gevo

We discovered the domain registration ‘gevorestructuring.com’, which we believe references GEVO, the once high flying biofuel stock, which focuses on renewable jet fuel. We value the common equity at <$0.01 (98% downside) behind roughly $26MM 2017 notes and ~$22MM 2022 notes among other liabilities and believe the company could restructure / file for bankruptcy before September 15th, 2016.

The website was registered August 19th in a private registration, most likely by restructuring lawyers or a restructuring advisor to host docket information. We have extensive experience finding these WHOIS records.

According to the GEVO S-1 filed 8-12-2010, GEVO had aspirations to produce billions of gallons per year (BGPY) of isobutanol:

Without any modification, our isobutanol has applications as a specialty chemical and a fuel blendstock. The potential global market for isobutanol as a specialty chemical is approximately 1.1 BGPY, and the potential global market for isobutanol as a fuel blendstock is approximately 40 BGPY.

A commercial engineering study completed by ICM in May 2010 estimated the capital costs associated with the retrofit of a standard 50 MGPY ICM-designed corn ethanol plant to be approximately $22 to 24 million and the capital costs associated with the retrofit of a standard 100 MGPY ICM-designed corn ethanol plant to be approximately $40 to 45 million. These projected retrofit capital expenditures are substantially less than estimates for new plant construction for the production of advanced biofuels, including cellulosic ethanol. Notably, our calculations based on expected costs of retrofit, operating costs, volume of isobutanol production and price of isobutanol suggest that GIFT™ retrofits will result in an approximately two-year payback period on the capital invested in the retrofit. The ICM study also projected that each retrofit process would take approximately 14 months to complete. We believe that our exclusive alliance with ICM will enhance our ability to rapidly deploy our technology on a commercial scale at future production facilities. We plan to acquire additional production capacity to enable us to produce and sell over 500 million gallons of isobutanol in 2014.[1]

However, 2016 guidance was just LOWERED from 750,000 - 1,000,000 gallons (not millions or billions) according to the latest 10-Q:

We now expect isobutanol production at our production facility in Luverne to be in a range of 500,000 to 650,000 gallons in 2016.[2]

GEVO does not run a profitable business (or much of a business at all), COGS have been greater than revenues for most periods, in the first 6 months of 2016, revenues were $14.433MM, and COGS were $19.212MM. Loss from operations came in at $11.358MM. The company is not profitable and does not expect to be profitable in the near future, according to the ‘Risk Factors’ section of the latest 10-Q:

We have incurred net losses of $25.1 million, $36.2 million, $41.1 million, and $66.8 million during the six months ended June 30, 2016 and the years ended December 31, 2015, 2014, and 2013, respectively. As of June 30, 2016, we had an accumulated deficit of $364.6 million. We expect to incur losses and negative cash flows from operating activities for the foreseeable future. We currently derive revenue from the sale of isobutanol, ethanol and related products at the Agri-Energy Facility, although over certain periods of time, we may and have operated the plant for the sole production of ethanol and related products to maximize cash flows.

Additionally, we have generated limited revenue from the sale of products such as alcohol-to-jet fuel produced from isobutanol that has been used for engine qualification and flight demonstration by the U.S. Air Force and other branches of the U.S. military. If our existing grants and cooperative agreements are canceled prior to the expected end dates or we are unable to obtain new grants, cooperative agreements or product supply contracts, our revenues could be adversely affected.[2]

GEVO has a ~$26MM convertible note maturing March 15th, 2017 secured by most of its assets:

In May 2014, the Company entered into a term loan agreement (the “Loan Agreement”) with the lenders party thereto from time to time (each, a “Lender” and collectively, the “Lenders”) and Whitebox Advisors, LLC, as administrative agent for the Lenders (“Whitebox”), with a maturity date of March 15, 2017, pursuant to which the Lenders committed to provide one or more senior secured term loans to the Company in an aggregate amount of up to approximately $31.1 million on the terms and conditions set forth in the Loan Agreement (collectively, the “Term Loan”). The first advance of the Term Loan in the amount of $22.8 million (the “First Advance”), net of discounts and issue costs of $1.6 million and $1.5 million, respectively, was made to the Company in May 2014.

