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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission file number: 001-35073
Gevo, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
345 Inverness Drive South, Building C, Suite 310,
Englewood, CO
(Address of Principal Executive Offices)
87-0747704
(I.R.S. Employer
Identification No.)
80112
(Zip Code)
(303) 858-8358
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01 per share
Name of Each Exchange on Which Registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☐
Non-accelerated filer
☒ (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
☐
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sale price of the common stock on June 30, 2012 was approximately $74 million. Shares of
common stock held by each officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant’s common stock, par value $0.01 per share, as of February 28, 2013 was 41,060,366.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Part II of this Annual Report on Form 10-K and Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K incorporate information by reference from the registrant’s definitive
proxy statement to be filed pursuant to Regulation 14A in connection with the registrant’s 2012 Annual Meeting of Stockholders or an amendment to this Annual Report on Form 10-K to be filed with the
Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Annual Report on Form 10-K.
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GEVO, INC.
FORM 10-K—ANNUAL REPORT
For the Fiscal Year Ended December 31, 2012
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
SIGNATURES
Exhibits and Financial Statement Schedules
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Forward-Looking Statements
When used anywhere in this Annual Report on Form 10-K (this “Report”), the words “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan” and
similar expressions are intended to identify forward-looking statements. These statements relate to future events or our future financial or operational
performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or
achievement to differ materially from those expressed or implied by these forward-looking statements. These statements reflect our current views with respect to
future events and are based on assumptions and subject to risks and uncertainties. Such statements are subject to certain risks and uncertainties including those
related to the achievement of advances in our technology platform, the success of our retrofit production model, our ability to gain market acceptance for our
products, additional competition, changes in economic conditions, and those described in documents we have filed with the Securities and Exchange Commission
(the “SEC”), including this Report in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and subsequent
reports on Form 10-Q. All forward-looking statements in this document are qualified entirely by the cautionary statements included in this document 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 document. These forward-looking statements speak only as of the date of this document. 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 “Company” refer to
Gevo, Inc. and its wholly owned or indirect subsidiaries, and their predecessors.
This Report contains estimates and other information concerning our target markets that are based on industry publications, surveys and forecasts,
including those generated by SRI Consulting, a division of Access Intelligence, LLC (“SRI”), Chemical Market Associates, Inc. (“CMAI”), the U.S. Energy
Information Association (the “EIA”), the International Energy Agency (the “IEA”), the Renewable Fuels Association (the “RFA”), and Nexant, Inc. (“Nexant”).
Certain target market sizes presented in this report have been calculated by us (as further described below) based on such information. This information involves a
number of assumptions and limitations and you are cautioned not to give undue weight to this information. The industry in which we operate is subject to a high
degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause actual results to differ
materially from those expressed in these publications, surveys and forecasts.
Conventions that Apply to this Report
With respect to calculation of product market volumes:
•
•
•
•
product market volumes are provided solely to show the magnitude of the potential markets for isobutanol and the products derived from it. They are
not intended to be projections of our actual isobutanol production or sales;
product market volume calculations for fuels markets are based on data available for the year 2010 (the most current data available from the IEA);
product market volume calculations for chemicals markets are based on data available for the year 2012 (the most current data available from
Nexant); and
volume data with respect to target market sizes is derived from data included in various industry publications, surveys and forecasts generated by the
EIA, the IEA and Nexant.
We have converted these market sizes into volumes of isobutanol as follows:
•
we calculated the size of the market for isobutanol as a gasoline blendstock and oxygenate by multiplying the world gasoline market volume by an
estimated 12.5% by volume isobutanol blend ratio;
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•
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we calculated the size of the specialty chemicals markets by substituting volumes of isobutanol equivalent to the volume of products currently used
to serve these markets;
we calculated the size of the petrochemicals and hydrocarbon fuels markets by calculating the amount of isobutanol that, if converted into the target
products at theoretical yield, would be needed to fully serve these markets (in substitution for the volume of products currently used to serve these
markets); and
•
for consistency in measurement, where necessary we converted all market sizes into gallons.
Conversion into gallons for the fuels markets is based upon fuel densities identified by Air BP Ltd. and the American Petroleum Institute.
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Item 1.
Business.
Company Overview
PART I
We are a renewable chemicals and next generation biofuels company. Our overall strategy is to commercialize biobased alternatives to petroleum-based
products using a combination of synthetic biology and chemical technology. In order to implement this strategy, we are taking a building block approach. Initially,
we intend to produce and sell isobutanol from renewable feedstocks. 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 as a value-added fuel blendstock. Isobutanol can also be converted into butenes using straightforward
dehydration chemistry deployed in the refining and petrochemicals industries today. The convertibility of isobutanol into butenes is important because butenes are
primary hydrocarbon building blocks used in the production of lubricants, rubber, plastics, fibers, other polymers and hydrocarbon fuels. We believe that the
products derived from isobutanol have potential applications in approximately 40% of the global petrochemicals market, representing a potential market for
isobutanol of approximately 70 billion gallons per year (“BGPY”), and substantially all of the global hydrocarbon fuels market, representing a potential market
for isobutanol of approximately 950 BGPY. When combined with a potential specialty chemical market for isobutanol of approximately 1.2 BGPY we believe
that the potential global market for isobutanol is greater than 1,000 BGPY.
We believe that products derived from our isobutanol will be drop-in products, which means that our customers will be able to replace petroleum-based
intermediate products with isobutanol-based intermediate products without modification to their equipment or production processes. The final products produced
from our isobutanol-based intermediate products will be chemically and visually identical to those produced from petroleum-based intermediate products, except
that they will contain carbon from renewable sources. Customer interest in our isobutanol is primarily driven by our production route, which we believe will be
cost-efficient, and our isobutanol’s potential to serve as a cost-effective, environmentally sensitive alternative to the petroleum-based intermediate products that
they currently use. We believe that at every step of the value chain, renewable products that are chemically identical to the incumbent petrochemical products will
have lower market adoption hurdles in contrast with other bio-industrial products because the infrastructure and applications for such products already exist. In
addition, we believe that products made from biobased isobutanol will be subject to less raw material cost volatility than the petroleum-based products in use
today based on the historical cost volatility of agricultural feedstocks compared to oil.
In order to produce and sell isobutanol made from renewable sources, we have developed the Gevo Integrated Fermentation Technology (“GIFT ”), an
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integrated technology platform for the efficient production and separation of isobutanol. GIFT consists of two components, proprietary biocatalysts which
convert sugars derived from multiple renewable feedstocks into isobutanol through fermentation, and a proprietary separation unit which is designed to
continuously separate isobutanol from water during the fermentation process. We developed our technology platform to be compatible with the existing
approximately 23 BGPY of global operating ethanol production capacity, as estimated by the RFA. GIFT is designed to allow relatively low capital expenditure
retrofits of existing ethanol facilities, enabling a rapid route to isobutanol production from the fermentation of renewable feedstocks. We believe that our
production route will be cost-efficient and will enable rapid deployment of our technology platform and allow our isobutanol and the products produced from it to
be economically competitive with many of the petroleum-based products used in the chemicals and fuels markets today.
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We expect that the combination of our efficient proprietary technology, our marketing focus on providing drop-in substitutes for incumbent petrochemical
products and our relatively low capital investment retrofit approach will mitigate many of the historical issues associated with the commercialization of renewable
chemicals and fuels.
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Direct Use Markets
Without modification, isobutanol has applications in the specialty chemical and gasoline blendstock markets. Since our potential customers in these
markets would not be required to develop any additional infrastructure to use our isobutanol, we believe that selling into these markets will result in a relatively
low risk profile and produce attractive margins.
Specialty Chemicals
•
Isobutanol has direct applications as a specialty chemical. High-purity and chemical-grade isobutanol can be used as a solvent and chemical
intermediate. We plan to produce high-purity and chemical-grade isobutanol that can be used in the existing butanol markets as a cost-effective,
environmentally sensitive alternative to petroleum-based products.
•
•
We believe that our production route will be cost-efficient and will allow for significant expansion of the historical isobutanol markets within existing
butanol markets through displacing n-butanol, a related compound to isobutanol that is currently sold into butanol markets.
We estimate the total addressable world-wide market for isobutanol as a specialty chemical to be approximately 1.2 BGPY, or approximately $6.5
billion annually.
Gasoline Blendstocks
•
Isobutanol has direct applications as a gasoline blendstock. Fuel-grade isobutanol may be used as a high energy content, low Reid Vapor Pressure
(“RVP”), gasoline blendstock and oxygenate. Based on isobutanol’s low water solubility, in contrast with ethanol, we believe that isobutanol will be
compatible with existing refinery infrastructure, allowing for blending at the refinery rather than blending at the terminal.
•
Further, based on isobutanol’s high energy content and low water solubility, as well as testing completed by the National Marine Manufacturers
Association (“NMMA”), the Outdoor Power Equipment Institute (“OPEI”) and Briggs & Stratton (“B&S”), we believe that isobutanol has direct
applications as a blendstock in high value specialty fuels markets serving marine, small engine and sports vehicle markets.
•
We estimate the total addressable world-wide market for isobutanol as a gasoline blendstock to be approximately 40 BGPY, or approximately $100
billion annually.
Butene and Hydrocarbon Markets
Beyond direct use as a specialty chemical and fuel blendstock, isobutanol can be converted into butenes, para-xylene (“PX”), and many hydrocarbon fuels
and specialty blendstocks, offering substantial potential for additional demand.
Butenes
•
Isobutanol can be dehydrated to produce butenes which have many industrial uses in the production of plastics, fibers, rubber and other polymers.
The straightforward conversion of isobutanol into butenes is a fundamentally important process that enables isobutanol to be used as a building block
chemical in multiple markets.
•
Traditionally butenes have been produced as co-products from the process of cracking naptha in the production of ethylene. Reported reductions in
the use of naptha as the feedstock for the production of ethylene have changed the projected menu of co-products, resulting in a projected reduction
in the volume of available butenes. This structural shift in feedstocks increases the potential market opportunity for our isobutanol in the production
of butenes.
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•
•
Chemical-grade isobutanol can be sold to isobutylene and n-butene (butenes) chemicals users for conversion into lubricants, methyl methacrylate
(“MMA”) and rubber applications.
We estimate the total addressable world-wide market for butenes to be approximately 2.1 BGPY, or approximately $6.1 billion annually.
Para-xylene and Polyethylene Terephthalate
•
•
Jet Fuel
•
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Isobutanol can be used to produce PX and its derivatives, including polyesters, which are used in the beverage and food packaging and fibers
markets. PX is a key raw material in polyethylene terephthalate (“PET”) production.
We estimate the global market for PET to be approximately 50 million metric tons, or approximately $100 billion annually, of which approximately
30% will be used for plastic bottles and containers.
We have demonstrated the conversion of our isobutanol into a renewable jet fuel blendstock which meets current ASTM International (“ASTM”) and
U.S. military synthetic jet fuel blendstock performance and purity requirements. We are working to obtain an ASTM standard specification for the
use of such jet fuel blendstock in commercial aviation. We have already presented positive test results from fit-for-purpose testing of our biojet fuel
to ASTM’s ‘alcohol-to-jet’ (“ATJ”) task force. Full ASTM specification has been established for our ATJ fuel and is expected in 2014.
Military and commercial airlines are currently looking to form strategic alliances with biofuels companies to meet their fuel supply demands.
We estimate the global market for biojet fuel to be approximately 77 BGPY, or approximately $200 billion annually.
Other Hydrocarbon Fuels
•
Diesel fuel, gasoline, isooctane, isooctene and bunker fuel may also be produced from our isobutanol. In our laboratories we have demonstrated the
conversion of isobutanol to isooctane and renewable gasoline. We have also converted isobutanol to kerosene with properties which we expect may
be fit for diesel blending applications.
Our Retrofit Strategy
We plan to commercialize our isobutanol through a strategy of retrofitting existing ethanol production facilities to produce isobutanol and have developed
our technology platform to be compatible with the existing approximately 23 BGPY of global operating ethanol production capacity. This approach allows us to
project lower capital outlays and a faster commercial deployment schedule than the construction of new plants. We believe the ability of GIFT to convert sugars
from multiple renewable feedstocks into isobutanol will enable us to leverage the abundant domestic sources of historically low cost grain feedstocks (e.g., corn)
currently used for ethanol production and will potentially enable the expansion of our production capacity into international markets that use sugar cane or other
feedstocks that are prevalent outside of the U.S.
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We believe that our isobutanol not only offers a compelling value proposition to customers in the chemicals and fuels markets, but should also provide
current ethanol plant owners with an opportunity to increase their long-term operating margins through the retrofit of their existing facilities in joint venture
settings or through licensing of our technology. In addition, we plan to sell our isobutanol primarily under long-term off-take agreements, such as our agreement
with Sasol Chemical Industries, acting through its Sasol Solvents Division (“Sasol”). This approach, which is a departure from the traditional model for ethanol
sales, is expected to
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enhance operating margin stability by incorporating minimum volume amounts and pricing terms that adjust in part based on feedstock costs, thus improving the
overall business model for existing ethanol plant owners. Ethanol is often sold under marketing agreements that do not include volume requirements or pricing
formulas that adjust based on feedstock costs, which can result in volatile operating margins that are a significant operational challenge for current ethanol plant
owners.
