Edgar Filing: Gevo, Inc.

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 June 30, 2018

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

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

(303) 858-8358

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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

☐ (Do not check if a smaller reporting company)

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 July 31, 2018, 8,085,084 shares of the registrant’s common stock were outstanding.

GEVO, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017	3
	Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (unaudited)	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited)	5
	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	45

	Signatures	49

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

GEVO, INC.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	(unaudited)
	June 30,			December 31,
	2018			2017
Assets
Current assets:
Cash and cash equivalents	$	27,030		$	11,553
Accounts receivable		1,443			1,054
Inventories		3,846			4,362
Prepaid expenses and other current assets		15,258			712
Total current assets		47,577			17,681

Property, plant and equipment, net		67,180			70,369
Deposits and other assets		1,273			803
Total assets	$	116,030		$	88,853

Liabilities
Current liabilities:
Accounts payable and accrued liabilities	$	3,520		$	4,011
2020 Notes embedded derivative liability		684			5,224
Derivative warrant liability		86			1,951
Total current liabilities		4,290			11,186

2020 Notes, net		11,731			13,491
2022 Notes, net		-			515
Other long-term liabilities		414			130
Total liabilities	$	16,435		$	25,322

Commitments and Contingencies (see Note 11)

Stockholders' Equity
Common Stock, $0.01 par value per share; 250,000,000 authorized, 7,990,050 and 1,090,553 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		80			11
Additional paid-in capital		514,859			464,870
Accumulated deficit		(415,344	)		(401,350	)
Total stockholders' equity		99,595			63,531
Total liabilities and stockholders' equity	$	116,030		$	88,853

See the accompanying notes to unaudited consolidated financial statements.

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GEVO, INC.

Consolidated Statements of Operations

(in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenue and cost of goods sold
Ethanol sales and related products, net	$	8,813		$	6,839		$	17,031		$	12,333
Hydrocarbon revenue		607			660			607			749
Grant and other revenue		-			43			25			75
Total revenues		9,420			7,542			17,663			13,157

Cost of goods sold		10,693			9,705			21,276			19,113

Gross loss		(1,273	)		(2,163	)		(3,613	)		(5,956	)

Operating expenses
Research and development expense		1,469			1,891			2,258			3,108
Selling, general and administrative expense		1,637			2,123			3,507			4,297
Total operating expenses		3,106			4,014			5,765			7,405

Loss from operations		(4,379	)		(6,177	)		(9,378	)		(13,361	)

Other (expense) income
Interest expense		(904	)		(630	)		(1,729	)		(1,341	)
(Loss) on exchange of debt		(2,181	)		(3,969	)		(2,202	)		(4,933	)
(Loss) from change in fair value of the 2017 Notes		-			-			-			(339	)
(Loss)/Gain from change in fair value of derivative warrant liability		(3,517	)		2,260			(3,040	)		5,519
(Loss)/Gain from change in fair value of 2020 Notes embedded derivative		(511	)		(1,662	)		2,347			(1,662	)
Other income		-			20			8			26
Total other expense, net		(7,113	)		(3,981	)		(4,616	)		(2,730	)

Net loss	$	(11,492	)	$	(10,158	)	$	(13,994	)	$	(16,091	)

Net loss per share - basic and diluted	$	(7.19	)	$	(13.22	)	$	(10.26	)	$	(23.86	)
Weighted-average number of common shares outstanding - basic and diluted		1,597,242			768,625			1,363,394			674,451

See the accompanying notes to unaudited consolidated financial statements.

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GEVO, INC.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended June 30,,
	2018			2017
Operating Activities
Net loss	$	(13,994	)	$	(16,091	)
Adjustments to reconcile net loss to net cash used in operating activities:
(Loss)/Gain from change in fair value of derivative warrant liability		3,040			(5,519	)
(Loss)/Gain from change in fair value of 2020 Notes embedded derivative		(2,347	)		1,662
Loss from the change in fair value of the 2017 Notes		-			339
Loss on exchange of debt		2,202			4,933
Stock-based compensation		237			225
Depreciation and amortization		3,285			3,341
Non-cash interest expense		884			196
Other non-cash expense		6			-
Changes in operating assets and liabilities:
Accounts receivable		(389	)		(242	)
Inventories		516			(838	)
Prepaid expenses and other current assets		(416	)		(114	)
Accounts payable, accrued expenses, and long-term liabilities		(829	)		(1,276	)
Net cash used in operating activities		(7,805	)		(13,384	)

Investing Activities
Acquisitions of property, plant and equipment		(97	)		(1,315	)
Net cash used in investing activities		(97	)		(1,315	)


Financing Activities
Payments on secured debt		-			(9,616	)
Debt and equity offering costs		(299	)		(931	)
Proceeds from issuance of common stock		22,415			11,044
Proceeds from the exercise of common stock warrants		1,263			6
Net cash provided by financing activities		23,379			503

Net (decrease) in cash and cash equivalents		15,477			(14,196	)

Cash, cash equivalents, and restricted cash
Beginning of period		11,553			30,499
End of period	$	27,030		$	16,303

See the accompanying notes to unaudited consolidated financial statements.

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GEVO, INC.

Consolidated Statements of Cash Flows - Continued

(in thousands)

(unaudited)

Supplemental disclosures of cash and non-cash investing and financing transactions	Six Months Ended March 31,
	2018		2017
Cash paid for interest, net of interest capitalized	$	850	$	2,116
Non-cash purchase of property, plant and equipment	$	16	$	189
Exchange or conversion of convertible debt into common stock	$	3,701	$	8,653
Accrued debt and equity issuance costs	$	61	$	126
Discount due to exchange of 2017 Notes for 2020 Notes	$	—	$	3,009
Fair value of 2020 Notes embedded derivative upon exchange	$	—	$	6,975
Fair value of 2020 Notes embedded derivative liability upon conversion into common stock	$	2,193	$	—
Fair value of warrants at issuance and upon exercise, net	$	4,905	$	5,213
Shares of common stock sold but not paid at June 30, 2018	$	14,130	$	—

See the accompanying notes to unaudited consolidated financial statements.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

1. Nature of Business, Financial Condition, Basis of Presentation and Reverse Stock Split

Nature of Business. Gevo, Inc. (“Gevo” or the “Company,” which, unless otherwise indicated, refers to Gevo, Inc. and its subsidiaries) is a renewable chemicals and next generation "low-carbon" fuel company focused on the development and commercialization of renewable alternatives to petroleum-based products. Low-carbon fuels reduce the carbon intensity, or the level of greenhouse gas emissions, compared to standard fossil-based fuels across their lifecycle. The most common low-carbon fuels are renewable fuels. Gevo is focused on the development and production of mainstream fuels like gasoline and jet fuel using renewable feedstocks that have the potential to lower greenhouse gas emissions at a meaningful scale and enhance agricultural production, including food and other related products. In addition to serving the low-carbon fuel markets, through Gevo's technology, Gevo can also serve markets for the production of chemical intermediate products for solvents, plastics and building block chemicals.

In addition to its ethanol production capabilities, the Company developed proprietary technology that uses a combination of synthetic biology, metabolic engineering, chemistry and chemical engineering to make isobutanol and hydrocarbon products from isobutanol that can displace petrochemical incumbent products. The Company has been able to genetically engineer yeast, whereby the yeast produces isobutanol from carbohydrates. The Company’s technology converts its renewable isobutanol to alcohol-to-jet (“ATJ”), isooctane, isooctene, and para-xylene (building block for polyester) at its hydrocarbons demonstration plant located at South Hampton Resources located in Silsbee, Texas. In addition the Company’s production facility located in Luverne, Minnesota (the "Luverne Facility") has production capacity of about 20 MGPY of ethanol, 45-50 kilotons (“KT”) of animal feed, and 3 million pounds of corn oil.

