Item 1A. Risk
Factors.
You should carefully consider the risks described below before investing in our publicly-traded securities.
The risks described below are not the only ones facing us. Our business is also subject to the risks that affect many other companies, such as competition, technological obsolescence, labor relations, general economic conditions, geopolitical
changes and international operations. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business operations and our liquidity. The risks described below could cause our actual results to
differ materially from those contained in the forward-looking statements we have made in this Report, the information incorporated herein by reference and those forward-looking statements we may make from time to time.
Certain Risks Related to Our Business and Strategy.
We are a development stage company with a history of net losses, and we may not achieve or maintain profitability.
We have incurred net losses since our inception, including losses of $47.5 million, $48.2 million, $40.1 million and $19.9 million in the nine months ended September 30, 2012 and fiscal years ended
December 31, 2011, 2010 and 2009, respectively. As of September 30, 2012, we had an accumulated deficit of $182.2 million. We expect to incur losses and negative cash flow from operating activities for the foreseeable future. We are a
development stage company and, to date, our revenues have been extremely limited and we have not generated revenues from the sale of isobutanol.
Prior to September 2010, our revenues were primarily derived from government grants and
cooperative agreements. From the completion of our acquisition of Agri-Energy in September 2010 until the commencement of our initial start-up operations in May 2012, we had generated revenue from the sale of ethanol and related products. Similarly,
we expect to derive revenue from the sale of ethanol and distillers grains during any period in which the Agri-Energy Facility is temporarily reverted to ethanol production, including the current planned reversion during which we will focus on
optimizing specific parts of our technology to further enhance isobutanol production rates. Following the commencement of full-scale commercial production of isobutanol, we do not expect to generate future revenues from the sale of ethanol at the
Agri-Energy Facility. If our existing grants and cooperative agreements are canceled prior to the expected end dates or we are unable to obtain new grants and cooperative agreements, our revenues could be adversely affected. Furthermore, we expect
to spend significant amounts on further development of our technology, acquiring or otherwise gaining access to ethanol plants and retrofitting them for isobutanol production, marketing, general and administrative expenses associated with our
planned growth and management of operations as a public company. In addition, the cost of preparing, filing, prosecuting, maintaining and enforcing patent, trademark and other intellectual property rights and defending ourselves against claims by
others that we may be violating their intellectual property rights may be significant.
In particular, over time, the costs of our litigation
with Butamax has been and may continue to be significant (as described further in our Annual Report on Form 10-K, as amended, and other reports that we have filed with the SEC). As a result, even if our revenues increase substantially, we expect
that our expenses will exceed revenues for the foreseeable future. We do not expect to achieve profitability during the foreseeable future, and may never achieve it. If we fail to achieve profitability, or if the time required to achieve
profitability is longer than we anticipate, we may not be able to continue our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
Our retrofits of the Agri-Energy Facility and the Redfield Facility will be our first commercial retrofits and, as a result, our production of
isobutanol could be delayed or we could experience significant cost overruns in comparison to our current estimates.
In September
2010, we acquired ownership of an ethanol production facility, the Agri-Energy Facility in Luverne, Minnesota, and in June 2011, we acquired access to a second ethanol production facility, the Redfield Facility in Redfield, South Dakota, pursuant to
our joint venture with Redfield. We intend to retrofit both facilities to produce isobutanol. Cost overruns or other unexpected difficulties could cause the retrofits to cost more than we anticipate which could increase our need for funding. Such
funds may not be available when we need them, on terms that are acceptable to us or at all, which could delay our initial commercial production of isobutanol. If additional funding is not available to us, or not available on terms acceptable to us,
our ability to optimize the isobutanol production technology currently in place at the Agri-Energy Facility, complete the retrofit of the Redfield Facility, which is not yet underway, or acquire access to or retrofit additional ethanol plants may be
limited. Such a result could reduce the scope of our business plan and have an adverse effect on our results of operations.
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Our ability to compete may be adversely affected if we are unsuccessful in defending against any
claims by competitors or others that we are infringing upon their intellectual property rights, such as if Butamax is successful in its lawsuits alleging that we are infringing its patents for the production of isobutanol using certain microbial
host cells.
The various bioindustrial markets in which we plan to operate are subject to frequent and extensive litigation regarding
patents and other intellectual property rights. In addition, many companies in intellectual property-dependent industries, including the renewable energy industry, have employed intellectual property litigation as a means to gain an advantage over
their competitors. As a result, we may be required to defend against claims of intellectual property infringement that may be asserted by our competitors against us and, if the outcome of any such litigation is adverse to us, it may affect our
ability to compete effectively. Currently, we are defending against eight lawsuits filed by Butamax alleging that we have infringed patents for certain recombinant microbial host cells that produce isobutanol and methods for the production of
isobutanol using such host cells, a patent covering a modified Pseudomonas KARI enzyme, a patent covering a modified E. coli KARI enzyme, and a patent covering the use of L. lactis and S. mutans dihydroxy acid dehydratase enzymes in yeast. The
litigation with Butamax is dynamic. We have filed complaints alleging infringement of certain of our patents by Butamax and we anticipate that additional patents involving the isobutanol production process that are issued to Butamax, its members or
us will be involved in litigation. The trial for the earliest-filed Butamax litigation is currently scheduled for April 2013 and additional trials are currently scheduled for July 2014.
Our involvement in litigation, interferences, opposition proceedings or other intellectual property proceedings inside and outside of the U.S. may divert management time from focusing on business
operations, could cause us to spend significant amounts of money and may have no guarantee of success. Any current and future intellectual property litigation also could force us to do one or more of the following:
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stop selling, incorporating, manufacturing or using our products that use the subject intellectual property;
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obtain from a third party asserting its intellectual property rights, a license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all;
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redesign those products or processes, such as our process for producing isobutanol, that use any allegedly infringing or misappropriated technology,
which may result in significant cost or delay to us, or which redesign could be technically infeasible; or
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pay damages, including the possibility of treble damages in a patent case if a court finds us to have willfully infringed certain intellectual property
rights.
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We are aware of a significant number of patents and patent applications relating to aspects of our technologies
filed by, and issued to, third parties, including, but not limited to Butamax. We cannot assure you that we will ultimately prevail if any of this third-party intellectual property is asserted against us or that we will ultimately prevail in the
patent infringement litigation with Butamax.
Following completion of its retrofit to isobutanol production, the Agri-Energy Facility
will be our first commercial isobutanol production facility, and, as a result, our production of isobutanol could be delayed or we could experience significant cost overruns in comparison to our current estimates of production costs or be unable to
produce planned quantities of isobutanol.
In May 2012, we announced that we had commenced initial start-up operations for the retrofit
of the Agri-Energy Facility to isobutanol production. In September 2012, we updated our initial production expectations for the Agri-Energy Facility noting that we had decided to optimize certain specific parts of our isobutanol production
technology to further enhance isobutanol production rates at the Agri-Energy Facility. Technical completion of the retrofit is not expected until 2013. Even with technical completion of the Agri-Energy Facility, we expect that initial production
volumes will be lower than the projected nameplate capacity for isobutanol production at the facility. We project that the Agri-Energy Facility will be able to produce isobutanol at a run rate of approximately one million gallons per month by the
end of 2013 and will reach full production capacity run rates in 2014. However, we may encounter further unexpected production challenges during the completion of the retrofit and the projected ramp up in production rates. Any such production
challenges may prevent us from producing significant quantities of isobutanol or may significantly increase our cost to produce isobutanol which could have a material adverse effect on our business, financial condition and results of operations.
Some of our retrofits, including the retrofit of the Agri-Energy Facility, will include additional equipment necessary to switch
between ethanol and isobutanol production but we cannot guarantee that we will be successful in switching between isobutanol and ethanol production in a timely or efficient manner at these facilities.
While we have designed the retrofit of the Agri-Energy Facility to allow the capability to switch between isobutanol and ethanol production, which may,
subject to regulatory factors and depending on market conditions, mitigate certain significant risks associated with start-up operations for isobutanol production, there can be no assurance that we will be able to revert to ethanol production. In
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September 2012, when we updated our initial production expectations for the Agri-Energy Facility, we announced that we had made the strategic decision to temporarily pause isobutanol production
at the Agri-Energy Facility for a period of time during which we plan to produce ethanol at the Agri-Energy Facility while we focus on optimizing specific parts of our technology to further enhance isobutanol production rates. Even if we are able to
revert to ethanol production, the facility may produce ethanol less efficiently or in lower volumes than it did prior to the retrofit and such ethanol production may not generate positive economic returns
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If we are unable to produce
isobutanol at the volumes, rates and costs that we expect and are unable to revert back to ethanol production at full capacity, we would be unable to match the facilitys historical economic performance and our business, financial condition and
results of operations would be materially adversely affected.
We may not be successful in the development of individual steps in, or an
integrated process for, the production of commercial quantities of isobutanol from plant feedstocks in a timely or economic manner, or at all.
As of the date of this Report, we have produced limited commercial quantities of isobutanol and we may not be successful increasing our production from these limited startup production levels to
full-scale commercial production levels. The production of isobutanol requires multiple integrated steps, including:
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obtaining the plant feedstocks;
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treatment with enzymes to produce fermentable sugars;
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fermentation by organisms to produce isobutanol from the fermentable sugars;
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distillation of the isobutanol to concentrate and separate it from other materials;
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purification of the isobutanol; and
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storage and distribution of the isobutanol.
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Our future success depends on our ability to produce commercial quantities of isobutanol in a timely and economic manner. Our biocatalysts have not yet produced full-scale commercial volumes of
isobutanol. While we have produced isobutanol using our biocatalysts at our laboratories in Colorado, at the demonstration facility and at the Agri-Energy Facility, such production was not at full commercial rate and scale and in September 2012, we
announced our plan to temporarily revert the Agri-Energy Facility to ethanol production, depending on our assessment of then current ethanol economic conditions for ethanol production, while we focus on optimizing specific parts of our technology to
further enhance isobutanol production rates. To date, we have focused the majority of our research and development efforts on producing isobutanol from dextrose and challenges remain in achieving substantial production volumes with other sugars,
like corn mash. The risk of contamination and other problems rise as we increase the scale of our isobutanol production. If we are unable to successfully manage these risks, we may encounter difficulties in achieving our target isobutanol production
yield, rate, concentration or purity at a commercial scale, which could delay or increase the costs involved in commercializing our isobutanol production. In addition, we have limited experience sourcing large quantities of feedstocks and in storing
and/or distributing significant volumes of isobutanol. The technological and logistical challenges associated with each of the processes involved in production, sale and distribution of isobutanol are extraordinary, and we may not be able to resolve
any difficulties that arise in a timely or cost effective manner, or at all. Even if we are successful in developing an economical process for converting plant feedstocks into commercial quantities of isobutanol, we may not be able to adapt such
process to other biomass raw materials, including cellulosic biomass.
Prior to the Agri-Energy Facility retrofit, neither we nor ICM had ever
built (through retrofit or otherwise) or operated a commercial isobutanol facility. We assume that we understand how the engineering and process characteristics of the one MGPY demonstration facility will scale up to larger facilities, but these
assumptions may prove to be incorrect. Accordingly, we cannot be certain that we can manufacture isobutanol in an economical manner in commercial quantities. If our costs to build large-scale commercial isobutanol facilities are significantly higher
than we expect or if we fail to manufacture isobutanol economically on a commercial scale or in commercial volumes, our commercialization of isobutanol and our business, financial condition and results of operations will be materially adversely
affected.
We may not be able to successfully identify and acquire access to additional ethanol production facilities suitable for
efficient retrofitting, or acquire access to sufficient capacity to be commercially viable or meet customer demand.
Our strategy
currently includes accessing and retrofitting, either independently or with potential development partners, existing ethanol facilities for the production of large quantities of isobutanol for commercial distribution and sale. We have acquired one
22 MGPY ethanol production facility and we have acquired access to one 50 MGPY ethanol production facility pursuant to our joint venture with Redfield. We plan to acquire access to additional production capacity to enable us to produce and sell
approximately 350 MGPY of isobutanol in 2015. However, we may not find development partners with whom we can implement this growth strategy, and we may not be able to identify facilities suitable for joint venture, acquisition, lease or license.
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Even if we successfully identify a facility suitable for efficient retrofitting, we may not be able to
acquire access to such facility in a timely manner, if at all. The owners of the ethanol facility may reach an agreement with another party, refuse to consider a joint venture, acquisition, lease or license, or demand more or different consideration
than we are willing to provide. In particular, if the profitability of ethanol production increases, plant owners may be less likely to consider modifying their production, and thus may be less willing to negotiate with us or agree to allow us to
retrofit their facilities for isobutanol production. We may also find that it is necessary to offer special terms, incentives and/or rebates to owners of ethanol facilities that allow us to access and retrofit their facilities before our production
technology has been proven on a commercial scale. Even if the owners of a facility are interested in reaching an agreement that grants us access to the plant, negotiations may take longer or cost more than we expect, and we may never achieve a final
agreement. Further, we may not be able to raise capital on acceptable terms, or at all, to finance our joint venture, acquisition, participation or lease of facilities.
