gevo-10q_20160930.htm

 

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, 2016

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      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      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

 

 

  (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  

As of October 31, 2016, 136,447,127 shares of the registrant’s common stock were outstanding.

 

 

 

 


 

GEVO, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

INDEX

 

 

 

 

Page

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements

3

 

 

Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015

3

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015
(unaudited)

4

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (unaudited)

5

 

 

Notes to Unaudited Consolidated Financial Statements

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

 

Controls and Procedures

40

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

41

Item 1A.

 

Risk Factors

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

 

Defaults Upon Senior Securities

43

Item 4.

 

Mine Safety Disclosures

43

Item 5.

 

Other Information

43

Item 6.

 

Exhibits

44

 

 

Signatures

47

 

 

 

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,

 

 

2016

 

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

31,063

 

 

$

17,031

 

Accounts receivable

 

1,079

 

 

 

1,391

 

Inventories

 

3,203

 

 

 

3,487

 

Prepaid expenses and other current assets

 

844

 

 

 

731

 

Total current assets

 

36,189

 

 

 

22,640

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

76,507

 

 

 

76,777

 

Restricted deposits

 

2,611

 

 

 

2,611

 

Deposits and other assets

 

803

 

 

 

803

 

Total assets

$

116,110

 

 

$

102,831

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

$

4,360

 

 

$

7,476

 

Current portion of secured debt, net

 

-

 

 

 

330

 

Current portion 2017 Notes recorded at fair value

 

25,194

 

 

 

-

 

Derivative warrant liability

 

10,723

 

 

 

10,493

 

Other current liabilities

 

44

 

 

 

-

 

Total current liabilities

 

40,321

 

 

 

18,299

 

Long-term portion of secured debt, net

 

-

 

 

 

153

 

Long term portion 2017 Notes recorded at fair value

 

-

 

 

 

21,565

 

2022 Notes, net

 

8,779

 

 

 

14,341

 

Other long-term liabilities

 

18

 

 

 

147

 

Total liabilities

 

49,118

 

 

 

54,505

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (see Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

Common stock, $0.01 par value per share; 250,000,000 authorized; 131,769,984 and

   21,607,048 shares issued and outstanding at September 30, 2016 and

   December 31, 2015, respectively

 

1,317

 

 

 

216

 

Additional paid-in capital

 

440,106

 

 

 

387,602

 

Deficit accumulated

 

(374,431

)

 

 

(339,492

)

Total stockholders' equity

 

66,992

 

 

 

48,326

 

Total liabilities and stockholders' equity

$

116,110

 

 

$

102,831

 

 

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,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue and cost of goods sold

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ethanol sales and related products, net

$

6,363

 

 

$

7,551

 

 

$

19,288

 

 

$

20,604

 

Hydrocarbon revenue

 

451

 

 

 

192

 

 

 

1,462

 

 

 

1,449

 

Grant and other revenue

 

130

 

 

 

274

 

 

 

627

 

 

 

787

 

Total revenues

 

6,944

 

 

 

8,017

 

 

 

21,377

 

 

 

22,840

 

Cost of goods sold

 

9,650

 

 

 

10,629

 

 

 

28,862

 

 

 

29,761

 

Gross loss

 

(2,706

)

 

 

(2,612

)

 

 

(7,485

)

 

 

(6,921

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

1,156

 

 

 

1,527

 

 

 

3,670

 

 

 

5,014

 

Selling, general and administrative expense

 

2,273

 

 

 

5,135

 

 

 

6,337

 

 

 

13,406

 

Total operating expenses

 

3,429

 

 

 

6,662

 

 

 

10,007

 

 

 

18,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(6,135

)

 

 

(9,274

)

 

 

(17,492

)

 

 

(25,341

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,100

)

 

 

(2,121

)

 

 

(6,497

)

 

 

(6,186

)

(Loss)/Gain on exchange or conversion of debt

 

(920

)

 

 

-

 

 

 

(920

)

 

 

285

 

(Loss)/Gain on extinguishment of warrant liability

 

5

 

 

 

-

 

 

 

(918

)

 

 

1,775

 

(Loss)/Gain from change in fair value of the 2017

   Notes

 

(1,854

)

 

 

157

 

 

 

(3,629

)

 

 

3,582

 

(Loss)/Gain from change in fair value of derivative

   warrant liability

 

1,154

 

 

 

4,719

 

 

 

(4,171

)

 

 

(2,361

)

Loss on issuance of equity

 

-

 

 

 

-

 

 

 

(1,519

)

 

 

-

 

Other income

 

1

 

 

 

-

 

 

 

207

 

 

 

14

 

Total other expense, net

 

(3,714

)

 

 

2,755

 

 

 

(17,447

)

 

 

(2,891

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(9,849

)

 

 

(6,519

)

 

 

(34,939

)

 

 

(28,232

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share  - basic and diluted

$

(0.10

)

 

$

(0.39

)

 

$

(0.62

)

 

$

(2.22

)

Weighted-average number of common shares

   outstanding - basic and diluted

 

96,753,965

 

 

 

16,688,632

 

 

 

56,285,311

 

 

 

12,700,844

 

 

See notes to unaudited consolidated financial statements.

