Notes to Unaudited Consolidated Financial Statements
1. Nature of Business, Financial Condition and Basis of Presentation
Nature of Business
. Gevo, Inc. (“Gevo” or the “Company,” which, unless otherwise indicated, refers to Gevo, Inc. and its subsidiaries) is a renewable chemicals and next generation biofuels company focused on the development and commercialization of alternatives to petroleum-based products based on isobutanol produced from renewable feedstocks. Gevo, Inc. was incorporated in Delaware on June 9, 2005. Gevo, Inc. formed Gevo Development, LLC (“Gevo Development”) in September 2009 to finance and develop biorefineries through joint venture, licensing arrangements, tolling arrangements or direct acquisition (see Note 12 Gevo Development). Gevo Development became a wholly-owned subsidiary of the Company in September 2010. Gevo Development purchased Agri-Energy, LLC (“Agri-Energy”) in September 2010.
Through May 2012, Agri-Energy, was engaged in the business of producing and selling ethanol and related products produced at its plant located in Luverne, Minnesota (the “Luverne Facility”). The Company commenced the retrofit of the Luverne Facility in 2011 and commenced initial startup operations for the production of isobutanol at this facility in May 2012. In September 2012, the Company made the strategic decision to pause isobutanol production at the Luverne Facility to focus on optimizing specific parts of the process to further enhance isobutanol production rates.
In 2013, the Company modified the Luverne Facility in order to (i) verify that the modifications had significantly reduced the previously identified infections, (ii) demonstrate that its biocatalyst performs in the one million liter fermenters at the Luverne Facility, and (iii) confirm GIFT ® efficacy at commercial scale at the Luverne Facility.
In 2014, the Company reconfigured the Luverne Facility to enable the co-production of both isobutanol and ethanol, leveraging the flexibility of its GIFT ® technology, with one fermenter utilized for isobutanol production and three fermenters utilized for ethanol production. In line with the Company’s strategy to maximize asset utilization and site cash flows, the Company believes that this configuration of the plant should allow it to continue to optimize its isobutanol technology at a commercial scale, while taking advantage of potentially superior ethanol contribution margins
As of March 31, 2017, the Company continues to engage in research and development, business development, business and financial planning, optimize operations for isobutanol, hydrocarbon and ethanol production and raise capital to fund future expansion of our Luverne Facility for increased isobutanol and hydrocarbon production. Ultimately, the Company believes that the attainment of profitable operations is dependent upon future events, including (i) completing its development activities resulting in commercial production and sales of isobutanol or isobutanol-derived products and/or technology, (ii) obtaining adequate financing to complete its development activities, (iii) obtaining adequate financing to build out further isobutanol production capacity, (iv) gaining market acceptance and demand for its products and services, and (v) attracting and retaining qualified personnel.
The Company has primarily derived revenue from the sale of ethanol, distiller’s grains and other related products produced as part of the ethanol production process at the Luverne Facility. The production of ethanol alone is not the Company’s intended business and its future strategy is expected to depend on its ability to produce and market isobutanol and products derived from isobutanol. The Company is beginning to achieve more consistent production and revenue from the sale of isobutanol, therefore, the historical operating results of the Company may not be indicative of future operating results for Agri-Energy or Gevo.
Financial Condition
. For the three months ended March 31, 2017 and 2016, the Company incurred a consolidated net loss of $5.9 million and $3.6 million, respectively, and had an accumulated deficit of $382.6 million at March 31, 2017.The Company’s cash and cash equivalents at March 31, 2017 totaled $20.4 million which will be used for the following purposes: (i) operating activities of the Luverne Facility; (ii) operating activities at the Company’s corporate headquarters in Colorado, including research and development work; (iii) capital improvements primarily associated with the Luverne Facility; (iv) costs associated with optimizing isobutanol production technology; (v) exploration of restructuring, strategic alternatives and new financings; and (vi) debt service and repayment obligations.
The Company expects to incur future net losses as it continues to fund the development and commercialization of its product candidates. To date, the Company has financed its operations primarily with proceeds from multiple sales of equity and debt securities, borrowings under debt facilities and product sales. The Company expects to incur future net losses as it continues to fund the development and commercialization of its product candidates. The Company’s transition to profitability is dependent upon, among other things, the successful development and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability or positive cash flows, and unless and until it does, the Company will continue to need to raise additional cash. Management intends to fund future operations through additional private and/or public offerings of debt or equity securities. In addition, the Company may seek additional capital
7
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
through arrangements with strategic partners or from other sources, it may seek to restructure its secur
ed debt and it will continue to address its cost structure. Notwithstanding, there can be no assurance that the Company will be able to raise additional funds, or achieve or sustain profitability or positive cash flows from operations. Based on the Company
’s current operating plan, existing working capital at March 31, 2017 is not sufficient to meet the cash requirements to fund planned operations through the period that is one year after the date the Company’s 2017 year-end financial statements were issued
unless the Company is able to restructure and extend its debt obligations and/or raise additional capital to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern at March 31, 2017. The Compa
ny’s inability to continue as a going concern may potentially affect the Company’s rights and obligations under its Senior Secured Debt and Convertible Notes. The accompanying financial statements have been prepared assuming that the Company will continue
as a going concern and do not include adjustments that might result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.
Basis of Presentation.
The unaudited consolidated financial statements of the Company (which include the accounts of its wholly-owned subsidiaries Gevo Development and Agri-Energy) have been prepared, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company at March 31, 2017 and are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included under the heading “Financial Statements and Supplementary Data” in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”).
Reverse Stock Splits.
On December 21, 2016, the Board of Directors approved an amendment to its Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s common stock, par value $0.01 at a ratio of one-for-twenty. The reverse stock split became effective January 5, 2017. Unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split.
Recent Accounting Pronouncements
Revenue from Contracts with Customers (“ASU 2014-09”)
. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
. The objective of ASU 2014-09 is to outline a new, single comprehensive model to use in accounting for revenue arising from contracts with customers. The new revenue recognition model provides a five-step analysis for determining when and how revenue is recognized, depicting the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. ASU 2014-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early adoption is permitted. On July 9, 2015, the FASB Board voted to delay the implementation of ASU 2014-09 by one year to December 15, 2017. In April 2016, the FASB issued
Accounting Standards Update No. 2016-10 Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing
(“ASU 2016-10”) which provides additional clarification regarding
Identifying Performance Obligations and Licensing
. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method. The Company does not anticipate the new standard to materially impact how it accounts for its (a) ethanol and related products revenue and (b) hydrocarbon revenue. However, we are currently evaluating the impact to our grant revenue as there could be a potential for changes to the nature and timing of revenue recognized under our various grant agreements.
Leases (“ASU 2016-02”)
. In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Topic 842 Leases
. ASU-2016-02 requires leases to be reported on the financial statements. The objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Future minimum lease obligations for leases accounted for as operating leases at March 31, 2017 totaled $4.1 million. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements.
Statement of Cash Flows, Classification of Certain Cash Receivable and Cash Payments (“ASU 2016-15).
In August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows Classification of Certain Cash Receipts and
8
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Cash Paym
ents
which clarifies cash flow statement classification of eight specific cash flow issues. The purpose of ASU 2016-15 is to provide clarification and consistency for classifying the eight specific cash flow issues because current GAAP either is unclear or
does not include specific guidance. The amendments in the update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently in the process of evalu
ating the impact of adoption of ASU 2016-15 on its consolidated statements of cash flows.
Adoption of New Accounting Pronouncements
.
