Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements. When used anywhere in this Quarterly Report on Form 10-Q (this “Report”), the words “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. These statements relate to future events or our future financial or operational performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Such risks and uncertainties include those related to our ability to sell our products, our ability to expand or continue production of isobutanol at our production facility in Luverne, Minnesota (the “Luverne Facility”), our ability to meet our production, financial and operational guidance, the continued listing of our common stock on The NASDAQ Capital Market, our ability and plans to construct a commercial hydrocarbon facility to produce alcohol-to-jet fuel (“ATJ”), our ability to raise additional funds to continue operations and/or expand the Luverne Facility, our ability to produce isobutanol, achievement of advances in our technology platform, the success of our retrofit production model, additional competition and changes in economic conditions and those risks described in documents we have filed with the U.S. Securities and Exchange Commission (the “SEC”), including this Report in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” our Annual Report on Form 10-K for the year ended December 31, 2017 (our “Annual Report”), and other reports that we have filed with the SEC. All forward-looking statements in this Report are qualified entirely by the cautionary statements included in this Report and such other filings. These risks and uncertainties could cause actual results to differ materially from results expressed or implied by forward-looking statements contained in this Report. These forward-looking statements speak only as of the date of this Report. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Unless the context requires otherwise, in this Report the terms “we,” “us,” “our” and the “Company” refer to Gevo, Inc. and its subsidiaries.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes and other financial information appearing elsewhere in this Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including, without limitation, the disclosures in our Annual Report.
Company Overview
We are a renewable chemicals and next generation biofuels company, targeting what we believe to be very large potential markets: that of low carbon fuels and chemicals that can compete directly against petro-chemical products depending on the price of oil and value of carbon. Renewable fuels are one of the few markets where the value for renewable carbon has already been established, particularly in the U.S. We believe that the demand for low carbon fuels, chemicals, and plastics will continue and grow stronger over time. We believe that renewable carbon will eventually be valued in chemicals and plastics in addition to fuels.
The challenges to displace petrochemical products with renewable products are enormous: (i) the products need to meet or exceed the stringent performance requirements established by the incumbent products, (ii) the products need to be compatible with existing distribution infrastructure, (iii) the products must be economical in the market place, and (iv) in most cases, the products must have a lower carbon footprint and improve the “sustainability” of the business system. We believe we have viable technologies that produce products that address these challenges.
We have developed proprietary technology that uses a combination of synthetic biology, metabolic engineering, chemistry and chemical engineering to make isobutanol and hydrocarbon products from isobutanol that can displace petrochemical incumbent products. We have been able to genetically engineer yeast, whereby the yeast produces isobutanol from carbohydrates at costs that we believe to be commercially competitive once large production facilities are deployed that will enable economies of scale to be reached. We have shown that the isobutanol production process works in full scale fermenter systems at our production facility in Luverne, Minnesota (the “Luverne Facility”). We also have shown that our renewable isobutanol can be readily converted to hydrocarbon products that address large markets. Specifically, our renewable alcohol-to-jet fuel (“ATJ”) has been approved for use in commercial aviation and used multiple times for commercial flights. In addition, our renewable isobutanol is being used as a gasoline blendstock in the Houston area for on-road vehicles as an ethanol-free fuel option for consumers. Our renewable isooctane meets the performance and specification requirements for use in chemicals and fuels and is currently being used in the European Union. We believe that there is large potential to grow our business, through a combination of (i) directly producing and selling our renewable isobutanol and related hydrocarbon products, and (ii) licensing our technology.
We believe that renewable isobutanol is a potentially valuable commercial product because of its versatility to address large markets either as a product directly or as a key intermediate for producing renewable carbon alternatives to mainstream fuels such as jet fuel, gasoline, plastics such as PET, and various other chemical products and materials. Isobutanol is a four-carbon alcohol that can be sold directly for use as a specialty chemical in the production of solvents, paints and coatings, or more importantly from a market size and performance value-added point of view, as a gasoline blendstock. Because isobutanol can be readily converted to hydrocarbon products such hydrocarbon fuels, including isooctane, isooctene and ATJ, lubricants, polyester, rubber, plastics, fibers and other polymers, we believe that the addressable markets are very large; potentially being able to ultimately reach 40% of the global petrochemicals markets depending on the price of oil and the value of renewable carbon.