As of June 30, 2018, the Company continues to engage in research and development, business development, business and financial planning, optimizing operations for low-carbon ethanol, isobutanol, and related hydrocarbons production and raising capital to fund future expansion of its Luverne Facility. Ultimately, the Company believes that the attainment of profitable operations is dependent upon future events, including (i) completing certain capital improvements at the Luverne Facility to produce low-carbon ethanol side-by-side with low-carbon isobutanol; (ii) completing its development activities resulting in commercial production and sales of isobutanol or isobutanol-derived products and/or technology, (ii) obtaining adequate financing to complete its development activities, (iii) obtaining adequate financing to build out low-carbon ethanol capacity and further isobutanol and hydrocarbon production capacity, (iv) gaining market acceptance and demand for its products and services, and (v) attracting and retaining qualified personnel.

Financial Condition. For the six months ended June 30, 2018 and 2017, the Company incurred a consolidated net loss of $14.0 million and $16.1 million, respectively, and had an accumulated deficit of $415.3 million at June 30, 2018. The Company’s cash and cash equivalents at June 30, 2018 totaled $27.0 million (does not include gross proceeds of $14.9 million received under the at-the-market offering program after June 30, 2018 due to timing of settlement of sales under the at-the-market offering program) and are expected to be used for the following purposes: (i) operating activities of the Luverne Facility; (ii) operating activities at the Company’s corporate headquarters in Colorado, including research and development work; (iii) capital improvements primarily associated with the Luverne Facility; (iv) costs associated with optimizing isobutanol production technology; (v) exploration of strategic alternatives and new financings; and (vi) debt service and repayment obligations.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

The Company expects to incur future net losses as it continues to fund the development and commercialization of its product candidates. To date, the Company has financed its operations primarily with proceeds from multiple sales of equity and debt securities, borrowings under debt facilities and product sales. The Company’s transition to profitability is dependent upon, among other things, the successful development and commercialization of its product candidates and the achievement of a level of revenues adequate to support the Company’s cost structure. The Company may never achieve profitability or positive cash flows, and unless and until it does, the Company will continue to need to raise additional cash. Management intends to fund future operations through additional private and/or public offerings of debt or equity securities. In addition, the Company may seek additional capital through arrangements with strategic partners or from other sources, it may seek to restructure its debt and it will continue to address its cost structure. Notwithstanding, there can be no assurance that the Company will be able to raise additional funds, or achieve or sustain profitability or positive cash flows from operations. Existing working capital was not sufficient to meet the cash requirements to fund planned operations through the period that is one year after the date the Company’s audited 2017 year-end financial statements were issued. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s inability to continue as a going concern may potentially affect the Company’s rights and obligations under its outstanding senior secured convertible notes. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern and do not include adjustments that might result from the outcome of this uncertainty. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.

At-the-Market Offering Program. In February 2018, the Company commenced an at-the-market offering program, which initially allowed it to sell and issue up to $5.0 million of shares of the Company’s common stock. During the three months ended June 30, 2018, the Company amended the at-the-market offering program and increased the available capacity by approximately $84.9 million.

During the six months ended June 30, 2018, the Company issued 6,286,617 shares of common stock (after giving effect to the one-for-twenty reverse stock split effected on June 1, 2018) under the at-the-market offering for gross proceeds of $37.4 million, of which $14.5 million was not received until July 3, 2018. The Company paid commissions to its sales agent of approximately $0.9 million and incurred other offering related expenses of approximately $0.4 million during the six months ended June 30, 2018.

During the three months ended June 30, 2018, the Company issued 6,281,409 shares of common stock (after giving effect to the one-for-twenty reverse stock split effected June 1, 2018) under the at-the-market offering for gross proceeds of $37.4 million during the three months ended June 30, 2018, of which $14.5 million was not received until July 3, 2018. The Company paid commissions to its sales agent of approximately $0.9 million and the incurrence of other offering related expenses of $0.2 million during the three months ended June 30, 2018.

Basis of Presentation. The unaudited consolidated financial statements of the Company (which include the accounts of its wholly-owned subsidiaries Gevo Development and Agri-Energy) have been prepared, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company at June 30, 2018 and are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included under the heading “Financial Statements and Supplementary Data” in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “Annual Report”).

Reverse Stock Split. On May 30, 2018, after receipt of stockholder approval, the Board of Directors approved an amendment to the Company's Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s common stock, par value $0.01 per share, by a ratio of one-for-twenty. The reverse stock split became effective June 1, 2018. Unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth in these notes and the accompanying consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split.

Recent Accounting Pronouncements

Leases (“ASU 2016-02”). In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Topic 842 Leases. ASU-2016-02 requires leases to be reported on the financial statements. The objective is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Future minimum lease obligations for leases accounted for as operating leases at June 30, 2018 totaled $2.3 million. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

Derivatives and Hedging (Topic 815). Accounting for Certain Financial Instruments with Down Round Provisions (“ASU 2017-11”). In July 2017, the FASB issued ASU No. 2017-11, Derivatives and Hedging (Topic 815) Accounting for Certain Financial Instruments with Down Round Provisions which simplifies the accounting for certain equity-linked financial instruments and embedded features with down round features that reduce the exercise price when the pricing of a future round of financing is lower. Currently, the existence of such features require classification outside of equity and recognition of changes in the fair value of the instrument in earnings each reporting period. This standard eliminates the need to remeasure the instruments at fair value and allows classification within equity. This standard will not materially impact the Company, as the Company's liability classified financial instruments and embedded derivatives that require separation from the host instrument have features other than down-round provisions that require current accounting and classification.

Adoption of New Accounting Pronouncements.

Revenue from Contracts with Customers (“ASU 2014-09”). In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The objective of ASU 2014-09 is to outline a new, single comprehensive model to use in accounting for revenue arising from contracts with customers. The new revenue recognition model provides a five-step analysis for determining when and how revenue is recognized, depicting the transfer of promised goods or services to customers in an amount that reflects the consideration that is expected to be received in exchange for those goods or services. ASU 2014-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. On July 9, 2015, the FASB Board voted to delay the implementation of ASU 2014-09 by one year to December 15, 2017. In April 2016, the FASB issued ASU No. 2016-10 Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing (“ASU 2016-10”) which provides additional clarification regarding Identifying Performance Obligations and Licensing. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. As a result of the Company’s conclusions below, there is no impact upon revenue recognition, historical or otherwise, due to the adoption of ASU 2014-09 effective January 1, 2018, and accordingly, there is no requirement to select a transition method.

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. The following provides the Company’s assessment on how this standard impacted the Company upon its adoption effective January 1, 2018

Ethanol sales and related products revenues, net. Ethanol sales and related products revenues, net are sold to customers on a “free-on-board, shipping point” basis. 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 Company has sold and continues to sell close to 100% of its ethanol production to a single customer, representing 69% and 75% of total revenues for the three months ended June 30, 2018 and 2017, respectively, and 71% and 77% of total revenues for the six months ended June 30, 2018 and 2017, respectively,. The Company completed its review of this customer and consistent with prior assessments, does not expect there to be any impact on how the Company has and will continue to account for sales of ethanol to this customer. The Company further evaluated related products, including distiller’s grains, corn oil and isobutanol, and after its review, there is no significant impact either historically or prospectively upon the Company’s adoption of this standard on January 1, 2018.

Hydrocarbon revenue. Hydrocarbon revenues include sales of ATJ, isooctene and isooctane and is sold mostly on a “free-on-board, shipping point” basis. 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 Company has determined that there will be no material impact as to how the Company has historically recognized or will recognize revenues upon adopting this standard on January 1, 2018.