Simplifying the Measurement of Inventory (“ASU 2015-11”)
. In July 2015, the FASB issued ASU 2015-11,
Simplifying the Measurement of Inventory
which requires an entity to measure in scope inventory at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company adopted this standard for the year-ending December 31, 2017. Adoption of this standard does not materially impact the measurement of the Company’s inventory.
Derivatives and Hedging (Topic 815) Contingent Put and Call Options in Debt Instruments
(“ASU 2016-06”).
In March 2016, the FASB issued Accounting Standards Update No. 2016-06,
Derivatives and Hedging (Topic 815) Contingent Put and Call Options in Debt Instruments
. Topic 815 requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. There are two approaches for determining if the criteria are met. The objective of ASU 2016-06 is intended to resolve the diversity in practice resulting from those two approaches. We adopted this standard in the first quarter of 2017. The adoption of this new standard does not impact the Company’s consolidated financial statements.
Compensation—Stock Compensation
(‘ASU 2016-09”).
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation—Stock Compensation
. This standard was issued as part of its Simplification Initiative. The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 effective as of January 1, 2017, and the adoption of this standard does not materially impact the Company’s accounting for stock compensation.
2. Earnings per Share
Basic net loss per share is computed by dividing the net loss attributable to Gevo common stockholders for the period by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share (“EPS”) includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Diluted EPS for the three months ended March 31, 2017 and 2016 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive, or would decrease the reported loss per share.
The following table sets forth securities outstanding that could potentially dilute the calculation of diluted earnings per share.
|
March 31,
|
|
|
2017
|
|
|
2016
|
|
Warrants to purchase common stock - liability classified (see Note 5)
|
|
14,017,373
|
|
|
|
698,056
|
|
Warrant to purchase common stock - equity classified
|
|
1,393
|
|
|
|
4,200
|
|
2017 Notes
|
|
47,827
|
|
|
|
75,192
|
|
2022 Notes
|
|
688
|
|
|
|
13,117
|
|
Outstanding options to purchase common stock
|
|
76,915
|
|
|
|
23,756
|
|
Unvested restricted common stock
|
|
7,536
|
|
|
|
13,448
|
|
Total
|
|
14,151,732
|
|
|
|
827,769
|
|
9
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
3. Inventories
The following table sets forth the components of the Company’s inventory balances (in thousands).
|
March 31,
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
|
|
|
|
|
|
Corn
|
$
|
212
|
|
|
$
|
108
|
|
Enzymes and other inputs
|
|
217
|
|
|
|
309
|
|
Nutrients
|
|
14
|
|
|
|
10
|
|
Finished goods
|
|
|
|
|
|
|
|
Ethanol
|
|
190
|
|
|
|
72
|
|
Isobutanol
|
|
994
|
|
|
|
755
|
|
Jet Fuels, Isooctane and Isooctene
|
|
726
|
|
|
|
519
|
|
Distiller's grains
|
|
18
|
|
|
|
-
|
|
Work in process - Agri-Energy
|
|
245
|
|
|
|
274
|
|
Work in process - Gevo
|
|
161
|
|
|
|
62
|
|
Spare parts
|
|
1,401
|
|
|
|
1,349
|
|
Total inventories
|
$
|
4,178
|
|
|
$
|
3,458
|
|
Work in process inventory includes unfinished jet fuel, isooctane, isooctene and isobutanol inventory.
During 2016, the Company chose to classify isobutanol as a component of finished goods due to the increased production of isobutanol at our Luverne Facility and the positive market development and customer demand for isobutanol being sold directly into the market as a gasoline blendstock.
4. Property, Plant and Equipment
The following table sets forth the Company’s property, plant and equipment by classification (in thousands).
|
Useful
|
March 31,
|
|
|
December 31,
|
|
|
Life
|
2017
|
|
|
2016
|
|
Construction in progress
|
|
$
|
574
|
|
|
$
|
293
|
|
Plant machinery and equipment (1)
|
10 years
|
|
15,574
|
|
|
|
15,397
|
|
Site improvements
|
10 years
|
|
7,050
|
|
|
|
7,050
|
|
Luverne retrofit asset (1)
|
20 years
|
|
70,842
|
|
|
|
70,791
|
|
Lab equipment, furniture and fixtures and vehicles
|
5 years
|
|
6,508
|
|
|
|
6,431
|
|
Demonstration plant
|
2 years
|
|
3,597
|
|
|
|
3,597
|
|
Buildings
|
10 years
|
|
2,543
|
|
|
|
2,543
|
|
Computer, office equipment and software
|
3 years
|
|
1,621
|
|
|
|
1,594
|
|
Leasehold improvements, pilot plant, land and support equipment
|
2 - 5 years
|
|
2,535
|
|
|
|
2,526
|
|
Total property, plant and equipment
|
|
|
110,844
|
|
|
|
110,222
|
|
Less accumulated depreciation and amortization
|
|
|
(36,306
|
)
|
|
|
(34,630
|
)
|
Property, plant and equipment, net
|
|
$
|
74,538
|
|
|
$
|
75,592
|
|
(1)
|
In May 2016, certain assets of the Luverne retrofit asset were reclassified from plant, machinery and equipment to the Luverne retrofit asset.
|
Included in cost of goods sold is depreciation of $1.5 million and $1.4 million during the three months ended March 31, 2017 and 2016, respectively.
Included in operating expenses is depreciation of $0.1 million and $0.2 million during the three months ended March 31, 2017 and 2016, respectively.
10
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
5. Embedded Derivatives and Derivative Warrant Liabilities
Convertible 2022 Notes
In July 2012, the Company issued 7.5% convertible senior notes due July 2022 (the “2022 Notes”) which contain the following embedded derivatives: (i) rights to convert into shares of the Company’s common stock, including upon a Fundamental Change (as defined in the indenture governing the 2022 Notes (the “Indenture”)); and (ii) a Coupon Make-Whole Payment (as defined in the Indenture) in the event of a conversion by the holders of the 2022 Notes prior to July 1, 2017. Embedded derivatives are separated from the host contract, the 2022 Notes, and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. The Company has concluded that the embedded derivatives within the 2022 Notes meet these criteria and, as such, must be valued separate and apart from the 2022 Notes as one embedded derivative and recorded at fair value each reporting period.
The Company used a binomial lattice model in order to estimate the fair value of the embedded derivative in the 2022 Notes. A binomial lattice model generates two probable outcomes, whether up or down, arising at each point in time, starting from the date of valuation until the maturity date. A lattice was initially used to determine if the 2022 Notes would be converted, called or held at each decision point. Within the lattice model, the following assumptions are made: (i) the 2022 Notes will be converted early if the conversion value is greater than the holding value; or (ii) the 2022 Notes will be called if the holding value is greater than both (a) the Redemption Price (as defined in the Indenture) and (b) the conversion value plus the Coupon Make-Whole Payment at the time. If the 2022 Notes are called, then the holders will maximize their value by finding the optimal decision between (1) redeeming at the Redemption Price and (2) converting the 2022 Notes.
Using this lattice model, the Company valued the embedded derivative using a “with-and-without method”, where the value of the 2022 Notes including the embedded derivative is defined as the “with”, and the value of the 2022 Notes excluding the embedded derivative is defined as the “without”. This method estimates the value of the embedded derivative by looking at the difference in the values between the 2022 Notes with the embedded derivative and the value of the 2022 Notes without the embedded derivative. The lattice model requires the following inputs: (i) price of Gevo common stock; (ii) Conversion Rate (as defined in the Indenture); (iii) Conversion Price (as defined in the Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated stock volatility; and (vii) estimated credit spread for the Company.