Even if we are able to access and retrofit several facilities, we may fail to access enough capacity to be commercially viable or meet the volume demands or minimum requirements of our customers,
including pursuant to definitive supply or distribution agreements that we may enter into, which may subject us to monetary damages. For example, under the terms of our international off-take and distribution agreement with Sasol, we are required to
pay certain shortfall fees if we are not able to supply Sasol with certain minimum quantities of product. Failure to acquire access to sufficient capacity in a timely manner and on favorable terms may slow or stop our commercialization process,
which could have a material adverse effect on our business, financial condition and results of operations.
Once we acquire access to
ethanol facilities, we may be unable to successfully retrofit them to produce isobutanol, or we may not be able to retrofit them in a timely and cost-effective manner.
For each ethanol production facility to which we acquire access, we will be required to obtain numerous regulatory approvals and permits to retrofit and operate the facility. These include such items as a
modification to the air permit, fuel registration with the U.S. Environmental Protection Agency (EPA), ethanol excise tax registration and others. These requirements may not be satisfied in a timely manner, or at all. Later-enacted
federal and state governmental requirements may also substantially increase our costs or delay or prevent the completion of a retrofit, which could have a material adverse effect on our business, financial condition and results of operations.
No two ethanol facilities are exactly alike, and each retrofit will require individualized engineering and design work. There is no guarantee
that we or any contractor we retain will be able to successfully design a commercially viable retrofit, or properly complete the retrofit once the engineering plans are completed. Prior to the Agri-Energy Facility retrofit, neither we nor ICM had
ever built, via retrofit or otherwise, a full-scale commercial isobutanol facility. Despite our experience with the retrofit of the Agri-Energy Facility, our estimates of the capital costs that we will need to incur to retrofit a commercial-scale
ethanol facility may prove to be inaccurate, and each retrofit may cost materially more to engineer and build than we currently anticipate. For example, our estimates assume that each plant we retrofit will be performing at full production capacity,
and we may need to expend substantial sums to repair underperforming facilities prior to retrofit.
Our retrofit design was developed in
cooperation with ICM and is based on ICM technology. There is no guarantee that our retrofit design will be compatible with existing ethanol facilities that do not utilize ICM technology. Before we can retrofit such facilities, we may need to modify
them to be compatible with our retrofit design. This may require significant additional expenditure of time and money, and there is no guarantee such modification will be successful.
Furthermore, the retrofit of acquired facilities will be subject to the risks inherent in the build-out of any manufacturing facility, including risks of delays and cost overruns as a result of factors
that may be out of our control, such as delays in the delivery of equipment and subsystems or the failure of such equipment to perform as expected once delivered. In addition, we will depend on third-party relationships in expanding our isobutanol
production capacity and such third parties may not fulfill their obligations to us under our arrangements with them. Delays, cost-overruns or failures in the retrofit process will slow our commercial production of isobutanol and harm our
performance.
Though our retrofit design for the Agri-Energy Facility includes the capability to switch between isobutanol and ethanol
production, we may be unable to successfully revert to ethanol production after we begin retrofit of an ethanol facility, or the facility may produce ethanol less efficiently or in lower volumes than it did before the retrofit. In addition, we may
be unable to secure the necessary regulatory approvals and permits to switch between isobutanol and ethanol production in a timely manner, or at all. Thus, if we fail to achieve commercial levels of isobutanol production at a retrofitted facility,
we may be unable to rely on ethanol production as an alternative revenue source, which could have a material adverse effect on our prospects.
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Our facilities and process may fail to produce isobutanol at the volumes, rates and costs we expect.
Some or all of the facilities we choose to retrofit may be in locations distant from corn or other feedstock sources, which could
increase our feedstock costs or prevent us from acquiring sufficient feedstock volumes for commercial production. General market conditions might also cause increases in feedstock prices, which could likewise increase our production costs.
Even if we secure access to sufficient volumes of feedstock, the facilities we retrofit for isobutanol production may fail to perform as
expected. The equipment and subsystems installed during the retrofit may never operate as planned. Our systems may prove incompatible with the original facility, or require additional modification after installation. Our biocatalyst may perform less
efficiently than it did in testing, if at all. Contamination of plant equipment may require us to replace our biocatalyst more often than expected, or cause our fermentation process to yield undesired or harmful by-products. Likewise, our feedstock
may contain contaminants like wild yeast, which naturally ferments feedstock into ethanol. The presence of contaminants, such as wild yeast, in our feedstock could reduce the purity of the isobutanol that we produce and require us to invest in more
costly isobutanol separation processes or equipment. Unexpected problems may force us to cease or delay production and the time and costs involved with such delays may prove prohibitive. Any or all of these risks could prevent us from achieving the
production throughput and yields necessary to achieve our target annualized production run rates and/or to meet the volume demands or minimum requirements of our customers, including pursuant to definitive supply or distribution agreements that we
may enter into, which may subject us to monetary damages. For example, under the terms of our international off-take and distribution agreement with Sasol, we are required to pay certain shortfall fees if we are not able to supply Sasol with certain
minimum quantities of product. Failure to achieve these rates or meet these minimum requirements, or achieving them only after significant additional expenditures, could substantially harm our commercial performance.
We may be unable to produce isobutanol in accordance with customer specifications.
Even if we produce isobutanol at our targeted rates, we may be unable to produce isobutanol that meets customer specifications. If we fail to meet specific product or volume specifications contained in a
supply agreement, the customer may have the right to seek an alternate supply of isobutanol and/or terminate the agreement completely, and we could be required to pay shortfall fees or otherwise be subject to damages. For example, under the terms of
our international off-take and distribution agreement with Sasol, we are required to meet defined high-purity isobutanol product standards. A failure to successfully meet the specifications of our potential customers could decrease demand, and
significantly hinder market adoption of our products.
We lack significant experience operating commercial-scale ethanol and isobutanol
facilities, and may encounter substantial difficulties operating commercial plants or expanding our business.
We have very limited
experience operating commercial-scale ethanol and isobutanol facilities. Accordingly, we may encounter significant difficulties operating at a commercial scale. We believe that our future facilities will, like the Agri-Energy Facility, be able to
continue producing ethanol during much of the retrofit process. We will need to successfully administer and manage this production. Though ICM and the employees of Agri-Energy and Redfield are experienced in the operation of ethanol facilities, and
our future development partners or the entities that we acquire may likewise have such experience, we may be unable to manage ethanol-producing operations, especially given the possible complications associated with a simultaneous retrofit. Once we
complete a commercial retrofit, operational difficulties may increase, because neither we nor anyone else has significant experience operating a pure isobutanol fermentation facility at a commercial scale. The skills and knowledge gained in
operating commercial ethanol facilities or small-scale isobutanol plants may prove insufficient for successful operation of a large-scale isobutanol facility, and we may be required to expend significant time and money to develop our capabilities in
isobutanol facility operation. We may also need to hire new employees or contract with third parties to help manage our operations, and our performance will suffer if we are unable to hire qualified parties or if they perform poorly.
We may face additional operational difficulties as we further expand our production capacity. Integrating new facilities with our existing operations may
prove difficult. Rapid growth, resulting from our operation of, or other involvement with, isobutanol facilities or otherwise, may impose a significant burden on our administrative and operational resources. To effectively manage our growth and
execute our expansion plans, we will need to expand our administrative and operational resources substantially and attract, train, manage and retain qualified management, technicians and other personnel. We may be unable to do so. Failure to meet
the operational challenges of developing and managing increased isobutanol production, or failure to otherwise manage our growth, may have a material adverse effect on our business, financial condition and results of operations.
We may have difficulty adapting our technology to commercial-scale fermentation, which could delay or prevent our commercialization of isobutanol.
While we have succeeded in reaching our commercial fermentation performance targets for isobutanol concentration, fermentation
productivity and isobutanol yield in laboratory tests, and we have demonstrated the ability to produce isobutanol under the
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demonstration plant operating conditions and under commercial scale operating conditions at the Agri-Energy Facility, we have not yet accomplished these targets in a commercial plant environment.
We are currently optimizing certain specific parts of our isobutanol production technology to further enhance our isobutanol production rates at our Agri-Energy Facility. This process, if it succeeds, may take longer or cost more than expected. Our
yeast biocatalyst may not be able to meet the commercial performance targets at a commercial-scale retrofitted plant in a timely manner, or ever. In addition, the risk of contamination and other problems may increase at commercial-scale isobutanol
production facilities, which could negatively impact our cost of production. If we encounter difficulties in optimizing our production, our commercialization of isobutanol and our business, financial condition and results of operations will be
materially adversely affected.
We may have difficulties gaining market acceptance and successfully marketing our isobutanol to
customers, including chemical producers and refiners.
A key component of our business strategy is to market our isobutanol to chemical
producers and refiners. We have no experience marketing isobutanol on a commercial scale and we may fail to successfully negotiate marketing agreements in a timely manner or on favorable terms. If we fail to successfully market our isobutanol to
refiners and chemical producers, our business, financial condition and results of operations will be materially adversely affected.
We also
intend to market our isobutanol to chemical producers for use in making various chemicals such as isobutylene, a type of butene that can be produced through the dehydration of isobutanol. Although a significant market currently exists for
isobutylene produced from petroleum, which is widely used in the production of plastics, specialty chemicals, alkylate for gasoline blending and high octane aviation fuel, no one has successfully created isobutylene on a commercial scale from
bio-based isobutanol. Therefore, to gain market acceptance and successfully market our isobutanol to chemical producers, we must show that our isobutanol can be converted into isobutylene at a commercial scale. As no company currently dehydrates
commercial volumes of isobutanol into isobutylene, we must demonstrate the large-scale feasibility of the process and reach agreements with companies that are willing to invest in the necessary dehydration infrastructure. Failure to reach favorable
agreements with these companies, or the inability of their plants to convert isobutanol into isobutylene at sufficient scale, will slow our development in the chemicals market and could significantly affect our profitability.
Obtaining market acceptance in the chemicals industry is complicated by the fact that many potential chemicals industry customers have invested
substantial amounts of time and money in developing petroleum-based production channels. These potential customers generally have well-developed manufacturing processes and arrangements with suppliers of chemical components, and may display
substantial resistance to changing these processes. Pre-existing contractual commitments, unwillingness to invest in new infrastructure, distrust of new production methods and lengthy relationships with current suppliers may all slow market
acceptance of isobutanol.
No market currently exists for isobutanol as a fuel or fuel blendstock. Therefore, to gain market acceptance and
successfully market our isobutanol to refiners, we must effectively demonstrate the commercial advantages of using isobutanol over other biofuels and blendstocks, as well as our ability to produce isobutanol reliably on a commercial scale at a
sufficiently low cost. We must show that isobutanol is compatible with existing infrastructure and does not damage pipes, engines, storage facilities or pumps. We must also overcome marketing and lobbying efforts by producers of other biofuels and
blendstocks, including ethanol, many of whom may have greater resources than we do. If the markets for isobutanol as a fuel or fuel blendstock do not develop as we currently anticipate, or if we are unable to penetrate these markets successfully,
our revenue and revenue growth rate, if any, could be materially and adversely affected.
We believe that consumer demand for environmentally
sensitive products will drive demand among large brand owners for renewable hydrocarbon sources. One of our marketing strategies is to leverage this demand to obtain commitments from large brand owners to purchase products made from our isobutanol
by third parties. We believe these commitments will, in turn, promote chemicals industry demand for our isobutanol. If consumer demand for environmentally sensitive products fails to develop at sufficient scale or if such demand fails to drive large
brand owners to seek sources of renewable hydrocarbons, our revenue and growth rate could be materially and adversely affected.
We may
face substantial delay in getting regulatory approvals for use of our isobutanol in the fuels and chemicals markets, which could substantially hinder our ability to commercialize our products.
Commercialization of our isobutanol will require approvals from state and federal agencies. Before we can sell isobutanol as a fuel or fuel blendstock
directly to large petroleum refiners, we must receive EPA fuel certification. We are currently conducting Tier 1 EPA testing, and the approval process may require significant time. Approval can be delayed for years, and there is no guarantee of
receiving it. Additionally, California requires that fuels meet both its fuel certification requirements and a separate state low-carbon fuel standard. Any delay in receiving approval will slow or prevent the commercialization of our isobutanol for
fuel markets, which could have a material adverse effect on our business, financial condition and results of operations.
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Before any biofuel we produce receives a renewable identification number (RIN), we must register
it with the EPA and receive approval that it meets specified regulatory requirements. Delay or failure in developing a fuel that meets the standards for advanced and cellulosic biofuels, or delays in receiving the desired RIN, will make our fuel
less attractive to refiners, blenders, and other purchasers, which could harm our competitiveness.
With respect to the chemicals markets, we
plan to focus on isobutanol production and sell to companies that can convert our isobutanol into other chemicals, such as isobutylene. However, should we later decide to produce these other chemicals ourselves, we may face similar requirements for
EPA and other regulatory approvals. Approval, if ever granted, could be delayed for substantial amounts of time, which could significantly harm the development of our business and prevent the achievement of our goals.
Our isobutanol fermentation process utilizes a genetically modified organism which, when used in an industrial process, is considered a new chemical
under the EPAs Toxic Substances Control Act (TSCA). The TSCA requires us to comply with the EPAs Microbial Commercial Activity Notice process to operate plants producing isobutanol using our biocatalysts. The TSCAs new
chemicals submission policies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of our isobutanol production.