 

 

 

4


 

GEVO, INC.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

 

2016

 

 

2015

 

Operating Activities

 

 

 

 

 

 

 

Net loss

$

(34,939

)

 

$

(28,232

)

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

 

 

 

 

 

 

 

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

 

4,171

 

 

 

2,361

 

Loss/(Gain) from change in fair value of the 2017 Notes

 

3,629

 

 

 

(3,582

)

Loss/(Gain) on exchange or conversion of debt

 

920

 

 

 

(285

)

Loss/(Gain) on extinguishment of warrant liability

 

918

 

 

 

(1,775

)

Loss/(Gain) on issuance of equity

 

1,519

 

 

 

-

 

Stock-based compensation

 

812

 

 

 

1,953

 

Depreciation and amortization

 

5,038

 

 

 

4,897

 

Non-cash interest expense

 

3,339

 

 

 

2,740

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

312

 

 

 

1,227

 

Inventories

 

284

 

 

 

1,589

 

Prepaid expenses and other current assets

 

(113

)

 

 

114

 

Accounts payable, accrued expenses, and long-term liabilities

 

(2,095

)

 

 

(2,019

)

Net cash used in operating activities

 

(16,205

)

 

 

(21,012

)

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Acquisitions of property, plant and equipment

 

(5,520

)

 

 

(271

)

Proceeds from sales tax refund for property, plant and equipment

 

-

 

 

 

144

 

Net cash used in investing activities

 

(5,520

)

 

 

(127

)

 

See notes to unaudited consolidated financial statements.

5


 

GEVO, INC.

Consolidated Statements of Cash Flows - Continued

(in thousands)

(unaudited)

 

 

Nine Months Ended September 30,

 

 

2016

 

 

2015

 

Financing Activities

 

 

 

 

 

 

 

Payments on secured debt

 

(504

)

 

 

(236

)

Debt and equity offering costs

 

(3,295

)

 

 

(2,785

)

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

   stock purchase plan

 

-

 

 

 

3

 

Proceeds from issuance of common stock and common stock units

 

28,661

 

 

 

23,850

 

Proceeds from the exercise of warrants

 

10,895

 

 

 

10,151

 

Net cash provided by financing activities

 

35,757

 

 

 

30,983

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

14,032

 

 

 

9,844

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

Beginning of period

 

17,031

 

 

 

6,359

 

End of period

$

31,063

 

 

$

16,203

 

 

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

2016

 

 

2015

 

Cash paid for interest, net of interest capitalized

$

3,102

 

 

$

3,449

 

Non-cash purchase of property, plant and equipment

$

140

 

 

$

131

 

Conversion of convertible debt to common stock

$

11,400

 

 

$

2,000

 

Sale of common stock shares (public offering)

$

13,023

 

 

$

-

 

Series A Warrant issuance

$

-

 

 

$

1,437

 

Series B Warrant issuance

$

-

 

 

$

2,528

 

Series C Warrant issuance

$

-

 

 

$

1,299

 

Series F Warrant issuance

$

2,162

 

 

$

-

 

Series G Warrant issuance

$

1,577

 

 

$

-

 

Series H Warrant issuance

$

2,146

 

 

$

-

 

Series I Warrant issuance

$

5,747

 

 

$

-

 

Series J Warrant issuance

$

1,776

 

 

$

-

 

 

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 with an emphasis on the production and sale of isobutanol and related products derived from renewable feedstocks. Gevo was incorporated in Delaware on June 9, 2005.

Gevo 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 at the Agri-Energy Facility, 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 was designed to 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 operated the plant for the sole production of ethanol across all four fermenters.  

In September 2015, the Company began deploying additional capital at the Agri-Energy Facility, primarily designed to decrease the cost of isobutanol production by insourcing parts of the process that had previously been done off-site by third parties. This required the cessation of isobutanol production while this equipment was being installed. In March 2016, the Company completed these capital projects and reestablished isobutanol production in one fermenter.

As of September 30, 2016, the Company’s business activities were focused on the following areas:  optimizing the co-production of isobutanol, ethanol and related products at the Agri-Energy Facility; research and development; business development; business and financial planning; 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 repay or refinance its debt and 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. The Company is only beginning to achieve more consistent production and revenue from the sale of isobutanol, therefore, the historical operating results of the Company 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, 2016 and 2015, the Company incurred a consolidated net loss of $34.9 million and $28.2 million, respectively, and had an accumulated deficit of $374.4 million at September 30, 2016.  The Company’s cash and cash equivalents at September 30, 2016 totaled $31.1 million which will be used for the following: (i) operating activities of the Agri-Energy Facility; (ii) operating activities at the Company’s corporate headquarters in Colorado, including research and development work; (iii) capital improvements primarily associated with the Agri-Energy Facility; (iv) costs associated with optimizing isobutanol production technology; (v) exploration of restructuring, strategic alternatives and new financings; and (vi) debt service  and repayment obligations.

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.  While existing working capital at September 30, 2016 was sufficient to meet the cash requirements to fund planned operations through December 31, 2016, it is not sufficient to satisfy all of the Company’s debt obligations expected to become due and payable in 2017.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s inability to continue as a going concern may potentially affect its rights and obligations under its debt obligations and may lead to bankruptcy.    

The Company’s transition to profitability is dependent upon, among other things, raising additional capital, repaying or refinancing its debt, the successful development and commercialization of its products and product candidates, the achievement of a level of revenue adequate to support the Company’s existing cost structure and the repayment or restructuring of the Company’s debt obligations. The Company may never achieve profitability or generate positive cash flows, and unless and until it does, the Company will continue to need to raise additional capital. 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, may seek to restructure its debt and will continue to address its cost structure. The Company intends to continue to explore various financing alternatives to improve its capital structure, including reducing debt and extending maturities.  These efforts may include investments from a strategic partner, new equity or debt financings or exchange offers with the Company’s existing debt holders (including exchanges of debt for debt or equity securities) and other transactions involving the Company’s outstanding debt securities.  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.