As of March 31, 2017 and December 31, 2016, the estimated fair value of the embedded derivatives was zero. Any decline in the estimated fair value of the embedded derivatives represents an unrealized gain which has been recorded as gain from change in fair value of embedded derivatives in the consolidated statements of operations. The Company recorded the estimated fair value of the embedded derivative with the 2022 notes, net in the consolidated balance sheets.
Derivative Warrant Liability
The following warrants were sold by the Company:
|
•
|
In December 2013, the Company sold warrants to purchase 71,013 shares of the Company’s common stock (the “2013 Warrants”).
|
|
•
|
In August 2014, the Company sold warrants to purchase 50,000 shares of the Company’s common stock (the “2014 Warrants”).
|
|
•
|
In February 2015, the Company sold Series A warrants to purchase 110,833 shares of the Company’s common stock (the “Series A Warrants”) and Series B warrants to purchase 110,883 shares of the Company’s common stock (the “Series B Warrants”).
|
|
•
|
In May 2015, the Company sold Series C warrants to purchase 21,500 shares of the Company’s common stock (the “Series C Warrants”).
|
|
•
|
In December 2015, the Company sold Series D warrants to purchase 502,500 shares of the Company’s common stock (the “Series D Warrants”) and Series E warrants to purchase 400,000 shares of the Company’s common stock (the “Series E Warrants”).
|
|
•
|
In April 2016, the Company sold 514,644 Series F warrants to purchase one share of common stock (each a “Series F Warrant”) and 1,029,286 Series H warrants, each to purchase one share of common stock (each, a “Series H Warrant”), and 328,571 pre-funded Series G warrants (“Series G Warrants”) to purchase one share of common stock, pursuant to an underwritten public offering.
|
11
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
|
•
|
In September 2016, the Company sold 712,503 Series I warrants to purchase one share of common stock (each a “Series I Warrant”) and 185,000 pre-funded Series J warrants (“Series J Warrants”) to purchase one share of comm
on stock, pursuant to an underwritten public offering.
|
|
•
|
In February 2017, the Company sold 6,250,000 Series K warrants to purchase one share of common stock (each a “Series K Warrant”), 570,000 pre-funded Series L warrants (“Series L Warrants”) to purchase one share of common stock, and 6,250,000 Series M warrants (“Series M Warrants”) each to purchase one share of common stock, pursuant to an underwritten public offering.
|
The following table sets forth information pertaining to shares issued upon the exercise of such warrants as of March 31, 2017:
|
|
Issuance
Date
|
|
Expiration
Date
|
|
Exercise Price as of March 31, 2017
|
|
|
Shares
Underlying
Warrants on
Issuance Date
|
|
|
Shares Issued upon Warrant Exercises as of March 31, 2017
|
|
|
Shares Underlying Warrants Outstanding as of March 31, 2017
|
|
2013 Warrants
|
|
12/16/2013
|
|
12/16/2018
|
|
$
|
15.84
|
|
|
|
71,013
|
|
|
|
(15,239
|
)
|
|
|
55,774
|
|
2014 Warrants
|
|
8/5/2014
|
|
8/5/2019
|
|
$
|
11.98
|
|
|
|
50,000
|
|
|
|
(30,538
|
)
|
|
|
19,462
|
|
Series A Warrants
|
|
2/3/2015
|
|
2/3/2020
|
|
$
|
1.90
|
|
|
|
110,833
|
|
|
|
(99,416
|
)
|
|
|
11,417
|
|
Series B Warrants
|
|
2/3/2015
|
|
8/3/2015
|
|
|
-
|
|
(1)
|
|
110,833
|
|
|
|
(96,795
|
)
|
|
|
-
|
|
Series C Warrants
|
|
5/19/2015
|
|
5/19/2020
|
|
$
|
9.59
|
|
|
|
21,500
|
|
|
|
-
|
|
|
|
21,500
|
|
Series D Warrants
|
|
12/11/2015
|
|
12/11/2020
|
|
$
|
2.00
|
|
|
|
502,500
|
|
|
|
(501,570
|
)
|
|
|
930
|
|
Series E Warrants
|
|
12/11/2015
|
|
12/11/2016
|
|
|
-
|
|
(1)
|
|
400,000
|
|
|
|
(400,000
|
)
|
|
|
-
|
|
Series F Warrants
|
|
4/1/2016
|
|
4/1/2021
|
|
$
|
2.00
|
|
|
|
514,644
|
|
|
|
(233,857
|
)
|
|
|
280,787
|
|
Series G Warrants
|
|
4/1/2016
|
|
4/1/2017
|
|
|
-
|
|
(1)
|
|
328,571
|
|
|
|
(328,571
|
)
|
|
|
-
|
|
Series H Warrants
|
|
4/1/2016
|
|
10/1/2016
|
|
|
-
|
|
(1)
|
|
1,029,286
|
|
|
|
(900,436
|
)
|
|
|
-
|
|
Series I Warrants
|
|
9/13/2016
|
|
9/13/2021
|
|
$
|
11.00
|
|
|
|
712,503
|
|
|
|
-
|
|
|
|
712,503
|
|
Series J Warrants
|
|
9/13/2016
|
|
9/13/2017
|
|
|
-
|
|
(1)
|
|
185,000
|
|
|
|
(185,000
|
)
|
|
|
-
|
|
Series K Warrants
|
|
2/17/2017
|
|
2/17/2022
|
|
$
|
2.35
|
|
|
|
6,250,000
|
|
|
|
-
|
|
|
|
6,250,000
|
|
Series L Warrants
|
|
2/17/2017
|
|
2/17/2018
|
|
$
|
0.01
|
|
(2)
|
|
570,000
|
|
|
|
(155,000
|
)
|
|
|
415,000
|
|
Series M Warrants
|
|
2/17/2017
|
|
11/17/2017
|
|
$
|
2.35
|
|
|
|
6,250,000
|
|
|
|
-
|
|
|
|
6,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
17,106,683
|
|
|
|
(2,946,422
|
)
|
|
|
14,017,373
|
|
(1)
|
Warrants have either been fully exercised and/or expired as of March 31, 2017.
|
(2)
|
The exercise price is $1.90 but $1.89 of the exercise price was pre-funded upon issuance of the Series L Warrants.
|
The agreements governing the above warrants include the following terms:
|
•
|
certain warrants have exercise prices which are subject to adjustment for certain events, including the issuance of stock dividends on the Company’s common stock and, in certain instances, the issuance of the Company’s common stock or instruments convertible into the Company’s common stock at a price per share less than the exercise price of the respective warrants;
|
|
•
|
warrant holders may exercise the warrants through a cashless exercise if, and only if, the Company does not have an effective registration statement then available for the issuance of the shares of its common stock. If an effective registration statement is available for the issuance of its common stock a holder may only exercise the warrants through a cash exercise;
|
12
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
|
•
|
the exercise price and the number and type of securities purchasable upon exercise of the warrants are subject to adjustment upon certain corporate events, including certain combinations, consolidations, liquidations, mergers, recapitalizations, reclassifi
cations, reorganizations, stock dividends and stock splits, a sale of all or substantially all of the Company’s assets and certain other events; and
|
|
•
|
in the event of an “extraordinary transaction” or a “fundamental transaction” (as such terms are defined in the respective warrant agreements), generally including any merger with or into another entity, sale of all or substantially all of the Company’s assets, tender offer or exchange offer, or reclassification of its common stock, in which the successor entity (as defined in the respective warrant agreements) that assumes the successor entity is not a publicly traded company, the Company or any successor entity will pay the warrant holder, at such holder’s option, exercisable at any time concurrently with or within 30 days after the consummation of the extraordinary transaction or fundamental transaction, an amount of cash equal to the value of such holder’s warrants as determined in accordance with the Black Scholes option pricing model and the terms of the respective warrant agreement. In some circumstances, the Company or successor entity may be obligated to make such payments regardless of whether the successor entity that assumes the warrants is a publicly traded company.
|
Based on these terms, the Company has determined that the 2013 Warrants, the 2014 Warrants, the Series A Warrants, the Series C Warrants, the Series D Warrants, the Series F Warrants, the Series H Warrants, the Series I Warrants, the Series K Warrants, the Series L Warrants, and the Series M Warrants (together, the “Warrants”) qualify as derivatives and, as such, are presented as derivative warrant liability on the consolidated balance sheets and recorded at fair value each reporting period. The fair value of the Warrants was estimated to be $4.9 million and $2.7 million as of March 31, 2017 and December 31, 2016, respectively. The increase in the derivative warrant liability is the result of the issuance of new warrants during the period offset by warrants exercised during the period.
