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 within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used anywhere in 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. These forward-looking statements include, among other things, statements about: the impact of the novel coronavirus ("COVID-19") pandemic on our business, our financial condition, our results of operation and liquidity, risks and uncertainties related to our ability to sell our products, our ability to expand or continue production of isobutanol, renewable hydrocarbon products and ethanol at our production facility in Luverne Minnesota (the “Luverne Facility”), our strategy to pursue low-carbon renewable fuels, our ability to replace our fossil-based energy sources with renewable energy sources at our production facilities, our ability and plans to construct a commercial hydrocarbon facility to produce renewable premium gasoline and jet fuel, our ability to raise additional funds to continue operations and/or expand our production capabilities, our ability to perform under our existing renewable hydrocarbon offtake agreements and other supply agreements we may enter into in the future, our ability to enter into additional hydrocarbon supply agreements, our ability to obtain project finance debt and third-party equity for our renewable natural gas project, our ability to produce isobutanol, renewable hydrocarbon products and ethanol on a commercial level and at a profit, achievement of advances in our technology platform, the success of our upgraded production facility, the availability of suitable and cost-competitive feedstocks, our ability to gain market acceptance for our products, the expected cost-competitiveness and relative performance attributes of our isobutanol, renewable hydrocarbon products and ethanol, additional competition and changes in economic conditions and the future price and volatility of petroleum and products derived from petroleum. Important factors could cause actual results to differ materially from those indicated or implied by forward-looking statements such as those contained in documents we have filed with the U.S. Securities and Exchange Commission (the “SEC”), including this Report in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” our Annual Report on Form 10-K for the year ended December 31, 2019 (our “Annual Report”), and subsequent reports on Form 10-Q, including Item 1A. "Risk Factors" of this Report. 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 undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and readers should not rely on the forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of this Report.
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 growth-oriented renewable fuels company that is commercializing the next generation of renewable low-carbon liquid transportation fuels with the potential to achieve a “net zero” greenhouse gas (“GHG”) footprint and address global needs of reducing GHG emissions with sustainable alternatives to petroleum fuels. As next generation renewable fuels, our hydrocarbon transportation fuels have the advantage of being “drop-in” substitutes for conventional fuels that are derived from crude oil, working seamlessly and without modification in existing fossil-fuel based engines, supply chains and storage infrastructure. In addition to the potential of net zero carbon emissions across the whole fuel life-cycle, our renewable fuels eliminate other pollutants associated with the burning of traditional fossil fuels such as particulates and sulfur, while delivering superior performance. We believe that the world is substantially under-supplied with low-carbon, drop-in renewable fuels that can be immediately used in existing transportation engines and infrastructure, and we are uniquely positioned to grow in serving that demand.
We use low-carbon, renewable resource-based raw materials as feedstocks. In the near-term, our feedstocks will primarily consist of non-food corn. As our technology is applied globally, feedstocks can consist of sugar cane, molasses or other cellulosic sugars derived from wood, agricultural residues and waste. Our patented fermentation yeast biocatalyst produces isobutanol, a four-carbon alcohol, via the fermentation of renewable plant biomass carbohydrates. The resulting renewable isobutanol has a variety of direct applications but, more importantly to our fundamental strategy, serves as a building block to make renewable isooctane (which we refer to as renewable premium gasoline) and renewable jet fuel using simple and common chemical conversion processes. We also reduce or eliminate fossil-based process energy inputs by replacing them with renewable energy such as wind-powered electricity and renewable natural gas (“RNG”).
COVID-19
The COVID-19 pandemic has had an adverse impact on global commercial activity, including the global transportation industry and our supply chain, and has contributed to significant volatility in the financial markets. In light of the current and potential future disruption to our own business operations and those of our customers, suppliers and other third parties with whom we do business, we considered the impact of the COVID-19 pandemic on our business. This analysis considered our business' resilience and continuity plans, financial modeling and stress testing of liquidity and financial resources.
We expect that the impact of the COVID-19 pandemic on general economic activity will negatively impact our revenue and operating results for at least the remainder of 2020 and beyond. The suspension of ethanol production at our Luverne Facility and reduction in our workforce during the first quarter of 2020 due to the impact of COVID-19 had an adverse impact on our financial results for the third quarter of 2020 reducing revenue by 97% compared to the same period in 2019. We expect that the suspension of ethanol production at the Luverne Facility and reduction in workforce will allow us to continue to reduce our cash burn during 2020.
With many of our employees work remotely, we face the risk that unusual working arrangements could impact the effectiveness of our operations or controls. A potential COVID-19 infection of any of our key employees could materially and adversely impact our operations. In addition, it is possible that COVID-19 restrictions could create difficulty for satisfying our legal or regulatory filing or other obligations, including with the SEC and other regulators.
There is also a risk that COVID-19 could continue to have a material adverse impact on customer demand and cash flow for the remainder of 2020 and beyond. We will continue to monitor the situation and assess possible implications to our business and our stakeholders and will take appropriate actions to help mitigate adverse consequences. The extent to which COVID-19 continues to impact our business and financial position will depend on future developments, which are difficult to predict, including the severity, duration and scope of the COVID-19 outbreak as well as the types of measures imposed by governmental authorities to contain the virus or address its impact and the duration of those actions and measures.