Although substantial doubts exist 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 U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the 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, 2016 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, 2015 (the “Annual Report”). 

Reverse Stock Split.  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.

9


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

 

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 voted to delay the implementation of ASU 2014-09 by one year to December 15, 2017.  In April 2016, the FASB issued Accounting Standards Update No. 2016-10 Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing (“ASU 2016-10”) which provides additional clarification regarding Identifying Performance Obligations and Licensing.  The Company is currently evaluating the impact of adopting ASU 2014‑09 and ASU 2016-10.  

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).  The objective of ASU 2014-15 is to provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures.  ASU 2015-15 requires a management evaluation about whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued or available to be issued. In doing so, ASU 2014-15 should reduce diversity in the timing and content of footnote disclosures.  ASU 201415 is effective for fiscal years and interim periods within those years beginning after December 15, 2016.  The Company is currently evaluating the impact of adopting ASU 2014-15.

 

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory ("ASU 2015-11") which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-11 on its consolidated balance sheets.

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) which clarifies cash flow statement classification of eight specific cash flow issues. The purpose of ASU 2016-15 is to provide clarification and consistency for classifying the eight specific cash flow issues because current GAAP either is unclear or does not include specific guidance.  The amendments in the update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The Company is currently in the process of evaluating the impact of adoption of ASU 2016-15 on its consolidated balance sheets.

 

Adoption of New Accounting Pronouncements.  In April 2015, the FASB issued Accounting Standards Update No. 2015-03  Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) 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 the Company’s debt liabilities. This guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company has adopted the guidance as of January 1, 2016. The adoption of this guidance had an immaterial impact on our financial position and has resulted in the following retrospective adjustments to our consolidated balance sheet at December 31, 2015 (in thousands):

 

 

December 31, 2015

 

 

As reported

 

 

As adjusted

 

Total Assets

$

103,128

 

 

$

102,831

 

Current portion of secured debt, net

$

332

 

 

$

330

 

2022 Notes, net

$

14,636

 

 

$

14,341

 

 

 

10


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

 

2. Earnings per Share

Basic net loss per share is computed by dividing the net loss attributable to Gevo common stockholders for the period by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share (“EPS”) includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Diluted EPS for the nine months ended September 30, 2016 and 2015 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share.

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

 

 

September 30,

 

 

2016

 

 

2015

 

Warrants to purchase common stock

 

29,385,497

 

 

 

3,913,718

 

2017 Notes

 

1,503,821

 

 

 

1,502,532

 

2022 Notes

 

128,824

 

 

 

291,611

 

Outstanding options to purchase common stock

 

715,119

 

 

 

433,371

 

Unvested restricted common stock

 

218,520

 

 

 

36,713

 

Total

 

31,951,781

 

 

 

6,177,945

 

 

 

3. Inventories

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

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Raw materials

 

 

 

 

 

 

 

Corn

$

188

 

 

$

517

 

Enzymes and other inputs

 

314

 

 

 

283

 

Nutrients

 

12

 

 

 

5

 

Finished goods

 

 

 

 

 

 

 

Ethanol

 

68

 

 

 

172

 

Isobutanol

 

264

 

 

 

239

 

Jet Fuels, Isooctane and Isooctene

 

551

 

 

 

514

 

Distiller's grains

 

12

 

 

 

13

 

Work in process - Agri-Energy

 

328

 

 

 

220

 

Work in process - Gevo

 

157

 

 

 

109

 

Spare parts

 

1,309

 

 

 

1,415

 

Total inventories

$

3,203

 

 

$

3,487

 

 

 

11


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

 

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

 

2016

 

 

2015

 

Construction in progress

-

 

$

430

 

 

$

1,801

 

Plant machinery and equipment (1)

10 years

 

 

13,919

 

 

 

14,113

 

Site improvements

10 years

 

 

7,045

 

 

 

7,039

 

Agri-Energy retrofit asset (1)

20 years

 

 

71,734

 

 

 

65,457

 

Lab equipment, furniture and fixtures and vehicles

5 years

 

 

6,402

 

 

 

6,389

 

Demonstration plant

2 years

 

 

3,597

 

 

 

3,597

 

Buildings

10 years

 

 

2,543

 

 

 

2,543

 

Computer, office equipment and software

3 years

 

 

1,593

 

 

 

1,566

 

Leasehold improvements, pilot plant, land and support equipment

2 - 5 years

 

 

2,182

 

 

 

2,175

 

Total property, plant and equipment

 

 

 

109,445

 

 

 

104,680

 

Less accumulated depreciation and amortization

 

 

 

(32,938

)

 

 

(27,903

)

Property, plant and equipment, net

 

 

$

76,507

 

 

$

76,777

 

 

(1)

In May 2016, certain assets of the Agri-Energy retrofit asset were reclassified from plant, machinery and equipment to the Agri-Energy retrofit asset.

Included in cost of goods sold is depreciation of $4.5 million and $4.3 million during the nine months ended September 30, 2016 and 2015, respectively.  

Included in operating expenses is depreciation of $0.6 million and $0.6 million during the nine months ended September 30, 2016 and 2015, respectively.  

 

 

5. Embedded Derivatives

Convertible 2022 Notes

In July 2012, the Company issued 7.5% convertible senior notes due July 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 model, 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.

12


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

 

Inputs used to estimate the value of the embedded derivative as of December 31, 2015 determined the value of the embedded derivatives to be zero. 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.  During the period ended September 30, 2016, factors that could have a significant impact on the estimated fair value of the embedded derivatives indicate the value to remain at zero.