In June 2014, the Lenders exchanged $25.9 million, the aggregate outstanding principal amount of the Term Loan provided in the First Advance for 10% convertible senior secured notes due 2017 (the “2017 Notes”), together with accrued paid-in-kind interest of $0.2 million. The terms of the 2017 Notes are set forth in an indenture by and among the Company, its subsidiaries in their capacity as guarantors, and Wilmington Savings Fund Society, FSB, as trustee (the “2017 Notes Indenture”). The 2017 Notes will mature on March 15, 2017. The 2017 Notes have a conversion price (the “Conversion Price”) equal to $17.38 per share, or 0.0576 shares per $1 principal amount of 2017 Notes. Optional prepayment of the 2017 Notes is not permitted. The 2017 Notes bear interest at a rate equal to 10% per annum, which is payable 5% in cash and, under certain circumstances, 5% in kind and capitalized and added to the principal amount of the 2017 Notes. While the 2017 Notes are outstanding, the Company is required to maintain an interest reserve in an amount equal to 10% of the aggregate outstanding principal amount, to be adjusted on an annual basis. As of June 30, 2016, there was a balance of $2.6 million in the interest reserve account. This amount is classified as restricted deposits.[2]

According to the note indenture, interest is paid quarterly and therefore a restructuring could possibly occur before the September 15th, 2016 payment is due:

Interest will be paid to the Person in whose name a Note is registered at the Close of Business on the March 15, June 15, September 15 and December 15 (whether or not such date is a Business Day), as the case may be, immediately preceding the relevant Interest Payment Date.[3]

The company admits it does not have enough cash to paydown the 2017 note. The company had roughly $22MM of cash as of June 30th, 2016, with $10.9MM coming from potentially fraudulent exercises of in-the-money warrants (more of these later):

As noted above, while our existing working capital at June 30, 2016 was sufficient to meet the cash requirements to fund planned operations through December 31, 2016, it is not sufficient to satisfy all of our debt obligations expected to become due and payable in 2017 unless we are able to raise additional capital or restructure our debt. [2]

The 2017 note has “fundamental change” language which requires the company to make a cash make-whole payment in the event of defined fundamental changes. According to the 10-Q:

A fundamental change includes, among other things, the Company’s common stock ceasing to be listed on a national securities exchange. [2]

On January 25, 2016, the Company received a notification letter (the “Notice”) from NASDAQ advising the Company that for 30 consecutive trading days preceding the date of the Notice, the bid price of the Company’s common stock had closed below the $1.00 per share minimum required for continued listing on The NASDAQ Capital Market pursuant to the Minimum Bid Price Rule. The Company was unable to regain compliance with the Minimum Bid Price Rule by July 25, 2016. However,

On July 26, 2016, The NASDAQ Stock Market (“NASDAQ”) granted the Company an additional 180 calendar days, or until January 23, 2017, to regain compliance with the $1.00 per share minimum required for continued listing on The NASDAQ Capital Market pursuant to NASDAQ Marketplace Rule 5550(a)(2) (the “Minimum Bid Price Rule”). [2]

While the company could potentially approve a reverse split to remain in compliance, the company already did this in April 2015:

On April 15, 2015, our Board of Directors approved a reverse split of our common stock, par value $0.01, at a ratio of one-for-fifteen. This reverse stock split became effective on April 20, 2015. [2]

Additionally, GEVO’s auditor has expressed doubts that the company can continue as a going concern:

Our independent auditor included “going-concern” emphasis language in our audited financial statements

To date, we have financed our operations primarily with proceeds from multiple sales of equity and debt securities, borrowings under debt facilities and product sales. While existing working capital at June 30, 2016 was sufficient to meet the cash requirements to fund planned operations through December 31, 2016, it is not sufficient to satisfy all of our debt obligations expected to become due and payable in 2017.