We have considered multiple scenarios, with both positive and negative inputs, as part of the significant estimates and assumptions that are inherent in our financial statements and are based on trends in customer behavior and the economic environment throughout the quarter ended September 30, 2020 and beyond as the COVID-19 pandemic has impacted the industries in which we operate. These estimates and assumptions include the collectability of billed and unbilled receivables, the estimation of revenue and tangible and intangible assets. With regard to collectability, we believe we may face atypical delays in client payments going forward but we have not experienced delays in collection as of September 30, 2020. In addition, we believe that the demand for certain discretionary lines of business may decrease, and that such decrease will impact our financial results in succeeding periods. Non-discretionary lines of business may also be adversely affected, for example because reduced economic activity or disruption in hydrocarbon markets reduces demand for or the extent of alcohol-to-jet ("ATJ"), isooctane and isooctene. We believe that these trends and uncertainties are comparable to those faced by other registrants as a result of the COVID-19 pandemic.
In response to the impact of the COVID-19 pandemic, each of Patrick R. Gruber, our Chief Executive Officer, Christopher M. Ryan, our President, Chief Operating Officer and Chief Technology Officer, L. Lynn Smull, our Chief Financial Officer, Timothy J. Cesarek, our Chief Commercial Officer, Geoffrey T. Williams, Jr., our General Counsel and Secretary, and Carolyn M. Romero, our Vice President - Controller and Principal Accounting Officer (collectively, the “Officers”) accepted 20% reductions to their base salaries as of April 1, 2020 and continued until July 31, 2020. In connection with the 20% salary reduction, the Officers were granted Company stock in the form of restricted stock awards in an amount equal to the 20% reduction. Certain remaining employees that earn above a certain dollar threshold also agreed to take a 20% salary reduction effective April 1, 2020 and continued through July 31, 2020, with the 20% portion to be paid in the form of restricted stock awards.
In addition, the effectiveness of external parties, including governmental and non-governmental organizations, in combating the spread and severity of COVID 19 could have a material impact on demand for our business. Further, steps taken by market counter parties such as commercial airlines could have an impact on their ability to perform agreements to which we are a party, which could impact our business. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID 19 on our business.
COVID-19 has materially disrupted, and could continue to materially disrupt, our own business operations and the services we provide, as well as the business operations of our customers, suppliers and other third parties with whom we interact. As an increasing percentage of our colleagues work remotely, we face the risk that unusual working arrangements could impact the effectiveness of our operations or controls. A potential COVID-19 infection of any of our key colleagues could materially and adversely impact our operations. In addition, it is possible that COVID-19 restrictions could create difficulty for satisfying our legal or regulatory filing or other obligations, including with the SEC and other regulators.
New Contracts. As previously disclosed, on April 4, 2019, Gevo, Inc. and Praj Industries Ltd. (“Praj”) entered into a Construction License Agreement (“CLA”), that certain Joint Development Agreement, effective as of April 1, 2018 (as amended, the “Feedstock JDA”) and that certain Development License Agreement, effective as of April 1, 2018. On August 13, 2020, we entered into a Master Framework Agreement (the “MFA”) with Praj to collaborate on providing renewable jet fuel and premium gasoline in India and neighboring countries. The MFA replaces the CLA effective August 13, 2020.
Under the MFA, Praj has exclusive rights to cause us to enter into negotiations with third-parties (each, a “Plant Operator”) that own or operate refineries for the production of Biobutanol (defined in the MFA), including conversion of ethyl alcohol to Biobutanol or for the production of isooctane, jet fuel and/or similar hydrocarbons (the “Hydrocarbon Transportation Fuel”) either in the Territory (as defined in the MFA) or who are named on the Plant List (as defined in the MFA). Provided the Plant Operator and the Company enter into such license, the MFA allows Praj to provide services (such as basic engineering and design package, supply of critical equipment, supervision services, engineering, procurement and construction services and additional related services) (the “Services”) to the applicable Plant Operator for (a) production of Biobutanol from juice, syrup, and/or molasses from sugarcane, beets, bagasse, rice straw, wheat straw or corn stover, and other additional feedstocks using the process design package developed under the Feedstock JDA and (b) for the production of Hydrocarbon Transportation Fuel using the Hydrocarbon PDPs (as defined in the MFA) for the conversion of Biobutanol to Hydrocarbon Transportation Fuel. Praj has no rights to commercially produce Biobutanol or otherwise convert Biobutanol to Hydrocarbon Transportation Fuel under the MFA.
We will receive certain finder’s fees to the extent one of our third party licensees (a) is not previously identified in the various agreements or not located in certain specified areas, (b) uses Praj’s enfinity Technology (as defined in the MFA) in concert with the Feedstock PDP and (c) the constructed facilities are of a certain commercial scale. The MFA will continue in effect for ten years, unless earlier terminated by either party, and automatically renews for additional one year terms until terminated. If Praj fails to fully commission Authorized Plants (as defined in the MFA) with the cumulative capacity to generate five million gallons per year of Biobutanol or Hydrocarbon Transportation Fuel by the fifth contract year, the exclusive license grants will terminate (unless otherwise mutually agreed in writing by the parties).