NASDAQ Market Price Compliance
On June 21, 2017, we received a deficiency letter from the Listing Qualifications Department of the Nasdaq Stock Market, notifying us that, for the prior 30 consecutive business days, the closing bid price of our common stock was not maintained at the minimum required closing bid price of at least $1.00 per share as required for continued listing on the Nasdaq Capital Market. In accordance with Nasdaq Listing Rules, we had an initial compliance period of 180 calendar days, to regain compliance with this requirement. On December 20, 2017, the Nasdaq Stock Market granted us an additional 180 calendar days, or until June 18, 2018, to regain compliance. To regain compliance, the closing bid price of our common stock must be $1.00 per share or more for a minimum of 10 consecutive business days at any time before June 18, 2018. The Nasdaq determination to grant the second compliance period was based on our meeting of the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on the Nasdaq Capital Market, with the exception of the bid price requirement, and our written notice of our intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.
On April 12, 2018, we filed a definitive proxy statement in connection with our 2018 Annual Meeting of Stockholders (the “Annual Meeting”) to be held on Wednesday, May 30, 2018. At the Annual Meeting, we are asking for stockholders to approve, among other thing, an amendment to our Amended and Restated Certificate of Incorporation to effect a reverse stock split of the outstanding shares of our common stock by a ratio of not less than one-for-two and not more than one-for-twenty at any time on or prior to June 5, 2018, with the exact ratio to be set at a whole number within this range by our Board of Directors in its sole discretion (the “Reverse Stock Split”). We believe that the Reverse Stock Split is necessary to maintain our listing on the NASDAQ Capital Market, and to provide us with resources and flexibility, with respect to raising capital, sufficient to execute our business plans and strategy, and improve the marketability and liquidity of our common stock. In addition, the delisting of our common stock from a national securities exchange would constitute a “fundamental change” under the indenture governing our 12% convertible senior secured notes due 2020 (the “2020 Notes”), which would give holders the right to require us to repurchase the 2020 Notes. The repurchase of the 2020 Notes as a result of a fundamental change would likely render us insolvent and result in some type of bankruptcy, insolvency, liquidation, or reorganization event for the Company.
Latest Highlights and Developments
|
●
|
On April 3, 2018, we announced the appointment of Tim Cesarek to the newly created position of Executive Vice President and Chief Commercial Officer. Mr. Cesarek brings over 20 years of knowledge and experience in strategic and commercial transactions, with 15 years in the field of renewable resource based fuels and chemicals. In addition to overseeing our commercial development of our fuel and chemical products, Mr. Cesarek we expect to develop opportunities for the Company with strategic customers and partners.
|
|
●
|
On February 8, 2018, we strengthened our existing relationship with Musket Corporation, a national fuel distributor under the umbrella of the Love’s Family of Companies, by amending our existing isobutanol supply agreement to provide Musket with the exclusive right to sell our renewable isobutanol within a 300 mile radius of Houston, Texas. This agreement establishes a market region that encompasses Austin, Dallas, Fort Worth, Oklahoma, Louisiana, as well as the majority of South and East Texas.
|
Market Development, Sales and Production Strategy for 2018
In 2018, we intend to continue to develop the markets for our isobutanol, jet fuel, isooctane, and other products made from isobutanol and ethanol. Ultimately, our primary target is to enter into binding supply contracts for isobutanol and related hydrocarbon products that represent the majority of the production volumes to be produced at the expanded Luverne Facility that we plan to construct (the “Luverne Facility Expansion”). The focus for market development continues to be:
|
●
|
Isobutanol for the ethanol free gasoline market, primarily in Reformulated Gasoline or RFG areas. We plan to increase our distribution network, and add additional regions, broadening our distribution footprint. We intend to use isobutanol in our inventory in part to develop these sales.
|
|
●
|
Isooctane for gasoline and chemicals are expected to continue to be a priority. We expect the vast majority of sales to ship to the European Union. We expect that the demand for this product will continue to grow, and we may expand or modify the hydrocarbon demonstration plant at South Hampton Resources in Silsbee, Texas to increase capacity for isooctane. We intend to use renewable isobutanol in our inventory for the feedstock for this product. We expect to continue to work on securing a set of offtake contracts that would support the Luverne Facility Expansion.