There are various third-party certification organizations, such as ASTM International (ASTM) and Underwriters Laboratories, Inc., involved in standard-setting regarding the
transportation, dispensing and use of liquid fuel in the U.S. and abroad. These organizations may change the current standards and additional requirements may be enacted that could prevent or delay approval of our products. The process of seeking
required approvals and the continuing need for compliance with applicable standards may require the expenditure of substantial resources, and there is no guarantee that we will satisfy these standards in a timely manner, if ever.
In addition, to retrofit ethanol facilities and operate the retrofitted plants to produce isobutanol, we will need to obtain and comply with a number of
permit requirements. As a condition to granting necessary permits, regulators may make demands that could increase our retrofit or operations costs, and permit conditions could also restrict or limit the extent of our operations, which could delay
or prevent our commercial production of isobutanol. We cannot guarantee that we will be able to meet all regulatory requirements or obtain and comply with all necessary permits to complete our planned ethanol plant retrofits, and failure to satisfy
these requirements in a timely manner, or at all, could have a substantial negative effect on our performance.
We are in negotiations,
facilitated by the Air Transport Association of America (ATA) with several major passenger and cargo airlines for potential commitments by several ATA member airlines to purchase jet fuel manufactured by third parties from our
isobutanol. Jet fuels must meet various statutory and regulatory requirements before they may be used in commercial aviation. In the U.S., the use of specific jet fuels is regulated by the Federal Aviation Administration (FAA). Rather
than directly approving specific fuels, the FAA certifies individual aircraft for flight. This certification includes authorization for an aircraft to use the types of fuels specified in its flight manual. To be included in an aircrafts flight
manual, the fuel must meet standards set by ASTM. The current ASTM requirements do not permit the use of jet fuel derived from isobutanol, and we will need to give ASTM sufficient data to justify creating a new standard applicable to alcohol-to-jet
(ATJ). Though our work testing isobutanol-based ATJ with the U.S. Air Force Research Laboratory has provided us with data we believe ASTM will take into consideration, the process of seeking required approvals and the continuing need for
compliance with applicable statutes and regulations will require the expenditure of substantial resources. Failure to obtain regulatory approval in a timely manner, or at all, could have a significant negative effect on our operations.
We may be unable to successfully negotiate final, binding terms related to our current non-binding isobutanol supply and distribution agreements,
which could harm our commercial prospects.
We have engaged in negotiations with a number of companies, and have agreed to preliminary
terms regarding supplying isobutanol or the products derived from it to various companies for their use or further distribution, including LANXESS Inc., Toray Industries, United Airlines and TOTAL PETROCHEMICALS USA, Inc. However, as of
September 30, 2012, we are not party to any final, definitive supply or distribution agreements for our isobutanol, other than our exclusive supply agreement with LANXESS Inc., our international off-take and distribution agreement with Sasol,
our commercial off-take agreement with Mansfield, our joint development agreement with Toray Industries and our contracts from the Defense Logistics Agency. We may be unable to negotiate final terms with other companies in a timely manner, or at
all, and there is no guarantee that the terms of any final agreement will be the same or similar to those currently contemplated in our preliminary agreements. Final terms may include less favorable pricing structures or volume commitments, more
expensive delivery or purity requirements, reduced contract durations and other adverse changes. Delays in negotiating final contracts could slow our initial isobutanol commercialization, and failure to agree to definitive
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terms for sales of sufficient volumes of isobutanol could prevent us from growing our business. To the extent that terms in our initial supply and distribution contracts may influence
negotiations regarding future contracts, the failure to negotiate favorable final terms related to our current preliminary agreements could have an especially negative impact on our growth and profitability. Additionally, as we have yet to produce
or supply commercial volumes of isobutanol to any customer, we have not demonstrated that we can meet the production levels contemplated in our current non-binding supply agreements. If our production scale-up proceeds more slowly than we expect, or
if we encounter difficulties in successfully completing plant retrofits, potential customers, including those with whom we have current letters of intent, may be less willing to negotiate definitive supply agreements, or demand terms less favorable
to us, and our performance may suffer.
Even if we are successful in producing isobutanol on a commercial scale, we may not be
successful in negotiating sufficient supply agreements for our production.
We expect that many of our customers will be large
companies with extensive experience operating in the fuels or chemicals markets. As a development stage company, we lack commercial operating experience, and may face difficulties in developing marketing expertise in these fields. Our business model
relies upon our ability to successfully negotiate and structure long-term supply agreements for the isobutanol we produce. Many of our potential customers may be more experienced in these matters than we are, and we may fail to successfully
negotiate these agreements in a timely manner or on favorable terms which, in turn, may force us to slow our production, delay our acquiring and retrofitting of additional plants, dedicate additional resources to increasing our storage capacity
and/or dedicate resources to sales in spot markets. Furthermore, should we become more dependent on spot market sales, our profitability will become increasingly vulnerable to short-term fluctuations in the price and demand for petroleum-based fuels
and competing substitutes.
Our isobutanol may encounter physical or regulatory issues, which could limit its usefulness as a fuel
blendstock.
In the fuel blendstock market, isobutanol can be used in conjunction with, or as a substitute for, ethanol and other
widely-used fuel oxygenates, and we believe our isobutanol will be physically compatible with typical gasoline engines. However, there is a risk that under actual engine conditions, isobutanol will face significant limitations, making it unsuitable
for use in high percentage gasoline blends. Additionally, current regulations limit fuel blends to low percentages of isobutanol, and also limit combination isobutanol-ethanol blends. Government agencies may maintain or even increase the
restrictions on isobutanol fuel blends. As we believe that the potential to use isobutanol in higher percentage blends than is feasible for ethanol will be an important factor in successfully marketing isobutanol to refiners, a low blend wall could
significantly limit commercialization of isobutanol as a fuel blendstock.
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Our isobutanol may be less compatible with existing refining and transportation infrastructure than we
believe, which may hinder our ability to market our product on a large scale.
We developed our business model based on our belief that
our isobutanol is fully compatible with existing refinery infrastructure. For example, when making isobutanol blends, we believe that gasoline refineries will be able to pump our isobutanol through their pipes and blend it in their existing
facilities without damaging their equipment. If our isobutanol proves unsuitable for such handling, it will be more expensive for refiners to use our isobutanol than we anticipate, and they may be less willing to adopt it as a fuel blendstock,
forcing us to seek alternative purchasers.
Likewise, our plans for marketing our isobutanol are based upon our belief that it will be
compatible with the pipes, tanks and other infrastructure currently used for transporting, storing and distributing gasoline. If our isobutanol or products incorporating our isobutanol cannot be transported with this equipment, we will be forced to
seek alternative transportation arrangements, which will make our isobutanol and products produced from our isobutanol more expensive to transport and less appealing to potential customers. Reduced compatibility with either refinery or
transportation infrastructure may slow or prevent market adoption of our isobutanol, which could substantially harm our performance.
Most of
the ethanol plants we initially plan to retrofit use dry-milled corn as a feedstock. Once we have optimized our full-scale commercial isobutanol production process, we plan to sell, as animal feed, the isobutanol distillers grains
(iDGs) left as a co-product of fermenting isobutanol from dry-milled corn. We believe that this will enable us to offset a significant portion of the expense of purchasing corn for fermentation. We are currently approved to sell
iDGs into animal feed through a self-assessed Generally Regarded as Safe process via third party scientific review. In order to improve the value of our iDGs, we are also in the process of obtaining U.S. Food and Drug Administration
(FDA) approval for the marketing of our iDGs. We believe obtaining FDA approval will increase the value of our iDGs by offering customers of our iDGs further assurance of the safety of our iDGs. FDA testing and
approval can take a significant amount of time, and there is no guarantee that we will ever receive such approval. If FDA approval is delayed or never obtained, or if we are unable to secure market acceptance for our iDGs, our net cost of
production will increase, which may hurt our operating results.
Our development strategy relies heavily on our relationship with ICM.
We rely heavily upon our relationship with ICM. In October 2008, we entered into a development agreement and a commercialization
agreement with ICM, each of which has since been amended. Pursuant to the terms of the development agreement, ICM engineers helped us install the equipment necessary to test and develop our isobutanol fermentation process at ICMs one MGPY
ethanol demonstration facility, and ICM agreed to assist us in running and maintaining the converted plant. We have used the demonstration plant to improve our biocatalysts and to develop processes for commercial-scale production of isobutanol.
Under the commercialization agreement, as amended, ICM serves as our exclusive engineering, procurement and construction (EPC) contractor for the retrofit of ethanol plants, and we serve as ICMs exclusive technology partner for the
production of butanols, pentanols and propanols from the fermentation of sugars. In August 2011, we entered into a work agreement with ICM. Pursuant to the terms of the work agreement, ICM provides EPC services for the retrofit of ethanol plants.
Because ICM has designed a significant number of the current operating ethanol production facilities in the U.S., we believe that our
exclusive alliance with ICM will provide us with a competitive advantage and allow us to more quickly achieve commercial-scale production of isobutanol. However, ICM may fail to fulfill its obligations to us under our agreements and under certain
circumstances, such as a breach of confidentiality by us, can terminate the agreements. In addition, ICM may assign the agreements without our consent in connection with a change of control. Since adapting our technology to commercial-scale
production of isobutanol and then retrofitting ethanol plants to use our technology is a major part of our commercialization strategy, losing our exclusive alliance with ICM would slow our technological and commercial development. It could also
force us to find a new contractor with less experience than ICM in designing and building ethanol plants, or to invest the time and resources necessary to retrofit plants on our own. Such retrofits may be less successful than if performed by ICM
engineers, and retrofitted plants might operate less efficiently than expected. This could substantially hinder our ability to expand our production capacity, and could severely impact our performance. If ICM fails to fulfill its obligations to us
under our agreements and our competitors obtain access to ICMs expertise, our ability to realize continued development and commercial benefits from our alliance could be affected. Accordingly, if we lose our exclusive alliance with ICM, if ICM
terminates or breaches its agreements with us, or if ICM assigns its agreements with us to a competitor of ours or to a third party that is not willing to work with us on the same terms or commit the same resources, our business and prospects could
be harmed.
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We may require substantial additional financing to achieve our goals, and a failure to obtain this
capital when needed or on acceptable terms could force us to delay, limit, reduce or terminate our development and commercialization efforts.
Since our inception, most of our resources have been dedicated to research and development, as well as demonstrating the effectiveness of our technology. We believe that we will continue to expend
substantial resources for the foreseeable future on further developing our technologies, developing future markets for our isobutanol and accessing facilities necessary for the production of isobutanol on a commercial scale. These expenditures will
include costs associated with research and development, accessing existing ethanol plants, retrofitting the plants to produce isobutanol, obtaining government and regulatory approvals, acquiring or constructing storage facilities and negotiating
supply agreements for the isobutanol we produce. In addition, other unanticipated costs may arise. Because the costs of developing our technology at a commercial scale are highly uncertain, we cannot reasonably estimate the amounts necessary to
successfully commercialize our production.
To date, we have funded our operations primarily through equity offerings, issuances of debt,
borrowing under our secured debt financing arrangements and revenues earned primarily from the sale of ethanol. Based on our current plans and expectations, we will require additional funding to achieve our goal of producing and selling
approximately 350 million gallons of isobutanol in 2015. In addition, the cost of preparing, filing, prosecuting, maintaining and enforcing patent, trademark and other intellectual property rights and defending against claims by others that we
may be violating their intellectual property rights, including the current litigation with Butamax, will be significant. Moreover, our plans and expectations may change as a result of factors currently unknown to us, and we may need additional funds
sooner than planned. We may also choose to seek additional capital sooner than required due to favorable market conditions or strategic considerations.
Our future capital requirements will depend on many factors, including:
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the timing of, and costs involved in developing and optimizing our technologies for commercial-scale production of isobutanol;
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the timing of, and costs involved in accessing existing ethanol plants;
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the timing of, and costs involved in retrofitting the plants we access with our technologies;
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the costs involved in establishing an enhanced yeast seed train;
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the cost of operating, maintaining and increasing production capacity of the retrofitted plants;
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our ability to negotiate agreements supplying suitable biomass to our plants, and the timing and terms of those agreements;
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the timing of, and the costs involved in developing adequate storage facilities for the isobutanol we produce;
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our ability to gain market acceptance for isobutanol as a specialty chemical, gasoline blendstock and as a raw material for the production of
hydrocarbons;
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our ability to negotiate supply agreements for the isobutanol we produce, and the timing and terms of those agreements;
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our ability to negotiate sales of our isobutanol for commercial-scale production of butenes and other industrially useful chemicals and fuels, and the
timing and terms of those sales;
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our ability to sell the iDGs left as a co-product of fermenting isobutanol from corn as animal feedstock;
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our ability to establish and maintain strategic partnerships, licensing or other arrangements and the timing and terms of those arrangements; and
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the cost of preparing, filing, prosecuting, maintaining, defending and enforcing patent, trademark and other intellectual property claims, including
litigation costs and the outcome of such litigation.