On August 14, 2020, we entered into a Renewable Hydrocarbons Purchase and Sale Agreement (the “Agreement”) with Trafigura Trading LLC (“Trafigura”), pursuant to which we agreed to supply renewable hydrocarbons to Trafigura. The initial term of the Agreement is 10 years, and Trafigura has the option to extend the initial term. Performance under the Agreement is subject to certain conditions as set forth below, including acquiring a production facility to produce the renewable hydrocarbon products contemplated by the Agreement and closing a financing transaction for sufficient funds to acquire and retrofit the production facility contemplated by the Agreement. We are required to use commercially reasonable efforts to cause the “Commercial Operations Date” to occur on or before December 31, 2023. We will sell the renewable hydrocarbons to Trafigura at certain indexed prices as set forth in the Agreement.
If we do not provide to Trafigura the design, capabilities (including the expected annual production capacity), specifications, required governmental authorizations, delivery logistics and location of an additional new project that we plan to develop or acquire (the “Production Facility”) (collectively, the “Facility Design”) to meet the requirements set forth in the Agreement on or before December 31, 2020, either party may terminate the Agreement. The parties respective obligations under the Agreement are also subject to certain Conditions Precedent (as defined in the Agreement), including, but not limited to, Gevo securing initial financing for the construction of the Production Facility, and Gevo having entered into engineering, procurement, and construction agreements for the construction of the Production Facility, in form and substance reasonably satisfactory to us.
Subject to the satisfaction or waiver of all of the Conditions Precedent, we are required to use commercially reasonable efforts to cause the “Commercial Operations Date” to occur on or before December 31, 2023. The Commercial Operations Date will be the date on which the Company determines that the production facility is capable of consistently producing renewable hydrocarbons conforming to specification and in quantities set forth under the Agreement, provided that the expected annual production capability is at least equal to 85% of the annual production capability contemplated by the Facility Design. If the Commercial Operations Date has not taken place on or before December 31, 2023 (as may be adjusted in accordance with the Agreement), then we will be required to pay Trafigura certain liquidated damages.
July 2020 Offering. On July 6, 2020, we completed a public offering (the “July 2020 Offering”) of (i) 20,896,666 Series 1 units (the “Series 1 Units”) at a price of $0.60 per Series 1 Unit, and (ii) 9,103,334 Series 2 units (the “Series 2 Units”) at a price of $0.59 per Series 2 Unit. The July 2020 Offering was made under a registration statement on Form S-1 filed with the Securities and Exchange Commission, declared effective on September 30, 2020.
Each Series 1 Unit consisted of one share of our common stock and one Series 2020-A warrant to purchase one share of our common stock (each, a “Series 2020-A Warrant”). Each Series 2 Unit consists of a pre-funded Series 2020-B warrant to purchase one share of our common stock (each, a “Series 2020-B Warrant” and, together with the Series 2020-A Warrants, the “Warrants”) and one Series 2020-A Warrant. The Series 2020-A Warrants are exercisable beginning on the date of original issuance and will expire five years from the date of issuance, at an exercise price of $0.60 per share. The pre-funded Series 2020-B Warrants are exercisable beginning on the date of issuance at a nominal exercise price of $0.01 per share of common stock any time until the Series 2020-B Warrants are exercised in full. In connection with the July 2020 Offering, the Company issued Series 2020-A Warrants to purchase an aggregate of 30,000,000 shares of common stock. As of September 30, 2020, all of the Series 2020-B Warrants were exercised.
The net proceeds to us from the July 2020 Offering were approximately $16.1 million, after deducting placement agent fees and other offering expenses payable by us, and not including any future proceeds from the exercise of the Warrants. We intend to use the net proceeds from the July 2020 Offering to fund working capital and for other general corporate purposes.
During the three months ended September 30, 2020, we received notices of exercise from holders of our Series 2020-A Warrants to issue an aggregate of 27,317,834 shares of common stock for total gross proceeds of approximately $16.4 million. Following these exercises, Series 2020-A Warrants to purchase 2,682,166 shares of our common stock remain outstanding at an exercise price of $0.60 per share.
August 2020 Offering. On August 25, 2020, we completed a registered direct offering pursuant to a securities purchase agreement with certain institutional and accredited investors providing for the issuance and sale by us of an aggregate of (i) 21,929,313 shares of our common stock (the “Shares”) at a price of $1.30 per share, and (ii) 16,532,232 pre-funded Series 2020-C warrants to purchase one share of our common stock (each, a “Series 2020-C Warrant”) at a price of $1.29 per Series 2020-C Warrant, in a registered direct offering (the “August 2020 Offering”). As of September 30, 2020, all of the Series 2020-C Warrants were exercised.
The net proceeds to us from the August 2020 Offering were approximately $45.8 million, after deducting placement agent fees and other estimated offering expenses payable by us, and not including any future proceeds from the exercise of the Warrants. We intend to use the net proceeds from the August 2020 Offering to fund working capital and for other general corporate purposes.
Conversion of 2020/21 Notes. On July 10, 2020, certain holders of the 2020/21 Notes converted $2.0 million in aggregate principal amount of 2020/21 Notes (including the conversion of an additional $0.3 million for make-whole payment) into an aggregate of 4,169,426 shares of common stock pursuant to the terms of the 2020/21 Indenture. We recorded a Loss on conversion of 2020/21 Notes of $0.5 million on our Consolidated Statements of Operations.