During the three months ended March 31, 2017, the Company issued 155,000 shares of common stock as a result of the exercise of Series L Warrants. The Company received proceeds of approximately $2,000 from such exercises.
In May 2016, as permitted by Section 2(a) of the Series H Warrant agreement, the board of directors of the Company approved a voluntary reduction of the exercise price of Series H Warrants exercisable into 375,000 shares of the Company’s common stock, from an exercise price of $15.00 per share of common stock to $6.00 per share of common stock, for the remaining term of these warrants. Except for the reduction in exercise price, the terms of these Series H Warrants remain unchanged.
In June 2016, as permitted by Section 2(a) of the Series H Warrant agreement, the Board of Directors of the Company approved a voluntary reduction of the exercise price of Series H Warrants exercisable into 150,000 shares of the Company’s common stock, from an exercise price of $15.00 per share of common stock to $8.40 per share of common stock, for the remaining term of these warrants. The board of directors of the Company also approved a voluntary reduction of the exercise price of Series H Warrants exercisable into 100,000 shares of the Company’s common stock, from an exercise price of $15.00 per share of common stock to $10.40 per share of common stock, for the remaining term of these warrants. Ultimately, the Company adjusted the exercise price to $10.40 per share of common stock for Series H Warrants exercisable into 50,000 shares of the Company’s common stock. Except for the reduction in exercise price, the terms of these Series H Warrants remain unchanged.
In June 2016, as permitted by Section 9 of the Series D Warrant agreement, the Company agreed with certain holders of the Series D Warrants to the amend the exercise price and accelerate the initial exercise date for Series D Warrants exercisable into 208,370 shares of the Company’s common stock held by such holders. Pursuant to that amendment, with respect to these Series D Warrants held by those holders, the exercise price was increased from an exercise price of $2.00 per share of common stock to $3.50 per share of common stock, for the remaining term of these warrants and the initial exercise date was changed from June 11, 2016 to June 8, 2016. Except for the change in exercise price and the initial exercise date, the terms of these Series D Warrants remained unchanged.
As of March 31, 2017, all of the Series H Warrants and Series D Warrants for which the exercise price had been adjusted were fully exercised.
13
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
6. Accounts Payable and Accrued Liabilities
The following table sets forth the components of the Company’s accounts payable and accrued liabilities in the consolidated balance sheets (in thousands).
|
March 31
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Accounts payable - trade
|
$
|
2,118
|
|
|
$
|
2,611
|
|
Accrued legal-related fees
|
|
282
|
|
|
|
626
|
|
Accrued employee compensation
|
|
867
|
|
|
|
1,385
|
|
Accrued interest
|
|
22
|
|
|
|
359
|
|
Accrued taxes payable
|
|
163
|
|
|
|
136
|
|
Short-term capital lease
|
|
147
|
|
|
|
147
|
|
Other accrued liabilities *
|
|
1,399
|
|
|
|
929
|
|
Total accounts payable and accrued liabilities
|
$
|
4,998
|
|
|
$
|
6,193
|
|
*
|
Other accrued liabilities consist of franchise taxes, property taxes, audit fees, and a variety of other expenses, none of which individually represent greater than five percent of total current liabilities.
|
7. Senior Secured Debt and 2022 Notes
Senior Secured
In June 2014, certain of the Company’s lenders exchanged an aggregate of $25.9 million of outstanding principal amount of a term loan for 10% convertible senior secured notes due 2017 (the “2017 Notes” and, together with the 2022 Notes, the “Convertible Notes”), together with accrued paid-in-kind interest of $0.2 million. The terms of the 2017 Notes are set forth in an indenture by and among the Company, its subsidiaries in their capacity as guarantors, and Wilmington Savings Fund Society, FSB, as trustee (the “2017 Notes Indenture”).
The 2017 Notes were originally set to mature on March 15, 2017. In February 2017, WB Gevo Ltd. (“Whitebox”), the holder of the 2017 Notes and the Company agreed to extend the maturity date to June 23, 2017 (the “2017 Note Extension Transaction”). The 2017 Notes have a conversion price (the “Conversion Price”) equal to $344.83 per share or 0.0029 shares per $1 principal amount of 2017 Notes. Optional prepayment of the 2017 Notes is not permitted. In addition, the February 2017 Note Extension Transaction amended the interest rate applicable to the 2017 Notes. The 2017 Notes now bear interest at a rate equal to 12% per annum, which is payable 6% in cash and, under certain circumstances, 6% in kind and capitalized and added to the principal amount of the 2017 Notes. While the 2017 Notes are outstanding, the Company is required to maintain an interest reserve in an amount equal to 10% of the original outstanding principal amount of $26.1 million, to be adjusted on an annual basis. As of March 31, 2017 and December 31, 2016, there was a balance of $2.6 million in the interest reserve account. This amount is classified as restricted deposits. On April 19, 2017, Whitebox and the Company agreed, among other things, to eliminate the requirement to maintain an interest reserve account, and the balance of the interest reserve account was transferred to an unrestricted account of the Company.
The 2017 Notes Indenture contains customary affirmative and negative covenants for agreements of this type and events of default, including, restrictions on disposing of certain assets, granting or otherwise allowing the imposition of a lien against certain assets, incurring certain amounts of additional indebtedness, making investments, acquiring or merging with another entity, and making dividends and other restricted payments, unless the Company receives the prior approval of the required holders. For the three months ended March 31, 2017 and the year ended December 31, 2016, the Company was in compliance with the covenants. The 2017 Notes Indenture also contains limitations on the ability of the holder to assign or otherwise transfer its interest in the 2017 Notes. The 2017 Notes are secured by a lien on substantially all of the assets of the Company and is guaranteed by Agri-Energy and Gevo Development (together, the “Guarantor Subsidiaries” or “Guarantors”). On June 6, 2014, in connection with the issuance of the 2017 Notes, the Company and the Guarantor Subsidiaries entered into a Pledge and Security Agreement in favor of the collateral trustee. The collateral pledged includes substantially all of the assets of the Company and the Guarantor Subsidiaries, including intellectual property and real property. Agri-Energy has also entered into a mortgage with respect to the real property located in Luverne Minnesota.