|
|
●
|
We plan to sell ATJ for market development purposes and demonstrations. In certain niche markets, we may begin commercial sales, depending on price and volumes that can be supported from the hydrocarbon demonstration plant at South Hampton Resources in Silsbee, Texas. We expect to continue to work on securing a set of offtake contracts that would support the Luverne Facility Expansion.
|
|
●
|
In 2018, we expect to sell approximately 19 million gallons or more of ethanol, and approximately 56 thousand tons of its animal feed product. As previously announced, in 2018, we expect to improve the cash flow out of the Luverne Facility by optimizing the ethanol production processes, developing value added products for ethanol, animal feed, and corn oil produced at the Luverne Facility plant and further reducing the cost of the Luverne Facility’s carbohydrates.
|
We expect to use our inventory of isobutanol to meet our market development needs in 2018. In 2017, we increased our on-hand inventory of isobutanol. During the production runs at the Luverne Facility in 2017, we also met our variable cost production targets for isobutanol. As previously disclosed, running isobutanol at a scale of 1.5 MGPY, the current capacity of the Luverne Facility, increases cash burn because not all of the fixed costs are covered given the relatively low run rate. We are prepared to ramp-up isobutanol production in response to positive demand and price appreciation. We continue to be focused on developing markets and generating cash using the current inventory. We expect to sell isobutanol into the gasoline blendstock market, as well as selling isooctane, jet fuel and other products made from inventoried isobutanol.
Path to Profitability
We believe that there are two paths by which we can become profitable. First, together with the initiatives to improve the cash flow profile of our business in 2018 compared to 2017, we believe that by optimizing the Luverne Facility’s ethanol production processes, developing value added products for ethanol and animal feed produced at the plant and further reducing the cost of the plant’s carbohydrate feedstock, we could become profitable in the near future, independent of isobutanol production.
Second, we believe that we could become profitable if we are able to obtain binding offtake agreements for our isobutanol and related hydrocarbon products that justify the Luverne Facility Expansion, along with adequate financing for such expansion, whereby we would convert the Luverne Facility primarily to the production of isobutanol at scale, with some percentage of such isobutanol volumes to be further processed into hydrocarbons such as ATJ and isooctane.
Luverne Facility Update
In 2018, as previously announced, we expect to undertake initiatives to improve the profitability of the Luverne Facility.
We currently have five fermentation vessels at our Luverne Facility. Three fermentation vessels are made from carbon steel. Two fermentation vessels are newer and made from stainless steel. The two stainless steel fermentation vessels and one of the three carbon steel fermentation vessels are expected to be used for ethanol production during 2018. The remaining two carbon steel fermentation vessels are not expected to be needed for production in 2018. If we were to run isobutanol production in side by side mode of operation with ethanol production, we would need one of the two other carbon steel fermentation vessels to be put back into operation, along with the other three fermentation vessels that we plan to use for ethanol production during 2018.
During 2017, we hired a third-party engineering firm to test the structural integrity of the carbon steel fermentation vessels. The results of the testing indicate that one of these fermentation vessels has at least one more year of life before needing repair, and the other one has approximately two months of life remaining. If we were to start up and run isobutanol for an extended period of time, at least one of these carbon steel fermentation vessels would need to be repaired prior to being put back into service. Repair costs are estimated to be approximately $250,000 per fermentation vessel.
Ultimately, we anticipate that as we build out, or expand the Luverne Facility to increase capacity, we might repair both carbon steel fermentation vessels, and/or install additional fermentation vessels depending on the need for capacity for isobutanol and/or ethanol at that time.
Debt Maturities and Exchanges
In January 2018, we entered into a private exchange agreement with a holder of our 2022 Notes to exchange the remaining $0.5 million of outstanding principal amount of the 2022 Notes for 780,303 shares of our common stock. Upon completion of this exchange, the 2022 Notes were satisfied in their entirety and there are no remaining obligations under the 2022 Notes.
Financial Condition
For the three months ended March 31, 2018 and 2017, we incurred a consolidated net loss of $2.5 million and $5.9 million, respectively, and had an accumulated deficit of $403.9 million at March 31, 2018. Our cash and cash equivalents at March 31, 2018 totaled $7.0 million which is primarily being used for the following: (i) operating activities of our Luverne Facility; (ii) operating activities at our corporate headquarters in Colorado, including research and development work; (iii) capital improvements primarily associated with the Luverne Facility; (iv) costs associated with optimizing isobutanol production technology; and (v) debt service obligations.