At-the-Market Offering Program. In February 2018, we commenced an at-the-market offering program, which allows it to sell and issue shares of its common stock from time-to-time. In August 2019, the at-the-market offering program was amended to provide available capacity under the at-the-market offering program of $10.7 million.
During the nine months ended September 30, 2020, we issued 1,343,121 shares of common stock under the at-the-market offering program for total proceeds of $2.2 million, net of commissions and other offering related expenses. No shares were issued under the at-the-market offering program during the three months ended September 30, 2020.
As of September 30, 2020, we have remaining capacity to issue up to approximately $6.5 million of common stock under the at-the-market offering program.
Restructuring Expenses
During the first quarter of 2020, we suspended our ethanol production at the Luverne Facility. In addition, due to the impact of the COVID-19 pandemic on the global economy and our industry, we also reduced our workforce impacting 26 people at the Luverne Facility and four people at our corporate headquarters.
We incurred $0.1 million related to severance costs and $0.2 million related to lease agreements for which we will no longer receive value during the nine months ended September 30, 2020, which are recorded as Restructuring expenses on the Consolidated Statements of Operations.
We intend to continue developing our hydrocarbon business, including the planned expansion of the Luverne Facility, and we expect to move forward in securing the project funding needed to expand the Luverne Facility. The expansion is designed to allow us to produce large quantities of low carbon isobutanol, sustainable aviation fuel and renewable isooctane. We also expect to continue engineering efforts for the expansion of isobutanol production and the construction of a commercial renewable hydrocarbon production facility, as well as additional decarbonization projects, at the Luverne Facility.
Financial Condition
We have incurred consolidated net losses since inception and we had a significant accumulated deficit as of September 30, 2020. Our cash and cash equivalents at September 30, 2020 totaled $80.6 million, which is primarily being used for the following: (i) development of the Luverne Facility expansion plan; (ii) identification of new production facilities and to plan for expanded production to fulfill existing off-take agreements; (iii) operating activities at the Company’s corporate headquarters in Colorado, including research and development work; (iv) development expenses associated with our RNG projects; (v) exploration of strategic alternatives and additional financings, including project financing; and (vi) 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.
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 expansion 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 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, especially in light of the impact of the COVID-19 pandemic on us and the financial markets in general.
Results of Operations
Comparison of the Three Months Ended September 30, 2020 and 2019
|
|
Three Months Ended September 30,
|
|
|
|
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
Revenue and cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol sales and related products, net
|
|
$
|
21
|
|
|
$
|
5,554
|
|
|
$
|
(5,533
|
)
|
Hydrocarbon revenue
|
|
|
101
|
|
|
|
550
|
|
|
|
(449
|
)
|
Other revenue
|
|
|
70
|
|
|
|
6
|
|
|
|
64
|
|
Total revenues
|
|
|
192
|
|
|
|
6,110
|
|
|
|
(5,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
2,260
|
|
|
|
9,893
|
|
|
|
(7,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(2,068
|
)
|
|
|
(3,783
|
)
|
|
|
1,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
870
|
|
|
|
1,789
|
|
|
|
(919
|
)
|
Selling, general and administrative expense
|
|
|
3,215
|
|
|
|
2,431
|
|
|
|
784
|
|
Restructuring costs
|
|
|
(50
|
)
|
|
|
—
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,035
|
|
|
|
4,220
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,103
|
)
|
|
|
(8,003
|
)
|
|
|
1,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(473
|
)
|
|
|
(605
|
)
|
|
|
132
|
|
(Loss) on conversion of 2020/21 Notes to common stock
|
|
|
(543
|
)
|
|
|
—
|
|
|
|
(543
|
)
|
Gain from change in fair value of derivative warrant liability
|
|
|
—
|
|
|
|
(2
|
)
|
|
|
2
|
|
Gain (loss) from change in fair value of 2020/21 Notes and 2020 Notes embedded derivative liability
|
|
|
247
|
|
|
|
—
|
|
|
|
247
|
|
Other income
|
|
|
36
|
|
|
|
(9
|
)
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(733
|
)
|
|
|
(616
|
)
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,836
|
)
|
|
$
|
(8,619
|
)
|
|
$
|
1,783
|
|
Revenue. Revenue from the sale of ethanol, isobutanol and related products for the three months ended September 30, 2020 was $0.02 million, a decrease of $5.5 million compared to the three months ended September 30, 2019. This decrease was primarily the result of terminating ethanol and distiller's grains production at the Luverne Facility in March 2020 as a result of COVID-19 and in response to an unfavorable commodity environment. During the three months ended September 30, 2020, we sold 0 gallons of ethanol compared to 3.4 million gallons of ethanol sold in the three months ended September 30, 2019. We do not expect to earn revenue from the sale of ethanol, isobutanol and related products while the Luverne Facility's operations are suspended.
Hydrocarbon revenues are comprised of ATJ, isooctane and isooctene sales. Hydrocarbon sales decreased by $0.4 million during the three months ended September 30, 2020 as a result of decreased shipments of finished products from our demonstration plant located at the South Hampton Resources, Inc. facility near Houston, Texas (the “South Hampton Facility”).