Grant and other revenues. Grant and other revenues primarily have historically consisted of governmental and cooperative research grants, of which the Northwest Advanced Renewables Alliance (“NARA”) grant, funded by the United States Department of Agriculture (“USDA”), comprised the majority of these revenues since 2014. After reviewing this arrangement, the Company has concluded that this grant consists of a non-reciprocal arrangement, and therefore, does not qualify as a contract pursuant to Topic 606 “Revenues from Contracts with Customers”, which was established with the issuance of ASU 2014-09. However, Topic 606 stipulates revenue recognition under these circumstances, and the Company determined that there is no change to revenue recognition upon adopting this standard on January 1, 2018.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

Statement of Cash Flows – Restricted Cash (“ASU 2016-18”). In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows – Restricted Cash, which standardizes the classification and presentation of changes in restricted cash on the statement of cash flows. This amendment requires that that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This amendment was effective for public business entities for fiscal years beginning after December 15, 2017, but early adoption was permitted. This standard must be applied retrospectively for all periods presented. The Company’s adoption of this standard on January 1, 2018 materially impacted the presentation of the Company’s previously presented 2017 statements of cash flows for the three, six, nine and twelve months ended December 31, 2017, as the Company released approximately $2.6 million of restricted cash in April 2017. Prior to the adoption of this standard, the 2017 beginning of period cash and cash equivalents totaled $27.9 million. After adoption of this standard, the 2017 beginning period of cash, cash equivalents, and restricted cash totaled $30.5 million.

2. Earnings per Share

Basic net 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 six months ended June 30, 2018 and 2017 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.

	June 30,
	2018		2017
Warrants to purchase common stock - liability classified (see Note 7)		58,902		680,119
Warrant to purchase common stock - equity classified		6		72
2020 Notes		1,116,637		1,485,100
2022 Notes		–		21
Outstanding stock appreciation rights		68,638		–
Outstanding options to purchase common stock		358		3,846
Unvested restricted common stock		16		268
Total		1,244,557		2,169,426

The Company issued 95,000 shares of common stock under the at-the-market offering program, between July 1, 2018 and August 8, 2018, which are not reflected in the tables presented above. See Note 1, Nature of Business, Financial Condition and Basis of Presentation.

3. Revenues from Contracts with Customers Other Revenues

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

Hydrocarbon revenue. Hydrocarbon revenues include sales of ATJ, isooctene and isooctane and are sold mostly on a “free-on-board, shipping point” basis. 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.

Grant and other revenues. Grant and other revenues primarily have historically consisted of governmental and cooperative research grants, of which the Northwest Advanced Renewables Alliance (“NARA”) grant, funded by the United States Department of Agriculture (“USDA”), comprised the majority of those revenues since 2014. After reviewing this arrangement, the Company has concluded that this grant consists of a non-reciprocal arrangement, and therefore, does not qualify as a contract pursuant to Topic 606 “Revenues from Contracts with Customers”. Other revenues also include occasional short-term (less than one-year) consulting services and until December of 2017, the lease of the Company’s corn storage bins at its Luverne, MN facility.

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):

	Three Months Ended June 30, 2018
Major Goods/Service Line	Revenues from Contracts with Customers		Other Revenues		Total
Ethanol sales and related products, net	$	8,813	$	-	$	8,813
Hydrocarbon revenue		607		-		607
Grant and other revenue		-		-		-
	$	9,420	$	-	$	9,420
Timing of Revenue Recognition
Goods transferred at a point in time	$	9,420	$	-	$	9,420
Services transferred over time		-		-		-
	$	9,420	$	-	$	9,420
Operating Segment
Gevo	$	607	$	-	$	607
Gevo Development / Agri-Energy		8,813		-		8,813
	$	9,420	$	-	$	9,420
Geographic Region
United States	$	8,813	$	-	$	8,813
Other		607		-		607
	$	9,420	$	-	$	9,420

	Three Months Ended June 30, 2017
Major Goods/Service Line	Revenues from Contracts with Customers		Other Revenues		Total
Ethanol sales and related products, net	$	6,839	$	-	$	6,839
Hydrocarbon revenue		660		-		660
Grant and other revenue		-		43		43
	$	7,499	$	43	$	7,542
Timing of Revenue Recognition
Goods transferred at a point in time	$	7,499	$	-	$	7,499
Services transferred over time		-		43		43
	$	7,499	$	43	$	7,542
Operating Segment
Gevo	$	660	$	-	$	660
Gevo Development / Agri-Energy		6,839		43		6,882
	$	7,499	$	43	$	7,542
Geographic Region
United States	$	6,839	$	43	$	6,882
Other		660		-		660
	$	7,499	$	43	$	7,542

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	Six Months Ended June 30, 2018
Major Goods/Service Line	Revenues from Contracts with Customers		Other Revenues		Total
Ethanol sales and related products, net	$	17,031	$	-	$	17,031
Hydrocarbon revenue		607		-		607
Grant and other revenue		25		-		25
	$	17,663	$	-	$	17,663
Timing of Revenue Recognition
Goods transferred at a point in time	$	17,638	$	-	$	17,638
Services transferred over time		25		-		25
	$	17,663	$	-	$	17,663
Operating Segment
Gevo	$	632	$	-	$	632
Gevo Development / Agri-Energy		17,031		-		17,031
	$	17,663	$	-	$	17,663
Geographic Region
United States	$	17,056	$	-	$	17,056
Other		607		-		607
	$	17,663	$	-	$	17,663

	Six Months Ended June 30, 2017
Major Goods/Service Line	Revenues from Contracts with Customers		Other Revenues		Total
Ethanol sales and related products, net	$	12,333	$	-	$	12,333
Hydrocarbon revenue		749		-		749
Grant and other revenue		-		75		75
	$	13,082	$	75	$	13,157
Timing of Revenue Recognition
Goods transferred at a point in time	$	13,082	$	-	$	13,082
Services transferred over time		-		75		75
	$	13,082	$	75	$	13,157
Operating Segment
Gevo	$	749	$	-	$	749
Gevo Development / Agri-Energy		12,333		75		12,408
	$	13,082	$	75	$	13,157
Geographic Region
United States	$	12,333	$	75	$	12,408
Other		749		-		749
	$	13,082	$	75	$	13,157

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

Goods transferred at a point-in-time. For the three and six months ended June 30, 2018 and 2017, 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 June 30, 2018 and December 31, 2017, 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 six months, and there are no return or refund rights.

Services transferred over time. For the three and six months ended June 30, 2018 and 2017, 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 June 30, 2018 and December 31, 2017, there were no material unfulfilled or partially fulfilled performance obligations.

For the three and six months ended June 30, 2018 and 2017, revenues were recognized ratably over time, as the performance obligation was satisfied and benefit to the customer was transferred on a ratable basis over time.

Contract Assets and Trade Receivables. As of June 30, 2018 and December 31, 2017, 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. The Company did not incur any impairment losses on any receivables as all amounts owed were paid or current as of June 30, 2018 and December 31, 2017.

4. Inventories

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

	June 30,		December 31,
	2018		2017
Raw materials
Corn	$	188	$	189
Enzymes and other inputs		251		202
Nutrients		3		5
Finished goods
Ethanol		229		222
Isobutanol		897		1,122
Jet Fuels, Isooctane and Isooctene		484		524
Distiller's grains		49		59
Work in process - Agri-Energy		201		197
Work in process - Gevo		95		437
Spare parts		1,449		1,405
Total inventories	$	3,846	$	4,362

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

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

5. Prepaid Expenses and Other Current Assets

The following table sets forth the components of the Company's prepaid expenses and other current assets in the consolidated balance sheets (in thousands).

	June 30, 2018		December 31, 2017

Amounts owed to the Company from sale of common stock	$	14,130	$	-
All other non-trade receivables		239		73
Prepaid assets		889		639
Total prepaid expenses and other current assets	$	15,258	$	712

The amounts owed to the Company from the sale of its common stock under the At-The-Market offering program related to sales that occurred on June 29, 2018. The Company received payment, in full on July 3, 2018.