We are developing our retrofit equipment package through our exclusive alliance with ICM, Inc. (“ICM”), a leading engineering firm that has designed
approximately 50% of current North American operating ethanol production capacity, which the RFA estimates to be over 13.5 BGPY. We plan to secure access
to existing ethanol production facilities through joint ventures, licensing arrangements, tolling partnerships and direct acquisitions. We will then work with ICM
to deploy GIFT through retrofit of these production facilities.
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In September 2010, we acquired a 22 million gallon per year (“MGPY”) ethanol production facility in Luverne, Minnesota (the “Agri-Energy Facility”).
The Agri-Energy Facility is a traditional dry-mill facility, which means that it uses dry-milled corn as a feedstock. In partnership with ICM, we have developed a
detailed retrofit design for this facility and began the retrofit in 2011. In May 2012, we commenced initial startup operations for the production of bio-based
isobutanol at the Agri-Energy Facility. During initial startup operations we produced approximately 100,000 gallons of bio-based isobutanol for initial sales and
future customer testing. In September 2012, as a result of a lower than planned production rate of isobutanol, we made the strategic decision to pause isobutanol
production at the Agri-Energy Facility for a period of time to focus on optimizing specific parts of our technology to further enhance isobutanol production rates.
Factors that contributed to this strategic decision included, among others, that producing isobutanol at startup production rates while working to improve those
production rates would result in operating the Agri-Energy Facility at significantly below break-even cash flow levels and that we believed that we had generated
the necessary information required from our startup operations to work on enhancing our production rates at our testing laboratory in Colorado. We intend to
resume isobutanol production at the Agri-Energy Facility in support of future commercial operations once this work has been completed. Based on our progress
to date we anticipate commencing a limited commercial scale campaign for the production of isobutanol at the Agri-Energy Facility in 2013 to demonstrate
commercial scale capacity and sell resulting product.
Through December 31, 2012, we have incurred capital costs of approximately $56.1 million on the retrofit of the Agri-Energy Facility. The retrofit of the
Agri-Energy Facility includes a number of additional capital costs that are unique to the design of the facility, including additional equipment that we believe will
allow us to switch between ethanol and isobutanol production, modifications to increase the potential production capacity of GIFT at this facility and the
establishment of an enhanced yeast seed train to accelerate the adoption of improved yeast strains at this facility and at future plants. Capital expenditures at the
Agri-Energy Facility also include upfront design and engineering costs, plant modifications identified as necessary during initial startup operations for the
production of isobutanol as well as sales tax on equipment and capitalized interest. We have incurred approximately $21.7 million in capital expenditures
associated with these additional design features and other costs.
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Until May 2012, when we commenced startup operations for the production of isobutanol at the Agri-Energy Facility, we derived revenue from the sale of
ethanol, distiller’s grains and other related products produced as part of the ethanol production process at the Agri-Energy Facility. Continued ethanol production
during the retrofit process allowed us to retain local staff for the future operation of the plant, maintain the equipment and generate cash flow. However, the
continued production of ethanol is not our intended business and our future return on invested capital depends on our ability to produce and market isobutanol and
products derived from isobutanol, not on continued production and sales of ethanol. We believe that we will be able to transition back to the production and sale
of ethanol and related products at the Agri-Energy Facility, other than during certain periods while we are working to optimize certain parts of our isobutanol
production technology, if we were to project positive cash flows from ethanol operations versus maintaining the facility at idle, including any costs related to the
transition, but there is no guarantee that this will be the case. Through the date this
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Annual Report was filed, we have not transitioned back to ethanol production because, based on current ethanol operating conditions, we believe that we would
generate greater negative cash flows compared to maintaining the Agri-Energy Facility at idle. Following the commencement of full-scale commercial production
of isobutanol, we do not expect to generate significant future revenues from the sale of ethanol produced at the Agri-Energy Facility. Accordingly, the historical
operating results of our subsidiary, Agri-Energy, LLC (“Agri-Energy”), and the operating results reported during the retrofit to isobutanol production may not be
indicative of future operating results for Agri-Energy or Gevo’s consolidated results once commercial scale isobutanol production commences at this facility.
On June 15, 2011, we entered into an isobutanol joint venture agreement (the “Joint Venture Agreement”) with Redfield Energy, LLC, a South Dakota
limited liability company (“Redfield”), under which we have agreed to work with Redfield to retrofit Redfield’s approximately 50 MGPY ethanol production
facility located near Redfield, South Dakota (the “Redfield Facility”) for the commercial production of isobutanol. We will be responsible for all costs associated
with the retrofit of the Redfield Facility. We will be entitled to a percentage of Redfield’s profits, losses and distributions after commercial production of
isobutanol has begun. We have begun the project engineering and permitting process of the retrofit of the Redfield Facility. As of December 31, 2012, we have
incurred $0.4 million in planning-related costs for the future retrofit of the Redfield Facility, which have been recorded on our balance sheets in deposits and other
assets. Based on our preliminary engineering estimates, we will need to raise additional debt or equity capital to complete the retrofit of the Redfield Facility, but
are not obligated to do so.
We are currently in discussions with several other ethanol plant owners that have expressed an interest in entering into joint ventures, licensing
arrangements, tolling arrangements or selling their facilities to us for retrofit to produce isobutanol. Collectively, these ethanol plant owners represent over 1.7
BGPY of ethanol capacity. However, there can be no assurance that we will be able to acquire access to ethanol plants from these owners. We have also entered
into a non-binding collaborative agreement with the Malaysian government’s East Coast Economic Region Development Council, Malaysian Biotechnology
Corporation and the State Government of Terengganu with the intent to develop a cellulosic biomass isobutanol facility in Southeast Asia.
Customer Agreements
We anticipate commencing a limited commercial scale campaign for the production of isobutanol in 2013 at our Agri-Energy Facility to demonstrate
commercial scale capacity and sell resulting product. We expect initial commercial production to be directed to serve the high-purity and chemical-grade markets
as contemplated under our international off-take and distribution agreement with Sasol, and to provide introductory volumes to the specialty fuel blendstock
markets in the U.S., under our commercial off-take agreement with Mansfield Oil Company (“Mansfield”). Upon commencing commercial isobutanol
production, we intend to produce and sell isobutanol distiller’s grains (“iDGs™”) as an animal feed co-product in the same manner as distiller’s grains are sold in
the ethanol industry today.
As our access to production capacity increases, we plan to transition to selling increased isobutanol volumes under direct customer relationships, certain of
which we have already established. As of December 31, 2012, we have entered into the following agreements:
Off-take Agreements
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Sasol Chemical Industries. In July 2011, we entered into an international off-take and distribution agreement with Sasol to distribute isobutanol
globally. The agreement has an initial term of three years and appoints Sasol as a worldwide distributor of our high-purity, chemical-grade biobased
isobutanol for sale as a solvent or chemical intermediate. Sasol has been granted non-exclusive distribution rights in North and South America and
exclusive distribution rights in the rest of the world. Upon our first commercial sale of isobutanol under the terms of the agreement, if Sasol desires
to maintain its exclusive distribution rights, it is obligated to either purchase certain minimum quantities of isobutanol
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or pay us applicable shortfall fees. We are also obligated to either supply Sasol with certain minimum quantities of isobutanol or pay Sasol applicable
shortfall fees. The agreement includes a pricing mechanism that accounts for changes in corn feedstock costs, within certain market-based limits.
•
Mansfield Oil Company. In August 2011, we entered into a commercial off-take agreement with Mansfield to distribute isobutanol-based fuel into
the petroleum market. Mansfield markets and distributes fuel to thousands of commercial customers across the U.S. and has over 900 supply points
across the U.S. The agreement allows Mansfield to blend our isobutanol for its own use and to be a distributor of our isobutanol for a term of five
years. We also entered into a three-year supply services agreement with C&N, a Mansfield subsidiary (“C&N”), which will provide supply chain
services including logistics management, customer service support, invoicing and billing services. Substantially all ethanol sold by Agri-Energy since
its acquisition in September 2010 has been sold to C&N pursuant to a separate ethanol purchase and marketing agreement.
•
Land O’Lakes Purina Feed LLC. In December 2011, we entered into a commercial off-take and marketing agreement with Land O’Lakes Purina
Feed LLC (“Land O’Lakes Purina Feed”) for the sale of iDGs™ produced by the Agri-Energy Facility. Land O’ Lakes Purina Feed provides farmers
and ranchers with an extensive line of agricultural supplies (feed, seed, and crop protection products) and services. Land O’Lakes Purina Feed will be
the exclusive marketer of our iDGs™ and modified wet distiller grains for the animal feed market. The agreement has an initial three-year term
following the first commercial sales of iDGs™ with automatic one-year renewals thereafter unless terminated by one of the parties. Further, we plan
to work with Land O’Lakes Purina Feed to explore opportunities to upgrade the iDGs™ for special value-added applications in feed markets.
Supply and Commercialization Agreements
•
U.S. Air Force. In September 2011, we were awarded a solicitation by the Defense Logistics Agency (“DLA”), to supply ATJ to the U.S. Air Force
(“USAF”). DLA sources and provides nearly 100% of the consumable items the U.S. military needs to operate. Under the solicitation, we provided
the USAF with 11,000 gallons of ATJ which was used to support engine testing and a demonstration flight in an A-10 aircraft. The demonstration
flight was successfully completed in June 2012. The ATJ was produced from isobutanol at our hydrocarbon processing demonstration plant near
Houston, Texas, in partnership with South Hampton Resources. In September 2012, we were awarded an additional contract for the procurement of
up to 45,000 gallons of ATJ for delivery by October 31, 2013. We anticipate that the ATJ supplied under the September 2012 award will be produced
from isobutanol produced at our Agri-Energy Facility.
•
The Coca-Cola Company. In November 2011, we entered into a joint research, development, license and commercialization agreement with The
Coca-Cola Company (“Coca-Cola”) to create bio-PX from our isobutanol. The objective of the agreement is to accelerate the development of Coca-
Cola’s second-generation PlantBottle™ packaging made from 100% plant-based materials. We will work with Coca-Cola to enable and deliver an
integrated system to produce bio-PX, a key building block toward Coca-Cola’s goal of creating all of their packaging from renewable materials.
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Toray Industries. In June 2011, we announced that we had produced fully renewable and recyclable PET in cooperation with Toray Industries, Inc.
(“Toray Industries”). Working directly with Toray Industries, we employed prototypes of commercial operations from the petrochemical and refining
industries to make PX from isobutanol. Toray Industries used our bio-PX and commercially available renewable mono ethylene glycol to produce
fully renewable PET films and fibers. In June 2012, we entered into a definitive agreement with Toray Industries for the joint development of an
integrated supply chain for the production of bio-PET. Pursuant to the terms of the agreement with Toray Industries, we received $1.0 million, which
we will use for the design, construction and/or operation of a pilot plant. We anticipate producing bio-PX at the pilot plant, some of which will be
sold to Toray Industries. Toray Industries is obligated to purchase initial volumes of our bio-PX. In the event we are unable to produce and deliver a
minimum quantity of bio-PX to Toray Industries by December 31,
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2013, we will be required to refund the $1.0 million by January 31, 2014. Any excess bio-PX that is produced can be sold to third parties.
•
LANXESS. In May 2010, we entered into a non-binding heads of agreement outlining the terms of a future supply agreement with LANXESS Inc.
(“LANXESS”), an affiliate of LANXESS Corporation, a stockholder in our company. LANXESS is a specialty chemical company with global
operations that currently produces butyl rubber from petrochemical-based isobutylene. Isobutylene is a type of butene that can be produced from
isobutanol through straightforward, well-known chemical processes. Pursuant to the heads of agreement, LANXESS has proposed to purchase at
least 20 MGPY of our isobutanol for an initial term of 10 years, with an option to extend the term for an additional five years. The pricing under our
heads of agreement with LANXESS includes a mechanism that adjusts for future changes in the cost of our feedstock. In January 2011, we also
entered into an exclusive supply agreement, as amended, with LANXESS pursuant to which LANXESS has granted us an exclusive first right to
supply LANXESS and its affiliates with certain of their requirements of biobased isobutanol during the initial ten-year term. Our exclusive first right
to supply biobased isobutanol to LANXESS and its affiliates will be subject to the terms of the future supply agreement that we intend to enter into
with LANXESS, as described above.
Although we have agreed to preliminary terms with each of the potential customers discussed above, only our agreements with Sasol, Mansfield, Land
O’Lakes Purina Feed, Coca-Cola, Toray Industries and the DLA on behalf of the USAF, and our exclusive supply agreement with LANXESS, are binding and
there can be no assurance that we will be able to enter into definitive supply agreements with other potential customers, or attract customers based on our
arrangements with the petrochemical companies and large brand owners discussed above.