Cost of goods sold. Cost of goods sold was $2.3 million during the three months ended September 30, 2020, compared with $9.9 million during the three months ended September 30, 2019, a decrease of approximately $7.6 million, primarily the result of terminating ethanol production in March 2020 as a result of COVID-19 and in response to an unfavorable commodity environment. Cost of goods sold included approximately $0.9 million associated with the maintenance of the Luverne Facility and approximately $1.4 million in depreciation expense during the three months ended September 30, 2020.
Until the Luverne Facility restarts production, cost of goods sold will primarily be comprised of costs to process ATJ, isooctane and isooctene at our South Hampton Facility as well as costs to maintain the Luverne Facility. In late October of 2020, we began producing approximately 50,000 gallons of isobutanol at the Luverne Facility which will be shipped to the South Hampton Facility for use in production of renewable hydrocarbons during the first quarter of 2021. We plan to produce an additional 50,000 gallons of isobutanol during the second quarter of 2021 for use at the South Hampton Facility.
Research and development expense. Research and development expense decreased by approximately $0.9 million during the three months ended September 30, 2020, compared with the three months ended September 30, 2019, due primarily to a decrease in personnel and consulting expenses.
Selling, general and administrative expense. Selling, general and administrative expense increased by approximately $0.8 million during the three months ended September 30, 2020, compared with the three months ended September 30, 2019, due primarily to an increase in personnel, consulting and insurance expenses and professional fees, offset by a decrease in investor relations expenses.
Interest expense. Interest expense during the three months ended September 30, 2020 was $0.5 million, a decrease of $0.1 million compared to the three months ended September 30, 2019, due to lower amortization of original issue discounts and debt issuance costs and conversion of $2.0 million of 2020/21 Notes to common stock during July 2020.
(Loss) on conversion of 2020/21 Notes to common stock. During the three months ended September 30, 2020, we incurred a $0.5 million loss related to the conversion of $2.0 million of 2020/21 Notes into common stock during July 2020.
(Loss) gain from change in fair value of the 2020/21 Notes and 2020 Notes embedded derivative liability. During the three months ended September 30, 2020, the estimated fair value of the 2020/21 Notes embedded derivative liability increased resulting in a non-cash gain of $0.2 million, primarily due to the revaluation of the embedded derivative liability.
Comparison of the Nine Months Ended September 30, 2020 and 2019
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
Change
|
|
Revenue and cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol sales and related products, net
|
|
$
|
3,804
|
|
|
$
|
16,184
|
|
|
$
|
(12,380
|
)
|
Hydrocarbon revenue
|
|
|
1,085
|
|
|
|
1,381
|
|
|
|
(296
|
)
|
Other revenue
|
|
|
116
|
|
|
|
34
|
|
|
|
82
|
|
Total revenues
|
|
|
5,005
|
|
|
|
17,599
|
|
|
|
(12,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
13,043
|
|
|
|
27,306
|
|
|
|
(14,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(8,038
|
)
|
|
|
(9,707
|
)
|
|
|
1,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
2,127
|
|
|
|
3,712
|
|
|
|
(1,585
|
)
|
Selling, general and administrative expense
|
|
|
8,917
|
|
|
|
6,705
|
|
|
|
2,212
|
|
Restructuring costs
|
|
|
254
|
|
|
|
—
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,298
|
|
|
|
10,417
|
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(19,336
|
)
|
|
|
(20,124
|
)
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,559
|
)
|
|
|
(2,127
|
)
|
|
|
568
|
|
(Loss) on modification of 2020 Notes
|
|
|
(726
|
)
|
|
|
—
|
|
|
|
(726
|
)
|
(Loss) on conversion of 2020/21 Notes to common stock
|
|
|
(543
|
)
|
|
|
—
|
|
|
|
(543
|
)
|
Gain from change in fair value of derivative warrant liability
|
|
|
8
|
|
|
|
1
|
|
|
|
7
|
|
(Loss) gain from change in fair value of 2020/21 Notes and 2020 Notes embedded derivative liability
|
|
|
(29
|
)
|
|
|
394
|
|
|
|
(423
|
)
|
Other income
|
|
|
53
|
|
|
|
11
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(2,796
|
)
|
|
|
(1,721
|
)
|
|
|
(1,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,132
|
)
|
|
$
|
(21,845
|
)
|
|
$
|
(287
|
)
|
Revenue. Revenue from the sale of ethanol, isobutanol and related products for the nine months ended September 30, 2020 was $3.8 million, a decrease of $12.4 million compared to the nine months ended September 30, 2019. This decrease was primarily the result of terminating ethanol and distiller's grains production at the Luverne Facility in March 2020 as a result of COVID-19 and in response to an unfavorable commodity environment. During the nine months ended September 30, 2020, we sold 2.4 million gallons of ethanol compared to 10.2 million gallons of ethanol sold in the nine months ended September 30, 2019.
Hydrocarbon sales decreased by $0.3 million during the nine months ended September 30, 2020 as a result of decreased shipments of finished products from our demonstration plant located at the South Hampton Facility.
