Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

---

 

FORM 10-Q

 

---

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

For the transition period from ________________ to ________________

 

Commission File Number 001-35073

 

---

 

GEVO, INC.

(Exact name of registrant as specified in its charter)

 

---

 

Delaware		87-0747704
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

 

 

345 Inverness Drive South, Building C, Suite 310 Englewood, CO		80112
(Address of principal executive offices)		(Zip Code)

 

(303) 858-8358

(Registrant's telephone number,

including area code)

 

---

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	GEVO	Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☒
				Emerging growth company		☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of October 30, 2020, 119,628,203 shares of the registrant’s common stock were outstanding.

 

---

---

 

 

 

GEVO, INC.

 

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS

 

		Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019	3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (unaudited)	4
	Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43
	Signatures	46

 

 

 

		September 30, 2020 (unaudited)				December 31, 2019
Assets
Current assets:
Cash and cash equivalents		$	80,621			$	16,302
Accounts receivable			370				1,135
Inventories			2,551				3,201
Prepaid expenses and other current assets			4,614				3,590
Total current assets			88,156				24,228
Property, plant and equipment, net			63,324				66,696
Investment in Juhl			1,500				1,500
Deposits and other assets			507				935
Total assets		$	153,487			$	93,359
Liabilities
Current liabilities:
Accounts payable and accrued liabilities		$	4,904			$	5,678
2020/21 Notes (current), net			12,506				—
2020 Notes (current), net			—				13,900
2020/21 Notes embedded derivative liability			29				—
Loans payable - other (current)			704				516
Total current liabilities			18,143				20,094
Loans payable - other (long-term)			583				233
Other long-term liabilities			172				528
Total liabilities			18,898				20,855
Commitments and Contingencies (see Note 12)
Stockholders' Equity
Common stock, $0.01 par value per share; 250,000,000 authorized; 119,578,203 and 14,083,232 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.			1,196				141
Additional paid-in capital			613,511				530,349
Accumulated deficit			(480,118	)			(457,986	)
Total stockholders' equity			134,589				72,504
Total liabilities and stockholders' equity		$	153,487			$	93,359

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
Revenue and cost of goods sold
Ethanol sales and related products, net		$	21			$	5,554			$	3,804			$	16,184
Hydrocarbon revenue			101				550				1,085				1,381
Other revenue			70				6				116				34
Total revenues			192				6,110				5,005				17,599
Cost of goods sold			2,260				9,893				13,043				27,306
Gross loss			(2,068	)			(3,783	)			(8,038	)			(9,707	)
Operating expenses
Research and development expense			870				1,789				2,127				3,712
Selling, general and administrative expense			3,215				2,431				8,917				6,705
Restructuring expenses			(50	)			—				254				—
Total operating expenses			4,035				4,220				11,298				10,417
Loss from operations			(6,103	)			(8,003	)			(19,336	)			(20,124	)
Other income (expense)
Interest expense			(473	)			(605	)			(1,559	)			(2,127	)
(Loss) on modification of 2020 Notes			—				—				(726	)			—
(Loss) on conversion of 2020/21 Notes to common stock			(543	)			—				(543	)			—
(Loss) gain from change in fair value of derivative warrant liability			—				(2	)			8				1
Gain (loss) from change in fair value of 2020/21 Notes and 2020 Notes embedded derivative liability			247				—				(29	)			394
Other income (expense)			36				(9	)			53				11
Total other income (expense), net			(733	)			(616	)			(2,796	)			(1,721	)
Net loss		$	(6,836	)		$	(8,619	)		$	(22,132	)		$	(21,845	)
Net loss per share - basic and diluted		$	(0.09	)		$	(0.66	)		$	(0.62	)		$	(1.87	)
Weighted-average number of common shares outstanding - basic and diluted			77,049,896				12,968,265				35,682,794				11,679,530

 

		Common Stock								Paid-In				Accumulated				Stockholders’
		Shares				Amount				Capital				Deficit				Equity
Balance, December 31, 2019			14,083,232			$	141			$	530,349			$	(457,986	)		$	72,504
Issuance of common stock, net of issue costs			425,776				4				902				—				906
Non-cash stock-based compensation			—				—				336				—				336
Issuance of common stock under stock plans, net of taxes			105,882				—				—				—				—
Net loss			—				—				—				(9,253	)			(9,253	)
Balance, March 31, 2020			14,614,890				145				531,587				(467,239	)			64,493
Issuance of common stock, net of issue costs			917,345				9				1,238				—				1,247
Non-cash stock-based compensation			—				—				497				—				497
Issuance of common stock under stock plans, net of taxes			(18,137	)			—				(307	)			—				(307	)
Net loss			—				—				—				(6,043	)			(6,043	)
Balance, June 30, 2020			15,514,098				154				533,015				(473,282	)			59,887
Issuance of common stock and common stock warrants, net of issue costs			42,772,687				428				61,265				—				61,693
Issuance of common stock upon exercise of warrants			52,953,400				530				16,117				—				16,647
Issuance of common stock upon conversion of 2020/21 Notes			4,169,426				42				2,441				—				2,483
Issuance of common stock in exchange for services rendered			101,730				1				93				—				94
Non-cash stock-based compensation			—				—				642				—				642
Issuance of common stock under stock plans, net of taxes			4,066,862				41				(62	)			—				(21	)
Net loss			—				—				—				(6,836	)			(6,836	)
Balance, September 30, 2020			119,578,203			$	1,196			$	613,511			$	(480,118	)		$	134,589
Balance, December 31, 2018			8,640,583			$	86			$	518,027			$	(429,326	)		$	88,787
Issuance of common stock, net of issue costs			3,244,941				33				9,611				—				9,644
Non-cash stock-based compensation			—				—				234				—				234
Net loss			—				—				—				(6,136	)			(6,136	)
Balance, March 31, 2019			11,885,524				119				527,872				(435,462)				92,529
Issuance of common stock, net of issue costs			—				—				(14	)			—				(14	)
Non-cash stock-based compensation			—				—				172				—				172
Net loss			—				—				—				(7,090	)			(7,090	)
Balance, June 30, 2019			11,885,524				119				528,030				(442,552)				85,597
Issuance of common stock, net of issue costs			—				—				(161	)			—				(161	)
Non-cash stock-based compensation			—				—				304				—				304
Issuance of common stock under stock plans, net of taxes			1,483,477				14				(215	)			—				(201	)
Net loss			—				—				—				(8,619	)			(8,619	)
Balance, September 30, 2019			13,369,001			$	133			$	527,958			$	(451,171	)		$	76,920

