gallon of isobutanol sold or transferred by the Company, its affiliates or sublicensees within the Direct Fuel Blending field (whether through Butamax or not) and on commercially reasonable terms to be negotiated between the parties, and Butamax will only sell isobutanol through the Company in the Jet field subject to a royalty based on the net sales price for each gallon of isobutanol sold or transferred by Butamax, its affiliates or sublicensees within the Jet field (whether through the Company or not) and on commercially reasonable terms to be negotiated between the parties; provided, that each party may sell up to fifteen million gallons of isobutanol in a given year directly to customers in the other party’s customer-facing field on a royalty-free basis so long as the isobutanol volumes are within the permitted thirty million gallons of isobutanol sold or otherwise transferred per year in any field described above and, in certain instances, each party may then sell up to the total permitted thirty million gallons per year in the other party’s customer-facing field on a royalty-free basis. In addition, in order to maintain its status as the primary customer-facing seller in these specific fields, each party must meet certain milestones within the first five years of the License Agreement.  If such milestones are not met as determined by an arbitration panel, then the other party will have the right to sell directly to customers in the other party’s customer-facing field subject to the payment of certain royalties to the other party on such sales.

In addition to the royalties discussed above for sales of isobutanol in the Direct Fuel Blending field, and subject to the Company’s right to sell up to thirty million gallons of isobutanol per year in any field on a royalty-free basis, the Company will pay to Butamax a royalty per gallon of isobutanol sold or transferred by the Company, its affiliates or sublicensees within the field of isobutylene applications (other than isobutylene for paraxylene, isooctane, Jet, diesel and oligomerized isobutylene applications).  Likewise, in addition to the royalties discussed above for sales of isobutanol in the Jet field, and subject to Butamax’s right to sell up to thirty million gallons of isobutanol per year in any field on a royalty-free basis, Butamax will pay to the Company a royalty per gallon of isobutanol sold or transferred by Butamax, its affiliates or sublicensees within the fields of marine gasoline, retail packaged fuels and paraxylene (except for gasoline blending that results in use in marine or other fuel applications).  The royalties described

19


GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)

above will be due only once for any volume of isobutanol sold or transferred under the License Agreement, and such royalties accrue when such volume of isobutanol is distributed for end use in the particular royalty-bearing field.  All sales of isobutanol in other fields will be royalty-free, subject to the potential technology fee described below.

In the event that the Company, its affiliates or sublicensees choose to employ a certain solids separation technology for the production of isobutanol at one of their respective plants, the Company is granted an option to license such technology from Butamax on a non-exclusive basis subject to the pay