Cost of goods sold. Cost of goods sold was $13.0 million during the nine months ended September 30, 2020, compared with $27.3 million during the nine months ended September 30, 2019, a decrease of approximately $14.3 million, primarily the result of terminating ethanol production in March 2020 as a result of COVID-19 and in response to an unfavorable commodity environment. Cost of goods sold included approximately $8.4 million associated with the production of ethanol and related products and maintenance of the Luverne Facility and approximately $4.6 million in depreciation expense during the nine months ended September 30, 2020.
Until the Luverne Facility restarts production, cost of goods sold will primarily be comprised of costs to process ATJ, isooctane and isooctene at the South Hampton Facility as well as costs to maintain the Luverne Facility. In late October of 2020, we began producing approximately 50,000 gallons of isobutanol which will be shipped to the South Hampton Facility for use in production of renewable hydrocarbons during the first quarter of 2021. We plan to produce an additional 50,000 gallons of isobutanol during the second quarter of 2021 for use at the South Hampton Facility.
Research and development expense. Research and development expense decreased by approximately $1.6 million during the nine months ended September 30, 2020, compared with the nine months ended September 30, 2019, due primarily to a decrease in personnel and consulting expenses.
Selling, general and administrative expense. Selling, general and administrative expense increased by approximately $2.2 million during the nine months ended September 30, 2020, compared with the nine months ended September 30, 2019, due primarily to an increase in personnel, consulting and insurance expenses and professional fees offset by a decrease in investor relations and travel expenses.
Restructuring Costs. During the nine months ended September 30, 2020, we incurred $0.3 million of restructuring charges related to the restructuring of Agri-Energy, termination of employees at Agri-Energy and Gevo and renegotiating contracts.
Interest expense. Interest expense during the nine months ended September 30, 2020 was $1.6 million, a decrease of $0.6 million compared to the nine months ended September 30, 2019, due to lower amortization of original issue discounts and debt issuance costs and conversion of $2.0 million of 2020/21 Notes to common stock during July 2020.
(Loss) from modification of 2020 Notes. During the nine months ended September 30, 2020, we incurred $0.7 million of legal and professional fees to modify the 2020 Notes into the 2020/21 Notes.
(Loss) on conversion of 2020/21 Notes to common stock. During the nine months ended September 30, 2020, we incurred a $0.5 million loss related to the conversion of $2.0 million of 2020/21 Notes into common stock during July 2020.
(Loss) gain from change in fair value of the 2020/21 Notes and 2020 Notes embedded derivative liability. During the nine months ended September 30, 2020, the estimated fair value of the 2020/21 Notes embedded derivative liability increased resulting in a non-cash loss of $0.03 million, primarily due to the revaluation of the embedded derivative liability as a result of the modification of the 2020 Notes.
Sources of Our Revenues
Our revenues are primarily derived from: (i) the sale of isobutanol, ethanol and related products; (ii) hydrocarbon sales consisting primarily of the sale of biojet fuel and isooctane derived from our isobutanol for purposes of certification and testing; and (iii) government grants and research and development programs. During the first quarter of 2020, we suspended our ethanol production at the Luverne Facility due to the impact of the COVID-19 pandemic on the economy and our industry as a whole. We do not anticipate earning revenue from the sale of ethanol during the remainder of 2020.
Principal Components of Our Cost Structure
Cost of Goods Sold. Our cost of goods sold consists primarily of costs directly associated with ethanol production and initial operations for the production of isobutanol 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 and maintenance operations at the Luverne Facility. Other operating costs include utilities and natural gas usage.
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.
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, 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 expenses and hiring expenses.
Interest Expense. Our 2020/21 Notes have, and the 2020 Notes had, a fixed interest rate of 12%. As of September 30, 2020, the 2020/21 Notes had a principal balance of $12.7 million. As of December 31, 2019, the 2020 Notes had a principal balance of $14.1 million.
Liquidity and Capital Resources
Since our inception in 2005, we have devoted most of our cash resources to manufacturing ethanol, isobutanol and related products, research and development and selling, general and administrative activities related to the commercialization of ethanol, isobutanol, as well as related products from renewable feedstocks. We have incurred losses since inception and expect to incur losses through at least 2021. 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 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 capabilities, 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.
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 expansion of the Luverne Facility or a Retrofit facility at other suitable locations. 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 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.
The Company has incurred consolidated net losses since inception and has a significant accumulated deficit as of September 30, 2020. As of
September 30, 2020, we had cash and cash equivalents totaling $80.6 million.
The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(14,581
|
)
|
|
$
|
(14,798
|
)
|
Net cash used in investing activities
|
|
$
|
(1,756
|
)
|
|
$
|
(7,260
|
)
|
Net cash provided by financing activities
|
|
$
|
80,656
|
|
|
$
|
9,268
|
|
Operating Activities
Our primary uses of cash from operating activities are personnel related expenses, research and development related expenses including costs incurred under development agreements, costs of licensing of technology, legal-related costs, expenses for maintenance of the Luverne Facility and for the operation of our South Hampton Facility.
During the nine months ended September 30, 2020, net cash used for operating activities was $14.6 million compared to $14.8 million for the nine months ended September 30, 2019. The $0.2 million decrease in operating cash flows was primarily due to reduced production at the Luverne Facility offset by increased engineering and development fees on our RNG projects.