 

		Nine Months Ended September 30,
		2020				2019
Operating Activities
Net loss		$	(22,132	)		$	(21,845	)
Adjustments to reconcile net loss to net cash used in operating activities:
(Gain) from change in fair value of derivative warrant liability			(8	)			(1	)
Loss (gain) from change in fair value of 2020/21 Notes and 2020 Notes embedded derivative liability			29				(394	)
Loss on conversion of 2020/21 Notes to common stock			543				—
Loss (gain) on retirement of property, plant and equipment			38				(19	)
Stock-based compensation			1,347				938
Depreciation and amortization			4,754				4,849
Non-cash lease expense			45				25
Non-cash interest expense			606				1,089
Other non-cash expense			—				1
Changes in operating assets and liabilities:
Accounts receivable			765				148
Inventories			650				204
Prepaid expenses and other current assets, deposits and other assets			(613	)			(23	)
Accounts payable, accrued expenses and long-term liabilities			(605	)			230
Net cash used in operating activities			(14,581	)			(14,798	)
Investing Activities
Acquisitions of property, plant and equipment			(1,756)				(5,779	)
Proceeds from sale of property, plant and equipment			—				19
Investment in Juhl			—				(1,500	)
Net cash used in investing activities			(1,756	)			(7,260	)
Financing Activities
Proceeds from SBA loans			1,006				—
Debt and equity offering costs			(6,170	)			(178	)
Proceeds from issuance of common stock and common stock warrants			69,985				9,647
Proceeds from exercise of warrants			16,647				—
Net settlement of common stock under stock plans			(331	)			(201	)
Payment of loans payable - other			(481	)			—
Net cash provided by financing activities			80,656				9,268
Net increase (decrease) in cash and cash equivalents			64,319				(12,790	)
Cash and cash equivalents
Beginning of period			16,302				33,734
End of period		$	80,621			$	20,944

Supplemental disclosures of cash and non-cash investing and financing transactions		Nine Months Ended September 30,
		2020				2019
Cash paid for interest		$	953			$	1,038
Non-cash purchase of property, plant and equipment		$	2			$	41
Issuance of common stock upon exchange of debt and make-whole		$	2,517			$	—
Issuance of common stock in exchange for services rendered		$	94			$	—
Original issue discount paid with 2020/21 Notes		$	282			$	—
Right-of-use asset purchased with financing lease		$	13			$	—

 

1. Nature of Business, Financial Condition and Basis of Presentation

 

Nature of Business.  Gevo, Inc. (“Gevo” or the “Company,” which, unless otherwise indicated, refers to Gevo, Inc. and its subsidiaries) is a 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, Gevo’s 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, Gevo’s renewable fuels eliminate other pollutants associated with the burning of traditional fossil fuels such as particulates and sulfur, while delivering superior performance.

 

Gevo uses low-carbon, renewable resource-based raw materials as feedstock. In the near-term, Gevo’s feedstocks will primarily consist of non-food corn. As Gevo’s technology is applied globally, feedstocks can consist of sugar cane, molasses or other cellulosic sugars derived from wood, agricultural residues and waste. Gevo’s 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 Gevo’s fundamental strategy, serves as a building block to make renewable isooctane (which we refer to as a renewable premium gasoline) and renewable jet fuel using simple and common chemical conversion processes. Gevo also reduces or eliminates fossil-based process energy inputs by replacing them with renewable energy such as wind-powered electricity and renewable natural gas (“RNG”).

 

Ultimately, the Company believes that the attainment of profitable operations is dependent upon future events, including (i) completing certain capital improvements at the Company’s production facility located in Luverne, Minnesota (the "Luverne Facility") to increase the production capacity of renewable gasoline and jet fuel and other related products that can be made from isobutanol; (ii) completing the Company's development activities resulting in commercial production and sales of renewable hydrocarbon products; (iii) obtaining adequate financing to complete the Company's development activities, including the build out of isobutanol and renewable hydrocarbon capacity; (iv) gaining market acceptance and demand for the Company's products and services; (v) attracting and retaining qualified personnel; and (vi) achieving a level of revenues adequate to support the Company's cost structure.