The holders of the 2017 Notes may, at any time until the close of business on the business day immediately preceding the maturity date, convert the principal amount of the 2017 Notes, or any portion of such principal amount which is at least $1,000, into
14
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
shares of the Company’s common stock. Upon conversion of the 2017 Notes, the Company will deliver shares of common stock at a conversion rate of 0.0029 shares of common stock per $1.00 principal amount
of the 2017 Notes (equivalent to a conversion price of approximately $344.83 per share of common stock). Such conversion rate is subject to adjustment in certain circumstances, including in the event that there is a dividend or distribution paid on shares
of the common stock or a subdivision, combination or reclassification of the common stock. The Company also has the right to increase the conversion rate (i) by any amount for a period of at least 20 business days if the Company’s board of directors deter
mines that such increase would be in the Company’s best interest or (ii) to avoid or diminish any income tax to holders of shares of common stock or rights to purchase shares of common stock in connection with any dividend or distribution. In addition, sub
ject to certain conditions described herein, each holder who exercises its option to voluntarily convert its 2017 Notes will receive a make-whole payment in an amount equal to any unpaid interest that would otherwise have been payable on such 2017 Notes th
rough the maturity date (a “Voluntary Conversion Make-Whole Payment”). Subject to certain limitations, the Company may pay any Voluntary Conversion Make-Whole Payments either in cash or in shares of common stock, at its election.
The Company has the right to require holders of the 2017 Notes to convert all or part of the 2017 Notes into shares of its common stock if the last reported sales price of the common stock over any 10 consecutive trading days equals or exceeds 150% of the applicable conversion price (a “Mandatory Conversion”). Each holder whose 2017 Notes are converted in a Mandatory Conversion will receive a make-whole payment for the converted notes in an amount equal to any unpaid interest that would have otherwise been payable on such 2017 Notes through the maturity date (a “Mandatory Conversion Make-Whole Payment”). Subject to certain limitations, the Company may pay any Mandatory Conversion Make-Whole Payments either in cash or in shares of common stock, at its election. The Company did not require any holders to convert in 2014, 2015 or 2016.
If a fundamental change of the Company occurs, the holders of 2017 Notes may require the Company to repurchase all or a portion of the 2017 Notes at a cash repurchase price equal to 100% of the principal amount of such 2017 Notes, plus accrued and unpaid interest, if any, through, but excluding, the repurchase date, plus a cash make-whole payment for the repurchased 2017 Notes in an amount equal to any unpaid interest that would otherwise have been payable on such convertible 2017 Notes through the maturity date. A fundamental change includes, among other things, the Company’s common stock ceasing to be listed on a national securities exchange.
On July 31, 2014, January 28, 2015, May 13, 2015, November 12, 2015, December 7, 2015, March 28, 2016, September 7, 2016 and February 13, 2017, we entered into amendments to the 2017 Notes Indenture to, among other things, permit the offering and issuance of additional warrants and the incurrence of indebtedness by us under such additional warrants. In connection with the November 12, 2015 amendments, we did not issue any warrants or incur any indebtedness.
On June 1, 2015, the Company entered into further amendments to the 2017 Notes Indenture to, among other things, permit (i) the execution, delivery, and performance of the FCStone Agreements (as defined below) and the related guaranty, (ii) the incurrence of indebtedness by the Company and Agri-Energy pursuant thereto and (iii) the making of the investments by the Company and Agri-Energy thereunder.
On August 22, 2015, the Company entered into further amendments to the 2017 Notes Indenture to, among other things, permit (i) the execution, delivery, and performance of the patent cross-license and settlement agreements with Butamax Advanced Biofuels LLC and (ii) the exchange of all or any portion of the 2022 Notes for common stock issued by the Company.
In connection with the transactions described above, the Company also entered into a Registration Rights Agreement, dated May 9, 2014 (the “Registration Rights Agreement”), pursuant to which the Company filed a registration statement on Form S-3 registering the resale of approximately 60,000 shares of the Company’s common stock which are issuable under the 2017 Notes. This registration statement was declared effective on July 25, 2014.
As part of the February 2017 Note Extension, the Company paid down approximately $9.6 million in principal outstanding on the 2017 Notes, leaving the remaining principal balance of the 2017 Notes at approximately $16.5 million.
15
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
The Company has elected the fair value option for accounting of the 2017 Notes in order for management to mitigate income statement volatility caused by measurement basis differences between the embedded instruments o
r to eliminate complexities of applying certain accounting models. Accordingly, the principal amount of 2017 Notes outstanding at March 31, 2017 and December 31, 2016 of $16.5 million and $26.1 million, respectively, has been recorded at its estimated fair
value of $16.5 million and $25.8 million respectively, and is included in the 2017 Notes recorded at fair value on the consolidated balance sheets at March 31, 2017 and December 31, 2016 respectively. Debt issuance costs of $1.5 million were expensed at i
ssuance and a gain of $4.2 million has been recognized in subsequent periods in connection with the election of the fair value option. Change in the estimated fair value of the 2017 Notes represents an unrealized loss included in gain (loss) from change i
n fair value of 2017 Notes in the consolidated statements of operations. The fair value of the 2017 Notes at the issuance date were equal to the net proceeds from the loan. During the three months ended March 31, 2017 and 2016, the Company incurred cash i
nterest expense of $0.6 million and $0.7 million related to the 2017 Notes, respectively.
The following table sets forth the inputs to the lattice model that were used to value the 2017 Notes for which the fair value option was elected.
|
March 31
|
|
|
December 31,
|
|
|
2017
|
|
|
2016
|
|
Stock price
|
$
|
1.14
|
|
|
$
|
3.40
|
|
Conversion Rate per $1,000
|
|
2.90
|
|
|
|
2.90
|
|
Conversion Price
|
$
|
344.83
|
|
|
$
|
344.83
|
|
Maturity date
|
June 23, 2017
|
|
|
March 15, 2017
|
|
Risk-free interest rate
|
|
0.76
|
%
|
|
|
0.49
|
%
|
Estimated stock volatility
|
|
100.0
|
%
|
|
|
80.0
|
%
|
Estimated credit spread
|
|
20.0
|
%
|
|
|
20.0
|
%
|
The following table sets forth information pertaining to the 2017 Notes which is included in the Company’s consolidated balance sheets (in thousands).
|
Principal
Amount of
2017 Notes
|
|
|
Change in
Estimated
Fair Value
|
|
|
Total
|
|
Balance - December 31, 2016
|
$
|
26,108
|
|
|
$
|
(339
|
)
|
|
$
|
25,769
|
|
Loss from change in fair value of debt
|
|
-
|
|
|
|
339
|
|
|
|
339
|
|
Paydown of principal balance
|
|
(9,616
|
)
|
|
|
-
|
|
|
|
(9,616
|
)
|
Balance - March 31, 2017
|
$
|
16,492
|
|
|
$
|
-
|
|
|
$
|
16,492
|
|
Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the 2017 Notes. For example, the estimated fair value will generally decrease with: (1) a decline in the stock price; (2) decreases in the estimated stock volatility; and (3) a decrease in the estimated credit spread. The change in the estimated fair value of the 2017 Notes during the three months ended March 31, 2017, represents an unrealized loss which has been recorded as a loss from change in fair value of 2017 Notes in the consolidated statements of operations.
See Note 13 –
Subsequent Events,
for a discussion of the restructuring of the 2017 Notes.