During the first quarter of 2020, we suspended our ethanol production at the Luverne Facility due to COVID-19 and an unfavorable commodity environment, largely the result of greater corn costs as compared to national markets than the region has historically produced. We are currently maintaining the Luverne Facility until we arrange financing of its expansion for the production of hydrocarbons.
We currently plan to spend approximately $7 million - $10 million over the next 15 months for engineering and development costs related to the expansion of the Luverne Facility and our RNG projects. We expect that additional expenditures will be required during the next 15 months for engineering and development work related to the expansion of the Luverne Facility, the RNG projects and other business initiatives.
Investing Activities
During the nine months ended September 30, 2020, we used $1.8 million in cash for investing activities, substantially all of which related to capital expenditures at our Luverne Facility. We are installing equipment to fractionate distillers grains at the Luverne Facility totaling approximately $2.0 million as of September 30, 2020. The cost of the fractionation machine has been funded with a financing lease. No amounts are payable on this financing lease until the equipment is operational. The fractionation machine is expected to be operational in the first half of 2023.
We are developing an RNG project comprised of anaerobic digesters to be located at three dairy farms in northwest Iowa, plus associated gas upgrading equipment, to supply our Luverne Facility with renewable thermal energy upon its startup in 2023. We expect to finance the RNG project, including finance-related costs and initial working capital, with approximately $65 million of combined project finance debt and third-party equity. Agri-Energy is expected to have a purchase option on approximately 50% of the RNG project’s estimated annual 350,000 MMBtu of RNG production. The RNG project is expected to be operational in early 2022, subject to securing adequate financing to complete the RNG project.
Financing Activities
During the nine months ended September 30, 2020, we generated $80.7 million in cash from financing activities, which primarily consisted of $2.2 million of net proceeds under our "at-the-market" offering program, receiving $16.1 million from the sale of common stock and warrants in the July 2020 Offering, $45.8 million from the sale of common stock and pre-funded warrants in the August 2020 Offering, $16.6 million from the exercise of Series 2020-A Warrants, Series 2020-B Warrants and Series 2020-C Warrants, and $1.0 million from the Small Business Administration's Paycheck Protection Program (“SBA PPP”) discussed below, offset by $0.5 million paid on loans payable - other.
On July 6, 2020, we completed a public offering (the “July 2020 Offering”) of (i) 20,896,666 Series 1 units (the “Series 1 Units”) at a price of $0.60 per Series 1 Unit, and (ii) 9,103,334 Series 2 units (the “Series 2 Units”) at a price of $0.59 per Series 2 Unit. The net proceeds to us from the July 2020 Offering were approximately $16.1 million, after deducting placement agent fees and other estimated offering expenses payable by the Company, and not including any future proceeds from the exercise of the Warrants. The Company intends to use the net proceeds from the July 2020 Offering to fund working capital and for other general corporate purposes. See Note 1, Nature of Business, Financial Condition and Basis of Presentation, to our consolidated financial statements included herein for additional information regarding the July 2020 Offering. As of September 30, 2020, all of the Series 2020-B warrants were exercised.
During the quarter ended September 30, 2020, we received notices of exercise from holders of our Series 2020-A Warrants to issue an aggregate of 27,317,834 shares of common stock for total gross proceeds of approximately $16.4 million. Following these exercises, Series 2020-A Warrants to purchase 2,682,166 shares of our common stock remain outstanding at an exercise price of $0.60 per share.
On August 25, 2020, we completed a registered direct offering pursuant to a securities purchase agreement with certain institutional and accredited investors providing for the issuance and sale by us of an aggregate of (i) 21,929,313 shares of our common stock (the “Shares”) at a price of $1.30 per share, and (ii) 16,532,232 pre-funded Series 2020-C warrants to purchase one share of our common stock (each, a “Series 2020-C Warrant”) at a price of $1.29 per Series 2020-C Warrant, in a registered direct offering (the “August 2020 Offering”). The net proceeds from the August 202 Offering were approximately $45.8 million, after deducting placement agent fees and other estimated offering expenses. The Company intends to use the net proceeds from the August 2020 Offering to fund working capital and for other general corporate purposes. See Note 1, Nature of Business, Financial Condition and Basis of Presentation, to our consolidated financial statements included herein for additional information regarding the August 2020 Offering. As of September 30, 2020, all of the Series 2020-C warrants were exercised.
At-the-Market Offering Program. In February 2018, we commenced an at-the-market offering program, which allows us to sell and issue shares of our common stock from time-to-time. In August 2019, the at-the-market offering program was amended to provide available capacity under the at-the-market offering program of $10.7 million.
During the nine months ended September 30, 2020, we issued 1,343,121 shares of common stock under the at-the-market offering program for net proceeds of $2.2 million, net of commissions and offering related expenses. No shares were issued under the at-the-market offering program in the three months ended September 30, 2020. As of September 30, 2020, we had remaining capacity to issue up to $6.5 million of common stock under the at-the-market offering program.
Under current SEC rules and regulations, if the aggregate market value of our common stock held by non-affiliates, or public float, falls to less than $75 million (calculated as set forth in Form S-3 and SEC rules and regulations) at the time of filing of our next Annual Report on Form 10- K, the amount we can raise through primary public offerings of our securities in any twelve-month period using a registration statement on Form S- 3 will be limited to one-third of our public float.