These conditions raise substantial doubt about our ability to continue as a going concern. Our inability to continue as a going concern may potentially affect our rights and obligations under our debt obligations and may lead to bankruptcy. [2]

Additionally, the company has been reviewing strategic alternatives to reduce debt and recently hired Cowen and Co.:

As disclosed above, on May 31, 2016, we announced that we commenced a review of strategic alternatives.

There can be no assurances that we will implement a recapitalization transaction. If we are unable to implement a recapitalization or restructuring transaction involving Whitebox and the holders of the 2022 Notes, we will have to seek other strategic alternatives, including other sources of financing and, if unsuccessful, may be forced to seek the protection of bankruptcy court by filing for bankruptcy.[2]

However, the common stock still has a market capitalization of ~$47MM and is trading at $0.53 with an average volume of ~6M shares/day. We believe the stock is worth <$0.01 behind roughly $26MM 2017 notes and ~$22MM 2022 notes among other liabilities.

The company has a horrendous track record of preserving shareholder value, in fact the only way the company was able to recently raise capital was to issue in-the-money warrants, which were extremely dilutive and value-destructive to common stockholders:

During the six months ended June 30, 2016, the Company issued 42,782,210 shares of Common Stock as a result of the exercise of Series A, D, E, G and H Warrants. The Company received proceeds of $10.9 million from such exercises. [2]

The company then LOWERED the exercise price of these warrants, allowing holders to immediately exercise these warrants and sell the common in the open market, locking in a profit essentially at the expense of common shareholders!

In May of 2016, as permitted by Section 2(a) of the Series H Warrant agreement, the board of directors of the Company approved a voluntary reduction of the exercise price for 7.5 million of the outstanding Series H Warrants, from an exercise price of $0.75 per share of common stock to $0.30 per share of common stock, for the remaining term of these warrants. Except for the reduction in exercise price, the terms of these Series H Warrants remain unchanged.

In June of 2016, as permitted by Section 2(a) of the Series H Warrant agreement, the board of directors of the Company approved a voluntary reduction of the exercise price for 3 million of the outstanding Series H Warrants, from an exercise price of $0.75 per share of common stock to $0.42 per share of common stock, for the remaining term of these warrants. The board of directors of the Company also approved a voluntary reduction of the exercise price for 2.0 million of the outstanding Series H Warrants, from an exercise price of $0.75 per share of common stock to $0.52 per share of common stock, for the remaining term of these warrants.

In June of 2016, as permitted by Section 9 of the Series D Warrant agreement, the Company agreed with certain holders of the Series D Warrants to the amendment of the exercise price and the acceleration of the initial exercise date for 4,167,391 of the outstanding Series D Warrants held by such holders. Pursuant to that amendment agreement, with respect to 4,167,391 of the outstanding Series D Warrants held by those holders, the exercise price was increased from the an exercise price of $0.10 per share of common stock to $0.175 per share of common stock, for the remaining term of these warrants and the initial exercise date was changed from June 11, 2016 to June 8, 2016.

As of June 30, 2016 all of the Series H Warrants or Series D Warrants for which the exercise price had been adjusted were fully exercised. [2]

It was also interesting that the company raised the exercise price of some series D warrants to amend the initial exercise date from June 11th to June 8th. To understand why take a look at the chart below:

gevo-chart

According to a prospectus supplement filed on June 9th, 2016 the company permitted these amendments the DAY BEFORE the stock traded up almost 100%!

As permitted by Section 2(a) of the Series H Warrants to Purchase Common Stock (the “Series H Warrants”), on Tuesday, June 7, 2016, the board of directors of the Company approved a voluntary reduction of the exercise price for 3,000,000 of the outstanding Series H Warrants, from the current exercise price of $0.75 per share of common stock to $0.42 per share of common stock, for the remaining term of these warrants. Except for the reduction in exercise price, the terms of these Series H Warrants remain unchanged.