Derivative Warrant Liability

In December 2013, the Company sold warrants to purchase 1,420,250 shares of the Company’s common stock (the “2013 Warrants”). In August 2014, the Company sold warrants to purchase 1,000,000 shares of the Company’s common stock (the “2014 Warrants”). In February 2015, the Company sold Series A warrants to purchase 2,216,667 shares of the Company’s common stock (the “Series A Warrants”) and Series B warrants to purchase 2,216,667 shares of the Company’s common stock (the “Series B Warrants”). In May 2015, the Company sold Series C warrants to purchase 430,000 shares of the Company’s common stock (the “Series C Warrants”).  In December 2015, the Company sold Series D warrants to purchase 10,050,000 shares of the Company’s common stock (the “Series D Warrants”) and Series E warrants to purchase 8,000,000 shares of the Company’s common stock (the “Series E Warrants”). In April 2016, the Company sold 10,292,858 Series F warrants to purchase one share of common stock (each a “Series F Warrant”) and 20,585,716 Series H warrants, each to purchase one share of common stock (each, a “Series H Warrant”), and 6,571,429 pre-funded Series G warrants (“Series G Warrants”) to purchase one share of common stock, pursuant to an underwritten public offering.  In September 2016, the Company sold 14,250,000 Series I warrants to purchase one share of common stock (each a “Series I Warrant”) and 3,700,000 pre-funded Series J warrants (“Series J Warrants”) to purchase one share of common stock, pursuant to an underwritten public offering.

 

The following table sets forth information pertaining to shares issued upon the exercise of such warrants as of September 30, 2016:

 

 

 

Issuance

Date

 

Expiration

Date

 

Exercise

Price

 

 

Shares

Underlying

Warrants on

Issuance Date

 

 

Shares Issued

upon Warrant

Exercises as of

September 30, 2016

 

 

Shares

Underlying

Warrants

Outstanding

as of

September 30, 2016

 

2013 Warrants

 

12/16/2013

 

12/16/2018

 

$

2.56

 

 

 

1,420,250

 

 

 

(304,774

)

 

 

1,115,476

 

2014 Warrants

 

8/5/2014

 

8/5/2019

 

$

1.86

 

 

 

1,000,000

 

 

 

(610,771

)

 

 

389,229

 

Series A Warrants

 

2/3/2015

 

2/3/2020

 

$

0.30

 

 

 

2,216,667

 

 

 

(1,988,335

)

 

 

228,332

 

Series B Warrants

 

2/3/2015

 

8/3/2015

 

$

 

 

 

2,216,667

 

 

 

(1,935,601

)

 

 

 

Series C Warrants

 

5/19/2015

 

5/19/2020

 

$

1.42

 

 

 

430,000

 

 

 

 

 

 

430,000

 

Series D Warrants

 

12/11/2015

 

12/11/2020

 

$

0.10

 

 

 

10,050,000

 

 

 

(10,031,400

)

 

 

18,600

 

Series E Warrants

 

12/11/2015

 

12/11/2016

 

$

 

 

 

8,000,000

 

 

 

(8,000,000

)

 

 

 

Series F Warrants

 

4/1/2016

 

4/1/2021

 

$

0.30

 

 

 

10,292,858

 

 

 

 

 

 

10,292,858

 

Series G Warrants

 

4/1/2016

 

4/1/2017

 

$

 

 

 

6,571,429

 

 

 

(6,571,429

)

 

 

 

Series H Warrants

 

4/1/2016

 

10/1/2016

 

$

0.75

 

 

 

20,585,716

 

 

 

(18,008,716

)

 

 

2,577,000

 

Series I Warrants

 

9/13/2016

 

9/13/2021

 

$

0.55

 

 

 

14,250,000

 

 

 

 

 

 

14,250,000

 

Series J Warrants

 

9/13/2016

 

9/13/2017

 

$

0.01

 

(1)

 

3,700,000

 

 

 

(3,700,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80,733,587

 

 

 

(51,151,026

)

 

 

29,301,495

 

 

(1)

The exercise price is $0.55 but $0.54 of the exercise price was pre-funded upon issuance of the Series J Warrants.  The warrants were fully exercised at September 30, 2016.

 

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;

13


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

 

 

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” 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.

Based on these terms, the Company has determined that the 2013 Warrants, the 2014 Warrants, the Series A Warrants, the Series C Warrants, the Series D Warrants, the Series F Warrants, the Series H Warrants and the Series I 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 $10.7 million and $10.5 million as of September 30, 2016 and December 31, 2015, respectively. The increase in the estimated fair value of the Warrants is the result of exercises of warrants during the period offset by the issuance of new warrants during the period.  

 

During the nine months ended September 30, 2016, the Company issued 51,151,312 shares of common stock as a result of the exercise of Series A, D, E, G, H and J Warrants.  The Company received proceeds of $10.9 million from such exercises. 

In May 2016, as permitted by Section 2(a) of the Series H Warrant agreement, the board of directors of the Company approved a voluntary reduction of the exercise price for 7.5 million of the outstanding Series H Warrants, from an exercise price of $0.75 per share of common stock to $0.30 per share of common stock, for the remaining term of these warrants. Except for the reduction in exercise price, the terms of these Series H Warrants remain unchanged.

In June 2016, as permitted by Section 2(a) of the Series H Warrant agreement, the Board of Directors of the Company approved a voluntary reduction of the exercise price for 3.0 million of the outstanding Series H Warrants, from an exercise price of $0.75 per share of common stock to $0.42 per share of common stock, for the remaining term of these warrants. The board of directors of the Company also approved a voluntary reduction of the exercise price for 2.0 million of the outstanding Series H Warrants, from an exercise price of $0.75 per share of common stock to $0.52 per share of common stock, for the remaining term of these warrants. Ultimately, the Company adjusted the exercise price to $0.52 per share of common stock for only 1.0 million of the Series H Warrants. Except for the reduction in exercise price, the terms of these Series H Warrants remain unchanged.