The continued operation of our business is dependent upon raising additional capital through future public and private equity offerings, debt financings or through other alternative financing arrangements. In addition, successful completion of our research and development programs and the attainment of profitable operations are dependent upon future events, including our ability to raise sufficient capital to expand our commercial production facility, completion of our development activities resulting in sales of isobutanol or isobutanol-derived products and/or technology, achieving market acceptance and demand for our products and services and attracting and retaining qualified personnel.
We expect to incur future net losses as we continue to fund the development and commercialization of our products and product candidates. We have primarily relied on raising capital to fund our operations and debt service obligations by issuing common stock and warrants in underwritten public offerings. Those issuances have caused significant dilution to our existing stockholders. While we have sought, and will continue to seek, other, less dilutive forms of financing to fund our operations and debt service obligations, there is no assurance that we will be successful in doing so.
Based on our current operating plan, existing working capital at December 31, 2017 was not sufficient to meet the cash requirements to fund planned operations through the period that is one year after the date our 2017 financial statements were issued unless we are able to raise additional capital to fund operations. Our audited financial statements for the year ended December 31, 2017, were prepared under the assumption that we would continue our operations as a going concern. Our independent registered public accounting firm for the year ended December 31, 2017 included a “going concern” emphasis of matter paragraph in its report on our financial statements as of, and for the year ended, December 31, 2017. These conditions raise substantial doubt about our ability to continue as a going concern. Our inability to continue as a going concern may potentially affect our rights and obligations under our debt obligations.
Our transition to profitability is dependent upon, among other things, the successful development and commercialization of our products and product candidates, the achievement of a level of revenues adequate to support our cost structure and securing sufficient financing for the build-out and Retrofit of the Luverne Facility or a facility at another suitable location. We may never achieve profitability or generate positive cash flows, and unless and until we do, we will continue to need to raise additional cash. We intend to fund future operations through additional private and/or public offerings of debt or equity securities. In addition, we may seek additional capital through arrangements with strategic partners or from other sources, may seek to restructure our debt and we will continue to address our cost structure. Notwithstanding, there can be no assurance that we will be able to raise additional funds, or achieve or sustain profitability or positive cash flows from operations.
Results of Operations
Comparison of the Three Months Ended March 31, 2018 and 2017
|
|
Three Months Ended March 31,
|
|
|
|
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
Revenue and cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol sales and related products, net
|
|
$
|
8,218
|
|
|
$
|
5,494
|
|
|
$
|
2,724
|
|
Hydrocarbon revenue
|
|
|
-
|
|
|
|
90
|
|
|
|
(90
|
)
|
Grant and other revenue
|
|
|
25
|
|
|
|
32
|
|
|
|
(7
|
)
|
Total revenues
|
|
|
8,243
|
|
|
|
5,616
|
|
|
|
2,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
10,583
|
|
|
|
9,408
|
|
|
|
1,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(2,340
|
)
|
|
|
(3,792
|
)
|
|
|
1,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
789
|
|
|
|
1,217
|
|
|
|
(428
|
)
|
Selling, general and administrative expense
|
|
|
1,870
|
|
|
|
2,173
|
|
|
|
(303
|
)
|
Total operating expenses
|
|
|
2,659
|
|
|
|
3,390
|
|
|
|
(731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,999
|
)
|
|
|
(7,182
|
)
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(825
|
)
|
|
|
(713
|
)
|
|
|
(112
|
)
|
(Loss) on exchange of debt
|
|
|
(21
|
)
|
|
|
(964
|
)
|
|
|
943
|
|
(Loss) from change in fair value of the 2017 Notes
|
|
|
-
|
|
|
|
(339
|
)
|
|
|
339
|
|
Gain from change in fair value of derivative warrant liability
|
|
|
477
|
|
|
|
3,258
|
|
|
|
(2,781
|
)
|
Gain from change in fair value of 2020 Notes embedded derivative
|
|
|
2,858
|
|
|
|
–
|
|
|
|
2,858
|
|
Other income
|
|
|
8
|
|
|
|
6
|
|
|
|
2
|
|
Total other expense, net
|
|
|
2,497
|
|
|
|
1,248
|
|
|
|
1,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,502
|
)
|
|
$
|
(5,934
|
)
|
|
$
|
3,432
|
|
Revenues.