6. Property, Plant and Equipment

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

	Useful Life		June 30,			December 31,
	(in years)		2018			2017
Construction in progress			$	537		$	479
Plant machinery and equipment		10		16,285			16,284
Site improvements		10		7,055			7,051
Luverne retrofit asset		20		70,842			70,842
Lab equipment, furniture and fixtures and vehicles		5		6,513			6,513
Demonstration plant		2		3,597			3,597
Buildings		10		2,543			2,543
Computer, office equipment and software		3		1,808			1,795
Leasehold improvements, pilot plant, land and support equipment		2-5		2,536			2,536
Total property, plant and equipment				111,716			111,640
Less accumulated depreciation and amortization				(44,536	)		(41,271	)
Property, plant and equipment, net			$	67,180		$	70,369

Included in cost of goods sold is depreciation of $1.6 million and $1.5 million during the three months ended June 30, 2018 and 2017, respectively, and $3.1 million and $3.1 million during the six months ended June 30, 2018 and 2017, respectively.

Included in operating expenses is depreciation of $0.1 million and $0.1 million for the three months ended June 30, 2018 and $0.2 million and $0.2 million during the six months ended June 30, 2018 and 2017, respectively.

7. Embedded Derivatives and Derivative Warrant 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 contain 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.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

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 binomial lattice model, the following assumptions are 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 binomial 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 is 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 binomial 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.

As of June 30, 2018, the estimated fair value of the embedded derivatives was $0.7 million. Any change in the estimated fair value of the embedded derivatives represents an unrealized gain or loss, which has been recorded as a $0.5 million loss and a $2.3 million gain from the change in fair value of embedded derivatives in the consolidated statements of operations for the three and six months ended June 30, 2018, respectively. The Company recorded the estimated fair value of the embedded derivative with the 2020 Notes, net in the consolidated balance sheets.

The following table sets forth the inputs to the lattice model that were used to value the embedded derivatives.

	June 30,			December 31,
	2018			2017
Stock price	$	3.80			0.59
Conversion Rate per $1,000		67.9			1,358.90
Conversion Price	$	14.72		$	0.74
Maturity date		March 15, 2020		March 15, 2020
Risk-free interest rate		2.43	%		1.89	%
Estimated stock volatility		125	%		75	%
Estimated credit spread		27	%		28	%

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 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.

2022 Notes Embedded Derivative

In July 2012, the Company issued 7.5% convertible senior notes due July 2022 (the “2022 Notes”) which contain the following embedded derivatives: (i) rights to convert into shares of the Company’s common stock, including upon a Fundamental Change (as defined in the indenture governing the 2022 Notes (the “2022 Notes Indenture”)); and (ii) a Coupon Make-Whole Payment (as defined in the 2022 Notes Indenture) in the event of a conversion by the holders of the 2022 Notes prior to July 1, 2017.

The Company had concluded that the embedded derivatives within the 2020 Notes required separation from the host instrument and was re-valued each reporting period, with changes in the fair value of the embedded derivative recognized as a component of the Company’s consolidated Statements of Operations. As of December 31, 2017, the fair value of the 2020 Notes embedded derivative was zero. In January 2018, the Company entered into a private exchange agreement with a holder of the 2022 Notes to exchange the remaining $0.5 million of outstanding principal amount of the 2022 Notes for 39,016 shares of common stock. Upon completion of this exchange, the 2022 Notes were satisfied in their entirety and there are no remaining obligations under the 2022 Notes, including any remaining obligations under the 2022 Notes embedded derivative.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

Derivative Warrant Liability

The following warrants were sold by the Company:

•

In December 2013, the Company sold warrants to purchase 3,551 shares of the Company’s common stock (the “2013 Warrants”).

•

In August 2014, the Company sold warrants to purchase 2,500 shares of the Company’s common stock (the “2014 Warrants”).

•

In February 2015, the Company sold Series A warrants to purchase 5,542 shares of the Company’s common stock (the “Series A Warrants”) and Series B warrants to purchase 5,542 shares of the Company’s common stock (the “Series B Warrants”).

•

In May 2015, the Company sold Series C warrants to purchase 1,075 shares of the Company’s common stock (the “Series C Warrants”).

•

In December 2015, the Company sold Series D warrants to purchase 25,125 shares of the Company’s common stock (the “Series D Warrants”) and Series E warrants to purchase 20,000 shares of the Company’s common stock (the “Series E Warrants”).

•

In April 2016, the Company sold Series F warrants to purchase 25,733 shares of the Company’s common stock (the “Series F Warrants”) and Series H warrants to purchase 51,465 shares of the Company’s common stock (the “Series H Warrants”), and pre-funded Series G warrants (the “Series G Warrants”) to purchase 16,429 shares of the Company’s common stock, pursuant to an underwritten public offering.

•

In September 2016, the Company sold Series I warrants to purchase 35,650 shares of the Company’s common stock (the “Series I Warrant”) and pre-funded Series J warrants (“Series J Warrants”) to purchase 9,250 shares of the Company’s common stock, pursuant to an underwritten public offering.

•

In February 2017, the Company sold Series K warrants to purchase 312,516 shares of the Company’s common stock (the “Series K Warrants”) and Series M warrants to purchase 312,500 shares of the Company’s common stock (the “Series M Warrants”), and pre-funded Series L warrants (the “Series L Warrants”) to purchase 28,500 shares of the Company’s common stock, pursuant to an underwritten public offering.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

The following table sets forth information pertaining to shares issued upon the exercise of such warrants as of June 30, 2018:

	Issuance Date	Expiration Date	Exercise Price as of June 30, 2018			Shares Underlying Warrants on Issuance Date		Shares Issued upon Warrant Exercises as of June 30, 2018		Shares Underlying Warrants Outstanding as of June 30, 2018 (4)
2013 Warrants	12/16/2013	12/16/2018	$	85.05			3,551		762		2,789
2014 Warrants	08/05/2014	08/05/2019	$	65.50			2,500		1,526		974
Series A Warrants	02/03/2015	02/03/2020	$	3.80			5,542		5,222		320
Series B Warrants	02/03/2015	08/03/2015		-	(1)		5,542		5,542		-
Series C Warrants	05/19/2015	05/19/2020	$	53.43			1,075		-		1,075
Series D Warrants	12/11/2015	12/11/2020	$	40.00			25,125		25,078		47
Series E Warrants	12/11/2015	12/11/2020		-	(1)		20,000		20,000		-
Series F Warrants	04/01/2016	04/01/2021	$	40.00			25,733		11,692		14,041
Series G Warrants	04/01/2016	04/01/2017		-	(1)		16,429		16,429		-
Series H Warrants	04/01/2016	10/01/2016		-	(1)		51,465		51,465		-
Series I Warrants	09/13/2016	09/13/2021	$	220.00			35,650		-		35,650
Series J Warrants	09/13/2016	09/13/2017		-	(1)		9,250		9,250		-
Series K Warrants	02/17/2017	2/17/2022	$	3.80			312,516		308,510		4,006
Series L Warrants	02/17/2017	02/17/2018		-	(1)		28,500		28,500		-
Series M-A Warrants	02/17/2017	11/17/2017		-	(1), (2)		115,250		74,250		-
Series M-B Warrants	02/17/2017	11/17/2017		-	(1), (3)		197,250		197,250		-
							855,378		755,476		58,902

(1)	Warrants have either been fully exercised and/or expired as of June 30, 2018.

(2)	In October 2017, the exercise price of Series M warrants to purchase 74,250 shares of common stock were repriced between $12.00 and $13.00 per share. Of those warrants that were repriced, all were exercised in the fourth quarter of 2017, providing proceeds of $1.0 million.

(3)	In September 2017, the exercise price of Series M warrants to purchase 197,250 shares of common stock were repriced to $12.00 per share. Of those warrants that were repriced, all were exercised in the second half of 2017, providing proceeds of $2.4 million.

(4)	This table does not include equity-classified warrants to purchase 6 shares of common stock issued in 2011, with strike price of $354 per share.

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

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

•

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 June 30, 2018, Series A Warrants to purchase 251 shares of common stock and Series K Warrants to purchase 300,510 shares of common stock were exercised to purchase an aggregate of 300,761 shares of common stock, providing cash proceeds of approximately $1.3 million.