 

COVID-19.  The novel coronavirus ("COVID-19") pandemic has had an adverse impact on global commercial activity, including the global transportation industry and its supply chain and has contributed to significant volatility in the financial markets. In light of the current and potential future disruption to the Company's business operations and those of its customers, suppliers and other third parties with whom the Company does business, the Company considered the impact of the COVID-19 pandemic on its business. This analysis considered the Company's resilience and continuity plans, financial modeling and stress testing of liquidity and financial resources.

 

The Company expects that the impact of the COVID-19 pandemic on general economic activity could negatively impact its revenue and operating results for at least the remainder of 2020 and beyond. The suspension of ethanol production at the Company's Luverne Facility and reduction in the Company's workforce during the first quarter of 2020 due to the impact of COVID-19 had an adverse impact on the Company’s financial results for the third quarter of 2020 reducing revenue by 97% compared to the same period in 2019. The Company expects that the suspension of ethanol production at the Luverne Facility and reduction in workforce will allow it to continue to reduce its cash burn during 2020.

 

With many of the Company’s employees working remotely, the Company faces the risk that unusual working arrangements could impact the effectiveness of its operations or controls. A potential COVID-19 infection of any of its key employees could materially and adversely impact its operations. In addition, it is possible that COVID-19 restrictions could create difficulty for satisfying the Company’s legal or regulatory filing or other obligations, including with the SEC and other regulators.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

There is also a risk that the COVID-19 pandemic could continue to have a material adverse impact on customer demand and cash flow for the remainder of 2020 and beyond. The Company will continue to monitor the situation and assess possible implications to the Company's business and its stakeholders and will take appropriate actions to help mitigate adverse consequences. The extent to which COVID-19 continues to impact the Company's 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.

 

The Company has considered multiple scenarios, with both positive and negative inputs, as part of the significant estimates and assumptions that are inherent in its 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 the Company operates. These estimates and assumptions include the collectability of billed and unbilled receivables and the estimation of revenue and tangible and intangible assets. With regard to collectability, the Company believes it may face atypical delays in client payments going forward but the Company has not experienced delays in collection as of September 30, 2020. In addition, management believes that the demand for certain discretionary lines of business may decrease, and that such decrease will impact its 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 renewable alcohol-to-jet fuel (“ATJ”), isooctane and isooctene. The Company believes 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, the Company's Chief Executive Officer, Christopher M. Ryan, the Company's President, Chief Operating Officer and Chief Technology Officer, L. Lynn Smull, the Company's Chief Financial Officer, Timothy J. Cesarek, the Company's Chief Commercial Officer, Geoffrey T. Williams, Jr., the Company's General Counsel and Secretary, and Carolyn M. Romero, the Company's Vice President - Controller and Principal Accounting Officer (collectively, the “Officers”) accepted 20% reductions to their base salaries. These reductions became effective as of April 1, 2020 and continued until July 31, 2020. In connection with the 20% salary reduction, the Officers were granted Company common 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 through July 31, 2020, with the 20% portion to be paid in the form of restricted stock awards.

 

New Contracts. As previously disclosed, Gevo and Praj Industries Ltd. (“Praj”) entered into a Construction License Agreement (“CLA”) effective April 4, 2019, a Joint Development Agreement, effective as of April 1, 2018 (as amended, the “Feedstock JDA”) and a Development License Agreement, effective as of April 1, 2018. On August 13, 2020, the Company and Praj entered into a Master Framework Agreement (the “MFA”) to collaborate on providing renewable jet fuel and premium gasoline in India and neighboring countries which replaced the CLA.

 

Pursuant to the licenses granted by the Company to Praj under the MFA, Praj has exclusive rights to cause the Company 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). 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.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The Company will receive certain finder’s fees as set forth in the MFA to the extent one of the Company’s 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 contains customary representations, warranties and covenants, indemnification provisions and other terms. The MFA will continue in effect for 10 years, unless earlier terminated by either party as set forth in the MFA, and automatically renews for additional one year terms until terminated or either party provides at least 30 days’ notice prior to the end of the current term. 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, Gevo entered into a Renewable Hydrocarbons Purchase and Sale Agreement (the “Agreement”) with Trafigura Trading LLC (“Trafigura”), whereby the Company 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.

 

If the Company does 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 the Company plans 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, the Company securing initial financing for the construction of the Production Facility, and the Company having entered into engineering, procurement, and construction agreements for the construction of the Production Facility, in form and substance reasonably satisfactory to the Company.

 

Subject to the satisfaction or waiver of all of the Conditions Precedent, the Company is 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 the Company will be required to pay Trafigura certain liquidated damages.

 

Restructuring Expenses. During the first quarter of 2020, the Company suspended its ethanol production at the Luverne Facility. In addition, due to the impact of the COVID-19 pandemic on the global economy and the Company’s industry, in March 2020, the Company reduced its workforce, impacting 26 people at the Luverne Facility and four people at the Company's corporate headquarters. Affected employees were offered a severance package which included a one-time payment, one month of health insurance and acceleration of vesting for any unvested restricted stock awards.

 

The Company incurred $0.1 million related to severance costs and $0.2 million related to lease agreements for which it 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. Restructuring expense totaled $0.02 million and $0.3 million for Gevo and Gevo Development/Agri-Energy segments, respectively, during the nine months ended September 30, 2020.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The Company intends to continue developing its hydrocarbon business, including the planned expansion of the Luverne Facility, and the Company expects to move forward in securing the project funding needed to expand the Luverne Facility. The expansion is designed to allow the Company to produce large quantities of low carbon isobutanol, sustainable aviation fuel and renewable isooctane. The Company also expects 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.