Revenue associated with the sale of ethanol, as well as isobutanol and related products for the three months ended March 31, 2018 was $8.2 million, an increase of $2.7 million from the three months ended March 31, 2017. This increase was primarily a result of increased ethanol and distiller grain sales. During the three months ended March 31, 2018, we sold 4.9 million gallons of ethanol compared to 3.3 million gallons of ethanol sold in the three months ended March 31, 2017. Hydrocarbon revenue decreased less than $0.1 million during the three months ended March 31, 2018 as a result of lower shipments of finished products from our demonstration plant located at the South Hampton Resources, Inc. facility near Houston, Texas (the “South Hampton Facility”). Hydrocarbon revenues are comprised of ATJ, isooctane and isooctene sales. Grant and other revenue was less than $0.1 million during the three months ended March 31, 2018, approximately the same as the comparable period in 2017.
Cost of goods sold.
Cost of goods sold was $10.6 million during the three months ended March 31, 2018, compared with $9.4 million during the three months ended March 31, 2017. Cost of goods sold included approximately $9.0 million associated with the increased production of ethanol and related products and approximately $1.6 million in depreciation expense.
Research and development expense.
Research and development expense decreased by approximately $0.4 million during the three months ended March 31, 2018, compared with the three months ended March 31, 2017, due primarily to a decrease in employee related expenses.
Selling, general and administrative expense.
Selling, general and administrative expense decreased by approximately $0.3 million during the three months ended March 31, 2018, compared with the three months ended March 31, 2017, due primarily to a decrease in employee related expenses.
Interest expense
. Interest expense in the three months ended March 31, 2018 was $0.8 million, an increase of $0.1 million compared to the three months ended March 31, 2017, due to an increase in the interest rate on our outstanding debt obligations as a result of the June 20, 2017 exchange of the 2017 Senior Secured Notes for the 2020 Senior Secured Notes. .
(Loss)/Gain from change in fair value of derivative warrant liability.
During the three months ended March 31, 2018 we incurred a $0.5 million non-cash gain on changes in the fair value of the derivative warrant liability, primarily due to the decrease in the price of our common stock.
(Loss) from change in fair value of the 2020 Notes embedded derivative.
During the three months ended March 31, 2018, the estimated fair value of the 2020 Notes embedded derivative liability decreased, resulting in a non-cash gain of $2.9 million primarily due to the decrease in the price of our common stock.
Revenues, Cost of Goods Sold and Operating Expenses
Revenues
During the three months ended March 31, 2018 and 2017, we generated revenue from: (i) the sale of ethanol, isobutanol and related products; (ii) hydrocarbon sales consisting primarily of the sale of ATJ fuel, isooctane and isooctene derived from our isobutanol for purposes of certification and testing; and (iii) government grants and research and development programs.
Cost of Goods Sold and Gross Loss
Cost of goods sold during the three months ended March 31, 2018 and 2017 primarily includes costs directly associated with isobutanol production and ethanol production at the Luverne Facility, such as costs for direct materials, direct labor, depreciation, other operating costs and certain plant overhead costs. Direct materials include corn feedstock, denaturant and process chemicals. Direct labor includes compensation of personnel directly involved in production operations at the Luverne Facility. Other operating costs include utilities and natural gas usage.
Our gross loss is defined as our total revenue less our cost of goods sold.
Research and Development
Our research and development costs consist of expenses incurred to identify, develop and test our technologies for the production of isobutanol and the development of downstream applications thereof. Research and development expenses include personnel costs (including stock-based compensation), consultants and related contract research, facility costs, supplies, depreciation and amortization expense on property, plant and equipment used in product development, license fees paid to third parties for use of their intellectual property and patent rights and other overhead expenses incurred to support our research and development programs. Research and development expenses also include upfront fees and milestone payments made under licensing agreements and payments for sponsored research and university research gifts to support research at academic institutions.