In June 2016, as permitted by Section 9 of the Series D Warrant agreement, the Company agreed with certain holders of the Series D Warrants to the amend the exercise price and accelerate the initial exercise date for 4,167,391 of the outstanding Series D Warrants held by such holders. Pursuant to that amendment, with respect to 4,167,391 of the outstanding Series D Warrants held by those holders, the exercise price was increased from an exercise price of $0.10 per share of common stock to $0.175 per share of common stock, for the remaining term of these warrants and the initial exercise date was changed from June 11, 2016 to June 8, 2016. Except for the change in exercise price and the initial exercise date, the terms of these Series D Warrants remained unchanged.

As of September 30, 2016, all of the Series H Warrants and Series D Warrants for which the exercise price had been adjusted were fully exercised.

 

 

14


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

 

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,

 

 

2016

 

 

2015

 

Accounts payable - trade

$

1,865

 

 

$

2,691

 

Accrued legal-related fees

 

352

 

 

 

854

 

Accrued employee compensation

 

556

 

 

 

2,082

 

Accrued interest

 

313

 

 

 

840

 

Accrued taxes payable

 

210

 

 

 

138

 

Short-term capital lease

 

147

 

 

 

144

 

Other accrued liabilities *

 

917

 

 

 

727

 

Total accounts payable and accrued liabilities

$

4,360

 

 

$

7,476

 

 

*

Other accrued liabilities consists of accrued professional fees, audit fees, utility expenses and other expenses none of which individually represent greater than 5% of total current liabilities.

 

 

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 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 $25.9 million, the aggregate outstanding principal amount of the Term Loan provided in the First Advance for 10% convertible senior secured notes due 2017 (the “2017 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 is not 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, 2016, there was a balance of $2.6 million in the interest reserve account. This amount is classified as restricted deposits.

15


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

 

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 are guaranteed by Agri-Energy and Gevo Development (together, the “Guarantors”). On June 6, 2014, in connection with the issuance of the 2017 Notes, the Company and the Guarantors 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 Guarantors, 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 the Conversion Rate of 0.0576 shares of common stock per $1.00 principal amount of the 2017 Notes (equivalent to the 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 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 2015 and has not required any holders to convert through the nine months ended September 30, 2016.

If a fundamental change of the Company occurs, the holders of the 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, May 13, 2015, November 12, 2015, December 7, 2015 March 28, 2016 and September 7, 2016, 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. In connection with the November 12, 2015 amendments, the Company did not issue any warrants or incur any indebtedness.

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.

16


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

 

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 by the SEC on July 25, 2014.

The Company has elected the fair value option for accounting for the 2017 Notes in order for management to mitigate income statement volatility caused by measurement basis differences between the embedded instruments and to eliminate complexities of applying certain accounting models. Accordingly, the principal amount of 2017 Notes outstanding at September 30, 2016 of $26.1 million has been recorded at its estimated fair value of $25.2 million and is included in the 2017 Notes recorded at fair value on the consolidated balance sheets at September 30, 2016. Debt issuance costs of $1.5 million were expensed at issuance and a gain of $3.6 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 was equal to the net proceeds from the loan.  During the nine months ended September 30, 2016, the Company incurred cash interest expense of $3.2 million.

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

 

 

September 30,

 

 

December 31,

 

 

2016

 

 

2015

 

Stock price

$

0.48

 

 

$

0.62

 

Conversion Rate

 

57.55

 

 

 

57.55

 

Conversion Price

$

17.38

 

 

$

17.38

 

Maturity date

March 15, 2017

 

 

March 15, 2017

 

Risk-free interest rate

 

0.41

%

 

 

0.74

%

Estimated stock volatility

 

150.0

%

 

 

140.0

%

Estimated credit spread

 

20.0

%

 

 

30.0

%

 

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

 

 

Principal

Amount of

2017 Notes

 

 

Change in

Estimated

Fair Value

 

 

Total

 

Balance - December 31, 2015

$

26,108

 

 

$

(4,543

)

 

$

21,565

 

Loss from change in fair value of debt

 

-

 

 

 

3,629

 

 

 

3,629

 

Balance - September 30, 2016

$

26,108

 

 

$

(914

)

 

$

25,194

 

 

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, 2016, represents an unrealized loss which has been recorded as a loss from change in fair value of 2017 Notes in the consolidated statements of operations.

17


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

 

Secured Debt

Amended Agri-Energy Loan Agreement. In October 2011, the original 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.  The Amended Agri-Energy Loan Agreement includes affirmative and negative covenants and events of default customary for agreements of this type.  In October 2011, Agri-Energy borrowed $10.0 million under the additional term loan facilities which originally matured in October 2015. In January 2012, Agri-Energy borrowed an additional $5.0 million under the additional term loan facilities which originally matured in December 2015, bringing the total amount borrowed under the additional term loan facilities to $15.0 million.  The aggregate amount outstanding under the additional term loan facilities bears interest at a rate equal to 11% and is subject to an end-of-term payment equal to 5.75% of the amount borrowed.  As security for its obligations under the Amended Agri-Energy Loan Agreement, Agri-Energy granted TriplePoint a security interest in and lien upon all of its assets. Gevo 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 entered into an amendment to its security agreement with TriplePoint (the “Gevo Security Agreement”), which secured its guarantee of Agri-Energy’s obligations under the Amended Agri-Energy Loan Agreement.