16
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
2022 Notes
The following table sets forth information pertaining to the 2022 Notes which is included in the Company’s consolidated balance sheets (in thousands).
|
Principal
Amount
of 2022 Notes
|
|
|
Debt
Discount
|
|
|
Debt Issue
Costs
|
|
|
Total
|
|
Balance - December 31, 2016
|
$
|
9,575
|
|
|
$
|
(1,307
|
)
|
|
$
|
(47
|
)
|
|
$
|
8,221
|
|
Amortization of debt discount
|
|
-
|
|
|
|
77
|
|
|
$
|
-
|
|
|
|
77
|
|
Amortization of debt issue costs
|
|
-
|
|
|
|
-
|
|
|
$
|
3
|
|
|
|
3
|
|
Exchange of 2022 Notes
|
|
(8,400
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
(8,400
|
)
|
Write-off of debt discount and debt issue costs associated with
extinguishment of debt
|
|
-
|
|
|
|
1,146
|
|
|
$
|
41
|
|
|
|
1,187
|
|
Balance - March 31, 2017
|
$
|
1,175
|
|
|
$
|
(84
|
)
|
|
$
|
(3
|
)
|
|
$
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In July 2012, the Company sold $45.0 million in aggregate principal amount of 2022 Notes, with net proceeds of $40.9 million, after accounting for $2.7 million and $1.4 million of discounts and issue costs, respectively. The 2022 Notes bear interest at 7.5% which is to be paid semi-annually in arrears on January 1 and July 1 of each year. The 2022 Notes will mature on July 1, 2022, unless earlier repurchased, redeemed or converted. During the three months ended March 31, 2017 and 2016, respectively, the Company recorded $0.08 million and $1.1 million of expense related to the amortization of debt discounts and issue costs, $1.2 million and nil million of expense related to the exchange of debt; and $0.02 million and $0.4 million of interest expense related to the 2022 Notes. The amortization of debt issue costs, debt discounts and cash interest are included as a component of interest expense in the consolidated statements of operations. The Company amortizes debt discounts and debt issue costs associated with the 2022 Notes using an effective interest rate of 40% from the issuance date through July 1, 2017, a five-year period, which represents the date the holders can require the Company to repurchase the 2022 Notes.
The 2022 Notes are convertible at a conversion rate of 0.5856 shares of the Company’s common stock per $1,000 principal amount of 2022 Notes, subject to adjustment in certain circumstances as described in the Indenture. This is equivalent to a conversion price of approximately $1,707.65 per share of common stock. Holders may convert the 2022 Notes at any time prior to the close of business on the third business day immediately preceding the maturity date of July 1, 2022.
If a holder elects to convert its 2022 Notes prior to July 1, 2017, such holder shall be entitled to receive, in addition to the consideration upon conversion, a Coupon Make-Whole Payment. The Coupon Make-Whole Payment is equal to the sum of the present values of the number of semi-annual interest payments that would have been payable on the 2022 Notes that a holder has elected to convert from the last day through which interest was paid up to but excluding July 1, 2017, computed using a discount rate of 2%. The Company may pay any Coupon Make-Whole Payment either in cash or in shares of common stock at its election. If the Company elects to pay in common stock, the stock will be valued at 90% of the average of the daily volume weighted average prices of the Company’s common stock for the 10 trading days preceding the date of conversion. In November 2015, we issued 55,392 shares of common stock to redeem 2,500 bonds at a face value of $1,000 per bond and reduce the liability of the 2022 Notes by $2.5 million. The net loss on the extinguishment of the 2022 Notes was $0.05 million. In February 2015, the Company issued 8,502 shares of common stock to convert 2,000 bonds at a face value of $1,000 per bond to reduce the liability of the 2022 Notes by $2.0 million. The net gain on the extinguishment of the 2022 Notes was $0.3 million. In September 2016, the Company issued 699,968 shares of common stock in exchange for the redemption of $11.4 million of the 2022 Notes. The net loss on the extinguishment of the 2022 Notes was $0.9 million. In December 2016, the Company issued 251,832 shares of common stock in exchange for the redemption of $1.4 million of the 2022 Notes. The net gain on the extinguishment of the 2022 Notes was $0.1 million. In January 2017, the Company issued 2,155,382 shares of common stock in exchange for the redemption of $8.4 million. The net loss on extinguishment was $1.0 million.
If a Make-Whole Fundamental Change (as defined in the Indenture) occurs and a holder elects to convert its 2022 Notes prior to July 1, 2017, the conversion rate will increase based upon reference to the table set forth in Schedule A of the Indenture. In no event will the conversion rate increase to more than 0.6734 per $1,000 principal amount of 2022 Notes.
The Company has a provisional redemption right (“Provisional Redemption”) to redeem, at its option, all or any part of the 2022 Notes at a price payable in cash, beginning on July 1, 2015 and prior to July 1, 2017, provided that the Company’s common stock for
17
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
20
or more trading days in a period of 30 consecutive trading days ending on the trading day immediately prior to the date of the redemption notice exceeds 150% of the conversion price for the 2022 Notes in effect on such trading day. On or after July 1, 2017
, the Company shall have an optional redemption right (“Optional Redemption”) to redeem, at its option, all or any part of the 2022 Notes at a price payable in cash. The price payable in cash for the Optional Redemption or Provisional Redemption is equal t
o 100% of the principal amount of 2022 Notes redeemed plus any accrued and unpaid interest thereon through, but excluding, the repurchase date.
If there is an Event of Default (as defined in the Indenture) under the 2022 Notes, the holders of not less than 25% in principal amount of the outstanding notes by notice to the Company and the trustee may, and the trustee at the request of such holders shall, declare the principal amount of all the Outstanding Notes and accrued and unpaid interest thereon to be due and payable immediately. There have been no Events of Default as of March 31, 2017.
8. Gevo Development
Gevo made capital contributions to Gevo Development of $1.8 million and $12.3 million, respectively, during the three months ended March 31, 2017 and the year ended December 31, 2016.
The following table sets forth (in thousands) the net loss incurred by Gevo Development (including Agri-Energy after September 22, 2010, the closing date of the acquisition) which has been fully allocated to Gevo, Inc.’s capital contribution account based upon its capital contributions (for the period prior to September 2010) and 100% ownership (for the period after September 22, 2010).
|
Three
Months Ended March 31,
|
|
|
2017
|
|
|
2016
|
|
Gevo Development Net Loss
|
$
|
(4,173
|
)
|
|
$
|
(3,576
|
)
|
The accounts of Agri-Energy are consolidated within Gevo Development as a wholly-owned subsidiary which is then consolidated into Gevo.
9. Stock-Based Compensation
The Company records stock-based compensation expense during the requisite service period for share-based payment awards granted to employees and non-employees.
The following table sets forth the Company’s stock-based compensation expense (in thousands) for the periods indicated.
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
Stock options and employee stock purchase plan
awards
|
|
|
|
|
|
|
|
|
Research and development
|
$
|
9
|
|
|
$
|
25
|
|
|
Selling, general and administrative
|
|
30
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
|
|
|
|
|
|
Research and development
|
|
12
|
|
|
|
50
|
|
|
Selling, general and administrative
|
|
17
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
|
|
|
|
|
|
Research and development
|
|
18
|
|
|
|
13
|
|
|
Selling, general and administrative
|
|
42
|
|
|
|
99
|
|
|
Total stock-based compensation
|
$
|
128
|
|
|
$
|
358
|
|
|
18
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
10. Commitments and Contingencies
Legal Matters
. From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any litigation that we believe to be material and we are not aware of any pending or threatened litigation against us that we believe could have a material adverse effect on our business, operating results, financial condition or cash flows.
Leases
. During the year ended December 31, 2012, the Company entered into a six-year software license agreement. The Company concluded that the software license agreement qualified as a capital lease. Accordingly, at March 31, 2017 and December 31, 2016, the Company had capital lease liabilities of $0.2 million and $0.1 million, respectively, included in accounts payable and accrued liabilities and other long-term liabilities on its consolidated balance sheets.