Selling, General and Administrative
Selling, general and administrative expenses consist of personnel costs (including stock-based compensation), consulting and service provider expenses (including patent counsel-related costs), legal fees, marketing costs, corporate insurance costs, occupancy-related costs, depreciation and amortization expenses on property, plant and equipment not used in our product development programs or recorded in cost of goods sold, travel and relocation and hiring expenses.
We also record selling, general and administrative expenses for the operations of the Luverne Facility that include administrative and oversight expenses, certain personnel-related expenses, insurance and other operating expenses.
Liquidity and Capital Resources
Our independent auditor included “going-concern” language in our audited financial statements for the year-ended December 31, 2017. For more information, see “—Financial Condition.”
Since our inception in 2005, we have devoted most of our cash resources to manufacturing, research and development, defense of intellectual property and selling, general and administrative activities related to the commercialization of isobutanol, as well as related products from renewable feedstocks. We have incurred losses since inception and expect to incur losses through at least the remainder of 2018 and likely beyond. To date, we have financed our operations primarily with proceeds from multiple sales of equity and debt securities, borrowings under debt facilities and product sales.
The continued operation of our business, including the Luverne Facility Expansion, is dependent upon raising additional capital through future public and private equity offerings, debt financings or through other alternative financing arrangements. In addition, successful completion of our research and development programs and the attainment of profitable operations are dependent upon future events, including access to sufficient capital, repayment of our current debt, completion of our development activities resulting in sales of isobutanol or isobutanol-derived products and/or technology, achieving market acceptance and demand for our products and services and attracting and retaining qualified personnel. Such additional capital may not be available to us on acceptable terms or at all.
As of March 31, 2018, we had an accumulated deficit of $403.9 million with cash and cash equivalents totaling $7.0 million.
The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash used in operating activities
|
|
$
|
(4,350
|
)
|
|
$
|
(8,047
|
)
|
Net cash used in investing activities
|
|
$
|
(67
|
)
|
|
$
|
(673
|
)
|
Net cash provided by/(used in) financing activities
|
|
$
|
(107
|
)
|
|
$
|
1,225
|
|
Operating Activities
Our primary uses of cash from operating activities are personnel-related expenses, research and development-related expenses, which include costs incurred under development agreements; costs and expenses for the production of isobutanol, ethanol and related products; logistics costs; costs associated with further processing of isobutanol and costs associated with the operation of the South Hampton Facility and debt service payments.
During the three months ended March 31, 2018, we used $4.5 million in cash from operating activities primarily resulting from a net loss of $2.5 million, a $0.7 million increase in working capital items, and approximately $1.3 million in non-cash operating activities.
Investing Activities
During the three months ended March 31, 2018, we used $0.1 million in cash from investing activities related primarily to capital expenditures at our Luverne Facility.
Financing Activities
During the three months ended March 31, 2018, we used approximately $0.1 million associated with financing activities, primarily from the $0.1 million raised as part of our “at-the-market” public offering, offset by approximately $0.2 million in offering costs related to such offering.
At-the-Market Offering Program.
In February 2018, we commenced an at-the-market offering program, which allows us to sell and issue up to $5.0 million of shares of our common stock. In the first quarter of 2018, we issued 104,138 shares of common stock under the at-the-market offering for gross proceeds of $0.1 million. We paid commissions to our sales agent of approximately $1,000 and incurred other offering related expenses of $0.2 million, the majority of which were one-time expenses associated with the establishment of the "
At-the-Market Offering Program"
. We have remaining capacity to issue up to approximately $4.9 million of additional shares of common stock under the at-the-market offering program. Net proceeds will be used for general corporate purposes.
2020 Notes
On April 19, 2017, we entered into an Exchange and Purchase Agreement (the “Purchase Agreement”) with WB Gevo, LTD, the holder of the 2017 Notes (the “Holder”), , and Whitebox Advisors LLC, in its capacity as representative of the Holder (“Whitebox”). Pursuant to the terms of the Purchase Agreement, the Holder, subject to certain conditions, including approval of the transaction by our stockholders (which was received on June 15, 2017), agreed to exchange all of the outstanding principal amount of the 2017 Notes for an equal principal amount of our newly created 2020 Notes, plus an amount in cash equal to the accrued and unpaid interest (other than interest paid in kind) on the 2017 Notes (the “Exchange”). On June 20, 2017, we completed the Exchange, terminated the 2017 Notes Indenture and cancelled the 2017 Notes. As of March 31, 2018 and December 31, 2017, the outstanding principal on the 2020 Notes was $16.7 million and $16.7 million, including paid-in-kind interest, respectively.