 

As of September 30, 2020, the Company had the following liabilities outstanding related to the restructuring expenses included in "Accounts payable and accrued liabilities" in the Consolidated Balance Sheets:

 

 

 

Financial Condition. The Company has incurred consolidated net losses since inception and had a significant accumulated deficit as of September 30, 2020. The Company’s cash and cash equivalents as of September 30, 2020 totaled $80.6 million and are expected to be used for the following purposes: (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 projects associated with the Company's RNG projects; (v) exploration of strategic alternatives and additional financings, including project financing; and (vi) debt service obligations.

 

The Company expects to incur future net losses as it continues to fund the development and commercialization of its product candidates. To date, the Company has financed its operations primarily with proceeds from issuance of equity and debt securities, borrowings under debt facilities and product sales. The Company’s transition to profitability is dependent upon, among other things, the successful development and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability or positive cash flows, and unless and until it does, the Company will continue to need to raise additional capital. Management intends to fund future operations through additional private and/or public offerings of debt or equity securities. In addition, the Company may seek additional capital through arrangements with strategic partners or from other sources, and it will continue to address its cost structure. Notwithstanding, there can be no assurance that the Company will be able to raise additional funds or achieve or sustain profitability or positive cash flows from operations.

 

July 2020 Offering. On July 6, 2020, Gevo 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 the Company’s common stock and one Series 2020-A warrant to purchase one share of the Company’s 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 the Company’s 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.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The net proceeds to the Company from the July 2020 Offering were approximately $16.1 million, after deducting placement agent fees and other 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.

 

During the three months ended September 30, 2020, the Company 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 the Company's common stock remain outstanding at an exercise price of $0.60 per share.

 

August 2020 Offering. On August 25, 2020, the Company completed a registered direct offering pursuant to a securities purchase agreement with certain institutional and accredited investors providing for the issuance and sale by the Company of an aggregate of (i) 21,929,313 shares of the Company’s 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 the Company’s 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 pre-funded Series 2020-C 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-C Warrants are exercised in full.  As of September 30, 2020, all of the Series 2020-C Warrants were exercised.

 

The net proceeds to the Company from the August 2020 Offering were approximately $45.8 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 August 2020 Offering to fund working capital and for other general corporate purposes.

 

The Company evaluated the Series 2020-A, Series 2020-B and Series 2020-C Warrants for liability or equity classification in accordance with the provisions of Accounting Standards Codification 480, Distinguishing Liabilities from Equity, and determined that equity treatment was appropriate because neither the Series 2020-A, Series 2020-B or Series 2020-C Warrants met the definition of liability instruments.

 

The Warrants are classified as component of permanent equity because they are freestanding financial instruments that are legally detachable and separately exercisable from the shares of common stock with which they were issued, are immediately exercisable, do not embody an obligation for the Company to repurchase its shares, and permit the holders to receive a fixed number of shares of common stock upon exercise. In addition, the Warrants do not provide any guarantee of value or return. The Company valued the Series 2020-A, Series 2020-B and Series 2020-C Warrants at issuance using the Black-Scholes option pricing model and determined the fair value of the Series 2020-A, Series 2020-B and Series 2020-C Warrants to purchase the Company’s common stock at $8.3 million, $2.9 million and $21.4 million, respectively. The key inputs to the valuation model included a weighted average volatility of 130% to 141%, risk-free rate of 0.30% to 0.31% and an expected term of five years.

 

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. The Company recorded a Loss on conversion of 2020/21 Notes of $0.5 million on its Consolidated Statements of Operations.

 

At-the-Market Offering Program. In February 2018, the Company 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, the Company 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, the Company has remaining capacity to issue up to approximately $6.5 million of common stock under the at-the-market offering program.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Basis of Presentation. The unaudited consolidated financial statements of the Company (which include the accounts of its wholly-owned subsidiaries Gevo Development, LLC (“Gevo Development”) and Agri-Energy, LLC (“Agri-Energy”)) have been prepared, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company at September 30, 2020 and are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included under the heading “Financial Statements and Supplementary Data” in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Income Taxes. There is no provision for income taxes because the Company has incurred operating losses since inception.

 

Concentration of Business Risk. As of September 30, 2020, four customers, Coryton Advanced Fuels Ltd ("Coryton"), Total Petrochemicals & Refining USA, Inc. ("Total"), Eco-Energy, LLC ("Eco-Energy") and World Kinect Energy Services (" Kinect"), comprised approximately 27%, 20%, 14% and 12% of the Company's outstanding trade accounts receivable, respectively. As of December 31, 2019, three customers, Eco-Energy, Purina Animal Nutrition, LLC ("Purina"), and HCS Group GmbH ("HCS") comprised 57%, 13% and 15% of the Company's outstanding trade accounts receivable, respectively.

 

For the three months ended September 30, 2020, Coryton and Total accounted for approximately 52% and 39% of the Company's consolidated revenue, respectively. For the three months ended September 30, 2019, Eco-Energy and Purina represented approximately 73% and 16% of the Company's consolidated revenue, respectively. For the nine months ended September 30, 2020, Eco-Energy, Purina and HCS accounted for approximately 57%, 17% and 15% of the Company's consolidated revenue, respectively. For the nine months ended September 30, 2019, Eco-Energy and Purina accounted for approximately 73% and 16% of the Company's consolidated revenue, respectively. HCS, Coryton and Total Cray Valley are customers of the Company's Gevo segment. Eco-Energy and Purina are customers of the Company's Gevo Development/Agri-Energy segment (see Note 14).