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Additional funds may not be available when we need them, on terms that
are acceptable to us, or at all. If needed funds are not available to us on a timely basis, we may be required to delay, limit, reduce or terminate:
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our research and development activities;
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our plans to access and/or retrofit existing ethanol facilities;
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our production of isobutanol at retrofitted plants; and/or
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our activities in developing storage capacity and negotiating supply agreements that may be necessary for the commercialization of our isobutanol
production.
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Raising additional capital may cause dilution to our existing stockholders, restrict our operations or
require us to relinquish rights to our technologies.
We may seek additional capital through a combination of public and private equity
offerings, debt financings, strategic partnerships and licensing arrangements. To the extent that we raise additional capital through the sale or issuance of equity, warrants or convertible debt securities, your ownership interest will be diluted,
and the terms of such securities may include liquidation or other preferences that adversely affect your rights as a stockholder. If we raise capital through debt financing, it may involve agreements
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that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional
funds through strategic partnerships or licensing agreements with third parties, we may have to relinquish valuable rights to our technologies, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds when
needed, we may be required to delay, limit, reduce or terminate our development and commercialization efforts.
We may pay vendors in
stock as consideration for their services; this may result in additional costs and may cause dilution to our existing stockholders.
In
order for us to preserve our cash resources, we may in the future pay vendors, including technology partners, in shares, warrants or options to purchase shares of our common stock rather than cash. Payments for services in stock may materially and
adversely affect our stockholders by diluting the value of outstanding shares of our common stock. In addition, in situations where we agree to register the shares issued to a vendor, this will generally cause us to incur additional expenses
associated with such registration.
Our quarterly operating results may fluctuate in the future. As a result, we may fail to meet or
exceed the expectations of investment research analysts or investors, which could cause our stock price to decline.
Our financial
condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in the future due to a variety of factors, many of which are beyond our control. Factors relating to our
business that may contribute to these fluctuations are described in our Annual Report on Form 10-K, as amended, and other reports that we have filed with the SEC. Accordingly, the results of any prior quarterly or annual periods should not be relied
upon as indications of our future operating performance.
Fluctuations in the price of corn and other feedstocks may affect our cost
structure.
Our approach to the biofuels and chemicals markets will be dependent on the price of corn and other feedstocks that will be
used to produce isobutanol. A decrease in the availability of plant feedstocks or an increase in the price may have a material adverse effect on our financial condition and operating results. At certain levels, prices may make these products
uneconomical to use and produce, as we may be unable to pass the full amount of feedstock cost increases on to our customers.
The price and
availability of corn and other plant feedstocks may be influenced by general economic, market and regulatory factors. These factors include weather conditions, farming decisions, government policies and subsidies with respect to agriculture and
international trade, and global demand and supply. The significance and relative impact of these factors on the price of plant feedstocks is difficult to predict, especially without knowing what types of plant feedstock materials we may need to use.
Fluctuations in the price and availability of natural gas may harm our performance.
The ethanol facilities that we have retrofitted or plan to retrofit to produce isobutanol, including the Agri-Energy Facility in
Luverne, Minnesota, and the Redfield Facility in Redfield, South Dakota, use significant amounts of natural gas to produce ethanol. After retrofit with our GIFT
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technology, these facilities will continue to require natural gas to produce isobutanol. Accordingly, our business is dependent upon natural gas supplied by third
parties. Should the price of natural gas increase, our performance could suffer. Likewise, disruptions in the supply of natural gas could have a material impact on our business and results of operations.
Fluctuations in petroleum prices and customer demand patterns may reduce demand for biofuels and bio-based chemicals.
We anticipate marketing our biofuel as an alternative to petroleum-based fuels. Therefore, if the price of oil falls, any revenues that we generate from
biofuel products could decline, and we may be unable to produce products that are a commercially viable alternative to petroleum-based fuels. Additionally, demand for liquid transportation fuels, including biofuels, may decrease due to economic
conditions or otherwise. We will encounter similar risks in the chemicals industry, where declines in the price of oil may make petroleum-based hydrocarbons less expensive, which could reduce the competitiveness of our bio-based alternatives.
Changes in the prices of distillers grains and iDGs could have a material adverse effect on our financial condition.
From September 2010 through May 2012, we sold distillers grains as a co-product from the production of ethanol at the
Agri-Energy Facility in Luverne, Minnesota. Additionally, as a result of our strategic decision to pause isobutanol production for a period of time during which we plan to produce ethanol while we focus on optimizing specific parts of our
technology, we may continue to sell distillers grains as a co-product from the temporary production of ethanol at the Agri-Energy Facility. We may also sell distillers grains produced by other ethanol facilities that we acquire, enter
into a joint venture or tolling arrangement with, or license to in the future. We also plan to sell the iDGs that will be produced as a co-product of our commercial isobutanol production. Distillers grains and iDGs compete with
other animal
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feed products, and decreases in the prices of these other products could decrease the demand for and price of distillers grains and iDGs. Additionally, we have not yet produced
commercial iDGs and, as such, there is a risk that our iDGs may not meet market requirements. If the price of distillers grains and iDGs decreases or our iDGs do not meet market requirements, our revenue from the sale
of distillers grains and iDGs could suffer, which could have a material adverse effect on our financial condition.
To the
extent that we produce ethanol at accessed plants before commencing isobutanol production, or during periods in which we make the strategic decision to revert to ethanol production, we will be vulnerable to fluctuations in the price of and cost to
produce ethanol.
We believe that, like the Agri-Energy Facility, the other ethanol production facilities we access will continue to
produce ethanol during most of the retrofit process. In certain cases, we expect to obtain income from this ethanol production. Further, we have designed our isobutanol production technology to allow us to revert to ethanol production at certain
facilities, such as the Agri-Energy Facility. Our earnings from ethanol revenue will be dependent on the price of, demand for and cost to produce ethanol. Decreases in the price of ethanol, whether caused by decreases in gasoline prices, changes in
regulations, seasonal fluctuations or otherwise, will reduce our revenues, while increases in the cost of production will reduce our margins. Many of these risks, including fluctuations in feedstock costs and natural gas costs, are identical to
risks we will face in the production of isobutanol. To the extent that ethanol production costs increase or price decreases, earnings from ethanol production could suffer, which could have a material adverse effect on our business.
Reductions or changes to existing regulations and policies may present technical, regulatory and economic barriers, all of which may significantly
reduce demand for biofuels or our ability to supply isobutanol.
The market for biofuels is heavily influenced by foreign, federal,
state and local government regulations and policies concerning the petroleum industry. For example, in 2007, the U.S. Congress passed an alternative fuels mandate that required nearly 14 billion gallons of liquid transportation fuels sold in 2011 to
come from alternative sources, including biofuels, a mandate that grows to 36 billion gallons by 2022. Of this amount, a minimum of 21 billion gallons must be advanced biofuels. In the U.S. and in a number of other countries, these regulations and
policies have been modified in the past and may be modified again in the future. Any reduction in mandated requirements for fuel alternatives and additives to gasoline may cause demand for biofuels to decline and deter investment in the research and
development of biofuels. Market uncertainty regarding future policies may also affect our ability to develop new biofuels products or to license our technologies to third parties. Any inability to address these requirements and any regulatory or
policy changes could have a material adverse effect on our biofuels business, financial condition and results of operations. Our other potential bioindustrial products may be subject to additional regulations.
Additionally, like the ethanol facilities that we retrofit, our isobutanol plants will emit greenhouse gases. Any changes in state or federal emissions
regulations, including the passage of cap-and-trade legislation or a carbon tax, could limit our production of isobutanol and iDGs and increase our operating costs, which could have a material adverse effect on our business, financial
condition and results of operations.
If we engage in additional acquisitions, we will incur a variety of costs and may potentially face
numerous risks that could adversely affect our business and operations.
If appropriate opportunities become available, we expect to
acquire businesses, assets, technologies or products to enhance our business in the future. In connection with any future acquisitions, we could:
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issue additional equity securities which would dilute our current stockholders;
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incur substantial debt to fund the acquisitions; or
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assume significant liabilities.
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Acquisitions involve numerous risks, including problems integrating the purchased operations, technologies or products, unanticipated costs and other liabilities, diversion of managements attention
from our core business, adverse effects on existing business relationships with current and/or prospective partners, customers and/or suppliers, risks associated with entering markets in which we have no or limited prior experience and potential
loss of key employees. Other than our acquisition of Agri-Energy, we have not engaged in acquisitions in the past, and do not have experience in managing the integration process. Therefore, we may not be able to successfully integrate any
businesses, assets, products, technologies or personnel that we might acquire in the future without a significant expenditure of operating, financial and management resources, if at all. The integration process could divert management time from
focusing on operating our business, result in a decline in employee morale and cause retention issues to arise from changes in compensation, reporting relationships, future prospects or the direction of the business. In addition, we may acquire
companies that
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have insufficient internal financial controls, which could impair our ability to integrate the acquired company and adversely impact our financial reporting. If we fail in our integration efforts
with respect to acquisitions and are unable to efficiently operate as a combined organization, our business, financial condition and results of operations may be materially adversely affected.
If we engage in additional joint ventures, we will incur a variety of costs and may potentially face numerous risks that could adversely affect our
business and operations.
If appropriate opportunities become available, we expect to enter into joint ventures with the owners of
existing ethanol production facilities in order to acquire access to additional isobutanol production capacity. We currently anticipate that in each such joint venture, the ethanol producer would contribute access to its existing ethanol production
facility and we would be responsible for retrofitting such facility to produce isobutanol. Upon completion of the retrofit, and in some cases the attainment of certain performance targets, both parties to the joint venture would receive a portion of
the profits from the sale of isobutanol, consistent with our business model. In connection with these joint ventures, we could incur substantial debt to fund the retrofit of the accessed facilities and we could assume significant liabilities.
Realizing the anticipated benefits of joint ventures, including projected increases to production capacity and additional revenue
opportunities, involves a number of potential challenges. The failure to meet these challenges could seriously harm our financial condition and results of operations. Joint ventures are complex and time-consuming and we may encounter unexpected
difficulties or incur unexpected costs related to such arrangements, including:
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difficulties negotiating joint venture agreements with favorable terms and establishing relevant performance metrics;
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difficulties completing the retrofits of the accessed facilities using our integrated fermentation technology;
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the inability to meet applicable performance targets related to the production of isobutanol;
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difficulties obtaining the permits and approvals required to produce and sell our products in different geographic areas;
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complexities associated with managing the geographic separation of accessed facilities;
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diversion of management attention from ongoing business concerns to matters related to the joint ventures;
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difficulties maintaining effective relationships with personnel from different corporate cultures; and
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the inability to generate sufficient revenue to offset retrofit costs.
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Additionally, our joint venture partners may have liabilities or adverse operating issues that we fail to discover through due diligence prior to entering into the joint ventures. In particular, to the
extent that our joint venture partners failed to comply with or otherwise violated applicable laws or regulations, or failed to fulfill their contractual obligations, we may suffer financial harm and/or reputational harm for these violations or
otherwise be adversely affected.
Our joint venture partners may have significant amounts of existing debt and may not be able to service
their existing debt obligations, which could cause the failure of a specific project and the loss by us of any investment we have made to retrofit the facilities owned by the joint venture partner. In addition, if we are unable to meet specified
performance targets related to the production of isobutanol at a facility owned by one of our joint venture partners, we may never become eligible to receive a portion of the profits of the joint venture and may be unable to recover the costs of
retrofitting the facility.
Additionally, we plan to be the sole marketer for all isobutanol and co-products produced using our proprietary
technology including, without limitation, all isobutanol that is produced by any facilities that we access via joint venture. Marketing agreements can be very complex and the obligations that we assume as the sole marketer of isobutanol may be time
consuming. We have no experience marketing isobutanol on a commercial scale and we may fail to successfully negotiate marketing agreements in a timely manner or on favorable terms. If we fail to successfully market the isobutanol produced using our
proprietary technology to refiners and chemical producers, our business, financial condition and results of operations will be materially adversely affected.
If we lose key personnel, including key management personnel, or are unable to attract and retain additional personnel, it could delay our product development programs and harm our research and
development efforts, we may be unable to pursue partnerships or develop our own products and it may trigger an event of default under our loan agreements with TriplePoint.
Our business is complex and we intend to target a variety of markets. Therefore, it is critical that our management team and employee workforce are knowledgeable in the areas in which we operate. The loss
of any key members of our management, including our named executive officers, or the failure to attract or retain other key employees who possess the requisite expertise for the conduct of our business, could prevent us from developing and
commercializing our products for our
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target markets and entering into partnerships or licensing arrangements to execute our business strategy. In addition, the loss of any key scientific staff, or the failure to attract or retain
other key scientific employees, could prevent us from developing and commercializing our products for our target markets and entering into partnerships or licensing arrangements to execute our business strategy. We may not be able to attract or
retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology and other technology-based businesses, particularly in the advanced biofuels area, or due to the limited availability of personnel
with the qualifications or experience necessary for our renewable chemicals and advanced biofuels business. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing
constraints that will adversely affect our ability to meet the demands of our partners and customers in a timely fashion or to support our internal research and development programs. In particular, our product and process development programs are
dependent on our ability to attract and retain highly skilled scientists. Competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to do so on
acceptable terms. Additionally, certain changes in our management could trigger an event of default under the Amended Agri-Energy Loan Agreement, and we could be forced to pay the outstanding balance of the loan(s) in full. All of our employees are
at-will employees, meaning that either the employee or we may terminate their employment at any time.