2020/21 Notes. On January 10, 2020, the Company entered into an Exchange and Purchase Agreement (as amended, the “2020/21 Purchase Agreement”) with the guarantors party thereto (the "Guarantors"), the holder of the 2020 Notes and Whitebox Advisors LLC ("Whitebox"), in its capacity as representative of the holder. Pursuant to the terms of the 2020/21 Purchase Agreement, the holder of the 2020 Notes, subject to certain conditions, agreed to exchange all of the outstanding principal amount of the 2020 Notes, which was approximately $14.1 million including unpaid accrued interest, for approximately $14.4 million in aggregate principal amount of the Company's newly created 2020/21 Notes (the “2020/21 Exchange”). Pursuant to the 2020/21 Purchase Agreement, the Company also granted an option to purchase up to an additional aggregate principal amount of approximately $7.1 million of 2020/21 Notes (the “2020/21 Option Notes”), at a purchase price equal to the aggregate principal amount of such 2020/21 Option Notes purchased less an original issue discount of 2.0%, having identical terms (other than with respect to the issue date and restrictions on transfer relating to compliance with applicable securities law) to the 2020/21 Notes issued, at any time during the period beginning on the date of closing of the 2020/21 Exchange and ending on the later of (a) 180 days thereafter, and (b) 30 days following June 3, 2020. In addition, on January 10, 2020, the Company completed the 2020/21 Exchange and cancelled the 2020 Notes. In addition, the Company entered into an Indenture by and among the Company, the guarantors named therein (the “2020/21 Notes Guarantors”) and FSB, as trustee and as collateral trustee (the “Original Indenture”), as supplemented by that certain First Supplemental Indenture, dated as of April 7, 2020 (the “First Supplemental Indenture”), that certain Second Supplemental Indenture, dated as of July 2, 2020 (the “Second Supplemental Indenture”), and that certain Third Supplemental Indenture, dated as of August 24, 2020 (the “Third Supplemental Indenture” and, together with the Original Indenture, the First Supplemental Indenture and the Second Supplemental Indenture, the “2020/21 Notes Indenture”), pursuant to which the Company issued the 2020/21 Notes. During the nine months ended September 30, 2020, the Company recognized an approximately $0.7 million loss on the 2020/21 Exchange within the Consolidated Statements of Operations.
The 2020/21 Notes will mature on December 31, 2020, provided that the maturity date will automatically be extended to April 1, 2021 if the aggregate outstanding principal balance of the 2020/21 Notes (including any 2020/21 Option Notes) as of December 15, 2020 is less than $7 million. The 2020/21 Notes bear interest at a rate equal to 12% per annum (with 4% potentially payable as PIK Interest (as defined 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 2020/21 Notes by either (a) increasing the principal amount of the 2020/21 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 2020/21 Notes are convertible into shares of our common stock, subject to certain terms and conditions. The initial conversion price of the 2020/21 Notes is equal to $2.442 per share of common stock, or 0.4095 shares of common stock per $1 principal amount of 2020 Notes.
On July 10, 2020, certain holders of the 2020/21 Notes converted $2.0 million in the aggregate principal amount of 2020/21 Notes (including the conversion of an additional $0.3 million for make-whole payment) into 4,169,428 shares of common stock pursuant to the terms of the indenture. There was $12.5 million principal outstanding for the 2020/21 Notes upon completion of the conversion of the 2020/21 Notes.
See Note 9, Debt, to our consolidated financial statements included herein for further discussion of the 2020/21 Notes.
Loans Payable - Other. During the first quarter of 2020, we purchased equipment under a financing lease. During the fourth quarter of 2019, we financed part of our insurance obligation. The equipment notes and financing lease pay interest between 4% and 21%, have total monthly payments of $0.1 million and mature at various date from August 2020 to February 2025. The equipment loans are secured by the related equipment.
The rapidly evolving changes in financial markets could have a material impact on our ability to obtain financing, which could impact our liquidity. In April 2020, we entered into two loan agreements with Live Oak Banking Company, pursuant to which we obtained two loans from the Small Business Administration's Paycheck Protection Program (“SBA PPP”) totaling $1.0 million in the aggregate (the "SBA Loans"). The SBA Loans will mature in April 2022 and bear interest at a rate equal to 1% per annum, subject to the potential for partial or full loan forgiveness as dictated by U.S. federal law. Principal and interest are deferred until August 2021 and interest continues to accrue during the deferral period. The SBA Loans are payable monthly beginning August 5, 2021, with aggregate payments totaling $0.06 million per month, including interest and principal. The SBA Loans must be used for payroll, rent payments, mortgage interest payments and utilities payments as governed by the SBA PPP and are subject to partial or full forgiveness for the initial 24-week period following the loan disbursement if all proceeds are used for eligible purposes and within certain thresholds, we maintain certain employment levels and the we maintain certain compensation levels. No assurance can be given that we will obtain forgiveness of the loan in whole or in part. The loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the lender or breaching the terms of the loan documents.
See Note 9, Debt, to our consolidated financial statements included herein for further discussion.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies since December 31, 2019. 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.
Off-Balance Sheet Arrangements
As of September 30, 2020, we did not have any material off-balance sheet arrangements.