 

Related Party Transaction. During the nine months ended September 30, 2020, Gevo paid Blocksize Capital GmbH ("Blocksize"), a company in which a director of Gevo has an indirect ownership interest, $0.1 million for block chain software development services. There were no amounts payable to Blocksize as of September 30, 2020.

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

2. Earnings Per Share

 

Basic earnings (loss) per share is computed by dividing the net loss for the period by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share (“EPS”) includes the dilutive effect of common stock equivalents and is computed using the weighted-average number of common stock and common stock equivalents outstanding during the reporting period. Diluted EPS for the three and nine months ended September 30, 2020 and 2019 excluded common stock equivalents because the effect of their inclusion would be anti-dilutive or would decrease the reported loss per share.

 

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

 

 

 

 

3. Revenues from Contracts with Customers and Other Revenues

 

The Company’s current and historical revenues have consisted of the following: (a) ethanol sales and related products revenue, net; (b) hydrocarbon revenue; and (c) grant and other revenue, which primarily has historically consisted of revenues from governmental and cooperative research grants.

 

Ethanol sales and related products revenues. Ethanol sales and related products revenues are sold to customers on a free-on-board, shipping point basis. Revenue is recognized when the customer has control of the product. Each transaction occurs independent of any other sale, and once sold, there are no future obligations on the part of the Company to provide post-sale support or promises to deliver future goods or services.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Hydrocarbon revenue. Hydrocarbon revenues include sales of ATJ, isooctene and isooctane and is sold mostly on a free-on-board, shipping point basis. Revenue is recognized when the customer has control of the product. Each transaction occurs independent of any other sale, and once sold, there are no future obligations on the part of the Company to provide post-sale support or promises to deliver future goods or services.

 

The following table sets forth the components of the Company’s revenues between those generated from contracts with customers and those generated from arrangements that do not constitute a contract with a customer (in thousands):

 

 

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

Goods transferred at a point-in-time. For the three and nine months ended September 30, 2020 and 2019, there were no contracts with customers for which consideration was variable or for which there were multiple performance obligations for any given contract. Accordingly, the entire transaction price is allocated to the goods transferred. As of September 30, 2020 and December 31, 2019, there were no remaining unfulfilled or partially fulfilled performance obligations.

 

All goods transferred are tested to ensure product sold satisfies contractual product specifications prior to transfer. The customer obtains control of the goods when title and risk of loss for the goods has transferred, which in most cases is “free-on-board, shipping point”. All material contracts have payment terms of between one to three months and there are no return or refund rights.

 

Services transferred over time. For the three and nine months ended September 30, 2020 and 2019, there were no contracts for which consideration was variable or for which there were multiple performance obligation for any given contract. Accordingly, the entire transaction price is allocated to the individual service performance obligation. As of September 30, 2020 and December 31, 2019, respectively, there were no material unfulfilled or partially fulfilled performance obligations.

 

Contract Assets and Trade Receivables. As of September 30, 2020 and December 31, 2019, there were no contract assets or liabilities as all customer amounts owed to the Company are unconditional and the Company does not receive payment in advance for its products. Accordingly, amounts owed by customers are classified as account receivables on the Company’s Consolidated Balance Sheets. In addition, due to the nature of the Company’s contracts, there are no costs incurred or to be paid in the future that qualify for asset recognition as a cost to fulfill or obtain a contract as of September 30, 2020 and December 31, 2019. The Company did not incur any impairment losses on any receivables as all amounts owed were paid or current as of September 30, 2020 or December 31, 2019.

 

 

4. Leases, Right-to-Use Assets and Related Liabilities

 

The Company enters into various arrangements which constitute a lease as defined by Accounting Standards Codification ("ASC") 842, Leases, as part of its ongoing business activities and operations. Leases represent a contract or part of a contract that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. Such contracts result in both (a) right-to-use assets, which represent the Company’s right to use an underlying asset for the term of the contract; and (b) a corresponding lease liability which represents the Company’s obligation to make the lease payments arising from the contract, measured on a discounted basis.

 

The contracts for the Company are comprised of facility, equipment and transportation leases necessary to conduct the Company’s day-to-day operations for which the Company maintains control of right-to-use assets and incurs the related liabilities. The facility lease includes variable payments for common area maintenance. In addition, the Company has one financing lease for certain office equipment which is included in "Loans payable - other" on the Consolidated Balance Sheets.

 

There is one contractual agreement related to equipment improvements at the Luverne Facility that was not recognized as of September 30, 2020 as a result of operating contingencies which must be satisfied before the Company is obligated under the terms of the contract. The total estimated fair value of unrecognized right-to-use asset and related lease liability relating to this contract was approximately $2.0 million as of September 30, 2020. There are two contractual agreements related to equipment improvements at the Luverne Facility that were not recognized as of December 31, 2019 as a result of operating contingencies which must be satisfied before the Company is obligated under the terms of the contract. The total estimated fair value of unrecognized right-to-use assets and related lease liabilities relating to these contracts was approximately $3.0 million as of December 31, 2019.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

The following table presents the (a) costs by lease category and (b) other quantitative information relating to the Company’s leases (dollars in thousands):

 

 

 

The table below shows the future minimum payments under non-cancelable financing and operating leases at September 30, 2020 (in thousands):

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

5. Inventories

 

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

 

 