As of June 30, 2018, all of the Series B, E, G, H, J, L and M Warrants for which the exercise price had been adjusted were fully exercised or expired.

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).

	June 30,		December 31,
	2018		2017
Accounts payable - trade	$	1,053	$	666
Accrued legal-related fees		82		274
Accrued employee compensation		655		700
Accrued interest		418		434
Accrued production fees		315		447
Accrued utilities and supplies payable		605		677
Accrued taxes payable		52		172
Customer deposit		-		436
Other accrued liabilities *		340		205
Total accounts payable and accrued liabilities	$	3,520	$	4,011

*	Other accrued liabilities consist of franchise taxes, audit fees, and a variety of other expenses, none of which individually represent greater than five percent of total current liabilities.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

9. Debt

2020 Notes

The following table sets forth information pertaining to the 2020 Notes which is included in the Company’s consolidated balance sheets (in thousands).

	Principal Amount of 2020 Notes			Debt Discount			Debt Issue Costs			Total 2020 Notes			2020 Notes Embedded Derivative			Total 2020 Notes and 2020 Notes Embedded Derivative
Balance - December 31, 2017	$	16,657		$	(2,501	)	$	(665	)	$	13,491		$	5,224		$	18,715
Amortization of debt discount		-			566			-			566			-			566
Amortization of debt issue costs		-			-			150			150			-			150
Paid-in-kind interest		168			-			-			168			-			168
Change in fair value of 2020 Notes embedded derivative		-			-			-			-			(2,347	)		(2,347	)
Conversion of 2020 Notes into common stock		(3,186	)		428			114			(2,644	)		(2,193	)		(4,837	)
Balance - June 30, 2018	$	13,639		$	(1,507	)	$	(401	)	$	11,731		$	684		$	12,415

On April 19, 2017, the Company entered into an Exchange and Purchase Agreement (the “Purchase Agreement”) with WB Gevo, LTD, the holder of the 2017 Notes (the “Holder”) and Whitebox Advisors LLC, in its capacity as representative of the Holder (“Whitebox”). The 2020 Notes were issued under that certain Indenture dated as of June 6, 2014, by and among the Company, the guarantors party thereto, and Wilmington Savings Fund Society, FSB, as trustee and as collateral trustee (as supplemented, the “2017 Notes Indenture”), and Whitebox. Pursuant to the terms of the Purchase Agreement, the Holder, subject to certain conditions, including approval of the transaction by the Company’s stockholders (which was received on June 15, 2017), agreed to exchange all of the outstanding principal amount of the 2017 Notes for an equal principal amount of the 2020 Notes, plus an amount in cash equal to the accrued and unpaid interest (other than interest paid in kind) on the 2017 Notes (the “Exchange”). Pursuant to the Purchase Agreement, the Company also granted the Holder an option (the “Purchase Option”) to purchase up to an additional aggregate principal amount of $5.0 million of 2020 Notes (the “Option Notes”), at a purchase price equal to the aggregate principal amount of such Option Notes purchased, having identical terms (other than with respect to the issue date and restrictions on transfer relating to compliance with applicable securities law) to the 2020 Notes issued, at any time on or within ninety (90) days of the closing of the Exchange. The right to purchase Option Notes expired in the third quarter of 2017. On June 20, 2017, the Company completed the Exchange, terminated the 2017 Notes Indenture and cancelled the 2017 Notes. The Company recognized an approximately $3.9 million loss which has been recorded as loss on exchange or conversion of debt within the consolidated statements of operations.

The 2020 Notes will mature on March 15, 2020. The 2020 Notes bear interest at a rate equal to 12% per annum (with 2% potentially payable as PIK Interest (as defined and described below) at the Company’s option), payable on March 31, June 30, September 30, and December 31 of each year. Under certain circumstances, the Company has 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”). In the event the Company pays any portion of the interest due on the 2020 Notes as PIK Interest, the maximum aggregate principal amount of 2020 Notes that could be convertible into shares of the Company’s common stock will be increased. Additional shares of the Company’s common stock may also become issuable pursuant to the 2020 Notes in the event the Company is required to make certain make-whole payments as provided in the 2020 Notes Indenture.

The 2020 Notes are convertible into shares of the Company’s common stock, subject to certain terms and conditions. The initial conversion price of the 2020 Notes is equal to $14.72 per share of common stock, or .06795 shares of common stock per $1 principal amount of 2020 Notes (the “Conversion Price”). In addition, upon certain equity financing transactions by the Company, the Holders will have a one-time right to reset the Conversion Price (the “Reset Provision”) (i) in the first ninety (90) days following the Exchange Date, at a 25% premium to the common stock price in the equity financing and (ii) after ninety (90) and to and including one hundred eighty (180) days following the closing of the Exchange, at a 35% premium to the common stock share price in the equity financing. Following an exercise of the Reset Provision, the Holders will also have a right to consent to certain equity financings by the Company during the one hundred eighty (180) days following the closing of the Exchange.

Each Holder has agreed not to convert its 2020 Notes into shares of Company common stock to the extent that, after giving effect to such conversion, the number of shares of common stock beneficially owned by such Holder and its affiliates would exceed 4.99% of Company common stock outstanding at the time of such conversion (the “4.99% Ownership Limitation”); provided that a Holder may, at its option and upon sixty-one (61) days’ prior notice to the Company, increase such threshold to 9.99% (the “9.99% Ownership Limitation”). If a conversion of 2020 Notes by Whitebox would exceed the 4.99% Ownership Limitation or the 9.99% Ownership Limitation, as applicable, the 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.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

Other than as set forth in the Reset Provision, the 2020 Notes do not contain any anti-dilution adjustments for future equity issuances that are below the Conversion Price, and adjustments to the 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.

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 Notes.

During the three months ended June 30, 2018, an aggregate of 260,793 shares of common stock were issued to the holder of the 2020 Notes upon the conversion of an aggregate of approximately $3.2 million in outstanding principal and $0.7 million in "make-whole" interest.

2022 Notes

The following table sets forth information pertaining to the 2022 Notes which is included in the Company’s consolidated balance sheets (in thousands).

	Principal Amount of 2022 Notes
Balance - December 31, 2017	$	515
Exchange of 2022 Notes		(515	)
Balance – June 30, 2018	$	—

In July 2012, the Company sold $45.0 million in aggregate principal amount of 2022 Notes, for net proceeds of $40.9 million, after accounting for $2.7 million and $1.4 million of discounts and issue costs, respectively. The 2022 Notes bear interest at 7.5% per annum, which is to be paid semi-annually in arrears on January 1 and July 1 of each year. The 2022 Notes were to mature on July 1, 2022, unless earlier repurchased, redeemed or converted. During the six months ended June 30, 2018 and 2017, the Company recorded:

●

$0.0 million and $0.08 million, respectively, of expense related to the amortization of debt discounts and issue costs,

●

$0.02 million and $1.2 million, respectively, of expense related to the exchange of debt;

●

$0.0 million and $0.02 million, respectively, of interest expense related to the 2022 Notes.

The amortization of debt issue costs, debt discounts and cash interest are included as a component of interest expense in the consolidated statements of operations. The Company amortized debt discounts and debt issue costs associated with the 2022 Notes using an effective interest rate of 40% from the issuance date through July 1, 2017, a five-year period, which represents the date the holders can require the Company to repurchase the 2022 Notes.

In January 2018, the Company entered into a private exchange agreement with a holder of the 2022 Notes to exchange the remaining $0.5 million of outstanding principal amount of the 2022 Notes for 39,016 shares of common stock. Upon completion of this exchange, the 2022 Notes were satisfied in their entirety and there are no remaining obligations under the 2022 Notes.

10. Gevo Development

The Company made capital contributions to Gevo Development of $0.5 million and $3.0 million during the three months ended June 30, 2018 and 2017, and $1.8 million and 6.2$ million, respectively, during the six months ended June 30, 2018 and 2017, respectively.