June 2012 Amendments. In June 2012, the Company and Agri-Energy entered into (i) an amendment to the Gevo Security Agreement (the “Security Agreement Amendment”) and (ii) an amendment to the Amended Agri-Energy Loan Agreement. These amendments, among other things: (i) permitted the issuance of the 2022 Notes; (ii) removed Agri-Energy’s and the Company’s options to elect additional interest-only periods upon the achievement of certain milestones; (iii) permitted Agri-Energy to make dividend payments and distributions to the Company for certain defined purposes related to the 2022 Notes; (iv) added as an event of default the payment, repurchase or redemption of the 2022 Notes or of amounts payable in connection therewith other than certain permitted payments related to the 2022 Notes; (v) added a negative covenant whereby the Company may not incur any indebtedness other than as permitted under the Security Agreement Amendment; and (vi) added a prohibition on making any Coupon Make-Whole Payments (as defined in the indenture governing the 2022 Notes) in cash prior to the payment in full of all remaining outstanding obligations under the Amended Agri-Energy Loan Agreement.

December 2013 Amendments.  In December 2013, the Company entered into additional amendments to certain of its existing agreements with TriplePoint and entered into a new intellectual property assignment agreement in favor of TriplePoint to, among other things:

 

permit the issuance of warrants associated with our December 2013 offering of common stock units;

 

waive any prepayment premium (but not any end-of-term payment) with respect to the Amended Agri-Energy Loan Agreement;

 

expand the events of default to add as an event of default the repurchase of the warrants;

 

grant TriplePoint a lien and security interest in all of the intellectual property of the Company;

 

re-price the three outstanding warrants to purchase common stock of the Company that are held by TriplePoint;

 

waive the requirement for Agri-Energy to make principal amortization payments on the Amended Agri-Energy Loan Agreement through December 31, 2014 (the “Restructure Period”);

 

raise the interest rates under the Amended Agri-Energy Loan Agreement to 13% during the Restructure Period (such rate returned to 11% following the Restructure Period as no event of default under the Amended Agri-Energy Loan Agreement was continuing on the last day of the Restructure Period); and

 

during the period beginning January 2015, and continuing through and including the final monthly installment due under the Amended Agri-Energy Loan Agreement, adjust the monthly payment due and payable to 50% of the fully amortizing amount of principal and interest otherwise due and payable for such month, applied first to outstanding accrued interest and then to principal, with the remaining 50% portion of such required payments of principal and interest for such month accruing and made due and payable at the time of the final monthly installment.

 

18


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

 

May 2014 Amendments. In May 2014, the Company 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 “May 2014 Amendment”) pursuant to which TriplePoint amended its agreements with the Company and its subsidiaries and consented to (i) 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”); (ii) the incurrence of the Term Loan with Whitebox and any other indebtedness under the Senior Loan Documents (collectively, the “Senior Indebtedness”); (iii) the consummation of the exchange of the Term Loan for the 2017 Notes; (iv) 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; (v) the guaranty of the Senior Indebtedness provided by the Guarantors; (vi) 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; (vii) the consummation of any transactions contemplated by, and the terms of, the Senior Loan Documents by the Company and the Guarantors; and (viii) 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 May 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.

On July 31, 2014, January 28, 2015, May 13, 2015, November 11, 2015, December 7, 2015 March 28, 2016 and September 7, 2016, 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.  In connection with the November 11, 2015 amendments, the Company did not issue any warrants or incur any indebtedness.    

Debt discounts and debt issue costs 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 discounts and debt issue costs to interest expense over the term of the debt or expected life of the debt using the effective interest method.

On September 30, 2016, Agri-Energy voluntarily paid off in full all outstanding amounts owed under the Amended Agri-Energy Loan Agreement and all material commitments and obligations under the Loan and Security Agreement and associated documents were terminated. As a result, at September 30, 2016, the Amended Agri-Energy Loan Agreement had a principal balance of zero. In connection with the repayment, TriplePoint terminated all of its security interests under the Amended Agri-Energy Loan Agreement (including any mortgages and membership interest pledges). In addition, the guaranties by the Company and Gevo Development of the obligations under the Amended Agri-Energy Agreement were also terminated.

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).  

 

 

Principal

Amount

of 2022 Notes

 

 

Debt

Discount

 

 

Debt Issue

Costs

 

 

Total

 

Balance - December 31, 2015

$

22,400

 

 

$

(7,764

)

 

$

(295

)

 

$

14,341

 

Amortization of debt discount

 

-

 

 

 

3,193

 

 

 

-

 

 

 

3,193

 

Amortization of debt issue costs

 

-

 

 

 

-

 

 

 

124

 

 

 

124

 

Exchange of 2022 Notes

 

(11,400

)

 

 

-

 

 

 

-

 

 

 

(11,400

)

Write-off of debt discount and debt issue costs associated with

   extingishment of debt

 

-

 

 

 

2,429

 

 

 

92

 

 

 

2,521

 

Balance - September 30, 2016

$

11,000

 

 

$

(2,142

)

 

$

(79

)

 

$

8,779

 

 

19


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

 

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, 2016 and 2015, respectively, the Company recorded $2.2 million and $1.7 million of expense related to the amortization of debt discounts and issue costs; zero  and $1.0 million of expense related to the conversion of debt; and $0.8 million and $0.9 million of interest expense related to the 2022 Notes. The amortization of debt issue costs, debt discounts and cash interest are included as a component of interest expense in the consolidated statements of operations. The Company amortizes 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 a 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 $85.35 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.  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.