Work in process inventory includes unfinished jet fuel, isooctane and isooctene inventory.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

6. Property, Plant and Equipment

 

The following table sets forth the Company’s property, plant and equipment by classification (in thousands):

 

 

The Company recorded depreciation and amortization expense related to property, plant and equipment as follows (in thousands):

 

 

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

7. Embedded Derivatives Liabilities 

 

2020 Notes Embedded Derivative

 

In June 2017, the Company issued its 12% convertible senior secured notes due 2020 (the “2020 Notes”) in exchange for its 12.0% convertible senior secured notes due 2017 (the “2017 Notes”). The 2020 Notes contained the following embedded derivatives: (i) a Make-Whole Payment (as defined in the indenture governing the 2020 Notes (the “2020 Notes Indenture”)) upon either conversion or redemption; (ii) right to redeem the outstanding principal upon a Fundamental Change (as defined in the 2020 Notes Indenture); (iii) issuer rights to convert into a limited number of shares in any given three-month period commencing nine months from the issuance date and dependent on the stock price exceeding 150% of the then in-effect conversion price over a ten-business day period; and (iv) holder rights to convert into either shares of the Company’s common stock or pre-funded warrants upon the election of the holders of the 2020 Notes.

 

Embedded derivatives are separated from the host contract and the 2020 Notes and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. The Company has concluded that certain embedded derivatives within the 2020 Notes meet these criteria and, as such, must be valued separate and apart from the 2020 Notes as one embedded derivative and recorded at fair value each reporting period.

 

The Company used a binomial lattice model in order to estimate the fair value of the embedded derivative in the 2020 Notes. A binomial lattice model generates two probable outcomes, whether up or down, arising at each point in time, starting from the date of valuation until the maturity date. A lattice was initially used to determine if the 2020 Notes would be converted by the holder, called by the issuer, or held at each decision point. Within the lattice model, the following assumptions were made: (i) the 2020 Notes will be converted by the holder if the conversion value plus the holder’s Make-Whole Payment is greater than the holding value; or (ii) the 2020 Notes will be called by the issuer if (a) the stock price exceeds 150% of the then in-effect conversion price over a ten-business day period and (b) if the holding value is greater than the conversion value plus the Make-Whole Payment at the time.

 

Using this lattice model, the Company valued the embedded derivative using a “with-and-without method”, where the value of the 2020 Notes including the embedded derivative were defined as the “with”, and the value of the 2020 Notes excluding the embedded derivative is defined as the “without”. This method estimates the value of the embedded derivative by comparing the difference in the values between the 2020 Notes with the embedded derivative and the value of the 2020 Notes without the embedded derivative. The lattice model requires the following inputs: (i) price of Gevo common stock; (ii) Conversion Rate (as defined in the 2020 Notes Indenture); (iii) Conversion Price (as defined in the 2020 Notes Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated stock volatility; and (vii) estimated credit spread for the Company.

 

2020/21 Notes Embedded Derivative

 

In January 2020, the Company issued 12% convertible senior secured notes due 2020/2021 (the “2020/21 Notes”) in exchange for its 12.0% convertible senior secured notes due March 2020 (the “2020 Notes”). The 2020/21 Notes contain the following embedded derivatives: (i) a Make-Whole Payment (as defined in the 2020/21 Notes Indenture (as defined below) upon either conversion or redemption in certain circumstances; (ii) holder right to require the Company to repurchase the outstanding principal upon a Fundamental Change (as defined in the 2020/21 Notes Indenture); and (iii) holder rights to convert into either shares of the Company’s common stock or pre-funded warrants upon the election of the holders of the 2020/21 Notes.

 

Embedded derivatives are separated from the host contract and the 2020/21 Notes, and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. The Company has concluded that certain embedded derivatives within the 2020/21 Notes meet these criteria and, as such, must be valued separate and apart from the 2020/21 Notes as one embedded derivative and recorded at fair value each reporting period.

 

 

Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the embedded featured within the 2020/21 Notes and 2020 Notes. For example, the estimated fair value will generally decrease with: (1) a decline in the stock price; (2) decreases in the estimated stock volatility; and (3) a decrease in the estimated credit spread.

 

Derivative Warrant Liability

 

The following warrants were sold by the Company during the nine months ended September 30, 2020:

 

•

In July 2020, the Company sold Series 2020-A Warrants to purchase 30,000,000 shares of the Company's common stock and Series 2020-B Warrants to purchase 9,103,334 shares of the Company's common stock, pursuant to an underwritten public offering.

 

•

In August 2020, the Company sold Series 2020-C Warrants to purchase 16,532,232 shares of the Company's common stock, pursuant to a registered direct offering.

 

The following table sets forth information pertaining to shares issued upon the exercise of such warrants as of September 30, 2020:

 

(1)   The Series 2020-A, Series 2020-B and Series 2020-C Warrants are equity-classified warrants.