The Company has an operating lease for its office, research, and production facility in Englewood, Colorado with a term expiring in July 2021. The Company also maintains a corporate apartment in Colorado, which has a lease term expiring during the next 12 months. The Company has an operating lease for the rail cars used by Agri-Energy in Luverne, Minnesota.
Rent expense for the three months ended March 31, 2017 and 2016 was $0.4 million $0.4 million, respectively.
The Company recognizes rent expense on its operating leases on a straight-line basis.
The table below shows the future minimum payments under non-cancelable operating leases and capital leases at March 31, 2017 (in thousands):
|
Operating
Leases
|
|
|
Capital
Lease
|
|
|
Total Lease
Obligations
|
|
2017 (remaining)
|
|
1,152
|
|
|
|
167
|
|
|
|
1,319
|
|
2018
|
|
1,421
|
|
|
|
-
|
|
|
|
1,421
|
|
2019
|
|
907
|
|
|
|
-
|
|
|
|
907
|
|
2020
|
|
394
|
|
|
|
-
|
|
|
|
394
|
|
2021
|
|
200
|
|
|
|
-
|
|
|
|
200
|
|
Total
|
$
|
4,074
|
|
|
$
|
167
|
|
|
$
|
4,241
|
|
Indemnifications
. In the ordinary course of its business, the Company makes certain indemnities under which it may be required to make payments in relation to certain transactions. As of March 31, 2017 and December 31, 2016, the Company did not have any liabilities associated with indemnities.
In addition, the Company, as permitted under Delaware law and in accordance with its amended and restated certificate of incorporation and amended and restated bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The duration of these indemnifications, commitments, and guarantees varies and, in certain cases, is indefinite. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid. The Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. No such losses have been recorded to date.
Environmental Liabilities
. The Company’s operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when the Company’s liability is probable and the costs can be reasonably estimated. No environmental liabilities have been recorded as of March 31, 2017 or December 31, 2016.
19
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
11. Fair Value Measurements
Accounting standards define fair value, outline a framework for measuring fair value, and detail the required disclosures about fair value measurements. Under these standards, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. Standards establish a hierarchy in determining the fair market value of an asset or liability. The fair value hierarchy has three levels of inputs, both observable and unobservable. Standards require the utilization of the highest possible level of input to determine fair value.
Level 1 – inputs include quoted market prices in an active market for identical assets or liabilities.
Level 2 – inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data.
Level 3 – inputs are unobservable and corroborated by little or no market data.
These tables present the carrying value and fair value, by fair value hierarchy, of our financial instruments, excluding cash and cash equivalents, accounts receivable and accounts payable at March 31, 2017 and December 31, 2016, respectively (in thousands).
|
|
|
|
|
Fair Value Measurements at March 31, 2017 (In
thousands)
|
|
|
Fair Value at
3/31/2017
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Warrant Liability
|
$
|
4,942
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,942
|
|
2017 Notes
|
$
|
16,492
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,492
|
|
Total Recurring Fair Value Measurements
|
$
|
21,434
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn and finished goods inventory
|
$
|
2,092
|
|
|
$
|
223
|
|
|
$
|
1,869
|
|
|
$
|
-
|
|
|
$
|
2,092
|
|
|
$
|
223
|
|
|
$
|
1,869
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016 (In thousands)
|
|
|
Fair Value at
12/31/2016
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Recurring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Warrant Liability
|
$
|
2,698
|
|
|
$
|
-
|
|
|
$
|
1,884
|
|
|
$
|
814
|
|
2017 Notes
|
$
|
25,769
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,769
|
|
Total Recurring Fair Value Measurements
|
$
|
28,467
|
|
|
$
|
-
|
|
|
$
|
1,884
|
|
|
$
|
26,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corn and finished goods inventory
|
$
|
1,327
|
|
|
$
|
108
|
|
|
$
|
1,219
|
|
|
$
|
-
|
|
|
$
|
1,327
|
|
|
$
|
108
|
|
|
$
|
1,219
|
|
|
$
|
-
|
|
20
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
The following table provides changes to those fair value measurements using Level 3 inputs for the three months ended March 31, 2017.
|
|
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3) (in thousands)
|
|
|
|
Derivative Warrant Liability
|
|
|
2017 Notes
|
|
Opening Balance
|
|
$
|
814
|
|
|
$
|
25,769
|
|
Transfers into Level 3
|
|
|
1,884
|
|
|
|
-
|
|
Transfers out of Level 3
|
|
|
-
|
|
|
|
-
|
|
Total (gains) or losses for the period
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(3,259
|
)
|
|
|
339
|
|
Included in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Purchases, issues, sales and settlements
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
-
|
|
|
|
-
|
|
Issues
|
|
|
5,670
|
|
|
|
-
|
|
Sales
|
|
|
-
|
|
|
|
-
|
|
Settlements
|
|
|
(167
|
)
|
|
|
(9,616
|
)
|
Closing balance
|
|
$
|
4,942
|
|
|
$
|
16,492
|
|
Inventories.
The Company records its corn inventory at fair value only when the Company’s cost of corn purchased exceeds the market value for corn. The Company determines the market value of corn and dry distiller’s grain based upon Level 1 inputs using quoted market prices. The Company records its ethanol, isobutanol and hydrocarbon inventory at market using Level 2 inputs.
2017 Notes.
The Company has estimated the fair value of the 2017 Notes to be $16.5 million and $25.8 million at March 31, 2017 and December 31, 2016, respectively,
utilizing a binomial lattice model. See Note 7 for the fair value inputs used to estimate the fair value of the 2017 Notes.
2022 Notes Embedded Derivative
.
The Company had estimated the fair value of the embedded derivative on a stand-alone basis to be $0.0 million at March 31, 2017 and December 31, 2016, respectively, based upon Level 3 inputs. See Note 5 for the fair value inputs used to estimate the fair value of the 2022 Notes with and without the embedded derivative and the fair value of the embedded derivative.
.
Derivative Warrant Liability
. Prior to 2017, the Company estimated the fair value of the Series A, Series F and Series K warrants using a Monte-Carlo model (Level 3). For all other warrants the Company valued these using a standard Black-Scholes model (Level 2). However, in the first quarter 2017, the Company valued the Series F and K using a Monte-Carlo model (Level 3) and other warrants using Black-Scholes models comprised of some inputs requiring the use of Monte-Carlo models (Level 3).
While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
12. Segments
We have determined that we have two operating segments: (i) Gevo segment; and (ii) Gevo Development/Agri-Energy segment. We organize our business segments based on the nature of the products and services offered through each of our consolidated legal entities. Transactions between segments are eliminated in consolidation.
Gevo Segment
. Our Gevo segment is responsible for all research and development activities related to the future production of isobutanol, including the development of our proprietary biocatalysts, the production and sale of biojet fuel, our retrofit process and the next generation of chemicals and biofuels that will be based on our isobutanol technology. Our Gevo segment also develops, maintains and protects our intellectual property portfolio, develops future markets for our isobutanol and provides corporate oversight services.
21
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
Gevo Development/Agri-Energy Segment
. Our Gevo Developmen
t/Agri-Energy segment is currently responsible for the operation of our Luverne Facility and the production of ethanol, isobutanol and related products.