Competitive Strengths
Our competitive strengths include:
•
Renewable platform molecule to serve multiple large drop-in markets. We believe that the butenes produced from our isobutanol will serve as
renewable alternatives in the production of plastics, fibers, rubber and other polymers which comprise approximately 40% of the global
petrochemicals market, and will have potential applications in substantially all of the global hydrocarbon fuels market, enabling our customers to
reduce intermediate product cost volatility, diversify suppliers and improve feedstock security. We believe that we will face reduced market adoption
barriers in contrast to other new bio-industrial products because products derived from our isobutanol are chemically identical to petroleum-derived
products, except that they will contain carbon from renewable sources.
•
Proprietary, low cost technology with global applications. We believe that GIFT is currently the only known biological process capable of
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producing isobutanol cost-effectively from renewable carbohydrate sources, which we expect will enable the economic production of hydrocarbon
derivatives of isobutanol. Our biocatalysts have demonstrated a product yield on sugar of approximately 94% of theoretical maximum by weight,
which is near to, if not the maximum practical yield attainable from fermentable sugars. Collectively, we believe that these attributes, coupled with
our ability to leverage the existing ethanol production infrastructure, will create a relatively low capital cost route to isobutanol. Furthermore, we
believe that our production route will be cost-efficient which will allow our isobutanol to be economically competitive with many of the petroleum-
derived products used in the chemicals and fuels markets today. Additionally, GIFT is designed to enable the economic production of isobutanol
and other alcohols from multiple renewable feedstocks, which will allow our technology to be deployed worldwide.
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Capital-light commercial deployment strategy optimized for existing infrastructure. We have designed GIFT to enable capital-efficient retrofits of
existing ethanol facilities, which allows us to leverage the existing approximately 23 BGPY of global operating ethanol production capacity. Our
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retrofit strategy supports relatively low capital cost route to isobutanol production. Using a factored estimate based on the detailed design of the
Agri-Energy Facility in combination with our learning from the retrofit of that facility, we estimate retrofit costs for grain ethanol plant retrofits to be
approximately $1 per gallon of existing annual ethanol capacity. This projection translates to approximately $50 million for a 50 MGPY ethanol
facility and approximately $90 million for a 100 MGPY ethanol facility. These projected retrofit capital expenditures are less than estimates for new
plant construction for the production of advanced biofuels, including cellulosic ethanol. We have also designed our production technology to
minimize the disruption of ethanol production during the retrofit process, mitigating the costs associated with downtime as the plant is modified.
Following the transition to isobutanol production, we expect the original plant to operate in essentially the same manner as it did prior to the retrofit,
producing a primary product (isobutanol) and a co-product (iDGs™).
•
•
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GIFT demonstrated at commercially relevant scale. We previously completed the retrofit of a one MGPY ethanol facility in St. Joseph, Missouri
with our proprietary engineering package designed in partnership with ICM and we successfully produced isobutanol at this facility. In May 2012,
we commenced initial startup operations for the production of isobutanol at our Agri-Energy Facility and produced approximately 100,000 gallons of
bio-based isobutanol for initial sale and future customer testing. In September 2012, as a result of a lower than planned production rate of isobutanol
we made the strategic decision to pause isobutanol production at the Agri-Energy Facility at the conclusion of startup operations to focus on
optimizing specific parts of the process to further enhance isobutanol production rates. We anticipate commencing a limited commercial scale
campaign for the production of isobutanol at the Agri-Energy Facility in 2013 to demonstrate commercial scale capacity and sell resulting product.
Off-take agreements and strategic relationships with chemicals, fuels, animal feed and engineering industry leaders in place. We have entered
into off-take agreements and strategic relationships with global industry leaders to accelerate the execution of our commercial deployment strategy
both in the U.S. and internationally. These agreements establish demand for our isobutanol to meet the planned production from our Agri-Energy
Facility, which is expected to commence on a limited commercial scale in 2013 to demonstrate commercial scale capacity and sell resulting product.
To facilitate the adoption of our technology at existing ethanol plants, we have entered into an exclusive alliance with ICM. We expect our
relationships with entities such as Sasol, Mansfield Oil Company, Toray Industries, the USAF and LANXESS, among others, to contribute to the
development of new chemical and fuel market applications of our isobutanol. To enable the integration of cellulosic feedstocks into our isobutanol
production process, we have obtained an exclusive license from Cargill, Incorporated (“Cargill”), to integrate its proprietary biocatalysts into the
GIFT system. To accelerate the adoption of isobutanol as a platform molecule and to support the development of hydrocarbon products derived
from our isobutanol, we have developed a hydrocarbon demonstration plant near Houston, Texas with South Hampton Resources.
®
•
Experienced team with a proven track record. Our management team offers an exceptional combination of scientific, operational and managerial
expertise and our CEO, Dr. Patrick Gruber, has spent over 20 years developing and successfully commercializing industrial biotechnology products.
Across the Company, our employees have 450 combined years of biotechnology, synthetic biology and biobased product experience. Our employees
have generated over 300 patent and patent application authorships over the course of their careers. Our team members have played key roles in the
commercialization of several successful, large-scale industrial biotechnology projects, including a sugar substitute sweetener, four organic acid
technologies, an animal feed additive, monomers for plastics and biobased plastics and the first biologically derived high-purity monomer for the
production of plastic at a world-scale production facility. As a result of their deep experience, members of our management team play important roles
in the industrial biotechnology industry at U.S. and international levels.
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Our Production Technology Platform
We have used tools from synthetic biology, biotechnology and process engineering to develop a proprietary fermentation and separation process to cost
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effectively produce isobutanol from renewable feedstocks. GIFT is designed to allow for relatively low capital expenditure retrofits of existing ethanol facilities,
enabling a rapid route to isobutanol production. GIFT isobutanol production is very similar to existing ethanol production, except that we replace the ethanol
producing biocatalyst with our isobutanol producing biocatalyst and we incorporate well-known equipment into the production process to separate and collect the
isobutanol during the fermentation process. We believe that reusing large parts of the ethanol plant without modification is beneficial because the unchanged parts
will stay in place and continue to operate after the retrofit as they did when ethanol was produced. This means that the existing operating staff can continue to
manage the production of isobutanol because they will already have experience with the base equipment. We believe this continuity will reduce the risks
associated with the production startup following the retrofit as most of the process is unchanged and the existing operating staff is available to monitor and
manage the production process.
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We intend to process the spent grain mash from our fermenters to produce iDGs™, relying on established processes in the current ethanol industry. We plan
to market our iDGs™ to the dairy, beef, swine and poultry industries as a high-protein, high-energy animal feed. To support these efforts, in December 2011 we
entered into an exclusive off-take and marketing agreement with Land O’Lakes Purina Feed for the sale of iDGs™ produced at the Agri-Energy Facility. We
believe that our sales of our iDGs™ will allow us and our partners to offset a significant portion of our grain feedstock costs, in the same manner as is practiced
by the corn-based ethanol industry today through sale of dry distillers grains.
Biocatalyst Overview
Our biocatalysts are microorganisms that have been designed to metabolize sugars to produce isobutanol. Our technology team develops these proprietary
biocatalysts to efficiently convert fermentable sugars of all types by engineering isobutanol pathways into the biocatalysts, and then minimizing the production of
unwanted by-products to improve isobutanol yield and purity, thereby reducing operating costs. With our biocatalysts, we have demonstrated that we can produce
isobutanol at key commercial parameters, which we believe validates our biotechnology pathways and efficiencies. Our planned commercial biocatalyst is
designed to produce isobutanol from any fuel ethanol feedstock currently in commercial use, including grains (e.g., corn, wheat, sorghum and barley) and sugar
cane. This feedstock flexibility supports our initial deployment in the U.S., as we seek to retrofit available ethanol production facilities which are primarily
focused on corn feedstocks, and will enable our future expansion into international markets for production of isobutanol using sugar cane or other grain
feedstocks.
Although development work still needs to be done, we have shown at laboratory scale that we can convert cellulosic sugars into isobutanol. In addition,
through an exclusive license and a services arrangement with Cargill, we are developing a cellulosic sugar converting biocatalyst specifically designed to
efficiently produce isobutanol from the sugars derived from cellulosic feedstocks, including crops that are specifically cultivated to be converted into fuels (e.g.,
switchgrass), forest residues (e.g., waste wood, pulp and sustainable wood), agricultural residues (e.g., corn stalks, leaves, straw and grasses) and municipal green
waste (e.g., grass clippings and yard waste). We carefully select our biocatalyst platforms for their tolerance to isobutanol and other conditions present during an
industrial fermentation process, as well as their known utility in large-scale commercial production processes. As a result, we expect our biocatalysts to equal or
exceed the performance of the yeast used in prevailing grain ethanol production processes.
Biocatalyst Development
Initially, we used a pathway developed at the University of California, Los Angeles (“UCLA”) and exclusively licensed from The Regents of the
University of California (“The Regents”), to create a research biocatalyst capable of producing biobased isobutanol. We chose to use E. coli as the bacteria for our
research biocatalyst because of its ease of use and greater understanding relative to other biocatalysts, and because it was
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the microorganism used by UCLA in developing the licensed pathway. We then developed a new yeast biocatalyst to allow for anaerobic, or oxygen free,
isobutanol production as well as minimizing the production of unwanted by-products to improve isobutanol yield and purity, thereby reducing operating costs.
These efforts resulted in a substantial fermentation yield increase and enabled compatibility with existing ethanol infrastructure.
By fermenting sugars to isobutanol while reducing the production of unwanted by-products, our proprietary isobutanol pathway channels the available
energy content of fermentable sugars to isobutanol. Due to thermodynamic constraints that govern the conservation of energy, other processes may match our
yield, but will be unable to exceed it significantly. We have achieved approximately 94% of the theoretical yield, which is near to, if not the maximum practical
yield limit attainable from the fermentation of sugars. Our expected theoretical yield is equivalent to that of industrial ethanol production.
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We designed our biocatalysts to equal or exceed the performance of the yeast currently used in commercial ethanol production not only in yield, or
percentage of the theoretical maximum percentage of isobutanol that can be made from a given amount of feedstock, but also fermentation time, or how fast the
sugar fed to the fermentation is converted to isobutanol. At least matching this level of performance is important to our initial commercial production because
doing so allows GIFT fermentation to be performed in most existing grain ethanol fermenters without increasing vessel sizes. Because an isobutanol molecule
contains more carbon and hydrogen than an ethanol molecule, and because liquid isobutanol has a different density than liquid ethanol, the isobutanol volume our
fermentation process produces will be approximately 80% of the volume of ethanol produced by ethanol fermentation at an equivalent fermentation theoretical
yield on sugar. In other words, ICM’s design studies predict that a retrofitted 100 MGPY ethanol plant can produce approximately 80 MGPY of isobutanol. A
volume of 80 million gallons of isobutanol has roughly the same energy content as 100 million gallons of ethanol. Over time, we anticipate being able to the
increase the productivity of our yeast biocatalyst, thereby allowing for the production of a greater volume of isobutanol over the same fermentation time which
would allow for an increase in expected annual isobutanol production. Based on this expectation, we increased the size of the proprietary isobutanol separation
system that was installed at the Agri-Energy Facility to accommodate potential increased isobutanol production.
We initially achieved our target fermentation performance goals with our research biocatalyst at our GIFT mini-plant and then replicated this performance
®
in a retrofit one MGPY ethanol demonstration facility located at ICM’s St. Joseph, Missouri site. Yeast is generally the preferred host for industrial fermentation
because it is industrially proven for biofuels production, capable of out-competing bacteria, and is less susceptible to bacteriophage, a common problem for
bacterial fermentations. We select biocatalysts for their projected performance in the GIFT process, targeting lower cost isobutanol production. We continue to
seek to improve the performance parameters of our biocatalyst with a goal of reducing projected operating costs, increasing operating reliability and increasing
the volume of isobutanol production.
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Feedstock Flexibility
We have designed our biocatalyst platform to be capable of producing isobutanol from any fuel ethanol feedstock currently in commercial use, which we
believe, in conjunction with our proprietary isobutanol separation unit, will permit us to retrofit any existing fuel ethanol facility. We have demonstrated that our
biocatalysts are capable of converting the types of sugars in grains and sugar cane to isobutanol at our commercial targets for fermentation time and yield and we
believe that they will have the ability to convert these sugars into isobutanol at a commercial scale. The vast majority of fuel ethanol currently produced in the
U.S. is produced from corn feedstock, which is abundant according to data from the U.S. Department of Agriculture and the RFA. Although development work
still needs to be done, we have shown at laboratory scale that we can convert cellulosic sugars into isobutanol. Through an exclusive license with Cargill, we are
developing a future-generation yeast biocatalyst that is specifically designed to produce isobutanol from mixed sugars derived from cellulosic sources including
purpose grown energy crops, agricultural residues, forest residues and municipal green waste.
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We expect that our feedstock flexibility will allow our technology to be deployed worldwide and will enable us to offer our customers protection from the
raw material cost volatility historically associated with petroleum-based products.
GIFT Improves Fermentation Performance
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Our experiments show that the GIFT fermentation and recovery system provides enhanced fermentation performance as well as efficient recovery of
isobutanol and other alcohols. The GIFT system enables continuous separation of isobutanol from the fermentation tanks while fermentation is in process.