 

 

The agreements governing the above warrants include the following terms:

 

•

certain warrants have exercise prices which are subject to adjustment for certain events, including the issuance of stock dividends on the Company’s common stock and, in certain instances, the issuance of the Company’s common stock or instruments convertible into the Company’s common stock at a price per share less than the exercise price of the respective warrants;

 

•

warrant holders may exercise the warrants through a cashless exercise if, and only if, the Company does not have an effective registration statement then available for the issuance of the shares of its common stock. If an effective registration statement is available for the issuance of its common stock a holder may only exercise the warrants through a cash exercise;

 

•

the exercise price and the number and type of securities purchasable upon exercise of the warrants are subject to adjustment upon certain corporate events, including certain combinations, consolidations, liquidations, mergers, recapitalizations, reclassifications, reorganizations, stock dividends and stock splits, a sale of all or substantially all of the Company’s assets and certain other events; and

 

•

in the event of an “extraordinary transaction” or a “fundamental transaction” (as such terms are defined in the respective warrant agreements), generally including any merger with or into another entity, sale of all or substantially all of the Company’s assets, tender offer or exchange offer, or reclassification of its common stock, in which the successor entity (as defined in the respective warrant agreements) that assumes the successor entity is not a publicly traded company, the Company or any successor entity will pay the warrant holder, at such holder’s option, exercisable at any time concurrently with or within 30 days after the consummation of the extraordinary transaction or fundamental transaction, an amount of cash equal to the value of such holder’s warrants as determined in accordance with the Black-Scholes option pricing model and the terms of the respective warrant agreement. In some circumstances, the Company or successor entity may be obligated to make such payments regardless of whether the successor entity that assumes the warrants is a publicly traded company.

 

During the three months ended September 30, 2020, common stock was issued as a result of exercise of warrants as described below (dollars in thousands):

 

 

 

8. Accounts Payable and Accrued Liabilities

 

The following table sets forth the components of the Company’s accounts payable and accrued liabilities in the consolidated balance sheets (in thousands):

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

9. Debt

 

2020 Notes and 2020/21 Notes

 

The following table sets forth information pertaining to the 2020 Notes and 2020/21 Notes which are included in the Company’s consolidated balance sheets (in thousands):

 

 

On June 20, 2017, the Company issued the 2020 Notes in exchange for its 12.0% convertible senior secured notes due 2017 (the "2017 Notes"), plus an amount in cash equal to the accrued and unpaid interest. The 2020 Notes had a maturity date of March 15, 2020 and were secured by a first lien on substantially all of our assets. The 2020 Notes had an interest 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. To the extent that the Company paid any portion of the interest due on the 2020 Notes as PIK Interest, the maximum aggregate principal amount of the 2020 Notes that would have been convertible into shares of the Company's common stock increased.

 

Under certain circumstances, the Company had 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”).

 

Additional shares of the Company's common stock could also have become issuable pursuant to the 2020 Notes in the event the Company was required to make certain make-whole payments as provided in the 2020 Notes Indenture.

 

The 2020 Notes were convertible into shares of the Company's common stock, subject to certain terms and conditions. The initial conversion price of the 2020 Notes was equal to $14.72 per share of common stock, or 0.0679 shares of common stock per $1 principal amount of 2020 Notes.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

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. The right to purchase 2020/21 Option Notes expired on July 3, 2020. 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. The Company recognized an approximately $0.7 million loss. See "(Loss) on modification of 2020 Notes" 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% payable as PIK Interest (as defined and described below)), payable on March 31, June 30, September 30 and December 31 of each year. Under certain circumstances, the Company will 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 2020/21 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”). In the event the Company pays any portion of the interest due on the 2020/21 Notes as PIK Interest, the maximum aggregate principal amount of 2020/21 Notes that could be convertible into shares of the Company’s common stock will be increased.

 

The 2020/21 Notes are convertible into shares of the Company’s common stock at the conversion price, subject to certain terms and conditions. The initial conversion price of the 2020/21 Notes is equal to $2.442 per share of the Company’s common stock (the “2020/21 Notes Conversion Price”), or 0.4095 shares of the Company’s common stock per $1 principal amount of 2020/21 Notes. The Company and the holders may also mutually agree on other conversions of the 2020/21 Notes into shares of the Company’s common stock on a monthly basis (a “Contractual Conversion”) pursuant to the terms of the 2020/21 Notes Indenture. The 2020/21 Notes Conversion Price in a Contractual Conversion will be reduced to the lesser of the then-applicable 2020/21 Notes Conversion Price or a 10% discount to the average of the daily volume weighted average price of the Company’s common stock for the three forward trading days prior to the date of the Contractual Conversion.

 

Each holder has agreed not to convert its 2020/21 Notes into shares of the Company’s common stock to the extent that, after giving effect to such conversion, the number of shares of the Company’s common stock beneficially owned by such holder and its affiliates would exceed 4.99% of the Company’s common stock outstanding at the time of such conversion (the “4.99% Ownership Limitation”); provided that a holder may, at its option and upon 61 days’ prior notice to the Company, increase such threshold to 9.99% (the “9.99% Ownership Limitation”). If a conversion of 2020/21 Notes by a holder would exceed the 4.99% Ownership Limitation or the 9.99% Ownership Limitation, as applicable, the 2020/21 Purchase Agreement contains a provision granting the holder a fully funded prepaid warrant for such common stock with a term of nine months, subject to a six-month extension, which it can draw down from time to time.

 

The 2020/21 Notes may be redeemed in whole or in part, at the Company’s option, for cash at any time June 3, 2020 and upon 120 days’ notice to the holders of the 2020/21 Notes. A Redemption Make-Whole Payment (as defined in the 2020/21 Notes Indenture) applies only to a redemption of 2020/21 Notes that occurs on or after December 31, 2020. Following a notice of redemption of the 2020/21 Notes by the Company, the holders may elect to convert the 2020/21 Notes into shares of the Company’s common stock at the same conversion price as applicable to a Contractual Conversion.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

The 2020/21 Notes do not contain any anti-dilution adjustments for future equity issuances that are below the 2020/21 Notes Conversion Price, and adjustments to the 2020/21 Notes Conversion Price will only generally be made in the event that there is a dividend or distribution paid on shares of the Company’s common stock, a subdivision, combination or reclassification of the Company’s common stock, or at the discretion of the Board of Directors of the Company in limited circumstances and subject to certain conditions.