Our planned activities will require
additional expertise in specific industries and areas applicable to the products and processes developed through our technology platform or acquired through strategic or other transactions, especially in the end markets that we seek to penetrate.
These activities will require the addition of new personnel, and the development of additional expertise by existing personnel. The inability to attract personnel with appropriate skills or to develop the necessary expertise could impair our ability
to grow our business.
Our ability to compete may be adversely affected if we do not adequately protect our proprietary technologies or
if we lose some of our intellectual property rights through costly litigation or administrative proceedings.
Our success will depend
in part on our ability to obtain patents and maintain adequate protection of our intellectual property covering our technologies and products and potential products in the U.S. and other countries. We have adopted a strategy of seeking patent
protection in the U.S. and in certain foreign countries with respect to certain of the technologies used in or relating to our products and processes. As such, as of September 30, 2012, we exclusively licensed rights to 101 issued patents and
filed patent applications in the U.S. and in various foreign jurisdictions, and we owned rights to approximately 364 issued patents and filed patent applications in the U.S. and in various foreign jurisdictions. When and if issued, patents would
expire at the end of their term and any patent would only provide us commercial advantage for a limited period of time, if at all. Our patent applications are directed to our enabling technologies and to our methods and products which support our
business in the advanced biofuels and renewable chemicals markets. We intend to continue to apply for patents relating to our technologies, methods and products as we deem appropriate.
Only 13 of the patent applications that we have filed in the U.S. or in any foreign jurisdictions, and only certain of the patent applications filed by third parties in which we own rights, have been
issued. A filed patent application does not guarantee a patent will issue and a patent issuing does not guarantee its validity, nor does it give us the right to practice the patented technology or commercialize the patented product. Third parties
may have or obtain rights to blocking patents that could be used to prevent us from commercializing our products or practicing our technology. The scope and validity of patents and success in prosecuting patent applications involve
complex legal and factual questions and, therefore, issuance, coverage and validity cannot be predicted with any certainty. Patents issuing from our filed applications may be challenged, invalidated or circumvented. Moreover, third parties could
practice our inventions in secret and in territories where we do not have patent protection. Such third parties may then try to sell or import products made using our inventions in and into the U.S. or other territories and we may be unable to prove
that such products were made using our inventions. Additional uncertainty may result from implementation of the Leahy-Smith America Invents Act, enacted in September 2011, as well as other potential patent reform legislation passed by the U.S.
Congress and from legal precedent as handed down by the U.S. Court of Appeals for the Federal Circuit and the U.S. Supreme Court, as they determine legal issues concerning the scope, validity and construction of patent claims. Because patent
applications in the U.S. and many foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publication of discoveries in the scientific literature often lags behind the actual
discoveries, there is additional uncertainty as to the validity of any patents that may issue and the potential for blocking patents coming into force at some future date. Accordingly, we cannot ensure that any of our currently filed or
future patent applications will result in issued patents, or even if issued, predict the scope of the claims that may issue in our and other companies patents. Given that the degree of future protection for our proprietary rights is uncertain,
we cannot ensure that (i) we were the first to make the inventions covered by each of our filed applications, (ii) we were the first to file patent applications for these inventions, (iii) the proprietary technologies we develop will
be patentable, (iv) any patents issued will be broad enough in scope to provide commercial advantage and prevent circumvention, and (v) competitors and other parties do not have or will not obtain patent protection that will block our
development and commercialization activities.
These concerns apply equally to patents we have licensed, which may likewise be challenged,
invalidated or circumvented, and the licensed technologies may be obstructed from commercialization by competitors blocking patents. In addition, we generally do not
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control the patent prosecution and maintenance of subject matter that we license from others. Generally, the licensors are primarily or wholly responsible for the patent prosecution and
maintenance activities pertaining to the patent applications and patents we license, while we may only be afforded opportunities to comment on such activities. Accordingly, we are unable to exercise the same degree of control over licensed
intellectual property as we exercise over our own intellectual property and we face the risk that our licensors will not prosecute or maintain it as effectively as we would like.
In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our intellectual property is difficult, particularly where, as
here, the end products reaching the market generally do not reveal the processes used in their manufacture, and particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the U.S., so we
cannot be certain that the steps we have taken in obtaining intellectual property and other proprietary rights will prevent unauthorized use of our technology. If competitors are able to use our technology without our authorization, our ability to
compete effectively could be adversely affected. Moreover, competitors and other parties such as universities may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, the
potential competitive advantages provided by our intellectual property may be adversely affected. We may then need to license these competing technologies, and we may not be able to obtain licenses on reasonable terms, if at all, which could cause
material harm to our business. Accordingly, litigation may be necessary for us to assert claims of infringement, enforce patents we own or license, protect trade secrets or determine the enforceability, scope and validity of the intellectual
property rights of others.
Our commercial success also depends in part on not infringing patents and proprietary rights of third parties, and
not breaching any licenses or other agreements that we have entered into with regard to our technologies, products and business. We cannot be certain that patents have not or will not issue to third parties that could block our ability to obtain
patents or to operate our business as we would like, or at all. There may be patents in some countries that, if valid, may block our ability to commercialize products in those countries if we are unsuccessful in circumventing or acquiring rights to
these patents. There may also be claims in patent applications filed in some countries that, if granted and valid, may also block our ability to commercialize products or processes in these countries if we are unable to circumvent or license them.
As is commonplace in the biotechnology industries, some of our directors, employees and consultants are or have been employed at, or
associated with, companies and universities that compete with us or have or will develop similar technologies and related intellectual property. While employed at these companies, these employees, directors and consultants may have been exposed to
or involved in research and technology similar to the areas of research and technology in which we are engaged. Though we have not received such a complaint, we may be subject to allegations that we, our directors, employees or consultants have
inadvertently or otherwise used, misappropriated or disclosed alleged trade secrets or confidential or proprietary information of those companies. Litigation may be necessary to defend against such allegations and the outcome of any such litigation
would be uncertain.
Under some of our research agreements, our partners share joint rights in certain intellectual property we develop. For
example, under our development agreement with ICM, we have exclusive rights to all intellectual property developed within the defined scope of the project, but all other intellectual property developed pursuant to the agreement is to be jointly
owned. Such provisions may limit our ability to gain commercial benefit from some of the intellectual property we develop, and may lead to costly or time-consuming disputes with parties with whom we have commercial relationships over rights to
certain innovations.
If any other party has filed patent applications or obtained patents that claim inventions also claimed by us, we may
have to participate in interference, derivation or other proceedings declared by the United States Patent and Trademark Office to determine priority of invention and, thus, the right to the patents for these inventions in the U.S. These proceedings
could result in substantial cost to us even if the outcome is favorable. Even if successful, such a proceeding may result in the loss of certain claims. Even successful outcomes of such proceedings could result in significant legal fees and other
expenses, diversion of management time and efforts and disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm our ability to compete.
Our government grants are subject to uncertainty, which could harm our business and results of operations.
We have received various government grants, including a cooperative agreement, to complement and enhance our own resources. We may seek to obtain
government grants and subsidies in the future to offset all or a portion of the costs of retrofitting existing ethanol manufacturing facilities and the costs of our research and development activities. We cannot be certain that we will be able to
secure any such government grants or subsidies. Any of our existing grants or new grants that we may obtain may be terminated, modified or recovered by the granting governmental body under certain conditions.
We may also be subject to audits by government agencies as part of routine audits of our activities funded by our government grants. As part of an audit,
these agencies may review our performance, cost structures and compliance with applicable laws, regulations and
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standards. Funds available under grants must be applied by us toward the research and development programs specified by the granting agencies, rather than for all of our programs generally. If
any of our costs are found to be allocated improperly, the costs may not be reimbursed and any costs already reimbursed may have to be refunded. Accordingly, an audit could result in an adjustment to our revenues and results of operations.
We have received funding from U.S. government agencies, which could negatively affect our intellectual property rights.
Some of our research has been funded by grants from U.S. government agencies. When new technologies are developed with U.S. government
funding, the government obtains certain rights in any resulting patents and technical data, generally including, at a minimum, a nonexclusive license authorizing the government to use the invention or technical data for noncommercial purposes. U.S.
government funding must be disclosed in any resulting patent applications, and our rights in such inventions will normally be subject to government license rights, periodic progress reporting, foreign manufacturing restrictions and march-in rights.
March-in rights refer to the right of the U.S. government, under certain limited circumstances, to require us to grant a license to technology developed under a government grant to a responsible applicant or, if we refuse, to grant such a license
itself. March-in rights can be triggered if the government determines that we have failed to work sufficiently towards achieving practical application of a technology or if action is necessary to alleviate health or safety needs, to meet
requirements of federal regulations or to give preference to U.S. industry. If we breach the terms of our grants, the government may gain rights to the intellectual property developed in our related research. The governments rights in our
intellectual property may lessen its commercial value, which could adversely affect our performance.
We may not be able to enforce our
intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to
the same extent as federal and state laws in the U.S. Many companies have encountered significant problems in protecting and enforcing intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries,
particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to bioindustrial technologies. This could make it difficult for us to stop the infringement of
our patents or misappropriation of our other intellectual property rights. Proceedings to enforce our patents and other proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other
aspects of our business. Accordingly, our efforts to enforce our intellectual property rights in such countries may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop.
If our biocatalysts, or the genes that code for our biocatalysts, are stolen, misappropriated or reverse engineered, others could use these
biocatalysts or genes to produce competing products.
Third parties, including our contract manufacturers, customers and those involved
in shipping our biocatalysts, may have custody or control of our biocatalysts. If our biocatalysts, or the genes that code for our biocatalysts, were stolen, misappropriated or reverse engineered, they could be used by other parties who may be able
to reproduce these biocatalysts for their own commercial gain. If this were to occur, it would be difficult for us to discover or challenge this type of use, especially in countries with limited intellectual property protection.
Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.
We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade
secrets are difficult to protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require new employees and consultants to execute confidentiality agreements upon the
commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individuals
relationship with us be kept confidential and not disclosed to third parties. These agreements also generally provide that know-how and inventions conceived by the individual in the course of rendering services to us shall be our exclusive property.
Nevertheless, these agreements may not be enforceable, our proprietary information may be disclosed, third parties could reverse engineer our biocatalysts and others may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely
affect our competitive business position. In addition, an unauthorized breach in our information technology systems may expose our trade secrets and other proprietary information to unauthorized parties.
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We may face substantial competition, which could adversely affect our performance and growth.
We may face substantial competition in the markets for isobutanol, plastics, fibers, rubber, other polymers and hydrocarbon fuels. Our
competitors include companies in the incumbent petroleum-based industry as well as those in the nascent biorenewable industry. The incumbent petroleum-based industry benefits from a large established infrastructure, production capability and
business relationships. The incumbents greater resources and financial strength provide significant competitive advantages that we may not be able to overcome in a timely manner. Academic and government institutions may also develop
technologies, which will compete with us in the chemicals, solvents and blendstock markets.
The biorenewable industry is characterized by
rapid technological change. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Technological development by others may impact the competitiveness of our products in the
marketplace. Competitors and potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete or may use their greater resources to gain market share at our expense.
In the production of isobutanol, we face competition from Butamax, a joint venture between BP and DuPont. Additionally, a number of companies including
Cathay Industrial Biotech, Ltd., Green Biologics Ltd., METabolic Explorer, S.A., Eastman Chemical Company (which acquired TetraVitae Bioscience, Inc. in November 2011) and Cobalt Technologies, Inc. are developing n-butanol production capability from
a variety of renewable feedstocks.
In the plastics, fibers, rubber and other polymers markets, we face competition from incumbent
petroleum-derived products, other renewable isobutanol producers and renewable n-butanol producers. Our competitive position versus the incumbent petroleum-derived products and other renewable butanol producers may not be favorable.
Petroleum-derived products have dominated the market for many years and there is substantial existing infrastructure for production from petroleum sources, which may impede our ability to establish a position in these markets. Other isobutanol and
n-butanol companies may develop technologies that prove more effective than our isobutanol production technology, or such companies may be more adept at marketing their production. Additionally, one small company in France, Global Bioenergies, S.A.,
is pursuing the production of isobutylene from renewable carbohydrates directly. Since conversion of isobutanol to butenes such as isobutylene is a key step in producing many plastics, fibers, rubber and other polymers from our isobutanol, this
direct production of renewable isobutylene, if successful, could limit our opportunities in these markets.
In the gasoline blendstock market,
we will compete with renewable ethanol producers (including those working to produce ethanol from cellulosic feedstocks), producers of alkylate from petroleum and producers of other blendstocks, all of whom may reduce our ability to obtain market
share or maintain our price levels. For example, Coskata, Inc. is developing a hybrid thermochemical-biocatalytic process to produce ethanol from a variety of feedstocks. If any of these competitors succeed in producing blendstocks more efficiently,
in higher volumes or offering superior performance than our isobutanol, our financial performance may suffer. Furthermore, if our competitors have more success marketing their products or reach development or supply agreements with major customers,
our competitive position may also be harmed.