Isobutanol is removed from the fermentation broth using a low temperature distillation to continuously remove the isobutanol as it is formed without the
biocatalyst being affected. Since biocatalysts have a low tolerance for high isobutanol concentrations in fermentation, the ability of our process to continuously
remove isobutanol as it is produced allows our biocatalyst to continue processing sugar into isobutanol at a high rate without being suppressed by rising levels of
isobutanol in the fermenter, reducing the time to complete the fermentation. Using our biocatalysts, we have demonstrated that GIFT enables isobutanol
fermentation times equal to, or less than, those achieved in the current conventional production of ethanol, which allows us to fit our technology into existing
ethanol fermenters reducing capital expenditures. We have designed a proprietary engineering package in partnership with ICM to carry out our isobutanol
fermentation and recovery process. In May 2012, we commenced initial startup operations for the production of isobutanol at the Agri-Energy Facility and
produced approximately 100,000 gallons of bio-based isobutanol for initial sale and future customer testing. In September 2012, as a result of a lower than
planned production rate of isobutanol, we made the strategic decision to pause isobutanol production at the Agri-Energy Facility to focus on optimizing specific
parts of our technology to further enhance isobutanol production rates. We anticipate commencing a limited commercial scale campaign for the production of
isobutanol at the Agri-Energy Facility in 2013 to demonstrate commercial scale capacity and sell resulting product.
®
GIFT requires limited change to existing ethanol production infrastructure. As with ethanol production, feedstock is ground, cooked, treated with enzymes
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and fermented. Just like ethanol production, after fermentation, a primary product (isobutanol) and a co-product (iDGs™) are recovered for sale. The main
modifications of the GIFT system are replacing the ethanol producing yeast with Gevo’s proprietary isobutanol producing biocatalyst, and adding low
temperature distillation equipment for continuous removal and separation of isobutanol.
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Conversion of Isobutanol into Hydrocarbons
We have demonstrated conversion of our isobutanol into a wide variety of hydrocarbon products which are currently used to produce plastics, fibers,
rubber, other polymers and hydrocarbon fuels. Hydrocarbon products consist entirely of hydrogen and carbon and are currently derived almost exclusively from
petroleum. Importantly, isobutanol can be dehydrated to produce butenes, which are an intermediate product in the production of hydrocarbon products with
many industrial uses. The straightforward conversion of our isobutanol into butenes is a fundamentally important process that enables isobutanol to be used as a
building block chemical. Much of the technology necessary to convert isobutanol into butenes and subsequently into these hydrocarbon products is known and
practiced in the chemicals industry today, as shown in an SRI research study. For example, the dehydration of ethanol to ethylene, which uses a similar process
and technology to the dehydration of isobutanol, is practiced commercially today to serve the ethylene market. The dehydration of isobutanol into butenes is not
commercially practiced today, because isobutanol from petroleum is not cost-competitive with other petrochemical processes for generation of butenes. We
believe that our efficient fermentation technology for producing isobutanol will promote commercial isobutanol dehydration and provide us with the opportunity
to access hydrocarbon markets. To assist in accessing these markets, we have developed a hydrocarbon demonstration plant at our partner South Hampton
Resources’ site near Houston, Texas. The demonstration plant can process up to 10,000 gallons of our isobutanol per month into a variety of renewable
hydrocarbons for use as fuels and chemicals.
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Our Strategy
Our strategy is to commercialize our isobutanol for use directly as a specialty chemical and fuel blendstock and for conversion into plastics, fibers, rubber,
other polymers and hydrocarbon fuels. Key elements of our strategy include:
•
•
Deploy first commercial production facility. In September 2010, we acquired a 22 MGPY ethanol production facility in Luverne, Minnesota, the
Agri-Energy Facility. Following completion of the initial work to retrofit of the Agri-Energy Facility, in May 2012 we commenced initial startup
operations for the production of isobutanol at the facility and produced approximately 100,000 gallons of renewable isobutanol for initial sale and
future customer testing. In September 2012, as a result of a lower than planned production rate of isobutanol, we made the strategic decision to pause
isobutanol production at the Agri-Energy Facility for a period of time to focus on optimizing specific parts of our technology to further enhance
isobutanol production rates. We anticipate commencing a limited commercial scale campaign for the production of isobutanol at the Agri-Energy
Facility in 2013 to demonstrate commercial scale capacity and sell resulting product.
Build on existing off-take agreements with customers to support capacity growth. We have entered into an international off-take and distribution
agreement with Sasol that accounts for the majority of our planned isobutanol production volume during the initial term of the agreement, which
ends in July 2014. We also have in place a commercial off-take agreement with Mansfield to sell isobutanol into fuels markets. Based on our
expected available production volume from the Agri-Energy Facility, we project initial sales of our isobutanol into fuels markets will be introductory
volumes intended to conduct demonstration trials and sales into specialty fuels markets. To further support our commercial production of isobutanol,
we have entered into an off-take agreement with Land O’Lakes Purina Feed to be the exclusive marketer of the iDGs™ and modified wet distiller
grains produced at the Agri-Energy Facility for the animal feed market. We intend to add to our customer pipeline by entering into isobutanol supply
agreements for further capacity with additional customers in the refining, specialty chemicals and transportation sectors both in the U.S. and
internationally.
•
Expand our production capacity via retrofit of additional existing ethanol facilities. As we secure supply agreements with customers, we plan to
expand access to production capacity through increasing production capacity at our then current locations and acquiring or gaining access to
additional and larger scale ethanol facilities via joint ventures, licensing arrangements, tolling arrangements and acquisitions. We believe that our
exclusive alliance with ICM will enhance our ability to rapidly deploy our technology on a commercial scale.
•
Expand adoption of our isobutanol across multiple applications and markets. We intend to drive adoption of our isobutanol in multiple U.S. and
international chemicals and fuels end-markets by offering a renewable product with superior properties at a competitive price. In addition, we intend
to leverage existing and potential strategic partnerships with hydrocarbon companies to accelerate the use of isobutanol as a building block for drop-
in hydrocarbons. This strategy will be implemented through direct supply agreements with leading chemicals and fuels companies, as well as through
alliances with key technology providers.
•
Align the value chain for our isobutanol by collaborating with large brand owners and customers. We are developing commitments from large
brand owners to purchase products made from our isobutanol by third-party chemicals and fuels companies. For example, in June 2012, we entered
into a definitive agreement with Toray Industries for the joint development of an integrated supply chain for the production of bio-PET. Pursuant to
the agreement, we received $1.0 million for the design, construction and/or operation of a pilot plant for the production of bio-PX, which will be sold
to Toray Industries under terms established in the agreement. This is a key step in the production of bio-PET. We have also entered into a joint
research, development, license and commercialization agreement with Coca-Cola to create bio-PX from plant based isobutanol, which is intended to
accelerate the development of Coca-Cola’s second-generation PlantBottle™ packaging made from 100% plant-based materials. We have also been
awarded a contract to supply the USAF with up to 45,000 gallons of ATJ
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produced from renewable isobutanol to support further engine testing. We have previously supplied the USAF with 11,000 gallons of ATJ for initial
engine testing and use in a demonstration flight using an A-10 aircraft. We intend to use these commitments, as well as other future agreements, to
obtain contracts to sell our isobutanol directly into the manufacturing chain that will use our isobutanol as a building block in the production of PX,
PET, biojet fuel and other hydrocarbon products.
•
Incorporate additional feedstocks into our isobutanol production facilities. Our biocatalysts can produce isobutanol from any fuel ethanol
feedstock currently in commercial use, including grains (e.g., corn, wheat, sorghum and barley) and sugar cane. We believe the ability of our
biocatalysts to produce isobutanol from multiple feedstocks will support our future efforts to expand production of isobutanol in the U.S., as well as
into international markets that use sugar cane or other grain feedstocks, either directly or through partnerships. We are also developing a future-
generation biocatalyst under contract with Cargill, which we believe will enable us to efficiently integrate mixed sugars from cellulosic feedstocks
into our production facilities when the technology to separate and break down cellulosic biomass into separate simple sugar molecules becomes
commercially available.
Industry Overview
Petroleum is a fundamental source of chemicals and fuels, with annual global demand in 2011 estimated at $3.2 trillion based on data from the IEA.
Globally organic chemicals and fuels targeted by us are primarily derived from petroleum, as it has historically been convenient and inexpensive. However, recent
fundamental trends, including increasing petroleum demand (especially from emerging markets), limited new supply, price volatility and the changing regulatory
framework in the U.S. and internationally with regard to the environmental impact of fossil fuels has increased the need for economical, renewable and
environmentally sensitive alternatives to petroleum at stable prices.
These market developments, combined with advances in synthetic biology and metabolic pathway engineering, have encouraged the convergence between
the industrial biotechnology and energy sectors. These new technologies enable the production of flexible platform chemicals, such as isobutanol, from renewable
sources instead of fossil fuels, at economically competitive costs. Based on our compilation of data from SRI, Nexant, CMAI, the EIA and the IEA, we believe
that isobutanol and the products derived from it have potential applications in approximately 40% of the global petrochemicals market and substantially all of the
global fuels market, and that our isobutanol fulfills an immediate need for alternatives to petroleum. Previous attempts to create renewable, cost-effective
alternatives to petroleum-based products have faced several challenges:
•
•
•
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First generation renewable products are not considered drop-in solutions for existing petroleum infrastructure. Many products contemplated by
earlier manufacturers are not considered effective alternatives to conventional petroleum due to various limitations, including lower energy content,
viscosity and corrosive properties which limit pipeline transportation or require expensive engine modifications.
Capital intensity. Due to the high capital cost incurred in establishing new biofuels plants, numerous companies face limited expansion and
customization opportunities and have not been able to relocate to areas with access to new or more cost-effective feedstocks.
Reliance on regulatory environment. Many conventional alternatives to current nonrenewable chemicals and fuels have relied heavily on
government subsidies. In the absence of governmental support, these alternatives face significant operational hurdles and are often no longer
economically viable.
Abundant supply of petroleum-based products. Traditionally butenes have been produced as co-products from the process of cracking naptha in the
production of ethylene. Reported reductions in the use of naptha as the feedstock for the production of ethylene have changed the projected menu of
co-products, resulting in a projected reduction in the volume of available butenes. This structural shift in feedstocks increases the potential market
opportunity for our isobutanol in the production of butenes.
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Advantages of Our Isobutanol
We believe our isobutanol provides advantages over both petroleum-based products and alternative renewable chemicals and fuels. These advantages are
based on the chemical properties of isobutanol and our low cost production technology.
•
Lower cost to produce than petroleum isobutanol. We believe our biobased route to produce isobutanol will be lower cost than the predominant
route to produce petroleum-based isobutanol. This will allow us to offer our biobased isobutanol to the existing isobutanol markets at a price we
believe will encourage customers to switch from petroleum-based butanol to our biobased isobutanol. Further, we believe our lower cost production
will enable the development of new uses for isobutanol as a building block for a variety of intermediate chemicals and hydrocarbon products and as a
gasoline blendstock.
•
Alternative source of four-carbon hydrocarbons. Butenes, hydrocarbon products with many industrial uses, can be produced through the
dehydration of isobutanol. We believe that butenes derived from our isobutanol can be further processed into other high-value hydrocarbon products
using currently known chemistries, as shown in research reports by SRI and CMAI. These include ethyl tert-butyl ether, propylene and MMA, for
use in plastics, industrial coatings and other chemical additives, such as antioxidants and plastics modifiers. The prevailing process to manufacture
butenes for use by the petrochemical industry today is through the process of cracking naptha in the production of ethylene. Ethylene crackers
produce butenes as a co-product and the butenes market has tightened as these crackers have shut down and have shifted or committed to shift from
oil to natural gas feedstocks, reducing the available supply of butenes. As a result, we expect the hydrocarbons derived from our isobutanol to
provide chemical and fuel producers with both supply chain diversity and alternatives to current petroleum-derived products, which can be
particularly important in a tight petrochemicals environment.
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Feedstock flexibility. We believe our biocatalysts will produce isobutanol cost-effectively at a commercial scale from any feedstock currently used to
produce grain ethanol. Additionally, these biocatalysts provide the ability to convert sugar cane into isobutanol, which provides us with opportunities
to expand our production into areas with sugar cane ethanol facilities. Moreover, our work with Cargill to develop a future-generation biocatalyst
enabling cellulosic isobutanol production will position us to integrate non-food-based feedstocks into our production facilities when the technology
to separate and break down cellulosic biomass into separate simple sugar molecules becomes commercially available. We believe that having the
flexibility to use different crops and agricultural by-products as a feedstock for isobutanol production is a particularly attractive trait to the chemicals
and fuels markets and has the potential to mitigate their exposure to petroleum price volatility.