The following table sets forth (in thousands) the net loss incurred by Gevo Development (including Agri-Energy after September 22, 2010, the closing date of the acquisition) which has been fully allocated to the Company’s capital contribution account based upon its capital contributions (for the period prior to September 2010) and 100% ownership (for the period after September 22, 2010).

	Three Months Ended June 30, 2018						Six Months Ended June 30, 2018
	2018			2017			2018			2017
Gevo Development Net Loss	$	(2,062	)	$	(3,067	)	$	(4,579	)	$	(7,178	)

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

The accounts of Agri-Energy are consolidated within Gevo Development as a wholly-owned subsidiary which is then consolidated into Gevo.

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.

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Stock options and employee stock purchase plan awards
Research and development	$	9	$	9	$	18	$	18
Selling, general and administrative		11		31		41		61

Restricted stock awards
Research and development		-		1		-		13
Selling, general and administrative		-		-		-		17

Restricted stock units
Research and development		17		17		34		35
Selling, general and administrative		17		39		58		81

Stock appreciation rights
Research and development		-		-		-		-
Selling, general and administrative		86		-		86		-
Total stock-based compensation	$	140	$	97	$	237	$	225

12. Commitments and Contingencies

Legal Matters. From time to time, the Company has been and may again become involved in legal proceedings arising in the ordinary course of its business. The Company is not presently a party to any litigation that it believes to be material and is not aware of any pending or threatened litigation against the Company that it believes could have a material adverse effect on its business, operating results, financial condition or cash flows.

Leases. During the year ended December 31, 2012, the Company entered into a six-year software license agreement. The Company concluded that the software license agreement qualified as a capital lease. Accordingly, at June 30, 2018 and December 31, 2017, there were no capital lease obligations outstanding.

The Company has an operating lease for its office, research, and production facility in Englewood, Colorado with a term expiring in July 2021. The Company also maintains a corporate apartment in Colorado, which has a lease term expiring during the next 12 months. The Company has an operating lease for the rail cars used by Agri-Energy in Luverne, Minnesota.

Rent expense for the three months ended June 30, 2018 and 2017, respectively, was $0.4 and $0.4, and for the six months ended June 30, 2018 and 2017 was $0.9 million and $0.8 million, respectively.

The table below shows the future minimum payments under non-cancelable operating leases and at June 30, 2018 (in thousands):

	Operating Leases
2018 (remaining)	$	731
2019		943
2020		430
2021		218
2022 and thereafter		-
Total	$	2,322

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

On July 27, 2018, the Company entered into an Equipment Operating Lease and Services Agreement with Shockwave, LLC ("Shockwave") for one DGS Drying Machine (the "Dryer Agreement"). Pursuant to the terms of the Dryer Agreement, the Company is obligated to pay Shockwave $1.0 million in forty-eight equal payments following the installation of the DGS Drying Machine. Also on July 27, 2018, the Company entered into an Equipment Operating Lease and Services Agreement with Shockwave for one Corn Fractionation Machine ("the Corn Fractionation Agreement"). Pursuant to the terms of the Corn Fractionation Agreement, the Company is obligated to pay Shockwave $2.5 million in forty-eight equal payments following the Operation Date, as such term is defined in the Corn Fractionation Agreement.

Indemnifications. In the ordinary course of its business, the Company makes certain indemnities under which it may be required to make payments in relation to certain transactions. As of June 30, 2018 and December 31, 2017, the Company did not have any liabilities associated with indemnities.

Certain of the Company’s financial instruments consist of cash and cash equivalents, accounts receivable, and accounts payable, for which the carrying value on the Company’s balance sheet approximates their fair values due to the short maturities.

In addition, the Company, as permitted under Delaware law and in accordance with its amended and restated certificate of incorporation and amended and restated bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The duration of these indemnifications, commitments, and guarantees varies and, in certain cases, is indefinite. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover a portion of any future amounts paid. The Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. No such losses have been recorded to date.

Environmental Liabilities. The Company’s operations are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which it operates. These laws require the Company to investigate and remediate the effects of the release or disposal of materials at its locations. Accordingly, the Company has adopted policies, practices and procedures in the areas of pollution control, occupational health and the production, handling, storage and use of hazardous materials to prevent material environmental or other damage, and to limit the financial liability which could result from such events. Environmental liabilities are recorded when the Company’s liability is probable and the costs can be reasonably estimated. No environmental liabilities have been recorded as of June 30, 2018 or December 31, 2017.

13. Fair Value Measurements

Accounting standards define fair value, outline a framework for measuring fair value, and detail the required disclosures about fair value measurements. Under these standards, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. Standards establish a hierarchy in determining the fair market value of an asset or liability. The fair value hierarchy has three levels of inputs, both observable and unobservable. Standards require the utilization of the highest possible level of input to determine fair value.

Level 1 – inputs include quoted market prices in an active market for identical assets or liabilities.

Level 2 – inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an active market, and other observable information that can be corroborated by market data.

Level 3 – inputs are unobservable and corroborated by little or no market data.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

These tables present the carrying value and fair value, by fair value hierarchy, of the Company's financial instruments, excluding cash and cash equivalents, accounts receivable and accounts payable at June 30, 2018 and December 31, 2017, respectively (in thousands).

			Fair Value Measurements at June 30, 2018 (in thousands)
	Fair Value at June 30, 2018		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring:
Derivative Warrant Liability	$	86	$	-	$	-	$	86
2020 Embedded Derivative Liability		684		-		-		684
Total Recurring Fair Value Measurements	$	770	$	-	$	-	$	770


Nonrecurring
Corn and finished goods inventory	$	1,747	$	188	$	1,559	$	-
Total Non-Recurring Fair Value Measurements	$	1,747	$	188	$	1,559	$	-

Fair Value Measurements at December 31, 2017

(in thousands)

Fair Value at

December 31,

2017

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

Significant Other

Observable Inputs

(Level 2)

Significant

Unobservable

Inputs (Level 3)

Recurring:

Derivative Warrant Liability

1,951

–

1,951

2020 Notes Embedded Derivative Liability

5,224

–

5,224

Total Recurring Fair Value Measurements

7,175

–

7,175

Nonrecurring

Corn and finished goods inventory

1,916

189

1,727

–

Total Non-Recurring Fair Value Measurements

1,916

189

1,727

–

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

The following table provides changes to those fair value measurements using Level 3 inputs for the six months ended June 30, 2018.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (in thousands)

	Derivative Warrant Liability			2020 Notes Embedded Derivative
Opening Balance	$	1,951		$	5,224
Transfers into Level 3		–			–
Transfers out of Level 3		–			–
Total (gains) or losses for the period
Included in earnings		3,040			(2,347	)
Included in other comprehensive income		–			–
Purchases, issues, sales and settlements
Purchases		–			–
Issues		–			–
Sales		–			–
Settlements		(4,905	)		(2,193	)
Closing balance	$	86		$	684

Inventories. The Company records its corn inventory at fair value only when the Company’s cost of corn purchased exceeds the market value for corn. The Company determines the market value of corn and dry distiller’s grain based upon Level 1 inputs using quoted market prices. The Company records its ethanol, isobutanol and hydrocarbon inventory at market using Level 2 inputs.

2020 Notes Embedded Derivative. The Company had estimated the fair value of the embedded derivative on a stand-alone basis to be $0.7 million at June 30, 2018 and $5.2 million at December 31, 2017 based upon Level 3 inputs. Changes in the fair value of the embedded derivative is recognized each reporting period as a “Change in fair value of 2020 Notes embedded derivative” in the consolidated Statements of Operations and Statements of Cash Flows. See Note 6, Embedded Derivatives and Derivative Warrant Liabilities, for the fair value inputs used to estimate the fair value of the embedded derivative.

Derivative Warrant Liability. The Company values the Series K Warrants using a Monte-Carlo model (Level III), and all others using a Black-Scholes model, which have historically included additional inputs (Level III). The Company has estimated the fair value of the derivative warrant liability to be $0.1 million as of June 30, 2018. Changes in the fair value of the derivative warrant liability is recognized each reporting period as a “Change in fair value of derivative warrant liability” in the consolidated Statements of Operations and Statements of Cash Flows.