In addition, as permitted by Section 2(a) of the Series H Warrants to Purchase Common Stock, on Tuesday, June 7, 2016, the board of directors of the Company also approved a voluntary reduction of the exercise price for 2,000,000 of the outstanding Series H Warrants, from the current exercise price of $0.75 per share of common stock to $0.52 per share of common stock, for the remaining term of these warrants. Except for the reduction in exercise price, the terms of these Series H Warrants remain unchanged. [4]

A quick google for “GEVO June 8” yields hundreds of articles touting an Alaska Airlines flight (which had no material economic impact for GEVO’s financials) from the day before which used a 20% blend of biofuel from GEVO. The company clearly paid a PR company a tremendous amount of money anticipating a stock pop to allow the warrant “investors” (i.e. management insiders) be able to cash in on their warrants. Below are a few articles:

http://www.csmonitor.com/Business/2016/0608/Can-corn-make-good-jet-fuel-Alaska-Air-says-yes

http://www.bizjournals.com/denver/news/2016/06/08/more-on-those-historic-airline-flights-powered-by.html

http://www.biofuelsdigest.com/bdigest/2016/06/08/alaska-airlines-flies-two-commercials-flights-on-gevos-atj/

http://www.thepointreview.com/gevo-inc-nasdaqgevo-has-729-percent-upside-probability/

This is Amateur Hour at this point, management is not concerned with company operations and is only concerned with fleecing shareholders for millions of dollars through various tactics such as changing warrant strike prices. Management also owns almost no common stock. As of August 12th, 2016, Patrick Gruber the CEO only holds 42,381 shares of common stock and actually disposed of 108 shares on the 12th at a price of $0.56.

Additionally, management continues to invent clever ways to prime and dilute common stockholders. According to the recent shelf filed July 1, 2016 the board is authorized to issue 10MM shares of preferred stock, with the terms completely up to the board:

Our amended and restated certificate of incorporation provides that we may issue shares of preferred stock from time to time in one or more series. Our board of directors is authorized to fix the voting rights, if any, designations, powers, preferences, qualifications, limitations and restrictions thereof, applicable to the shares of each series of preferred stock. The board of directors may, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of our common stock, including the likelihood that such holders will receive dividend payments and payments upon liquidation, and could have anti-takeover effects, including preferred stock or rights to acquire preferred stock in connection with implementing a stockholder rights plan. The ability of the board of directors to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of control or the removal of our existing management. There are currently no shares of preferred stock outstanding. [5]

We believe these warrant transactions could be fraudulent and Section 548 of the bankruptcy code could be applied which deals with fraudulent conveyance. To prove a transfer is fraudulent, one must not only prove the absence of reasonably equivalent value granted, but also that the entity doing the transfer was insolvent at the time. We believe the noteholders (i.e. Whitebox) and the potentially the SEC need to step in and end this charade before more value is stripped from the business.

The 2017 and 2022 noteholders are clearly impaired, and we wonder what a restructuring will actually look like. Will the company even continue as a going concern, with lenders putting up additional capital in a rights offering to own the company? We doubt the lenders will want to put more capital into this business. Perhaps the lenders prefer Chapter 7, where the note holders attempt to sell the Luverne facility and retain the ~22mm in cash, perhaps giving a ~$1mm tip to equity holders to not sue over the potentially fraudulent $10.9MM warrant transfer. Additionally, given the fact that a website has been created, we imagine that there will be additional creditor claims, which makes the likelihood of any residual value being left for equity holders close to zero.

In any scenario, we can’t imagine any real value remaining for equity holders. Given the writing is on the wall with the recent registration of ‘gevorestructuring.com’, we remain short GEVO common with a price target of <$0.01.

[1] https://www.sec.gov/Archives/edgar/data/1392380/000119312510187275/0001193125-10-187275-index.htm

[2] https://www.sec.gov/Archives/edgar/data/1392380/000156459016023895/gevo-10q_20160630.htm

[3] https://www.sec.gov/Archives/edgar/data/1392380/000119312514234881/d743599dex41.htm

[4] https://www.sec.gov/Archives/edgar/data/1392380/000119312516617965/d184656d424b3.htm

[5] https://www.sec.gov/Archives/edgar/data/1392380/000119312516640482/d176680ds3a.htm