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Optimized for existing infrastructure. Isobutanol is a fungible, drop-in fuel with chemical and performance characteristics as a fuel additive that are
well known. For example, due to its low water solubility, we believe isobutanol can be transported in pipelines and blended into gasoline
formulations at the refinery in contrast to prevailing practices where ethanol is blended at the terminal and cannot be transported via pipelines. Initial
test results from DNV Columbus, Inc., a well-respected materials testing company, showed that isobutanol did not contribute to stress corrosion
cracking in pipeline materials under conditions where ethanol typically would. We believe that refiners are interested in the possibility of using
isobutanol to replace more expensive alkylates in their gasoline formulations. In addition, we believe that an important and distinct advantage of
isobutanol is its potential ability to align the interests of refiners, commodity agriculture and the ethanol industry, accelerating the development of a
biobased economy.
•
Highly effective solution to current regulatory limitations. The U.S. Environmental Protection Agency (“EPA”) currently limits gasoline blends for
use in normal automobile engines to a maximum of 15% ethanol for model years 2001 and later, and 10% for all other model years. Isobutanol can
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expand biofuel market opportunities as a fuel blendstock as we expect it to be blended into gasoline at higher levels without modifying engines or
gasoline distribution logistics. In November 2010, our isobutanol was approved by the EPA for 12.5% blending with gasoline. Additionally, we have
filed a dossier for advanced isobutanol with the EPA. Even if made from corn in retrofitted ethanol plants, isobutanol can qualify as an advanced
biofuel if it can provide a 50% lifecycle greenhouse gas (“GHG”) reduction compared to 2005 baseline gasoline. Lifecycle GHG emissions are the
aggregate quantity of GHGs related to the full fuel cycle, including all stages of fuel and feedstock production and distribution, from feedstock
generation and extraction through distribution, delivery and use of the finished fuel. Furthermore, because isobutanol contains approximately 30%
more energy than ethanol, each gallon of isobutanol provides a renewable identification number (“RIN”) value of 1.3. Therefore, a refiner could
purchase fewer gallons of isobutanol than ethanol while meeting its biofuels obligation under the Renewable Fuels Standard (“RFS2”).
•
Lower impact on air quality. Isobutanol has a low RVP. RVP measures a fuel’s volatility, and in warm weather, high RVP fuel can contribute to
precursors of smog formation. The EPA sets regional and seasonal clean air standards in the U.S., which include RVP limitations, with the potential
for stricter air quality regulations in the near future. Given isobutanol’s lower RVP relative to ethanol, we believe refiners using isobutanol blends
will have more flexibility in their gasoline formulations to meet clean air standards. This added flexibility can be valuable in regions of the U.S. that
fail to meet EPA-designated national air quality standards, or in markets like California where the RVP maximum is very low.
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Value added specialty applications. Due to isobutanol’s high energy content and low water solubility, as well as testing completed by the NMMA,
OPEI and B&S, we believe that isobutanol may have direct applications in high value specialty fuels settings serving marine, small equipment
engines and sports vehicle markets.
Competition
Our isobutanol is targeted for use in the following markets: direct use as a solvent and gasoline blendstock, use in the chemicals industry for producing
plastics, fibers, rubber and other polymers and use in the production of hydrocarbon fuels. We face competitors in each market, some of which are limited to
individual markets, and some of which will compete with us across all of our target markets.
Renewable isobutanol. We are a leader in the development of renewable isobutanol via fermentation of renewable plant biomass. While the competitive
landscape in renewable isobutanol production is limited at this time, we are aware of other companies that are seeking to develop isobutanol production
capabilities. These include Butamax Advanced Biofuels LLC (“Butamax”), a joint venture between BP p.l.c. (“BP”) and E. I. du Pont de Nemours and Company
(“DuPont”), and Butalco GmbH, a development stage company based in Switzerland. While each of these entities is a private company, based on our due
diligence related to intellectual property filings we believe that we have a favorable competitive position in the development of renewable isobutanol production.
Solvent markets. We also face competition from companies that are focused on the development of n-butanol, a related compound to isobutanol. These
companies include Cathay Industrial Biotech Ltd., METabolic EXplorer S.A., Eastman Chemicals Company, Cobalt Technologies, Inc. and Green Biologics Ltd.
We understand that these companies produce n-butanol from an acetone-butanol-ethanol (“ABE”) fermentation process primarily for the small chemicals markets.
ABE fermentation using a Clostridia biocatalyst has been used in industrial settings since 1919. As discussed in several academic papers analyzing the ABE
process, such fermentation is handicapped in competitiveness by high energy costs due to low concentrations of butanol produced and significant volumes of
water processed. It requires high capital and operating costs to support industrial scale production due to the low rates of the Clostridia fermentation, and results
in a lower butanol yield because it produces ethanol and acetone as by-products. We believe our proprietary process has many significant advantages over the
ABE process because of its limited requirements for new capital expenditures, its production
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output of only isobutanol as a primary product and its limited water usage in production. We believe these advantages will produce a lower cost isobutanol
compared to n-butanol produced by ABE fermentation. N-butanol’s lower octane rating compared to isobutanol gives it a lower value in the gasoline blendstock
market, but n-butanol can compete directly in many solvent markets where n-butanol and isobutanol have similar performance characteristics.
Gasoline blendstocks. In the gasoline blendstock market isobutanol competes with non-renewable alkylate and renewable ethanol. We estimate the total
potential global market for isobutanol as a gasoline blendstock to be approximately 40 BGPY. Alkylate is a premium value gasoline blendstock typically derived
from petroleum. However, petroleum feeds for alkylate manufacture are pressured by continued increases in the use of natural gas to generate olefins for the
production of alkylate, due to the low relative cost of natural gas compared to petroleum. Isobutanol has fuel properties similar to alkylate and, as such, we expect
that isobutanol could be used as a substitute for some alkylate in fuel applications. Ethanol is renewable and has a high octane rating, and although it has a high
RVP, ethanol receives a one pound RVP waiver in a large portion of the U.S. gasoline market. Renewability is important in the U.S. because the RFS2 mandates
that a minimum volume of renewable blendstocks be used in gasoline each year. A high octane rating is important for engine performance and is a valuable
characteristic because many inexpensive gasoline blendstocks have lower octane ratings. Low RVP is important because the EPA sets maximum permissible RVP
levels for gasoline. In markets where low RVP is important, isobutanol can enable refiners to meet fuel specifications at lower cost. Ethanol’s vapor pressure
waiver is valuable because it offsets much of the negative value of ethanol’s high RVP. We believe that our isobutanol will be valued for its combination of low
RVP, relatively high octane and renewability.
Many production and technology supply companies are working to develop ethanol production from cellulosic feedstocks, including Shell Oil Company,
BP, DuPont-Danisco Cellulosic Ethanol LLC, Abengoa Bioenergy, S.A., POET, LLC, ICM, Mascoma Corporation, Inbicon A/S, INEOS New Planet BioEnergy
LLC, Coskata, Inc., Archer Daniels Midland Company, BlueFire Ethanol, Inc., KL Energy Corporation, ZeaChem Inc., Iogen Corporation, Qteros, Inc., AE
Biofuels, Inc. and many smaller startup companies. Successful commercialization by some or all of these companies will increase the supply of renewable
gasoline blendstocks worldwide, potentially reducing the market size or margins available to isobutanol.
Plastics, fibers, rubber and other polymers. Isobutanol can be dehydrated to produce butenes, hydrocarbon intermediates currently used in the production
of plastics, fibers, rubber and other polymers. The straightforward conversion of our isobutanol into butenes is a fundamentally important process that enables
isobutanol to be used as a building block chemical in multiple markets. These markets include butyl rubber, lubricants and additives derived from butenes such as
isobutylene, poly methyl methacrylate from isobutanol, propylene for polypropylene from isobutylene, polyesters made via PX from isobutylene and polystyrene
made via styrene.
In these markets, we compete with the renewable isobutanol companies and renewable n-butanol producers described previously, and face similar
competitive challenges. Our competitive position versus petroleum-derived plastics, fibers, rubber and other polymers varies, but we believe that the high
volatility of petroleum prices, often tight supply markets for petroleum-based petrochemical feedstocks and the desire of many consumers for goods made from
more renewable sources will enable us to compete effectively. However, petrochemical companies may develop alternative pathways to produce petrochemical-
based hydrocarbon products that may be less expensive than our isobutanol or more readily available or developed in conjunction with major petrochemical,
refiner or end user companies. These products may have economic or other advantages over the plastics, fibers, rubber and other polymers developed from our
isobutanol. Further, some of these companies have access to significantly more resources than we do to develop products.
Additionally, Global Bioenergies, S.A. is pursuing the direct production of isobutylene from renewable carbohydrates. Through analysis of the
fermentation pathway, we believe that the direct production of butenes such as isobutylene via fermentation will have higher capital and operating costs than
production of butenes derived from our isobutanol.
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Hydrocarbon fuels. Beyond direct use as a fuel additive, isobutanol can be converted into many hydrocarbon fuels and specialty blendstocks, offering
substantial potential for additional demand in the fuels markets. We will compete with the incumbent petroleum-based fuels industry, as well as biofuels
companies. The incumbent petroleum-based fuels industry makes the vast majority of the world’s gasoline, jet and diesel fuels and blendstocks. The petroleum-
based fuels industry is mature, and includes a substantial base of infrastructure for the production and distribution of petroleum-derived products. However, the
industry faces challenges from its dependence on petroleum. High and volatile oil prices will provide an opportunity for renewable producers relying on biobased
feedstocks like corn, which in recent years have had lower price volatility than oil.
Biofuels companies will provide substantial competition in the gasoline market. These biofuels competitors are numerous and include both large
established companies and numerous startups. Government tax incentives for renewable fuel producers and regulations such as the RFS2 help provide
opportunities for renewable fuels producers to compete. In particular, in the gasoline and gasoline blendstock markets, Virent Energy Systems, Inc. (“Virent”)
offers a competitive process for making gasoline and gasoline blendstocks. However, we have the advantage of being able to target conversion of isobutanol into
specific high-value molecules such as isooctane, which can be used to make gasoline blendstocks with a higher value than whole gasoline, which we do not
believe Virent’s process can match. In the jet fuel market, we may face competition from companies such as Synthetic Genomics, Inc., Solazyme, Inc., Sapphire
Energy, Inc. and Exxon-Mobil Corporation, which are pursuing production of jet fuel from algae-based technology. LS9, Inc. (“LS9”) and others are also
targeting production of jet fuels from renewable biomass. We may also face competition from companies working to produce jet fuel from hydrotreated vegetable
oils. In the diesel fuels market, competitors such as Amyris Biotechnologies, Inc. (“Amyris”) provide alternative hydrocarbon diesel fuel. We believe our
technology provides a higher yield on feedstock than the isoprenoid fermentation pathway developed by Amyris, which we believe will yield a production cost
advantage.
Intellectual Property
Our success depends in large part on our proprietary products and technology for which we seek protection under patent, copyright, trademark and trade
secret laws. Such protection is also maintained in part using confidential disclosure agreements. Protection of our technologies is important so that we may offer
our customers and partners proprietary services and products unavailable from our competitors, and so that we may exclude our competitors from practicing
technology that we have developed or exclusively licensed. If competitors in our industry have access to the same technology, our competitive position may be
adversely affected. As of December 31, 2012, we exclusively licensed rights to 93 issued patents and filed patent applications in the U.S. and in various foreign
jurisdictions. Of the licensed patents and patent applications, most are owned by Cargill and exclusively licensed to us for use in certain fields. These licensed
patents and patent applications cover both enabling technologies and products or methods of producing products. Our licenses to such patents allow us to freely
practice the licensed inventions, subject only to the terms of these licenses. As of December 31, 2012, we have submitted 375 patent applications in the U.S. and
in various foreign jurisdictions. These patent applications are directed to our technologies and specific methods and products that support our business in the
biofuel and bioindustrial markets. We continue to file new patent applications, for which terms extend up to 20 years from the filing date in the U.S.
As of January 31, 2013, we have been issued 13 U.S. Patents: U.S. Patent Nos. 8,017,375; 8,017,376; 8,071,358; 8,097,440; 8,101,808; 8,133,715;
8,153,415; 8,158,404; 8,193,402; 8,232,089; 8,273,565; 8,283,505; and 8,304,588. As of January 31, 2013, we have been issued 2 international patents: Great
Britain Patent No. 2487889 and Mexico Patent No. 304602.
We will continue to file and prosecute patent applications and maintain trade secrets, as is consistent with our business plan, in an ongoing effort to protect
our intellectual property. It is possible that our licensors’ current patents, or patents which we may later acquire or license, may be successfully challenged or
invalidated in whole or in part. It is also possible that we may not obtain issued patents from our filed applications, and may not be
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able to obtain patents regarding other inventions we seek to protect. Under appropriate circumstances, we may sometimes permit certain intellectual property to
lapse or go abandoned. Due to uncertainties inherent in prosecuting patent applications, sometimes patent applications are rejected and we may subsequently
abandon them. It is also possible that we will develop products or technologies that will not be patentable or that the patents of others will limit or preclude our
ability to do business. In addition, any patent issued to us may provide us with little or no competitive advantage, in which case we may abandon such patent or
license it to another entity.
We have obtained registered trademarks for Gevo Integrated Fermentation Technology , GIFT , and Gevo in the U.S., and we have a pending U.S.