The 2020 Notes will mature on March 15, 2020. The 2020 Notes bear interest at a rate equal to 12% per annum (with 2% potentially payable as PIK Interest (as defined and described below) at our option), payable on March 31, June 30, September 30, and December 31 of each year. Under certain circumstances, we have the option to pay a portion of the interest due on the 2020 Notes by either (a) increasing the principal amount of the 2020 Notes by the amount of interest then due or (b) issuing additional 2020 Notes with a principal amount equal to the amount of interest then due (interest paid in the manner set forth in (a) or (b) being referred to as “PIK Interest”).
The 2020 Notes are convertible into shares of our common stock, subject to certain terms and conditions. The initial conversion price of the 2020 Notes is equal to $0.7359 per share of common stock, or 1.3589 shares of common stock per $1 principal amount of 2020 Notes (the “Conversion Price”). In addition, upon certain equity financing transactions by us, the Holders will have a one-time right to reset the Conversion Price (the “Reset Provision”) (i) in the first ninety (90) days following the Exchange Date, at a 25% premium to the common stock price in the equity financing and (ii) after ninety (90) and to and including one hundred eighty (180) days following the closing of the Exchange, at a 35% premium to the common stock share price in the equity financing. Following an exercise of the Reset Provision, the Holders will also have a right to consent to certain equity financings by us during the one hundred eighty (180) days following the closing of the Exchange.
See Note 7,
Debt
, to our consolidated financial statements included herein for further discussion of the 2020 Notes.
2022 Notes
In July 2012, we sold $45.0 million in aggregate principal amount of 2022 Notes, for net proceeds of $40.9 million, after accounting for $2.7 million and $1.4 million of cash discounts and issue costs, respectively. The 2022 Notes bear interest at 7.5% per annum, which is to be paid semi-annually in arrears on January 1 and July 1 of each year commencing on January 1, 2013. In January 2018, we entered into a private exchange agreement with a holder of the 2022 Notes to exchange the remaining $0.5 million of outstanding principal amount of the 2022 Notes for 780,303 shares of common stock. Upon completion of this exchange, the 2022 Notes were satisfied in their entirety and there are no remaining obligations under the 2022 Notes.
Critical Accounting Policies and Estimates
Except for the adoption of ASC 606 “
Revenues from Contracts with Customers”
(see Note 3 for the updated revenue recognition policy in accordance with ASU 2014-09), there have been no significant changes to our critical accounting policies since December 31, 2017. However, see Note 1,
Nature of Business, Financial Condition and Basis of Presentation,
to our consolidated financial statements included herein for a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report.
Contractual Obligations and Commitments
The following summarizes the future commitments arising from our contractual obligations at March 31, 2018 (in thousands).
|
|
Les
s
than 1 year
|
|
|
1 - 3 years
|
|
|
4 - 5 years
|
|
|
5+ Years
|
|
|
Total
|
|
Principal debt payments (1)
|
|
$
|
-
|
|
|
$
|
17,408
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,408
|
|
Interest payments on debt (2)
|
|
|
2,103
|
|
|
|
1,653
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,756
|
|
Operating leases (3)
|
|
|
1,459
|
|
|
|
1,116
|
|
|
|
110
|
|
|
|
-
|
|
|
|
2,685
|
|
Insurance & Maintenance
|
|
|
111
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
111
|
|
Total
|
|
$
|
3,673
|
|
|
$
|
20,177
|
|
|
$
|
110
|
|
|
|
|
|
|
$
|
23,960
|
|
(1)
|
Represents cash principal payments due to the holders of the 2020 Notes.
|
(2)
|
Represents interest payments due to the holders of the 2020 Notes.
|
(3)
|
Represents commitments for operating leases related to our leased facility in Englewood, Colorado and our lease for rail cars in Luverne, Minnesota for ethanol and isobutanol shipments.
|
The table above reflects only payment obligations that are fixed and determinable as of March 31, 2018.
Off-Balance Sheet Arrangements
As of March 31, 2018, we did not have any material off-balance sheet arrangements, except for operating lease obligations disclosed in our commitment and contingencies table above.