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Gevo
|
$
|
90
|
|
|
$
|
505
|
|
|
Gevo Development / Agri-Energy
|
|
5,526
|
|
|
|
5,815
|
|
|
Consolidated
|
$
|
5,616
|
|
|
$
|
6,320
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations:
|
|
|
|
|
|
|
|
|
Gevo
|
$
|
(3,065
|
)
|
|
$
|
(2,307
|
)
|
|
Gevo Development / Agri-Energy
|
|
(4,117
|
)
|
|
|
(3,559
|
)
|
|
Consolidated
|
$
|
(7,182
|
)
|
|
$
|
(5,866
|
)
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Gevo
|
$
|
714
|
|
|
$
|
2,134
|
|
|
Gevo Development / Agri-Energy
|
|
-
|
|
|
|
17
|
|
|
Consolidated
|
$
|
714
|
|
|
$
|
2,151
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense:
|
|
|
|
|
|
|
|
|
Gevo
|
$
|
137
|
|
|
$
|
168
|
|
|
Gevo Development / Agri-Energy
|
|
1,539
|
|
|
|
1,453
|
|
|
Consolidated
|
$
|
1,676
|
|
|
$
|
1,621
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of plant, property and equipment:
|
|
|
|
|
|
|
|
|
Gevo
|
$
|
56
|
|
|
$
|
3
|
|
|
Gevo Development / Agri-Energy
|
|
617
|
|
|
|
2,244
|
|
|
Consolidated
|
$
|
673
|
|
|
$
|
2,247
|
|
|
|
March 31,
|
|
|
December
31,
|
|
|
2017
|
|
|
2016
|
|
Total assets:
|
|
|
|
|
|
|
|
Gevo
|
$
|
102,331
|
|
|
$
|
110,072
|
|
Gevo Development / Agri-Energy
|
|
155,275
|
|
|
|
156,749
|
|
Intercompany eliminations
|
|
(153,019
|
)
|
|
|
(154,497
|
)
|
Consolidated
|
$
|
104,587
|
|
|
$
|
112,324
|
|
13. Subsequent Events
On April 19, 2017, the Company entered into an Exchange and Purchase Agreement (the “Exchange Agreement”) with the holders of the 2017 Notes, and Whitebox Advisors LLC, in its capacity as representative of the holders (“Whitebox”), pursuant to which the holders, subject to certain conditions, agreed to exchange all of the outstanding principal amount of the 2017 Notes for an equal principal amount of the Company’s newly created 12% Convertible Senior Secured Notes due 2020 (the “2020 Notes”), plus an amount in cash equal to the accrued and unpaid interest (other than interest paid in kind) on the 2017 Notes (the “Exchange”).
Pursuant to the Exchange Agreement, the Company also granted the Holders an option (the “Purchase Option”) to purchase up to an additional aggregate principal amount of $5.0 million of 2020 Notes (the “Option Notes”), at a purchase price equal to the aggregate principal amount of such Option Notes purchased, having identical terms (other than with respect to the issue date and restrictions on transfer relating to compliance with applicable securities law) to the 2020 Notes issued, at any time on or within ninety (90) days of the closing of the exchange contemplated by the Exchange Agreement.
The exchange contemplated in the Exchange Agreement and the ultimate issuance of the 2020 Notes is conditioned on the approval by the Company’s stockholders of the potential issuance of 19.99% or more of the Company’s outstanding common stock upon the conversion of, or otherwise issuable in relation to, the 2020 Notes.
22
GEVO, INC.
Notes to Unaudited Consolidated Financial Statements (Continued)
The terms of the 2020 Notes will be set forth in an indenture to be entered into prior to the initial issuance of 2020 Notes by and among the Company, certain subsidiary guarantors, and Wilmington Savings Fund Society, FSB, as trustee (the “2020 Notes Indenture”).
The key terms of the 2020 Notes are as follows:
|
•
|
Maturity Date
: The 2020 Notes will mature on March 15, 2020.
|
|
•
|
Interest
: The 2020 Notes will accrue interest at 12% per annum, with 10% payable in cash and 2% payable as Payment in Kind (“PIK”) interest. The PIK interest is paid by increasing the principal amount of the 2020 Notes by the amount of PIK interest due.
Interest will be payable on March 31, June 30, September 30, and December 31of each year.
|
|
•
|
Conversion and Conversion Price
: The 2020 Notes are convertible, at the option of the holders, into shares of the Company’s common stock. The 2020 Notes will have an initial conversion price (the “Conversion Price”) equal to the lesser of (i) $1.196 per share, or 0.8361 shares of common stock per $1.00 principal amount of the 2020 Notes, or (ii) a premium of 15% to the closing price of the Company’s common stock on the date of the Exchange.
|
|
•
|
Conversion Price Reset and Adjustments
:
The holders will have a one-time right to reset the conversion price (the “Reset Provision”) upon any equity financing that occurs within 180 days following the Exchange (the “Reset Period”) in accordance with the following reset calculations: (i) in the first 90 days following the Exchange, at a 25% premium to the common stock price in the equity financing and (ii) after 90 and within and including 180 days following the Exchange, at a 35% premium to the common stock share price in the equity financing. Following exercise of the Reset Provision, the Holders will also have a right to consent to certain equity financings by the Company during the Reset Period.
|
|
•
|
Make-Whole Payments
:
The 2020 Notes will provide for certain make-whole payments (the “Make-Whole Payments”) to be made by the Company to the holders as follows: (a) each holder who exercises its option to voluntarily convert any of its 2020 Notes will receive a make-whole payment for the converted 2020 Notes in an amount equal to any unpaid interest that would otherwise have been payable on such 2020 Notes through the applicable maturity date; (b) each holder whose 2020 Notes are converted in a mandatory conversion will receive a make-whole payment for the converted 2020 Notes in an amount equal to any unpaid interest that would have otherwise been payable on such 2020 Notes through the applicable maturity date; and (c) each holder who exercises its option to require the Company to repurchase any or all of such holder’s 2020 Notes upon the occurrence of a Fundamental Change (as defined in the 2020 Notes Indenture) will receive a cash make-whole payment for the repurchased 2020 Notes in an amount equal to any unpaid interest that would otherwise have been payable on such 2020 Notes through the applicable maturity date. A fundamental change includes, among other things, the Company’s common stock ceasing to be listed on a national securities exchange.
|
As noted above,
the Exchange and the issuance of the 2020 Notes requires stockholder approval and will be voted on at the Company’s Annual Meeting of Stockholders scheduled for June 15, 2017. A Current Report on Form 8-K was filed on April 20, 2017 with the U.S. Securities and Exchange Commission that includes a copy of the Exchange Agreement and 2020 Notes Indenture pursuant to which the 2020 Notes would be issued.
In addition, on April 19, 2017, the Company and its subsidiaries entered into an Eleventh Supplemental Indenture (the “Eleventh Supplemental Indenture”) with Wilmington Savings Fund Society, FSB, as trustee and collateral trustee, and WB Gevo, Ltd., as Requisite and Sole Holder, relating to the 2017 Notes. The Eleventh Supplemental Indenture amends the 2017 Notes to, among other things, (i) extend the maturity date of the 2017 Notes to provide that if the stockholder meeting of the Company to approve the potential issuance of 19.99% or more of the Company’s outstanding common stock upon the conversion of or otherwise issuable in relation to the 2020 Notes (the “Stockholder Meeting”) is adjourned or postponed pursuant to and in accordance with the Exchange Agreement, the maturity date shall be automatically extended to three (3) Business Days following the date of such adjourned or postponed Stockholder Meeting, but in no event beyond fourteen (14) days after June 23, 2017; (ii) upon consent of the Sole Holder, allow for the payoff of the 2022 Notes or exchange of the 2022 Notes for shares of Company common stock, and (iii) to eliminate the interest reserve account for the 2017 Notes.
23