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trademark application for iDGs™. These registered and pending U.S. trademarks are also registered or pending in certain foreign countries.
Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop technology or products that are similar
to or compete with ours. Patent, trademark and trade secret laws afford only limited protection for our technology platform and products. The laws of many
countries do not protect our proprietary rights to as great an extent as do the laws of the U.S. Despite our efforts to protect our proprietary rights, unauthorized
parties have in the past attempted, and may in the future attempt, to operate using aspects of our intellectual property or products or to obtain and use information
that we regard as proprietary. Third parties may also design around our proprietary rights, which may render our protected technology and products less valuable.
In addition, if any of our products or technologies is covered by third-party patents or other intellectual property rights, we could be subject to various legal
actions. We cannot assure you that our technology platform and products do not infringe patents held by others or that they will not in the future.
Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement, invalidity, misappropriation or other allegations. Any such litigation could result in substantial costs
and diversion of our resources. In particular, over time, the costs of defending the lawsuit filed by Butamax, a joint venture between DuPont and BP, alleging that
we have infringed upon one patent relating to the production of isobutanol, may become significant (as described further in Part I, Item 3 of this Report).
Moreover, any settlement of or adverse judgment resulting from such litigation could require us to obtain a license to continue to make, use or sell the products or
technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology.
Partnerships and Collaborations
ICM, Inc.
We currently have an exclusive alliance with ICM to retrofit ethanol plants to the production of isobutanol. ICM is a company that focuses on engineering,
building and supporting biorefineries for the renewable fuel industry. We believe that our alliance with ICM will provide us with a competitive advantage and
allow us to more quickly achieve commercial-scale production of isobutanol. Through our alliance with ICM, we plan to retrofit existing ethanol plants to expand
our production. ICM is well-positioned for this project because they have designed approximately 50% of the current North American operating ethanol
production capacity.
Development Agreement. On October 16, 2008, we entered into a development agreement with ICM, which set forth the terms for the development of a
one MGPY corn drying ethanol demonstration facility in St. Joseph, Missouri. Working with ICM engineers, we installed GIFT at the St. Joseph demonstration
plant, and successfully produced isobutanol. The development agreement, as amended, may be terminated by either party upon 30 days’ written notice.
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Commercialization Agreement. We entered into a commercialization agreement with ICM on October 16, 2008, which was amended and restated on
August 11, 2011. Under this agreement, as amended and restated, ICM serves as our exclusive engineering contractor for the retrofit of ethanol plants in North
America, and we serve as ICM’s exclusive technology partner for the production of butanols, pentanols and propanols from the
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fermentation of sugars. This commercialization agreement outlines the terms and fees under which ICM will provide engineering and construction services for
commercial plants utilizing dry-milled feedstocks of corn or grain sorghum. Pursuant to the commercialization agreement, we will work with ICM on the joint
development of commercial plants utilizing our GIFT system, including the development of engineering designs to retrofit existing dry-mill ethanol facilities.
Due to the fact that some of ICM’s proprietary process technology will be included in the plant designs, both parties intend that ICM will be the exclusive
engineering services provider for commercial plants. However, in the event that ICM fails to meet commercially reasonable timelines for the engineering of the
commercial plants, after a 30-day cure period, we may terminate our exclusivity obligations to ICM. The term of the commercialization agreement is through
October 16, 2018. Either party may terminate the commercialization agreement upon 30 days’ notice in the event that the other party ceases regular operations,
enters or is forced into bankruptcy or receivership, liquidates its assets or breaches the agreement.
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In August 2011, we also entered into a work agreement with ICM. Pursuant to the terms of the work agreement, ICM will provide engineering,
procurement and construction (“EPC”) services for the retrofit of ethanol plants. Under this work agreement, ICM provided us EPC services for the retrofit of the
Agri-Energy Facility. We expect our alliance with ICM to help us continue to develop efficiency and cost improvements in retrofitting plants and producing
isobutanol.
Cargill, Incorporated
We have obtained exclusive rights to develop and integrate Cargill’s microorganisms into GIFT . These microorganisms are able to process cellulosic
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biomass, which we hope will eventually allow low cost production of isobutanol from varied inputs, including purpose grown energy crops (e.g., switchgrass),
forest residues (e.g., waste wood, pulp and sustainable wood), agricultural residues (e.g., corn stalks, leaves, straw and grasses) and municipal green waste (e.g.,
grass clippings and yard waste).
License Agreement. On February 19, 2009, we entered into a license agreement with Cargill. Under the license agreement, Cargill granted us an exclusive,
worldwide, royalty-bearing license to certain Cargill patents and biological materials, including specialized microorganisms and tools for modifying those
microorganisms to produce specific molecules. We also have an option, with a first right of refusal, to purchase an exclusive license to use such patents and
biological materials owned by Cargill to produce additional molecules.
In exchange for the rights granted under the license agreement, we paid Cargill an upfront license fee and have committed to make additional payments to
Cargill including, (i) payments based on the achievement of certain milestones, (ii) payments upon the commercialization of product lines which use the Cargill
biological materials or are otherwise covered by the patent rights, and (iii) royalty payments. We may terminate the license agreement at any time upon 90 days’
written notice and either party may terminate the license agreement for a material breach by the other party that is not cured within 120 days of notification of
such breach. Unless terminated earlier, the agreement remains in effect until no licensed patent rights remain under the license agreement.
The Coca-Cola Company
We have established a working relationship with Coca-Cola to create bio-PX from our isobutanol in an effort to accelerate the development of Coca-Cola’s
second generation PlantBottle™ packaging made from 100% plant-based materials.
Joint Research, Development, License and Commercialization Agreement. In November 2011, we entered into a joint research, development, license and
commercialization agreement with Coca-Cola. Pursuant to this agreement, we have agreed to conduct research and development activities, including engineering
to produce bio-PX from isobutanol, with the ultimate goal of producing bio-PET for food-grade bottling. Our work is targeted to take the technology from
laboratory-scale to commercial-scale and support Coca- Cola’s efforts to lead the beverage industry away from fossil-fuel based packaging by offering an
alternative made completely from
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renewable raw materials. Pursuant to the terms of the agreement, Coca-Cola will pay us a fixed fee for the research program during the first two years of the
agreement ending November 2013.
Toray Industries, Inc.
In June 2011, we announced that we had successfully produced fully renewable and recyclable PET in cooperation with Toray Industries. Working directly
with Toray Industries, we employed prototypes of commercial operations from the petrochemical and refining industries to make PX from isobutanol. Toray
Industries used our bio-PX and commercially available renewable mono ethylene glycol to produce fully renewable PET films and fibers.
Joint Development Agreement. In June 2012, we entered into a definitive agreement with Toray Industries for the joint development of an integrated
supply chain for the production of bio-PET. Pursuant to the terms of the agreement with Toray Industries, we received $1.0 million which we will use for the
design, construction and/or operation of a pilot plant. We anticipate producing bio-based PX at the pilot plant, some of which will be sold to Toray Industries.
Toray Industries is obligated to purchase initial volumes of our bio-PX. In the event we are unable to produce and deliver a minimum quantity of bio-PX to Toray
Industries by December 31, 2013, we will be required to refund the $1.0 million. Any excess bio-PX that is produced can be sold to other parties.
Other Material Agreements
Gevo Development, LLC
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In September 2009, Gevo, Inc. formed Gevo Development, LLC (“Gevo Development”), as a majority-owned subsidiary to develop isobutanol production
assets using GIFT . Gevo Development has a flexible business model and aims to secure access to existing ethanol capacity either through joint venture, licensing
arrangements, tolling arrangements or direct acquisitions. Gevo Development has two classes of membership interests outstanding. Since Gevo Development’s
inception, Gevo, Inc. has been the sole owner of the class A interests, which comprise 90% of the outstanding equity interests of Gevo Development. When Gevo
Development was formed, CDP Gevo, LLC (“CDP”), which is beneficially owned by the two co-managing directors of Gevo Development, was the sole owner
of the class B interests, which comprise the remaining 10% of the outstanding equity interests of Gevo Development. In September 2010, Gevo, Inc. acquired
100% of the outstanding class B interests of Gevo Development from CDP pursuant to an equity purchase agreement. As a result of this acquisition, Gevo, Inc.
currently owns 100% of the outstanding equity interests of Gevo Development as a wholly owned subsidiary. See further discussion under the heading “Equity
Purchase Agreement and Related Transactions” below.
Amended and Restated Warrant Agreement. In connection with the formation of Gevo Development in September 2009, Gevo, Inc. granted a common
stock warrant to CDP to purchase up to 858,000 shares of our common stock. The warrant agreement has an exercise price of $2.70 per share, which was the
estimated fair value of a share of our common stock on the grant date. The warrant expires in September 2016, unless terminated earlier as provided in the
agreement. In September 2010, upon the consummation of Gevo, Inc.’s purchase of the class B interests from CDP, the warrant agreement was amended and
restated to provide that 50% of the warrant shares granted under such warrant agreement would vest on September 22, 2010. As of the date of this Report, the
remaining warrant shares have also vested.
Equity Purchase Agreement and Related Transactions. In September 2010, Gevo, Inc. became the sole owner of Gevo Development by acquiring 100%
of the class B interests in Gevo Development, which comprise 10% of the outstanding equity interests of Gevo Development, from CDP pursuant to an equity
purchase agreement. Between September 22, 2010 and March 23, 2012, each of the owners of CDP was employed by Gevo, Inc. as an Executive Vice President,
Upstream Business Development and as a co-managing director of Gevo Development. The employment of the co-managing directors was terminated effective
March 23, 2012.
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Agri-Energy Acquisition
In September 2010, we acquired all of the membership interests of Agri-Energy, LLC, a Minnesota limited liability company, and certain assets of Agri-
Energy Limited Partnership, a Minnesota limited partnership (collectively referred to herein as “Agri-Energy”), from their common owner, CORN-er Stone
Farmers’ Cooperative, a Minnesota cooperative association. Pursuant to the terms of the acquisition, we acquired ownership of the Agri-Energy Facility.
As of December 31, 2012, we have incurred capital costs of approximately $56.1 million on the retrofit of the Agri-Energy Facility. This includes costs of
approximately $21.7 million associated with design features for expanded capacity and the enhanced yeast seed train plus approximately $3.8 million for sales tax
and capitalized interest. We do not anticipate installing an advanced yeast seed train at each future retrofit site.
Redfield Joint Venture
On June 15, 2011, we entered into the “Joint Venture Agreement” with Redfield and executed the second amended and restated operating agreement of
Redfield (together, the “Joint Venture Documents”). Under the terms of the Joint Venture Documents, we have agreed to work with Redfield toward the retrofit of
the Redfield Facility, an approximately 50 MGPY ethanol production facility located near Redfield, South Dakota, for the commercial production of isobutanol.
Under the terms of the Joint Venture Agreement, Redfield has issued 100 Class G membership units in Redfield (the “Class G Units”) to our wholly-owned
subsidiary, Gevo Development. Gevo Development is the sole holder of Class G units, which entitle Gevo Development to certain information and governance
rights with respect to Redfield, including the right to appoint two members of Redfield’s 11-member board of managers. The Class G units currently carry no
interest in the allocation of profits, losses or other distributions of Redfield and no voting rights. Such rights will vest upon the commencement of commercial
isobutanol production at the Redfield Facility, at which time we anticipate consolidating Redfield’s operations because we anticipate we will control the activities
that are most significant to the entity.
We will be responsible for all costs associated with the retrofit of the Redfield Facility. Redfield will remain responsible for certain expenses incurred by
the facility including certain repair and maintenance expenses and any costs necessary to ensure that the facility is in compliance with applicable environmental
laws. We anticipate that the Redfield Facility will continue its current ethanol production activities during much of the retrofit. Following installation of the
retrofit assets, ethanol production operations will be suspended to enable testing of the isobutanol production capabilities of the facility (the “Performance Testing
Phase”). During the Performance Testing Phase, we will be entitled to receive all revenue generated by the Redfield Facility and will make payments to Redfield
to cover the costs incurred by Redfield to operate the facility plus the profits, if any, that Redfield would have received if the facility had been producing ethanol
during that period (the “Facility Payments”). We have also agreed to maintain an escrow fund during the Performance Testing Phase as security for our obligation
to make the Facility Payments.
If certain conditions are met, commercial production of isobutanol at the Redfield Facility will begin upon the earlier of the date upon which certain
production targets have been met or the date upon which the parties mutually agree that commercial isobutanol production at the Redfield Facility will be
commercially viable at the then-current production rate. At that time, (i) we will have the right to appoint a total of four members of Redfield’s 11-member board
of managers, and (ii) the voting and economic interests of the Class G units will vest and Gevo Development, as the sole holder of the Class G Units, will be
entitled to a percentage of Redfield’s profits, losses and distributions, to be calculated based upon the demonstrated isobutanol production capabilities of the
Redfield Facility.