 

In September 2016, the Company issued 13,999,354 shares of common stock in exchange for the redemption of $11.4 million of the 2022 Notes. The net loss on the extinguishment of the 2022 Notes was $0.9 million.  

 

In November 2015, the Company issued 1,107,833 shares of common stock in exchange for the redemption of $2.5 million of the 2022 Notes.    The net loss on the extinguishment of the 2022 Notes was $0.05 million.

In February 2015, the Company issued 170,042 shares of common stock to convert $2.0 million of the 2022 Notes. The net gain on the extinguishment of the 2022 Notes was $0.3 million.  

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.  A Fundamental Change includes, among other things, the Company’s common stock ceasing to be listed on a national securities exchange.

The Company has 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 for the 2022 Notes 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.

20


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

 

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, 2016.

 

 

8. Significant Agreements

Off-Take, Distribution and Marketing Agreements   

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 September 30, 2016 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 in April 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.

Distiller Grains Off-Take and Marketing Agreement with Land O’Lakes Purina Feed.  In December 2011, the Company entered into a commercial off-take and marketing agreement with Land O’Lakes Purina Feed LLC (“Land O’Lakes Purina Feed”) for the sale of iDGs™ produced by the Agri-Energy Facility. Land O’ Lakes Purina Feed provides farmers and ranchers with an extensive line of agricultural supplies (feed, seed, and crop protection products) and services. Pursuant to the agreement, Land O’Lakes Purina Feed is the exclusive marketer of the Company’s iDGs™ and modified wet distiller’s grains for the animal feed market. The agreement has an initial three-year term following the first commercial sales of iDGs™ with automatic one-year renewals thereafter unless terminated by one of the parties. Further, the Company’s plans to work with Land O’Lakes Purina Feed to explore opportunities to upgrade the iDGs™ for special value-added applications in feed markets.   Land O’Lakes Purina Fees also provides marketing services for the sale of the Company’s ethanol distiller grains.

Supply Agreement with Musket Corporation.  On June 16, 2016, the Company entered into an agreement with Musket Corporation (“Musket”) to supply isobutanol for blending with gasoline.  Musket is a national fuel distributor under the umbrella of the Love’s Family of Companies.  Initial target markets are expected to include the marine and off-road markets in Arizona, Nevada, and Utah. The supply program has begun with railcar quantities of isobutanol (a railcar holds approximately 28-29 thousand gallons). As isobutanol production ramps at Gevo’s production facility in Luverne, Minnesota, and isobutanol-blended gasoline becomes more established at retail outlets, Musket expects to expand its purchase quantities. Musket is initially targeting retail pumps at Lake Havasu in Arizona, followed by other large marine markets such as Lake Powell, Lake Mead, as well as other large lakes in the western states.   Later, Musket also anticipates expanding distribution into its core Oklahoma market.

BCD Chemie. In April 2015, the Company entered into its first purchase order to supply isooctene to BCD Chemie, a subsidiary of Brenntag AG, a leading chemical distributor based in Germany. BCD Chemie is targeting applications in Europe to replace petroleum-based hydrocarbons to enable companies to meet regulatory requirements for renewable content in fuels while satisfying the performance requirements of their customers. We subsequently entered into additional purchase orders to supply isooctene to BCD Chemie in 2016. To date, the total value of the purchase orders with BCD Chemie is over $1 million. 

Alaska Airlines. In May 2015, the Company entered into a strategic alliance agreement with Alaska Airlines. Pursuant to the terms of this agreement, Alaska Airlines agreed to purchase an initial quantity of the Company’s alcohol-to-jet (“ATJ”) fuel when the Company secures a revision to ASTM D7566, which occurred in April 2016. All of the ATJ fuel to be supplied under this agreement is expected to be produced from renewable isobutanol at the Agri-Energy Facility and then re-processed at a hydrocarbon processing demonstration plant near Houston, Texas, in partnership with South Hampton Resources, Inc. On June 7, 2016, the first two Alaska Airlines commercial flights using Gevo’s renewable ATJ took place originating in Seattle and flying to San Francisco International Airport and Ronald Reagan Washington National Airport.

21


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

 

Jet Fuel Supply Agreements with the Defense Logistics Agency (U.S. Air Force, U.S. Army and U.S. Navy). In September 2011, the Company was awarded a contract for the procurement of up to 11,000 gallons of ATJ fuel for the purposes of certification and testing by the U.S. Air Force.  The term of the agreement was through December 2012.  The Company recorded $0.6 million of revenue under this award during the year ended December 31, 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 ATJ 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 ATJ 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 ATJ fuel. During the years ended December 31, 2015, 2014 and 2013, the Company recorded $1.0 million, $2.0 million and $1.9 million, respectively, of revenue associated with shipments of ATJ fuel under these contracts. The Company did not record any revenue associated with shipments of ATJ fuel under these agreements in the nine months ended September 30, 2016.

Catalysts Agreement with Clariant Corp.  On May 19, 2016, the Company announced that it has entered into an agreement with Clariant Corp., one of the world’s leading specialty chemical companies, to develop catalysts to enable Gevo’s Ethanol-to-Olefins (“ETO”) technology. As previously disclosed, Gevo’s ETO technology, which uses ethanol as a feedstock, produces tailored mixes of propylene, isobutylene and hydrogen, which are valuable as standalone molecules, or as feedstocks to produce other products such as diesel fuel and commodity plastics, that would be drop-in replacements for their fossil-based equivalents.