While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

14. Segments

The Company has determined that it has two operating segments: (i) Gevo segment; and (ii) Gevo Development/Agri-Energy segment. The Company organizes its business segments based on the nature of the products and services offered through each of the Company's consolidated legal entities. Transactions between segments are eliminated in consolidation.

Gevo Segment. The Gevo segment is responsible for all research and development activities related to the future production of isobutanol, including the development of the Company's proprietary biocatalysts, the production and sale of biojet fuel, the Company's retrofit process and the next generation of chemicals and biofuels that will be based on the Company's isobutanol technology. The Gevo segment also develops, maintains and protects the Company's intellectual property portfolio, develops future markets for the Company's isobutanol and provides corporate oversight services.

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GEVO, INC.

Notes to Unaudited Consolidated Financial Statements

(unaudited)

Gevo Development/Agri-Energy Segment. The Gevo Development/Agri-Energy segment is currently responsible for the operation of the Company's Luverne Facility and the production of ethanol, isobutanol and related products.

The tables below present revenues, loss from operations, interest expense, depreciation expense and acquisitions of plant, property and equipment by segment, in thousands.

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Revenues:
Gevo	$	607		$	660		$	632		$	749
Gevo Development / Agri-Energy		8,813			6,882			17,031			12,408
Consolidated	$	9,420		$	7,542		$	17,663		$	13,157

Loss from operations:
Gevo	$	(2,315	)	$	(3,091	)	$	(4,791	)	$	(6,156	)
Gevo Development / Agri-Energy		(2,064	)		(3,086	)		(4,587	)		(7,205	)
Consolidated	$	(4,379	)	$	(6,177	)	$	(9,378	)	$	(13,361	)

Interest expense:
Gevo	$	904		$	630		$	1,729		$	1,341
Gevo Development / Agri-Energy		-			-			-			-
Consolidated	$	904		$	630		$	1,729		$	1,341

Depreciation expense:
Gevo	$	76		$	127		$	160		$	264
Gevo Development / Agri-Energy		1,563			1,538			3,125			3,077
Consolidated	$	1,639		$	1,665		$	3,285		$	3,341

Acquisitions of plant, property and equipment:
Gevo	$	2		$	53		$	2		$	109
Gevo Development / Agri-Energy		54			265			121			882
Consolidated	$	56		$	318		$	123		$	991

	June 30,			December 31,
	2018			2017
Total assets (in thousands):
Gevo	$	115,116		$	87,507
Gevo Development / Agri-Energy		143,982			149,758
Intercompany eliminations		(143,068	)		(148,412	)
Consolidated	$	116,030		$	88,853

15. Subsequent Events

None noted except for those events described in Notes 2, 5 and 125 to the unaudited consolidated financial statements for the three and six months ended June 30, 2018.

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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 27A of the Securities Act of 1933, as amended, and 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 important factors that may cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements may include, but are not limited to, risks and uncertainties related to our ability to sell our products, our ability to expand or continue production of ethanol and isobutanol at our Luverne Facility (as defined below),, our ability to meet our production, financial and operational guidance, our ability and plans to construct a commercial hydrocarbon facility to produce alcohol-to-jet fuel (“ATJ”), our ability to raise additional funds to continue operations and/or expand the Luverne Facility, our ability to produce ethanol and isobutanol on a commercial level and at a profit, achievement of advances in our technology platform, the success of our retrofit production model, 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 ethanol and isobutanol and the products derived from isobutanol, additional competition and changes in economic conditions, the future price and volatility of petroleum and products derived from petroleum, and those risks described in documents we have filed with the U.S. Securities Exchange Commission (the “SEC”), including this Report in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” our Annual Report on Form 10-K for the year ended December 31, 2017 (our “Annual Report”), and other reports that we have filed with the SEC. All forward-looking statements in this Report are qualified entirely by the cautionary statements included in this Report and such other filings. These risks and uncertainties could cause actual results to differ materially from results expressed or implied by forward-looking statements contained in this Report. These forward-looking statements speak only as of the date of this Report. We disclaim any undertaking to publicly update or revise any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Unless the context requires otherwise, in this Report the terms “we,” “us,” “our” and the “Company” refer to Gevo, Inc. and its subsidiaries.

The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes and other financial information appearing elsewhere in this Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including, without limitation, the disclosures in our Annual Report.

Reverse Stock Split

On May 30, 2018, after receipt of stockholder approval, our board of directors approved an amendment to our Amended and Restated Certificate of Incorporation to effect a reverse stock split of the outstanding shares of our common stock by a ratio of one-for-twenty (the “Reverse Stock Split”). On June 1, 2018, we effected the Reverse Stock Split and our common stock began trading on a Reverse Stock Split basis on June 4, 2018. Unless otherwise indicated, all share amounts, per share data, share prices, exercise prices and conversion rates set forth herein have, where applicable, been adjusted retroactively to reflect the Reverse Stock Split.

Company Overview

We are a next generation “low-carbon” fuel company focused on the development and commercialization of renewable alternatives to petroleum-based products. Low-carbon fuels reduce the carbon intensity, or the level of greenhouse gas emissions, compared to standard fossil-based fuels across their lifecycle. The most common low-carbon fuels are renewable fuels. We are focused on the development and production of mainstream fuels like gasoline and jet fuel using renewable feedstocks, that have the potential to lower greenhouse gas emissions at a meaningful scale and enhance agricultural production, including food and other related products. In addition to serving the low-carbon fuel markets, through our technology, we can also serve markets for the production of chemical intermediate products for solvents, plastics, and building block chemicals.

Our proven production technologies target what we believe to be large potential markets of renewable fuels and related chemicals that can compete directly against petrochemical products depending on the price of oil and the value of carbon intensity. Renewable fuels are one of the few fuel products where the value for renewable carbon has already been established, particularly in the United States and the European Union. We believe that the demand for low-carbon fuels and renewable chemicals will continue to grow in the future.

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Decarbonization

We believe that we have the technology and production platform to produce renewable fuels that reduce or eliminate greenhouse gases from the burning of fuels, and to do so profitably. Low-carbon fuels can best be produced by (i) replacing fossil-based carbon with renewable carbon, and (ii) replacing some or most of the fossil-based energy sources needed for heat and electricity during the fuel production process. Renewable carbon comes from growing plants and crops. Growing plants efficiently provides the opportunity to capture carbon in the soil and generate protein, further lowering the carbon intensity of fuels produced from these renewable feedstocks. Eliminating or reducing fossil-based carbon is referred to as “decarbonization,” and the products resulting from such a decarbonization process are rewarded with a lower carbon intensity (“C.I.”) score, which increases the market value of certain products. In addition to the U.S. Renewable Fuel Standard policy that rewards low-carbon fuels, certain markets in North America such as California, Oregon, Washington and Canada and countries such as Japan, China, India, and other Asian countries are ascribing extra economic value on decarbonization. We believe that decarbonization is an emerging market opportunity, and that we have the technologies, products and a base production facility to take advantage of this opportunity.

The State of California is a leader in the push for decarbonization with its Low Carbon Fuel Standard (LCFS), which is a market-based cap and trade approach to lowering the greenhouse gas emissions from petroleum-based transportation fuels. We believe that the LCFS approach to reducing greenhouse gases will be implemented by Canada and other states in the United States (Oregon and Washington, as examples) and eventually could be implemented at the Federal level, which should create more demand for low-carbon fuel products. The demand and value for low-carbon fuel products in California has sharpened our focus on low C.I. ethanol. Our current production plant is small enough and specialized enough so that, with certain process optimizations, we could reduce our demand for fossil-based energy required in the production process. By doing this, we would increase the value of our ethanol because it would carry a lower C.I. score, which would translate into a premium selling price in the market. Any improvements we make to produce low-carbon ethanol, are also expected to benefit any other low-carbon products we produce, such as our renewable isobutanol, jet fuel and isooctane (gasoline).