In the production of other cellulosic biofuels, key competitors include Shell Oil Company, BP,
DuPont-Danisco Cellulosic Ethanol LLC, Abengoa Bioenergy, S.A., POET, LLC, ICM, Mascoma Corporation, Range Fuels Inc., Inbicon A/S, INEOS New Planet BioEnergy LLC, Coskata, Inc., Archer Daniels Midland Company, BlueFire Ethanol, Inc., KL Energy
Corporation, ZeaChem Inc., Iogen Corporation, Qteros, Inc., AE Biofuels, Inc. and many smaller start-up companies. If these companies are successful in establishing low cost cellulosic ethanol or other fuel production, it could negatively impact the
market for our isobutanol as a gasoline blendstock.
In the markets for the hydrocarbon fuels that we plan to produce from our isobutanol, we
will face competition from the incumbent petroleum-based fuels industry. The incumbent petroleum-based fuels industry makes the vast majority of the worlds gasoline, jet and diesel fuels and blendstocks. It is a mature industry with a
substantial base of infrastructure for the production and distribution of petroleum-derived products. The size, established infrastructure and significant resources of many companies in this industry may put us at a substantial competitive
disadvantage, and delay or prevent the establishment and growth of our business in the market for hydrocarbon fuels.
Biofuels companies may
also provide substantial competition in the hydrocarbon fuels market. With respect to production of renewable gasoline, biofuels competitors are numerous and include both large established companies and numerous start-ups. For example, Virent Energy
Systems, Inc. has developed a process for making gasoline and gasoline blendstocks and Kior, Inc. has developed a technology platform to convert biomass into renewable crude oil. Many other competitors may do so as well. In the jet fuel market, we
will face competition from companies such as Synthetic Genomics, Inc., Solazyme, Inc., Sapphire Energy, Inc. and Exxon-Mobil Corporation that are pursuing production of jet fuel from algae-based technology. LS9, Inc. (LS9) and others are
also targeting production of jet fuels from renewable biomass. We may also face competition from companies working to produce jet fuel from hydrogenated fatty acid methyl esters. In the diesel fuels market, competitors such as Amyris Inc. and LS9
have developed technologies for production of alternative hydrocarbon diesel fuel.
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In the plastics, fibers, rubber and other polymers markets and the hydrocarbon fuels market, we expect to
face vigorous competition from existing technologies. The companies we may compete with may have significantly greater access to resources, far more industry experience and/or more established sales and marketing networks. Additionally, since we do
not plan to produce most of these products directly, we depend on the willingness of potential customers to purchase and convert our isobutanol into their products. These potential customers generally have well-developed manufacturing processes and
arrangements with suppliers of the chemical components of their products and may have a resistance to changing these processes and components. These potential customers frequently impose lengthy and complex product qualification procedures on their
suppliers, influenced by consumer preference, manufacturing considerations such as process changes and capital and other costs associated with transitioning to alternative components, supplier operating history, regulatory issues, product liability
and other factors, many of which are unknown to, or not well understood by, us. Satisfying these processes may take many months or years. If we are unable to convince these potential customers that our isobutanol is comparable or superior to the
alternatives that they currently use, we will not be successful in entering these markets and our business will be adversely affected.
We
also face challenges in marketing our isobutanol. Though we intend to enhance our competitiveness through partnerships and joint development agreements, some competitors may gain an advantage by securing more valuable partnerships for developing
their hydrocarbon products than we are able to obtain. Such partners could include major petrochemical, refiner or end-user companies. Additionally, petrochemical companies may develop alternative pathways for hydrocarbon production that may be less
expensive, and may utilize more readily available infrastructure than that used to convert our isobutanol into hydrocarbon products.
We plan
to enter into partnerships through which we will sell significant volumes of our isobutanol to partners who will convert it into useful hydrocarbons or use it as a fuel or fuel blendstock. However, if any of these partners instead negotiate supply
agreements with other buyers for the isobutanol they purchase from us, or sell it into the open market, they may become competitors of ours in the field of isobutanol sales. This could significantly reduce our profitability and hinder our ability to
negotiate future supply agreements for our isobutanol, which could have an adverse effect on our performance.
Our ability to compete
successfully will depend on our ability to develop proprietary products that reach the market in a timely manner and are technologically superior to and/or are less expensive than other products on the market. Many of our competitors have
substantially greater production, financial, research and development, personnel and marketing resources than we do. In addition, certain of our competitors may also benefit from local government subsidies and other incentives that are not available
to us. As a result, our competitors may be able to develop competing and/or superior technologies and processes, and compete more aggressively and sustain that competition over a longer period of time than we could. Our technologies and products may
be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. As more companies develop new intellectual property in our markets, the possibility of a competitor
acquiring patent or other rights that may limit our products or potential products increases, which could lead to litigation. Furthermore, to secure purchase agreements from certain customers, we may be required to enter into exclusive supply
contracts, which could limit our ability to further expand our sales to new customers. Likewise, major potential customers may be locked into long-term, exclusive agreements with our competitors, which could inhibit our ability to compete for their
business.
In addition, various governments have recently announced a number of spending programs focused on the development of clean
technologies, including alternatives to petroleum-based fuels and the reduction of carbon emissions. Such spending programs could lead to increased funding for our competitors or a rapid increase in the number of competitors within those markets.
Our limited resources relative to many of our competitors may cause us to fail to anticipate or respond adequately to new developments and
other competitive pressures. This failure could reduce our competitiveness and market share, adversely affect our results of operations and financial position and prevent us from obtaining or maintaining profitability.
The terms of the Amended Agri-Energy Loan Agreement and the Indenture governing the Convertible Notes may restrict our ability to engage in certain
transactions.
In August 2010, we entered into the Original Agri-Energy Loan Agreement under which our wholly owned subsidiary, Gevo
Development, borrowed $12.5 million to finance its acquisition of Agri-Energy. In October 2011, the Original Agri-Energy Loan Agreement was amended 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 Agri-Energy Facility to produce isobutanol. Pursuant to the terms of the Amended Agri-Energy Loan Agreement, we cannot engage in certain actions, including disposing of
certain assets, granting or otherwise allowing the imposition of a lien against certain assets, incurring certain kinds of additional indebtedness or acquiring or merging with other entities unless we receive the prior approval of TriplePoint. If
TriplePoint does not consent to any of the actions that we desire to take, we could be prohibited from engaging in transactions which could be beneficial to our business and our stockholders or could be forced to pay the outstanding balance of the
loan in full. As of September 30, 2012, the aggregate outstanding principal and final payments under the Amended Agri-Energy Loan Agreement was approximately $28.7 million.
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With respect to the Convertible Notes, if a Fundamental Change occurs prior to the maturity date of the
Convertible Notes, holders of the Convertible Notes will have the right, at their option, to require us to repurchase all or a portion of their Convertible Notes. In addition, if a Fundamental Change occurs prior to the maturity date of the
Convertible Notes, we will in some cases be required to increase the conversion rate for a holder that elects to convert its Convertible Notes in connection with such Fundamental Change. In addition, the Indenture prohibits us from engaging in
certain mergers or acquisitions unless, among other things, the surviving entity assumes our obligations under the Convertible Notes. These and other provisions could prevent or deter a third party from acquiring us, even where the acquisition could
be beneficial to you.
Business interruptions could delay us in the process of developing our products and could disrupt our sales.
We are vulnerable to natural disasters and other events that could disrupt our operations, such as riots, civil disturbances, war,
terrorist acts, floods, infections in our laboratory or production facilities or those of our contract manufacturers and other events beyond our control. We do not have a detailed disaster recovery plan. In addition, we may not carry sufficient
business interruption insurance to compensate us for losses that may occur. Any losses or damages we incur could have a material adverse effect on our cash flows and success as an overall business. Furthermore, ICM may terminate our
commercialization agreement if a force majeure event interrupts our operations for a specified period of time.
We engage in hedging
transactions, which could harm our business.
We currently engage in hedging transactions to offset some of the effects of volatility
in commodity prices. We expect to engage in similar transactions once we begin commercial isobutanol production. We generally follow a policy of using exchange-traded futures contracts to reduce our net position in agricultural commodity inventories
and forward purchase contracts to manage price risk. Hedging activities may cause us to suffer losses, such as if we purchase a position in a declining market or sell a position in a rising market. Furthermore, hedging exposes us to the risk that
the other party to a hedging contract defaults on its obligation. We may vary the hedging strategies we undertake, which could leave us more vulnerable to increases in commodity prices or decreases in the prices of isobutanol, distillers
grains, iDGs or ethanol. Losses from hedging activities and changes in hedging strategy could have a material adverse effect on our operations.
Ethical, legal and social concerns about genetically engineered products and processes, and similar concerns about feedstocks grown on land that could be used for food production, could limit or
prevent the use of our products, processes and technologies and limit our revenues.
Some of our processes involve the use of
genetically engineered organisms or genetic engineering technologies. Additionally, our feedstocks may be grown on land that could be used for food production, which subjects our feedstock sources to food versus fuel concerns. If we are
not able to overcome the ethical, legal and social concerns relating to genetic engineering or food versus fuel, our products and processes may not be accepted. Any of the risks discussed below could result in increased expenses, delays or other
impediments to our programs or the public acceptance and commercialization of products and processes dependent on our technologies or inventions.
Our ability to develop and commercialize one or more of our technologies, products, or processes could be limited by the following factors:
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public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products and
processes, which could influence public acceptance of our technologies, products and processes;
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public attitudes regarding, and potential changes to laws governing ownership of genetic material, which could harm our intellectual property rights
with respect to our genetic material and discourage others from supporting, developing or commercializing our products, processes and technologies;
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public attitudes and ethical concerns surrounding production of feedstocks on land which could be used to grow food, which could influence public
acceptance of our technologies, products and processes;
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governmental reaction to negative publicity concerning genetically engineered organisms, which could result in greater government regulation of genetic
research and derivative products; and
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governmental reaction to negative publicity concerning feedstocks produced on land which could be used to grow food, which could result in greater
government regulation of feedstock sources.
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The subjects of genetically engineered organisms and food versus fuel have
received negative publicity, which has aroused public debate. This adverse publicity could lead to greater regulation and trade restrictions on imports of genetically engineered products or feedstocks grown on land suitable for food production.
The biocatalysts that we develop have significantly enhanced characteristics compared to those found in naturally occurring enzymes or
microbes. While we produce our biocatalysts only for use in a controlled industrial environment, the release of such biocatalysts into uncontrolled environments could have unintended consequences. Any adverse effect resulting from such a release
could have a material adverse effect on our business and financial condition, and we may be exposed to liability for any resulting harm.
Compliance with stringent laws and regulations may be time consuming and costly, which could adversely affect the commercialization of our biofuels
products.
Any biofuels developed using our technologies will need to meet a significant number of regulations and standards, including
regulations imposed by the U.S. Department of Transportation, the EPA, the FAA, various state agencies and others. Any failure to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could
prevent or delay the commercialization of any biofuels developed using our technologies and subject us to fines and other penalties.
We
use hazardous materials in our business and we must comply with environmental laws and regulations. Any claims relating to improper handling, storage or disposal of these materials or noncompliance with applicable laws and regulations could be time
consuming and costly and could adversely affect our business and results of operations.
Our research and development processes involve
the use of hazardous materials, including chemical, radioactive and biological materials. Our operations also produce hazardous waste. We cannot eliminate entirely the risk of accidental contamination or discharge and any resultant injury from these
materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of, and human exposure to, these materials. We may be sued for any injury or contamination that results from our use or the use by
third parties of these materials, and our liability may exceed our total assets. Although we believe that our activities conform in all material respects with environmental laws, there can be no assurance that violations of environmental, health and
safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes. Compliance with applicable environmental laws and regulations may be expensive, and the failure to comply with past, present, or future
laws could result in the imposition of fines, third-party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of production or a cessation of operations, and our liability may exceed our
total assets. Liability under environmental laws can be joint and several and without regard to comparative fault. Environmental laws could become more stringent over time imposing greater compliance costs and increasing risks and penalties
associated with violations, which could impair our research, development or production efforts and harm our business.
As isobutanol has
not previously been used as a commercial fuel in significant amounts, its use subjects us to product liability risks, and we may have difficulties obtaining product liability insurance.
Isobutanol has not previously been used as a commercial fuel and research regarding its impact on engines and distribution infrastructure is ongoing.
Though we intend to test our isobutanol further before its commercialization, there is a risk that it may damage engines or otherwise fail to perform as expected. If isobutanol degrades the performance or reduces the lifecycle of engines, or causes
them to fail to meet emissions standards, market acceptance could be slowed or stopped, and we could be subject to product liability claims. Furthermore, due to isobutanols lack of commercial history as a fuel, we are uncertain as to whether
we will be able to acquire product liability insurance on reasonable terms, or at all. A significant product liability lawsuit could substantially impair our production efforts and could have a material adverse effect on our business, reputation,
financial condition and results of operations.