Joint Research, Development, License and Commercialization Agreement with The Coca-Cola Company. In November 2011, the Company entered into a joint research, development, license and commercialization agreement with The Coca-Cola Company (“Coca-Cola”). In the agreement, Coca-Cola agreed to pay the Company a fixed price fee for a research program outlined in the agreement. This agreement covered three years and represented $2.6 million of revenue.

License Agreements

Licensing Agreement with Porta. In January 2016, the Company entered into a license agreement and joint development agreement (“JDA”) with Porta Hnos. S.A. (“Porta”) to build or retrofit multiple isobutanol plants in Argentina using corn as a feedstock, the first of which is expected to be wholly owned by Porta and is anticipated to begin producing isobutanol in 2017.  The plant is expected to have a production capacity of up to five million gallons of isobutanol per year. Once the plant is operational, Gevo expects to generate revenues from this licensing arrangement, through royalties, sales and marketing fees, and other revenue streams such as yeast sales. The agreements also contemplate Porta building or retrofitting at least three additional isobutanol plants for certain of their existing ethanol plant customers. For these projects, Gevo would be the direct licensor of its technology and the marketer for any isobutanol produced, and would expect to receive all royalties and sales and marketing fees generated from these projects. Porta would provide the engineering, procurement and construction (“EPC”) services for the projects. The production capacity of these additional plants is still to be determined.

Joint Development Agreement with Praj Industries Limited.  In November 2015, the Company entered into a JDA with Praj Industries Limited (“Praj”), which establishes a strategic relationship to: (i) jointly develop our technology for use in certain ethanol plants that utilize certain non-corn based feedstocks (the “Feedstock”); (ii) jointly develop an engineering package for greenfield isobutanol plants and retrofitting ethanol plants to produce renewable isobutanol from the Feedstock; and (iii) license our technology to build greenfield isobutanol plants and retrofit certain ethanol plants to produce isobutanol. The Company and Praj will jointly develop and optimize the parameters to produce isobutanol from the Feedstock. After the development work is completed, the Company will negotiate commercial license agreements with Praj and third party licensees. Praj has the exclusive right to supply equipment and process engineering services for (i) certain greenfield isobutanol plants covered by the JDA and (ii) the addition of isobutanol capacity for certain ethanol plants that utilize the Feedstock and Praj technology. Praj agreed to meet certain milestones to maintain its exclusive rights. The Company will negotiate and license our technology for producing isobutanol directly with the ethanol plants covered by the JDA and will also have the right to supply biocatalysts, nutrient packages, and support services to such plants. Praj will be the EPC services supplier for the ethanol plants covered by the JDA and we will be the exclusive seller of all isobutanol produced by such plants.

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.

22


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

 

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 30 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 30 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 30 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 30 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 30 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 (a derivative of isobutanol) 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 30 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 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 payment of a one-time technology license fee based on the rated isobutanol capacity for each such plant (subject to additional fees upon expansion of such capacity).  The Company also received the option to obtain an engineering package from Butamax to implement this solids separation technology on commercially reasonable terms to be negotiated between the parties and subject to the technology fee described above and an additional technology licensing fee for use of the solids separation technology applicable to ethanol capacity as provided in such engineering package from Butamax (which capacity is not duplicative of the rated isobutanol capacity referenced above) in instances where Butamax provides an engineering package for use at a particular plant that will run isobutanol and ethanol production side-by-side using the licensed solids separation technology at such plant.

The License Agreement encompasses both parties’ patents for producing isobutanol, including biocatalysts and separation technologies, as well as for producing hydrocarbon products derived from isobutanol, including certain improvements and new patent applications filed within seven years of the date of the License Agreement.  While the parties have cross-licensed their patents for making and using isobutanol, the parties will not share their own proprietary biocatalysts with each other.  The parties may use third parties to manufacture biocatalysts on their behalf and may license their respective technology packages for the production of isobutanol to third parties, subject to certain restrictions.  A third party licensee would be granted a sub-license, and would be subject to terms and conditions that are consistent with those under the License Agreement.

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

 

Under the License Agreement, the parties have also agreed to certain limitations on the making or participating in a challenge of certain of the other party’s patents.  The License Agreement will continue in effect until the expiration of the licensed patents, unless earlier terminated by a party as provided in the License Agreement.  The parties also have certain termination rights with respect to the term of the license granted to the other party under the License Agreement upon the occurrence of, among other things, a material uncured breach by the other party.  In the event that a party’s license is terminated under the License Agreement, such party’s sublicense agreements may be assigned to the other party, subject to certain restrictions.

Other Significant Agreements

In June 2011, the Company announced that it had successfully produced fully renewable and recyclable polyethylene terephthalate (“PET”) in cooperation with Toray Industries, Inc. (“Toray Industries”). Working directly with Toray Industries, the Company employed prototypes of commercial operations from the petrochemical and refining industries to make para-xylene from isobutanol. Toray Industries used the Company’s bio-para-xylene (“bio-PX”) and commercially available renewable mono ethylene glycol to produce fully renewable PET films and fibers. In June 2012, the Company entered into a definitive agreement with Toray Industries, as amended in October 2013, for the joint development of an integrated supply chain for the production of bio-PET. Pursuant to the terms of the agreement with Toray Industries, the Company received $1.0 million which was used by the Company for the design and construction of a demonstration plant. In May 2014, the Company successfully shipped the requisite volumes of bio-PX associated with its contract with Toray Industries and, as a result, the Company recognized the $1.0 million, as well as revenue associated with the sale of the bio-PX, as a component of hydrocarbon revenue in the second quarter of 2014.

In June 2015, Agri-Energy entered into a Price Risk Management, Origination and Merchandising Agreement (the “Origination Agreement”) wit