Gevo Development, or one of its affiliates, will be the exclusive marketer of all products produced by the Redfield Facility once commercial production of
isobutanol at the Redfield Facility has begun. Additionally, we will license the technology necessary to produce isobutanol at the Redfield Facility to Redfield,
subject to the
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continuation of the marketing arrangement described above. In the event that the isobutanol production technology fails or Redfield is permanently prohibited
from using such technology, we will forfeit the Class G Units and lose the value of our investment in Redfield.
Gevo, Inc. entered into a guaranty effective as of June 15, 2011, pursuant to which it has unconditionally and irrevocably guaranteed the payment by Gevo
Development of any and all amounts owed by Gevo Development pursuant to the terms and conditions of the Joint Venture Agreement and certain other
agreements that Gevo Development and Redfield expect to enter into in connection with the retrofit of the Redfield Facility.
We have begun the project engineering and permitting process of the retrofit of the Redfield Facility. As of December 31, 2012, we have incurred $0.4
million in planning-related costs for the future retrofit of the Redfield Facility, which have been recorded on our balance sheets in deposits and other assets. Based
on estimates from our preliminary engineering process, we will need to raise additional debt or equity capital in order to complete the retrofit of the Redfield
Facility.
TriplePoint Financing
Gevo Loan Agreement. In August 2010, concurrent with the execution of the agreement to acquire Agri-Energy, Gevo, Inc. entered into a loan and security
agreement with TriplePoint Capital LLC (“TriplePoint”), pursuant to which we borrowed $5.0 million (the “Gevo Loan Agreement”). Under the terms of each of
(i) the Gevo Loan Agreement and (ii) Gevo, Inc.’s guarantee of Agri-Energy’s obligations under the Original Agri-Energy Loan Agreement described below, we
are prohibited from granting a security interest in our intellectual property assets to any other entity until both TriplePoint loans are paid in full. In July 2012, we
used $5.4 million of the proceeds from the offering of our 7.5% convertible senior notes due 2022 (the “Convertible Notes”) that was completed in July 2012 to
pay in full all amounts outstanding under the Gevo Loan Agreement, including an end-of-term payment equal to 8% of the amount borrowed.
Original Agri-Energy Loan Agreement. In August 2010, Gevo Development borrowed $12.5 million from TriplePoint to finance its acquisition of Agri-
Energy. In September 2010, upon completion of the acquisition, the loan and security agreement was amended to make Agri-Energy the borrower under the
facility. This loan and security agreement (the “Original Agri-Energy Loan Agreement”) includes customary affirmative and negative covenants for agreements of
this type and events of default. The aggregate amount outstanding under the Original Agri-Energy Loan Agreement bears interest at a rate equal to 13% and is
subject to an end-of-term payment equal to 8% of the amount borrowed. The loan is secured by the equity interests of Agri-Energy held by Gevo Development
and substantially all the assets of Agri-Energy. The loan matures on September 1, 2014. The loan is guaranteed by Gevo, Inc. pursuant to a continuing guaranty
executed by Gevo, Inc. in favor of TriplePoint, which is secured by substantially all of the assets of Gevo, Inc., other than its intellectual property.
Amended Agri-Energy Loan Agreement. In October 2011, Agri-Energy entered into and amended and restated loan and security agreement with TriplePoint
(the “Amended Agri-Energy Loan Agreement”) which amends and restates the Original Agri-Energy Loan Agreement. The Amended Agri-Energy Loan
Agreement includes customary affirmative and negative covenants for agreements of this type and events of default. The Amended Agri-Energy Loan Agreement
provides Agri-Energy with additional term loan facilities of up to $15.0 million (the “New Loan”) (which amount is in addition to the existing $12.5 million term
loan (the “Existing Loan”) provided under the Original Agri-Energy Loan Agreement, which Existing Loan remains in place under the Amended Agri-Energy
Loan Agreement), the proceeds of which were used to pay a portion of the costs, expenses, and other amounts associated with the retrofit of the Agri-Energy
Facility to produce isobutanol. The aggregate amount outstanding under the New Loan bears interest at a rate of 11% and is subject to an end-of-term payment
equal to 5.75% of the amount borrowed.
On October 20, 2011, Agri-Energy borrowed a portion of the New Loan in the amount of $10.0 million under the Amended Agri-Energy Loan Agreement
(the “October 2011 Loan”). The October 2011 Loan matures on October 31, 2015. On January 6, 2012, Agri-Energy borrowed an additional $5.0 million (the
“January 2012
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Loan”) under the Amended Agri-Energy Loan Agreement, bringing the total borrowed under the New Loan to $15.0 million. The January 2012 Loan matures on
December 31, 2015. At December 31, 2012, we were in compliance with the debt covenants under the Amended Agri-Energy Loan Agreement.
The Amended Agri-Energy Loan Agreement provides that Agri-Energy will secure all of its obligations under the Amended Agri-Energy Loan Agreement
and any other loan documents by granting to TriplePoint a security interest in and lien upon all or substantially all of its assets. Gevo, Inc. has guaranteed Agri-
Energy’s obligations under the Amended Agri-Energy Loan Agreement. As additional security, concurrently with the execution of the Amended Agri-Energy
Loan Agreement, (i) Gevo Development entered into a limited recourse continuing guaranty in favor of TriplePoint, (ii) Gevo Development entered into an
amended and restated limited recourse membership interest pledge agreement in favor of TriplePoint, pursuant to which it pledged the membership interests of
Agri-Energy as collateral to secure the obligations under its guaranty and (iii) Gevo, Inc. entered into an amendment to its security agreement with TriplePoint
(the “Gevo Security Agreement”), which secures its guarantee of Agri-Energy’s obligations (including up to $32.5 million in term loans) under the Amended
Agri-Energy Loan Agreement.
June Amendments. In June 2012, Gevo, Inc. entered into (i) an amendment (the “Security Agreement Amendment”) to the Gevo Security Agreement and
(ii) an amendment (the “Gevo Loan Amendment”) to the Gevo Loan Agreement. In addition, concurrently with the execution of the Security Agreement
Amendment and the Gevo Loan Amendment, Agri-Energy entered into an amendment to the Amended Agri-Energy Loan Agreement.
These amendments, among other things: (i) permitted the issuance of the Company’s Convertible Notes; (ii) removed Agri-Energy’s and the Company’s
options to elect additional interest-only periods upon the achievement of certain milestones (iii) permit Agri-Energy to make dividend payments and distributions
to the Company for certain defined purposes related to the Convertible Notes; (iv) add as an event of default the payment, repurchase or redemption of the
Convertible Notes or of amounts payable in connection therewith other than certain permitted payments related to the Convertible Notes; (v) add a negative
covenant whereby the Company may not incur any indebtedness other than as permitted under the Security Agreement; and (vi) add a prohibition on making any
Coupon Make-Whole Payments (as defined in the indenture governing the Convertible Notes (the “Indenture”)) in cash prior to the payment in full of all
remaining outstanding obligations in full under the Amended Agri-Energy Loan Agreement.
Research and Development
Our strategy depends on continued improvement of our technologies for the production of isobutanol, as well as next generation chemicals and biofuels
based on our isobutanol technology. Accordingly, we annually devote significant funds to research and development. The following table shows our research and
development costs by function during each of the three years ended December 31, 2012 (in thousands).
Biocatalyst development
Process engineering and operation of pilot and demo plants
Chemistry and applications development
Total Research and Development Expense
2012
$11,526
5,318
2,587
$19,431
Year Ended December 31,
2011
$ 9,722
8,462
1,569
$19,753
2010
$ 9,504
4,469
847
$14,820
During 2012, 2011 and 2010, we recorded revenue from government grants and cooperative agreements in the amounts of $3.5 million, $0.8 million and
$1.5 million, respectively, which primarily related to research and development activities performed in our biocatalyst, chemistry, and applications development
groups.
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Our research and development activities are currently being performed primarily in our corporate headquarters located in Englewood, Colorado and the
demonstration plant at the South Hampton Resources facility near Houston, Texas.
Environmental Compliance Costs
Regulation by governmental authorities in the U.S. and other countries is a significant factor in the development, manufacture and marketing of second-
generation biofuels. Our isobutanol and the next generation products isobutanol will be used to produce may require regulatory approval by governmental
agencies prior to commercialization. In particular, biofuels are subject to rigorous testing and premarket approval requirements by the EPA’s Office of
Transportation and Air Quality, and regulatory authorities in other countries. In the U.S., various federal, and, in some cases, state statutes and regulations also
govern or impact the manufacturing, safety, storage and use of biofuels. The process of seeking required approvals and the continuing need for compliance with
applicable statutes and regulations requires the expenditure of substantial resources. Regulatory approval, if and when obtained for any of these next generation
products, may be limited in scope, which may significantly limit the uses for which our isobutanol and these next generation products may be marketed.
When built at a dry-mill facility, our GIFT fermentation process creates iDGs™, a potential animal feed component, as a co-product. We have undertaken
a self-assessed Generally Regarded As Safe (GRAS) process via third party scientific review to support the sale of our iDGs™ as animal feed. While we believe
we can rely on this review, as we update our biocatalysts to increase isobutanol production, for further customer assurance, we also intend to pursue approval
from the Center for Veterinary Medicine of the U.S. Food and Drug Administration (the “FDA”). Further, the FDA’s policies may change and additional
government regulations may be enacted that could prevent, delay or require regulatory approval of our co-products. We cannot predict the likelihood, nature or
extent of adverse governmental regulations that might arise from future legislative or administrative action, either in the U.S. or abroad.
®
Our process contains a genetically engineered organism which, when used in an industrial process, is considered a new chemical under the EPA’s Toxic
Substances Control Act program (“TSCA”). These laws and regulations require us to obtain and comply with the EPA’s Microbial Commercial Activity Notice
process to operate our isobutanol assets. We do not anticipate a material adverse effect on our business or financial condition as a result of our efforts to comply
with these requirements. However, the TSCA new chemical submission policies may change and additional government regulations may be enacted that could
prevent or delay regulatory approval of our products. We cannot predict the likelihood, nature or extent of adverse governmental regulations that might arise from
future legislative or administrative action, either in the U.S. or abroad.
There are various third-party certification organizations, such as ASTM and Underwriters’ Laboratories, Inc. (“UL”), involved in certifying the
transportation, dispensing and use of liquid fuel in the U.S. and internationally. Voluntary standards development organizations may change and additional
requirements may be enacted that could prevent or delay marketing approval of our products. The process of seeking required approvals and the continuing need
for compliance with applicable statutes and regulations require the expenditure of substantial resources. We do not anticipate a material adverse effect on our
business or financial conditions as a result of our efforts to comply with these requirements, but we cannot predict the likelihood, nature or extent of adverse
third-party requirements that might arise from future action, either in the U.S. or abroad.
We are subject to various federal, state and local environmental laws and regulations, including those relating to the discharge of materials into the air,
water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials and the health and safety of our employees. These
laws and regulations require us to obtain environmental permits and comply with numerous environmental restrictions as we construct and operate isobutanol
assets. They may require expensive pollution control equipment or operation
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changes to limit actual or potential impacts to the environment. A violation of these laws, regulations or permit conditions can result in substantial fines, natural
resource damage, criminal sanctions, permit revocations and facility shutdowns.
There is a risk of liability for the investigation and cleanup of environmental contamination at each of the properties that we own or operate and at off-site
locations where we arrange for the disposal of hazardous substances. If these substances are or have been disposed of or released at sites that undergo
investigation or remediation by regulatory agencies, we may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act
or other environmental laws for all or part of the costs of investigation and remediation. We may also be subject to related claims by private parties alleging
property damage and personal injury due to exposure to hazardous or other materials at or from the properties. Some of these matters may require us to expend
significant amounts for investigation and cleanup or other costs. We are not aware of any material environmental liabilities relating to contamination at or from
our facilities or at off-site locations where we have transported or arranged for the disposal of hazardous substances.
In addition, new laws, new interpretations of existing laws, increased governmental enforcement of environmental laws or other developments could
require us to make significant additional expenditures. Continued government and public emphasis on environmental issues can be expected to result in increased
future investments in environmental controls at our facilities. Present and future environmental laws and regulations applicable to our operations, more vigorous
enforcement policies and discovery of currently unknown conditions could all require us to make substantial expenditures. For example, our air emissions are
subject to the Clean Air Act, the Clean Air Act Amendments of 1990 and similar state and local laws and associated regulations. Under the Clean Air Act, the
EPA has promulgated National Emissions Standards for Hazardous Air Pollutants (“NESHAP”), which could apply to facilities that we own or operate if the
emissions of hazardous air pollutants exceed certain thresholds. If a facility we operate is authorized to emit hazardous air pollutants above the threshold level,
then we might still be required to come into compliance with another NESHAP at some future time. New or expanded facilities might be required to comply with
both standards upon startup if they exceed the hazardous air pollutant threshold. In addition to costs for achieving and maintaining compliance with these laws,
more stringent standards may also limit our operating flexibility.
As a condition to granting the permits necessary for operating our facilities, regulators could make demands that increase our construction and operations
costs, which might force us to obtain additional financing. For example, unanticipated water discharge limits could sharply increase construction costs for our
projects. Permit conditions could also restrict or limit the extent of our operations. We cannot guarantee that we will be able to obtain or comply with the terms of
all necessary permits to complete the retrofit of an ethanol plant. Failure to obtain and comply with all applicable permits and licenses could halt our construction
and could subject us to future claims.