We may not be able to use some or all of our net operating loss carry-forwards to offset
future income.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an
ownership change is subject to limitation on its ability to utilize its pre-change net operating loss carry-forwards, or net operating losses, to offset future taxable income. We may have experienced one or more ownership changes in
prior years, and the issuance of shares in connection with our initial public offering may itself have triggered an ownership change; hence, our ability to utilize our net operating losses to offset income if we attain profitability may be limited.
In addition, these loss carry-forwards expire at various times over the next 20 years. We believe that it is more likely than not that these carry-forwards will not result in any material future tax savings.
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Enacted and proposed changes in securities laws and regulations have increased our costs and may
continue to increase our costs in the future.
In recent years, there have been several changes in laws, rules, regulations and
standards relating to corporate governance and public disclosure, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Sarbanes-Oxley Act of 2002 and various other new regulations promulgated
by the SEC and rules promulgated by the national securities exchanges.
The Dodd-Frank Act, enacted in July 2010, expands federal regulation
of corporate governance matters and imposes requirements on publicly-held companies, including us, to, among other things, provide stockholders with a periodic advisory vote on executive compensation and also requires compensation committee reforms
and enhanced pay-for-performance disclosures. While some provisions of the Dodd-Frank Act are effective upon enactment, others will be implemented upon the SECs adoption of related rules and regulations. The scope and timing of the adoption of
such rules and regulations is uncertain and accordingly, the cost of compliance with the Dodd-Frank Act is also uncertain.
These and other
new or changed laws, rules, regulations and standards are, or will be, subject to varying interpretations in many cases due to their lack of specificity. As a result, their application in practice may evolve over time as new guidance is provided by
regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our efforts to comply with evolving laws,
regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. Further, compliance with new
and existing laws, rules, regulations and standards may make it more difficult and expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain
coverage. Members of our board of directors and our principal executive officer and principal financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have
difficulty attracting and retaining qualified directors and executive officers, which could harm our business. We continually evaluate and monitor regulatory developments and cannot estimate the timing or magnitude of additional costs we may incur
as a result.
If we fail to maintain an effective system of internal controls, we might not be able to report our financial results
accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our stock.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the
Sarbanes-Oxley Act of 2002 (Section 404) requires us to evaluate and report on our internal control over financial reporting and have our chief executive officer and chief financial officer certify as to the accuracy and completeness of
our financial reports. The process of implementing our internal controls and complying with Section 404 is expensive and time consuming, and requires significant attention of management. We cannot be certain that these measures will ensure that
we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud
or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations.
Our management has concluded that there are no material weaknesses in our internal controls over financial reporting as of September 30, 2012.
However, there can be no assurance that our controls over financial processes and reporting will be effective in the future or that additional material weaknesses or significant deficiencies in our internal controls will not be discovered in the
future. If we, or our independent registered public accounting firm, discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the markets confidence in our financial statements and harm our stock price.
In addition, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions, including SEC action, ineligibility for short form resale registration, the suspension or delisting of our common stock from the
stock exchange on which it is listed and the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price and could harm our business.
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Certain Risks Related to Owning Our Securities.
We incurred significant indebtedness when we sold the Convertible Notes and we may incur additional indebtedness in the future. The indebtedness
created by the sale of the Convertible Notes and any future indebtedness we incur exposes us to risks that could adversely affect our business, financial condition and results of operations.
As of September 30, 2012, the aggregate outstanding principal and final payments under the Amended Agri-Energy Loan from TriplePoint was
approximately $28.7 million. In addition, we incurred $45 million of senior indebtedness when we sold the Convertible Notes in July 2012. We may also incur additional long-term indebtedness or obtain additional working capital lines of credit to
meet future financing needs. Our indebtedness could have significant negative consequences for our business, results of operations and financial condition, including:
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increasing our vulnerability to adverse economic and industry conditions;
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limiting our ability to obtain additional financing;
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requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our cash
flow available for other purposes;
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limiting our flexibility in planning for, or reacting to, changes in our business; and
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placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.
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We cannot assure you that we will continue to maintain sufficient cash reserves or that our business will generate cash
flow from operations at levels sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase. If we are unable to generate sufficient cash flow or otherwise obtain funds
necessary to make required payments, or if we fail to comply with the various requirements of our existing indebtedness, the Convertible Notes or any indebtedness which we may incur in the future, we would be in default, which would permit the
holders of the Convertible Notes and such other indebtedness to accelerate the maturity of the Convertible Notes and such other indebtedness and could cause defaults under the Convertible Notes and such other indebtedness. Any default under the
Convertible Notes or such other indebtedness could have a material adverse effect on our business, results of operations and financial condition.
We may incur substantially more debt or take other actions which would intensify the risks discussed above.
We and any current and future subsidiaries of ours may incur substantial additional debt in the future, subject to the specified limitations in our existing financing documents and the Indenture governing
the Convertible Notes. Under the terms of the Indenture governing the Convertible Notes, we will not be restricted from incurring additional debt, securing future debt, recapitalizing our debt or taking a number of other actions that are not limited
by the terms of the Indenture governing the Convertible Notes and that could have the effect of diminishing our ability to make payments on the Convertible Notes when due. If new debt is added to our or any of our subsidiaries debt levels, the
risks described in this Certain Risks Related to Owning our Securities section could intensify.
Our stock price may be
volatile, and your investment in our securities could suffer a decline in value. We expect that the trading value of the Convertible Notes will be significantly affected by the price of our common stock.
The market price of shares of our common stock has experienced significant price and volume fluctuations. For example, since February 19, 2011, when
we became a public company, the closing sales price for one share of our common stock has reached a high of $26.36 and a low of $1.77. The market price of our common stock, as well as the general level of interest rates and our credit quality, will
likely significantly affect the market price of the Convertible Notes. This may result in significantly greater volatility in the trading value of the Convertible Notes than would be expected for nonconvertible debt securities we may issue.
We cannot predict whether the price of our common stock or interest rates will rise or fall. A variety of factors may have a significant
effect on our stock price, including:
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actual or anticipated fluctuations in our financial condition and operating results;
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the position of our cash and cash equivalents;
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actual or anticipated changes in our growth rate relative to our competitors;
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actual or anticipated fluctuations in our competitors operating results or changes in their growth rate;
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announcements of technological innovations by us, our partners or our competitors;
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announcements by us, our partners or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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the entry into, modification or termination of licensing arrangements, marketing arrangements, and/or research, development, commercialization, supply,
off-take or distribution arrangements;
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additions or losses of customers;
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additions or departures of key management or scientific personnel;
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competition from existing products or new products that may emerge;
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issuance of new or updated research reports by securities or industry analysts;
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fluctuations in the valuation of companies perceived by investors to be comparable to us;
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litigation involving us, our general industry or both;
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disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our
technologies;
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changes in existing laws, regulations and policies applicable to our business and products, including the Renewable Fuel Standard (RFS)
program, and the adoption of or failure to adopt carbon emissions regulation;
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announcements or expectations of additional financing efforts;
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sales of our common stock by us or our stockholders;
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share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
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general market conditions in our industry; and
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general economic and market conditions, including the recent financial crisis.
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Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of
equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market
conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of our common stock, regardless of our operating performance, and cause the value of your investment to
decline. Because the Convertible Notes are convertible into our common stock, volatility or depressed prices of our common stock could have an adverse effect on the trading price of the Convertible Notes. Holders who receive common stock upon
conversion of the Convertible Notes also will be subject to the risk of volatility and depressed prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling in our common stock by market participants
because the conversion of the Convertible Notes could depress the price of our common stock.
Additionally, in the past, companies that have
experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and
divert our managements attention from other business concerns, which could seriously harm our business.
The price of our common stock
also could be affected by possible sales of common stock by investors who view the Convertible Notes as a more attractive means of equity participation in us and by hedging or arbitrage activity involving our common stock that we expect to develop
as a result of the issuance of the Convertible Notes. The hedging or arbitrage could, in turn, affect the trading prices of the Convertible Notes, or any common stock that holders receive upon conversion of the Convertible Notes.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market
that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. Stockholders as of September 30, 2012 who own more than 5% of our outstanding common stock, which consists of
four stockholders, collectively own approximately 37% of our outstanding common stock. If one or more of them were to sell a substantial portion of the shares they hold, it could cause our stock price to decline.
In addition, as of September 30, 2012, there were 3.1 million shares subject to outstanding options that are or will become eligible for sale
in the public market to the extent permitted by any applicable vesting requirements and Rules 144 and 701 under the Securities Act of 1933, as amended (the Securities Act). Moreover, certain holders of our outstanding common stock
(including shares of our common stock issuable upon the exercise of outstanding warrants) have rights, subject to some conditions, to require us to file registration statements covering their shares and to include their shares in registration
statements that we may file for ourselves or other stockholders.
We registered 6.8 million shares of common stock, which are reserved
for issuance under our stock incentive plans and our employee stock purchase plan. These shares can be freely sold in the public market upon issuance and once vested.
We may not have the ability to pay interest on the Convertible Notes or to repurchase or redeem the Convertible Notes.
The Convertible Notes, which have a principal balance of $45 million at September 30, 2012, bear interest at a rate of 7.5% per year, payable in cash semi-annually in arrears on January 1
and July 1 of each year, commencing in 2013. If a Fundamental Change occurs, holders of the Convertible Notes may require us to repurchase, for cash, all or a portion of their Convertible Notes. If we elect to redeem the Convertible Notes prior
to their maturity, the redemption price of any Convertible Notes redeemed by us will be paid for in
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cash. Our ability to pay the interest on the Convertible Notes, to repurchase or redeem the Convertible Notes, to refinance our indebtedness and to fund working capital needs and planned capital
expenditures depends on our ability to generate cash flow in the future. To some extent, this is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure
you that we will continue to maintain sufficient cash reserves or that our business will continue to generate cash flow from operations at levels sufficient to permit us to pay the interest on the Convertible Notes, to repurchase or redeem the
Convertible Notes or to pay cash upon conversion of the Convertible Notes, or that our cash needs will not increase. In addition, any such repurchase or redemption of the Convertible Notes, even if such action would be in our best interests, may
result in a default under the agreements governing our current indebtedness with TriplePoint unless we are able to obtain TriplePoints consent prior to the taking of such action.
Our failure to repurchase tendered Convertible Notes at a time when the repurchase is required by the Indenture would constitute a default under the Convertible Notes and would permit holders of the
Convertible Notes to accelerate our obligations under the Convertible Notes. Such default may also lead to a default under the agreements governing any of our current and future indebtedness. If the repayment of the related indebtedness were to be
accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness and repurchase the Convertible Notes or make cash payments upon conversions thereof.
If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and meet our other needs, we may have to
refinance all or a portion of our indebtedness, obtain additional financing, reduce expenditures or sell assets that we deem necessary to our business. We cannot assure you that any of these measures would be possible or that any additional
financing could be obtained on favorable terms, or at all. The inability to obtain additional financing on commercially reasonable terms could have a material adverse effect on our financial condition, which could cause the value of your investment
to decline.
Future issuances of our common stock or instruments convertible into our common stock, including in connection with
conversions of Convertible Notes, and hedging activities by holders of the Convertible Notes may materially and adversely affect the price of our common stock and the Convertible Notes.
If we issue additional shares of common stock or instruments convertible into common stock, it may materially and adversely affect the price of our common
stock. In addition, the conversion of some or all of the Convertible Notes may dilute the ownership interests of existing stockholders, and any sales in the public market of any of our common stock issuable upon such conversion could adversely
affect prevailing market prices of our common stock. Moreover, the anticipated conversion of the Convertible Notes into shares of our common stock could depress the trading price of our common stock.
If a holder of our Convertible Notes elects to convert some or all of their Convertible Notes on or after January 1, 2013 and prior to July 1,
2017, such holder will be entitled to receive a Coupon Make-Whole Payment for the Convertible Notes being converted. We have the option to issue our common stock to any converting holder in lieu of making the Coupon Make-Whole Payment in cash. If we
elect to issue our common stock for such payment, then the stock will be valued at 90% of the simple average of the daily volume weighted average prices of our common stock for the 10 trading days ending on and including the trading day immediately
preceding the conversion date. Given that the agreements governing our secured indebtedness with TriplePoint prohibit us from paying, repurchasing or redeeming the Convertible Notes or making cash payments in respect of the Coupon Make-Whole Payment
upon a conversion, we may be unable to make such payment in cash. If we elect to issue our common stock for such payment, this may cause significant additional dilution to our existing stockholders.
The price of our common stock also could be affected by possible sales of our common stock by investors who view the Convertible Notes as a more
attractive means of equity participation in our company and by hedging or arbitrage trading activity that we expect to develop involving our common stock by holders of the Convertible Notes.
We may not be permitted, by the agreements governing our secured indebtedness, to repurchase the Convertible Notes.
If a Fundamental Change occurs, the holders of the Convertible Notes may require us to repurchase all or a portion of their Convertible Notes for cash at a repurchase price equal to 100% of the principal
amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date. However, the agreements governing our secured indebtedness with TriplePoint prohibit us from paying, repurchasing or
redeeming the Convertible Notes or any amounts payable in connection with a Fundamental Change or at our option. In the event that a Fundamental Change occurs at a time when we are prohibited from repurchasing the Convertible Notes, we would need to
seek the consent of TriplePoint to repurchase the Convertible Notes from the holders or we would otherwise be risking an event of default under our agreements with TriplePoint. If we were to not obtain such a consent, compliance with the terms of
the Convertible Notes would trigger an event of default under our indebtedness with TriplePoint.