 

The 2020/21 Notes are secured by a lien on substantially all of the assets of the Company and the 2020/21 Notes Guarantors, including intellectual property and real property, and are guaranteed by the Company’s existing subsidiaries.

 

Additional shares of the Company's common stock could also become issuable pursuant to the 2020/21 Notes in the event the Company is required to make certain make-whole payments as provided in the 2020/21 Notes Indenture.

 

Under certain circumstances, the Company may file one or more registration statements on Form S-3 or amend filings in order to register shares of common stock for sale or resale, as necessary in connection with the 2020/21 Notes.

 

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. The Company recorded a Loss on conversion of 2020/21 Notes of $0.5 million on its Consolidated Statements of Operations.

 

Loans Payable - Other

 

During the first quarter of 2020, the Company purchased equipment under a financing lease. During the fourth quarter 2019, the Company purchased equipment and financed part of its 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 dates from August 2020 to February 2025. The equipment loans are secured by the related equipment.

 

In April 2020, the Company and Agri-Energy each entered into a loan agreement with Live Oak Banking Company, pursuant to which the Company and Agri-Energy obtained 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, the Company maintains certain employment levels and the Company maintains certain compensation levels.

 

The balance of these loans at September 30, 2020 and December 31, 2019 are as follows (in thousands):

 

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

 

 

10. Equity Incentive Plans

 

2010 Stock Incentive Plan. In February 2011, the Company’s stockholders approved the Gevo, Inc. 2010 Stock Incentive Plan (as amended and restated to date, the "2010 Plan"). The 2010 Plan provided for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units and other equity awards to employees and directors of the Company. On June 10, 2019, the 2010 Plan was amended and restated, which increased the number of shares of common stock reserved for issuance to 3,266,661 shares. On June 3, 2020, the 2010 Plan was amended and restated, which increased the number of shares of common stock reserved for issuance by 3,713,413 shares to a total of 6,980,074 shares.

 

Restricted common stock activity during the nine months ended September 30, 2020 consisted of the following:

 

	•	In February 2020, the Company issued 109,337 shares of restricted common stock, vesting over three years, and 1,258 shares of restricted common stock, vesting over two years, to certain of its employees in relation to restricted stock awards granted on February 27, 2020.
	•	In March 2020, the Company withheld 4,055 shares of common stock to settle income taxes related to the vested restricted stock awards for certain employees.
	•	In April 2020, the Company issued 239,155 shares of restricted common stock in relation to restricted stock awards granted to its employees on April 1, 2020 in connection with the 20% salary reduction discussed in Footnote 1, which vested on May 15, 2020. Also in April 2020, the Company issued 29,032 of restricted stock units in exchange for services rendered, which vested immediately.
	•	During the three months ended June 30, 2020, the Company withheld 77,768 shares of common stock to settle income taxes related to the vested restricted stock awards for certain employees.
	•	During July 2020, the Company issued 115,156 shares of restricted common stock in relation to restricted stock awards granted to its employees on July 1, 2020 in connection with the 20% salary reduction vesting on July 31, 2020. In addition, the Company issued 3,989,140 shares of restricted common stock to employees and directors and 101,730 restricted stock units in exchange for services rendered, vesting over two years.
	•	During the three months ended September 30, 2020, the Company withheld 245,990 shares of common stock to settle income taxes related to the vested restricted stock awards for certain employees.

 

At September 30, 2020, 1,242,905 shares remain available for awards under the 2010 Plan.

 

Employee Stock Purchase Plan. In February 2011, the Company’s stockholders approved the Employee Stock Purchase Plan (the "ESPP"). The offering periods for the ESPP are from January 1 to June 30 and from July 1 to December 31 of each calendar year. The Company has reserved 190 shares of common stock for issuance under the ESPP, of which 190 shares as of June 30, 2020 are available for future issuance. The purchase price of the common stock under the ESPP is 85% of the lower of the fair market value of a share of common stock on the first or last day of the purchase period. There were no purchases of common stock under the ESPP during the nine months ended September 30, 2020 or 2019.

 

11. Stock-Based Compensation

 

The Company records stock-based compensation expense during the requisite service period for share-based payment awards granted to employees and non-employees.

 

The following table sets forth the Company’s stock-based compensation expense (in thousands) for the periods indicated:

 

 

Stock Option Award Activity. Stock option activity under the Company’s stock incentive plans at September 30, 2020 and changes during the three months ended September 30, 2020 were as follows:

 

 

(1)  Exercise price of options outstanding range from $20.00 to $99,300.00 as of September 30, 2020.

 

 

GEVO, INC.

Notes to Consolidated Financial Statements

(unaudited)

Restricted Stock. Non-vested restricted stock awards at September 30, 2020 and changes during the three months ended September 30, 2020 were as follows:

 

 

The total fair value of restricted stock that vested during the nine months ended September 30, 2020 totaled $1.5 million. As of September 30, 2020, the total unrecognized compensation expense, net of estimated forfeitures, relating to restricted stock awards was $3.1 million, which is expected to be recognized over the remaining weighted-average period of approximately 1.6 years.