Low-Carbon Ethanol Opportunity

Our specialty production facility in Luverne, Minnesota (the “Luverne Facility”) has an annual production capacity of approximately 20 million gallons per year ("MGPY") of ethanol, 45-50 kilotons of animal feed, and 3 million pounds of corn oil.

The Luverne Facility has the capability, with certain capital improvements, to produce low-carbon ethanol side-by-side with low-carbon isobutanol, in addition to renewable jet fuel and isooctane and other related products that can be made from isobutanol. By focusing on low-carbon ethanol in the near term, debottlenecking production, while adapting and optimizing the Luverne Facility’s energy and equipment infrastructure to use lower amounts of lower fossil-based energy sources, we believe that we can increase revenues to make the Luverne Facility profitable on a non-GAAP Cash EBITDA basis. Cash EBITDA is a non-GAAP measure and is calculated by adding depreciation and non-cash stock compensation to GAAP loss/income from operations. See "Non-GAAP Financial Information" below for additional information regarding non-GAAP EBITDA.

In addition, by undertaking further capital investments to improve our Luverne Facility, we believe we may be able to generate sufficient profits at the Luverne Facility to make the Company on a consolidated basis profitable on a non-GAAP Cash EBITDA basis, independent from the production and sales of isobutanol, jet fuel, isooctane and related technologies. Such capital investments could include: (i) improvements at the Luverne Facility to further lower the C.I. score of our fuel products; and (ii) installing fractionation technologies at the Luverne Facility to produce value added protein feed products, food grade corn oil, as well products using the fiber fraction of corn. Concurrently, while focusing on low-carbon ethanol, we plan on expanding hydrocarbon production either at our hydrocarbons demonstration plant located at South Hampton Resources located in Silsbee, Texas (the “Silsbee Facility”) or, subject to securing adequate financing, by constructing a new larger demo facility at the Luverne Facility for specialty hydrocarbon fuels, which may add additional positive cash flow on a non-GAAP Cash EBITDA basis.

The future improvements that we are planning for the Luverne Facility will lower the carbon intensity of the Luverne Facility and should benefit both ethanol and isobutanol production. The smaller size of our Luverne Facility compared to other ethanol production facilities means that the Luverne Facility offers opportunities to lower carbon intensity that other larger scale plants might not possess. For example, we could install small cogeneration units or make certain changes to unit operations to improve water removal efficiency given the lower power demands for steam and electricity which would result in lower ongoing capital expenditures. We believe that smaller, specialized biofuel production facilities aimed at low-carbon specialty fuels, related specialty protein products, and food oils, will have an advantage over large scale ethanol plants that, out of necessity, have to focus on commodity products for industrial markets. In other words, as these low C.I. markets further develop, tracking carbon lifecycles will be important. Tracking carbon means knowing the supply of feedstock and how it is grown. We believe a smaller production facility like our Luverne Facility will be well positioned to source responsibly grown feedstocks.

Renewable Isobutanol, Jet Fuel, Gasoline and Related Products

We believe that renewable isobutanol is a potentially valuable commercial product because of its versatility to address large markets either as a product directly or as a key intermediate for producing renewable carbon alternatives to mainstream fuels such as jet fuel, gasoline, plastics such as polyethylene terephthalate (“PET”), and various other chemical products and materials. Isobutanol is a four-carbon alcohol that can be sold directly for use as a specialty chemical in the production of solvents, paints and coatings, or more importantly from a market size and performance value-added point of view, as a gasoline blendstock. Because isobutanol can be readily converted to hydrocarbon products such hydrocarbon fuels, including isooctane, isooctene and alcohol-to-jet fuel (“ATJ”), lubricants, polyester, rubber, plastics, fibers and other polymers, we believe that the addressable markets are large, potentially being able to ultimately reach 40% of the global petrochemicals markets depending on the price of oil and the market value of renewable carbon.

We also have proven that our renewable isobutanol can be readily converted to hydrocarbon products that address large markets, such as jet fuel and isooctane. Specifically, our renewable ATJ has been certified for use in commercial aviation and used multiple times for commercial flights.

Our renewable isobutanol is being used as a gasoline blendstock in the Houston area for on-road vehicles as an ethanol-free fuel option for consumers and off-road uses in vehicles, boats and small engines.

Our renewable isooctane meets the performance and specification requirements for use in fuels and related chemicals. It is currently being used in the European Union as a fuel for Formula One race cars, as well as other applications. As a result of the commercial traction that we have already achieved, we believe that there is large potential to grow our business, through a combination of (i) directly producing and selling our renewable isobutanol and related hydrocarbon products and (ii) licensing our technology.

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Our Strategy

Our strategy to grow our business is to become profitable by investing capital to upgrade the Luverne Facility to primarily produce low-carbon ethanol for the California market. We plan to use low-carbon ethanol to achieve positive cash flows, which should provide us the time to execute on our ultimate business goal of producing and selling into the isobutanol and its derivative hydrocarbon product markets such as ATJ and isooctane. Key elements of our strategy include:

	●	Undertake incremental process improvements to lower energy consumption at the Luverne Facility. By investing additional capital at the Luverne Facility, we believe that we can lower the carbon intensity (i.e. lower the carbon dioxide emissions from the plant) creating additional profit margin opportunities in low-carbon markets for ethanol, as well as for our isobutanol and its derivative hydrocarbon products.

	●	Implement fractionation technology at the Luverne Facility. We are evaluating various corn fractionation technologies that can be deployed at the Luverne Facility in order to generate additional revenue from incremental volumes of alcohol, distiller grains and corn oil, as well as generate new revenue opportunities from the production and sale of corn fiber.

	●	Expand hydrocarbon production at the Silsbee Facility. Along with our production partner, South Hampton Resources, we plan to expand and reconfigure the Silsbee Facility in order to generate greater revenues and better profit margins, while enabling customers to further develop markets for ATJ and isooctane which will help us transition these customers to long-term off-take agreements for greater volumes of products.

	●	Enter into supply agreements for isobutanol and its derivative hydrocarbon products with customers to support capacity growth using project financing or other less expensive and less dilutive forms of capital. We intend to build on our existing customer contracts, such as our isooctane supply agreements with HCS Holding GmbH, to obtain additional binding off-take agreements that would economically support converting the Luverne Facility primarily to the production of isobutanol and its derivative hydrocarbon products. If we are able to obtain sufficient new supply agreements, we expect to be able to raise capital to fund such conversion of the Luverne Facility using project financing or other less expensive and less dilutive forms of capital as compared to the equity offerings that we are conducting hereby and have used in the past.

	●	Subject to receipt of financing, we plan to scale up the Luverne Facility for the production of isobutanol and its derivative products. Upon, and subject to, securing adequate financing, we plan to build out the Luverne Facility to enable the production of isobutanol and its derivative products at levels sufficient to supply our initial larger scale off-take agreements with our customers.

	●	Expand the global production capacity of isobutanol and its derivative hydrocarbon products via licensing. We have proven that the isobutanol production process works in full scale fermenter systems at the Luverne Facility, and we have also proven that our renewable isobutanol can be readily converted to hydrocarbon products at the Silsbee Facility. We intend to expand the global production of isobutanol and its derivative hydrocarbon products beyond the Luverne Facility through a low-cost, high-margin licensing model, in collaboration with partners such as Praj Industries, with whom we have previously announced a joint development agreement.

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Latest Highlights and Developments

●

During the three months ended June 30, 2018, we sold 6,281,409 shares of common stock (after giving effect to the one-for-twenty reverse stock split effected on June 1, 2018) under our at-the-market offering program for gross proceeds of approximately $37.4 million, of which $14.5 million was received on July 3, 2018. As of June 30, 2018, we had cash and cash equivalents of approximately $27.0 million. We sold additional shares of our common stock and raised an additional $0.4 million under the at-the-market offering program after June 30, 2018.