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Although the Convertible Notes are referred to as senior notes, the Convertible Notes are
unsecured and are effectively subordinated to our secured indebtedness and effectively subordinated to all liabilities of our subsidiaries from time to time outstanding.
The Convertible Notes are obligations only of Gevo, Inc. and are to be guaranteed by our subsidiaries or secured by any of our or their properties or assets. The Convertible Notes are effectively
subordinated to all of our existing and future secured indebtedness and effectively subordinated to all existing and future liabilities of our subsidiaries, including trade payables. Our subsidiaries are separate legal entities and have no
obligation to pay any amounts due pursuant to the Convertible Notes. Our subsidiaries conduct a significant amount of our business, and may incur significant liabilities in connection with such business. As of September 30, 2012, our
subsidiaries had indebtedness and other obligations in the principal amount of approximately $28.7 million. These amounts of indebtedness structurally rank senior to the Convertible Notes.
In any liquidation, dissolution, bankruptcy or other similar proceeding, holders of our secured debt may assert rights against any assets securing such debt in order to receive full payment of the debt
before those assets may be used to pay the holders of the Convertible Notes. In such an event, we may not have sufficient assets remaining to pay amounts due on any or all of the Convertible Notes. At September 30, 2012, on a consolidated
basis, we had approximately $28.7 million in aggregate principal amount of secured indebtedness outstanding. In addition, our senior secured indebtedness to TriplePoint prohibits us from making payments on the Convertible Notes that are not
regularly scheduled payments.
We have made only limited covenants in the Indenture governing the Convertible Notes, and these limited
covenants may not protect the value of an investment in the Convertible Notes.
The Indenture governing the Convertible Notes does not:
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require us to maintain any financial ratios or specific levels of net worth, revenues, income, cash flows or liquidity and, accordingly, does not
protect holders of the Convertible Notes in the event that we experience significant adverse changes in our financial condition or results of operations;
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limit our subsidiaries ability to incur indebtedness that would effectively rank senior to the Convertible Notes;
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limit our ability to incur secured indebtedness that would effectively rank senior to the Convertible Notes or indebtedness that is equal in right of
payment to the Convertible Notes;
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restrict our subsidiaries ability to issue securities that would be senior to the common stock of our subsidiaries held by us;
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restrict our ability to repurchase our securities;
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restrict our ability to pledge our assets or those of our subsidiaries; or
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restrict our ability to make investments or to pay dividends or make other payments in respect of our common stock or other securities ranking junior
to the Convertible Notes.
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Furthermore, the Indenture governing the Convertible Notes contains only limited protections in
the event of a change in control. We could engage in many types of transactions, such as acquisitions, refinancings or recapitalizations, that could substantially affect our capital structure and the value of the Convertible Notes and our common
stock but would not constitute a Fundamental Change that permits holders to require us to repurchase their Convertible Notes.
Holders of Convertible Notes are not entitled to any rights with respect to our common stock, but will be subject to all changes made with respect
to such rights.
Holders of Convertible Notes are not entitled to any rights with respect to our common stock (including, without
limitation, voting rights and rights to receive any dividends or other distributions on our common stock), but holders of Convertible Notes will be subject to all changes affecting our common stock. For example, if an amendment is proposed to our
certificate of incorporation or bylaws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to a holders conversion of its Convertible Notes, such holder
will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes affecting our common stock that result from such amendment.
The adjustment to the conversion rate for Convertible Notes converted in connection with a Make-Whole Fundamental Change may not adequately compensate holders of the Convertible Notes for the lost
option value of the Convertible Notes as a result of such transaction.
If a Make-Whole Fundamental Change occurs prior to maturity of
the Convertible Notes, under certain circumstances, we will increase the conversion rate by a number of additional shares of our common stock for Convertible Notes converted in connection
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with such Make-Whole Fundamental Change. The increase in the conversion rate will be determined based on the date on which the specified corporate transaction constituting the Make-Whole
Fundamental Change becomes effective and the price paid (or deemed paid) per share of our common stock in such transaction. The adjustment to the conversion rate for Convertible Notes converted in connection with a Make-Whole Fundamental Change may
not adequately compensate holders of the Convertible Notes for any lost value of the Convertible Notes as a result of such transaction. In addition, if the price of our common stock in the transaction is greater than $20.00 per share or less than
$4.95 per share (in each case, subject to adjustment), no adjustment will be made to the conversion rate.
Our obligation to increase the
conversion rate upon the occurrence of a Make-Whole Fundamental Change could be considered a penalty, in which case the enforceability thereof would be subject to general principles of reasonableness of economic remedies.
The conversion rate of the Convertible Notes may not be adjusted for all dilutive events.
The conversion rate of the Convertible Notes is subject to adjustment for certain events, including, but not limited to, the issuance of stock dividends
on our common stock, the issuance of certain rights, options or warrants, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers. However, the conversion rate will not be adjusted for
other events, such as a third-party tender or exchange offer or an issuance of common stock or securities convertible or exercisable into common stock, that may adversely affect the trading price of the Convertible Notes or the consideration issued
upon conversion thereof. An event that adversely affects the value of the Convertible Notes may occur, and that event may not result in an adjustment to the conversion rate.
Some significant restructuring transactions may not constitute a Fundamental Change, in which case we would not be obligated to offer to repurchase the Convertible Notes.
Upon the occurrence of a Fundamental Change, holders have the right to require us to repurchase their Convertible Notes. However, the Fundamental Change
provisions will not afford protection to holders of Convertible Notes in the event of other transactions that could adversely affect the Convertible Notes. For example, transactions such as leveraged recapitalizations, refinancings, restructurings
or acquisitions initiated by us may not constitute a Fundamental Change requiring us to repurchase the Convertible Notes. In the event of any such transaction, holders would not have the right to require us to repurchase their Convertible Notes,
even though each of these transactions could increase the amount of our indebtedness or otherwise adversely affect our capital structure or any credit ratings, thereby adversely affecting the value of the Convertible Notes.
Holders of the Convertible Notes may not be able to accelerate the maturity of the Convertible Notes if we fail to make our SEC filings in a timely
manner.
The Indenture governing the Convertible Notes requires us to furnish our SEC filings to the trustee no more than 15 days after
the date on which we would have been required to file them with the SEC. The Indenture also requires us to comply with certain filing requirements as set forth in the Trust Indenture Act of 1939, as amended. However, the Indenture does not require
us to file any such reports on a timely basis with the SEC. Accordingly, holders of Convertible Notes may not be able to accelerate the maturity of the Convertible Notes if we fail to make our SEC filings in a timely manner.
We cannot assure you that an active trading market will be maintained for the Convertible Notes. Holders of the Convertible Notes may be unable to
sell their Convertible Notes at the price they desire or at all.
We do not intend to apply for listing of the Convertible Notes on any
securities exchange or to arrange for quotation on any interdealer quotation system. We have been informed by the underwriters that purchased the Convertible Notes that they intend to make a market in the Convertible Notes. However, the underwriters
may cease their market-making in their sole discretion at any time without notice. In addition, the liquidity of the trading market in the Convertible Notes, and the market price quoted for these Convertible Notes, may be adversely affected by,
among other things:
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changes in the overall market for debt securities;
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changes in our financial performance or prospects;
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the prospects for companies in our industry generally;
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the number of holders of the Convertible Notes;
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the interest of securities dealers in making a market for the Convertible Notes;
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the time remaining to the maturity of the Convertible Notes;
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the outstanding amount of the Convertible Notes;
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the market price and volatility of our common stock; and
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prevailing interest rates.
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Historically, the market for convertible debt has been subject to disruptions that have caused volatility in prices. It is possible that the market for
the Convertible Notes will be subject to disruptions that may have a negative effect on holders of the Convertible Notes, regardless of our operating results, financial performance or prospects.
As a result, we cannot assure holders of the Convertible Notes that an active trading market will be maintained for the Convertible Notes. If an active
trading market is not maintained, the market price and liquidity of the Convertible Notes may be adversely affected. In that case, investors in the Convertible Notes may not be able to sell the Convertible Notes at a particular time or at a
favorable price.
Any adverse rating of the Convertible Notes may cause their trading price to fall.
We do not intend to seek a rating on the Convertible Notes. However, if a rating service were to rate the Convertible Notes and if such rating service
were to lower its rating on the Convertible Notes below the rating initially assigned to the Convertible Notes or otherwise announce its intention to put the Convertible Notes on credit watch, the trading price of the Convertible Notes could
decline.
Developments in the convertible debt markets may adversely affect the market value of the Convertible Notes.
We expect that many investors in, and potential purchasers of, the Convertible Notes will employ, or seek to employ, a convertible
arbitrage strategy with respect to the Convertible Notes. Investors that employ a convertible arbitrage strategy with respect to convertible debt instruments typically implement that strategy by selling short the common stock underlying the
Convertible Notes and dynamically adjusting their short position while they hold the Convertible Notes. As a result, any specific rules regulating short selling of securities or other governmental action that interferes with the ability of market
participants to effect short sales in our common stock could adversely affect the ability of investors in, or potential purchasers of, the Convertible Notes to conduct the convertible arbitrage strategy that we believe they will employ, or seek to
employ, with respect to the Convertible Notes. This could, in turn, adversely affect the market price and liquidity of the Convertible Notes.
Holders of the Convertible Notes may be subject to tax if we make or fail to make certain adjustments to the conversion rate of the Convertible
Notes even if they do not receive a corresponding cash distribution.
The conversion rate of the Convertible Notes is subject to
adjustment in certain circumstances, including the payment of cash dividends. If the conversion rate is adjusted as a result of a distribution that is taxable to our common stockholders, such as a cash dividend, holders of the Convertible Notes may
be deemed to have received a dividend subject to U.S. federal income tax even if they have not received any cash. In addition, a failure to adjust (or to adequately adjust) the conversion rate after an event that increases a Convertible Note
holders proportionate interest in our assets and earnings could be treated as a deemed taxable dividend to the Convertible Note holder. If a Make-Whole Fundamental Change occurs prior to the maturity date of the Convertible Notes, under some
circumstances, we will increase the conversion rate for Convertible Notes converted in connection with the Make-Whole Fundamental Change. Such increase may also be treated as a distribution subject to U.S. federal income tax as a dividend.
We are subject to anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws and
under Delaware law that could delay or prevent an acquisition of the Company, even if the acquisition would be beneficial to our stockholders.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may delay or prevent an acquisition of the Company. Among other things, our amended and restated
certificate of incorporation and amended and restated bylaws provide for a board of directors that is divided into three classes with staggered three-year terms, provide that all stockholder action must be effected at a duly called meeting of the
stockholders and not by a consent in writing, and further provide that only our board of directors may call a special meeting of the stockholders. These provisions may also frustrate or prevent any attempts by our stockholders to replace or remove
our current management by making it more difficult for stockholders to replace members of our board of directors, who are responsible for appointing the members of our management team. Furthermore, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits, with some exceptions, stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Finally, our
charter documents establish advance notice requirements for nominations for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings. Although we believe these provisions together provide an
opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer to acquire the Company may be considered beneficial by some stockholders.
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Concentration of ownership among our existing officers, directors and principal stockholders may
prevent other stockholders from influencing significant corporate decisions and depress our stock price.
Our affiliates who held our
common stock as of September 30, 2012 together control approximately 29% of our outstanding common stock, with a single stockholder (Khosla Ventures I, L.P. and its affiliates) controlling approximately 18% of our outstanding common stock. If
these officers, directors and principal stockholders or a group of our principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and control matters requiring stockholder
approval, including the election of directors and approval of mergers or other business combination transactions. The interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders. For
instance, officers, directors and principal stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of ownership may have the effect of delaying or
preventing a change in control of the Company otherwise favored by our other stockholders. This concentration of ownership could depress our stock price.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline. The
trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us or our business.
We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our stock price would likely decline which in turn
would likely cause a decline in the value of the Convertible Notes. If one or more of these analysts cease coverage of the Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our
stock price and Convertible Note price to decline or the trading volume of our common stock to decline.
We do not anticipate paying
cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.
Under the terms of
our Amended Agri-Energy Loan Agreement with TriplePoint, subject to certain limited exceptions, Agri-Energy is only permitted to pay dividends if the following conditions are satisfied: (i) the retrofit of the Agri-Energy Facility is complete
and the facility is producing commercial volumes of isobutanol, (ii) its net worth is greater than or equal to $10.0 million, and (iii) no event of default has occurred and is continuing under the agreement. Agri-Energy is also permitted
to make dividends and distributions to Gevo, Inc. for certain defined purposes related to the Convertible Notes. Accordingly, even if we decide to pay cash dividends in the future, we may not be able to access cash generated by Agri-Energy if
amounts are then outstanding pursuant to the Amended Agri-Energy Loan Agreement. We have never paid cash dividends on our common stock and we do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future
payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. As a result, only appreciation of the price of our common stock, which may
never occur, will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.