Employees
As of December 31, 2012, Gevo, Inc. and its subsidiaries employed 120 employees, 88 of which were employed by Gevo, Inc. and were located in
Englewood, Colorado. Of the Gevo, Inc. employees, 70 were engaged in research and development activities and 18 were engaged in general, administrative and
business development activities. As of December 31, 2011, our subsidiary Agri-Energy employed 32 employees, all of which were located in Luverne,
Minnesota, and involved in the operations of our ethanol production facility. None of our employees are represented by a labor union, and we consider our
employee relations to be good.
Segments and Geographic Information
We have determined that we have two operating segments: the Gevo, Inc. segment and the Gevo Development/Agri-Energy segment. We organize our
business segments based on the nature of the products and services offered through each of our consolidated legal entities. Transactions between segments are
eliminated in
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consolidation. For both segments, all revenue is earned and all assets are held in the U.S. For additional financial information related to our segments, see Note 20
to our consolidated financial statements.
Gevo, Inc. Segment. Our Gevo, Inc. segment is responsible for all research and development activities related to the future production of isobutanol,
including the development of our proprietary biocatalysts, our retrofit process and the next generation of chemicals and biofuels that will be based on our
isobutanol technology. Our Gevo, Inc. segment also develops, maintains and protects our intellectual property portfolio, develops future markets for our
isobutanol and provides corporate oversight services.
Gevo Development/Agri-Energy Segment. Our Gevo Development/Agri-Energy segment is currently responsible for the operation of our Agri-Energy
Facility and the production of ethanol, isobutanol and related products. The Agri-Energy Facility operated as an ethanol facility until May 2012. During May
2012, we commenced initial startup isobutanol production and ceased ethanol production. In September 2012, as a result of a lower than planned production rate
of isobutanol we made the strategic decision to pause isobutanol production in order to optimize our isobutanol production technology. During the period of
startup isobutanol production, we produced approximately 100,000 gallons of isobutanol for initial sales and future customer testing. Substantially all of the
ethanol produced from the date of the acquisition of the Agri-Energy Facility through December 31, 2012 was sold through an ethanol marketing company. Sales
of ethanol and related products from our Gevo Development/Agri-Energy segment comprised approximately 85% of our consolidated revenue for the fiscal year
ended December 31, 2012.
Executive Officers and Directors of the Registrant
The following table sets forth certain information about our executive officers and directors, as of March 15, 2013.
Name
Patrick R. Gruber, Ph.D.
Christopher Ryan, Ph.D.
Mark Smith
Brett Lund, J.D., M.B.A.
Shai Weiss(1)(2)
Carlos A. Cabrera(2)(3)
Ruth I. Dreessen(3)
Samir Kaul
Ganesh M. Kishore, Ph.D.(1)
Gary W. Mize(1)(3)
Bruce A. Smith(2)
Stacy J. Smith(1)
Position(s)
Age
52 Chief Executive Officer and Director
51 President, Chief Operating Officer and Chief Technology Officer
51 Chief Financial Officer
37 Executive Vice President, General Counsel and Secretary
44 Chairman of the Board of Directors
61 Director
57 Director
39 Director
59 Director
62 Director
69 Director
50 Director
(1) Member of the compensation committee.
(2) Member of the nominating and corporate governance committee.
(3) Member of the audit committee.
Patrick R. Gruber, Ph.D. has served as Chief Executive Officer and a director of the Company since 2007. Prior to joining the Company, from 2005 to
2007 Dr. Gruber was President and Chief Executive Officer of Outlast Technologies, Inc. (“Outlast Technologies”), a technology and marketing company
primarily serving the textile industry, where he was responsible for all aspects of Outlast Technologies’ business. Previously, Dr. Gruber co-founded NatureWorks
LLC (formerly Cargill Dow, LLC) and served as Vice President, Technology and Operations, and Chief Technology Officer from 1997 to 2005, where he was
responsible for all aspects of the business’s project, application and process technology development. Dr. Gruber is a member of the Bioenergy Technical
Advisory Committee for the Energy Future Coalition. He currently serves on the board of
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directors of Segetis, Inc. From 2007 to January 2012, Dr. Gruber served on the board of directors of Green Harvest Technologies, LLC and from 2007 to 2008, he
served on the board of directors of Outlast Technologies. In 2011, Dr. Gruber was awarded the University of Minnesota Outstanding Achievement Award. In
2008, Dr. Gruber was awarded the first ever George Washington Carver Award, recognizing significant contributions by individuals in the field of industrial
biotechnology and its application in biological engineering, environmental science, biorefining and biobased products. Dr. Gruber holds a Ph.D. in chemistry
from the University of Minnesota, an M.B.A. from the University of Minnesota and a B.S. in chemistry and biology from the University of St. Thomas. We
believe Dr. Gruber’s qualifications to sit on our board include his experience as a Chief Executive Officer and business leader and his extensive experience
developing and commercializing industrial biotechnology products.
Christopher Ryan, Ph.D. has served as President and Chief Operating Officer of the Company since June 2011 and as Chief Technology Officer of the
Company since September 2012, having previously served the Company as its Executive Vice President, Business Development since June 2009. Prior to joining
the Company, he co-founded NatureWorks LLC (“NatureWorks”) in 1997. Dr. Ryan served as Chief Operating Officer for NatureWorks from 2008 to 2009 and
Chief Technology Officer for NatureWorks from 2005 to 2008, where he was involved in the development and commercialization of that company’s new
biobased polymer from lab-scale production in 1992 through the completion of a $300 million world-scale production facility. Prior to 1992, Dr. Ryan served for
four years in Corporate R&D for specialty chemical company HB Fuller Company. He has over 20 years of experience in strategic leadership, business
development and research and product development in biobased materials. Dr. Ryan holds a Ph.D. in organic chemistry from the University of Minnesota, a B.S.
in chemistry from Gustavus Adolphus College and completed the Management of Technology program at the University of Minnesota.
Mark Smith has served as Chief Financial Officer of the Company since November 2008. Prior to joining the Company, Mr. Mark Smith served as Chief
Financial Officer of Replidyne, Inc. (“Replidyne”) from March 2006 to February 2009, where he played a leadership role in completing its initial public offering
and executing its strategic sale to Cardiovascular Systems, Inc. Prior to joining Replidyne, Mr. Mark Smith was an officer at Nabi Biopharmaceuticals, from
August 1999 to March 2006, serving as Senior Vice President, Finance, and Chief Financial Officer from April 2001 to March 2006. Prior to joining Nabi
Biopharmaceuticals, Mr. Mark Smith was an officer at Neuromedical Systems, Inc., where he served as Vice President, Finance and Administration and Chief
Financial Officer from March 1998 to July 1999. He previously served in various financial executive capacities at Genzyme Corporation (“Genzyme”) from 1996
to 1998, most recently as Group Controller. From 1991 to 1996, Mr. Mark Smith worked in various financial management capacities at Genetrix, Inc., most
recently as Chief Financial Officer prior to its sale to Genzyme in 1996. He previously was an accountant at Price Waterhouse (now PricewaterhouseCoopers) in
both Australia and the U.S. Mr. Mark Smith holds a B.A. in accounting from Canberra College of Advanced Education.
Brett Lund, J.D., M.B.A. has served as Executive Vice President, General Counsel and Secretary of the Company since 2007. In 2013, Mr. Lund was named
“Forty Under 40” by the Denver Business Journal for being one of Top Forty Business Leaders Under age 40. In 2012, Mr. Lund was named one of the “Most
Influential Young Professionals” in Colorado by ColoradoBiz Magazine and also in 2012, Mr. Lund was named “Best Corporate Counsel” by the Denver
Business Journal. Before joining the Company, from 2004 to 2007, he served as Chairman of the legal, intellectual property and licensing group and
biotechnology licensing manager for Syngenta Biotechnology, Inc.’s (“Syngenta”) biofuels business. At Syngenta, Mr. Lund led the management of intellectual
property, in-licensing, out-licensing, research collaborations and strategic alliances. In 2006, Mr. Lund co-founded and was a Board Member of Agarigen, Inc.
where he developed a novel protein expression platform for biologic pharmaceuticals, vaccines, and commercial enzymes. At Agarigen, Mr. Lund worked on a
multi-million dollar research program for the Defense Advanced Research Projects Agency (DARPA) and later led the sale of Agarigen to Intrexon, Inc. Prior to
Agarigen, he served as Associate General Counsel for Ford Motor Company, Inc.’s Wingcast subsidiary. Mr. Lund was previously a corporate attorney at the law
firm of Cooley LLP, where he represented numerous companies regarding intellectual property licensing, initial public
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offerings, venture capital financing, mergers and acquisitions, securities, strategic alliances and related transactions. Mr. Lund holds a J.D. from Duke Law
School, an M.B.A. from Duke University’s Fuqua School of Business and a B.A. in political science from the University of California, San Diego. He is a
Certified Licensing Professional by the Licensing Executives Society and admitted to practice law in California and North Carolina.
Shai Weiss has served as a director of the Company since 2007 and was appointed chairman of our board of directors in September 2010. Mr. Weiss led the
formation of Virgin Green Fund I, L.P. (“Virgin Green Fund”), where he has been a partner since 2007. Prior to forming Virgin Green Fund, he held several
management positions at ntl:Telewest (now Virgin Media, Inc.), including Managing Director of Consumer Products from 2004 to 2006, Integration Director for
the merger between ntl, Inc. and Telewest Global, Inc. from 2005 to 2006, Director of Operations for the ntl Group from 2003 to 2004 and Director of Financial
Planning for the Consumer division from 2002 to 2003. In his work as Managing Director of Consumer Products, Mr. Weiss was responsible for the development
of internet, telephone and television for the consumer division and the Virgin.net broadband internet service provider. As director of operations for the ntl Group,
he was responsible for major operational and business development projects, joint ventures and development of relationships with strategic partners. Prior to
joining ntl:Telewest, Mr. Weiss organized the European office of the early-stage technology venture fund Jerusalem Venture Partners, L.P. in 2000, and was an
associate with Morgan Stanley’s hi-tech mergers and acquisitions and corporate finance teams from 1997 to 2000. Mr. Weiss holds an M.B.A. from Columbia
University and a B.B.A. from City University of New York, Baruch College in business and finance. We believe Mr. Weiss’s qualifications to sit on our board
include his extensive experience as a business leader and venture capitalist and his experience in advising growth-focused companies with respect to strategic
direction and business transactions.
Carlos A. Cabrera has served as a director of the Company since June 2010. Since December 2011, Mr. Cabrera has also served as Executive Co-Chairman
of Ivanhoe Energy, a publicly traded international heavy-oil development and production company. He has also served as a director of Ivanhoe Energy since
May 2010. From December 2009 to November 2011, he served as President and Chief Executive Officer of the National Institute of Low Carbon and Clean
Energy, or NICE, a wholly owned subsidiary of the Shenhua Group, a major Chinese coal company. At NICE, Mr. Cabrera led efforts to invent, acquire and
develop technologies to reduce the environmental and climate impact of producing energy from coal. From January 2009 to July 2009, he served as Chairman of
UOP LLC, a subsidiary of Honeywell International, Inc. (“UOP”). From November 2005 to January 2009, Mr. Cabrera served as UOP’s President and Chief
Executive Officer, where he oversaw all of UOP’s operations and helped grow the company’s revenue from $850 million when he assumed the role of Chief
Executive Officer to $2 billion in 2008. From January to October 2005, Mr. Cabrera served as UOP’s Senior Vice President, Process Technology and Equipment,
where he led UOP’s development in the refining and petrochemicals sectors. Mr. Cabrera’s previous roles at UOP include Senior Vice President, Process
Technology and Equipment, Senior Vice President, Refining and Petrochemicals, Vice President, Corporate Business Development and Ventures, and Vice
President and General Manager, Refining. Mr. Cabrera holds an M.B.A. in business from the University of Chicago and a B.S. in chemical engineering from the
University of Kentucky. We believe Mr. Cabrera’s qualifications to sit on our board include his broad technical and management experience in the refining,
chemicals and fuels industries and his experience structuring joint ventures and leading acquisition activities in these fields.
Ruth I. Dreessen has served as a director of the Company since March 2012. Ms. Dreessen has also been a director of Targa Resources Partners LP since
February 2013 and of Versar, Inc. since November 2010. Since October 2010, Ms. Dreessen has served as Managing Director of Lion Chemical Capital, LLC, a
private equity firm focused on building a portfolio of companies operating primarily in the chemical and chemical-related industries. Ms. Dreessen previously
served on the board of Better Minerals & Aggregates Corporation (USS Holdings, Inc.) from 1996 to 2007 and from 2005 to 2010, Ms. Dreessen served as
Executive Vice President and Chief Financial Officer of TPC Group, Inc., a leading producer of value-added products derived from niche petrochemical raw
materials such as C4 hydrocarbons. From 2003 to 2005, Ms. Dreessen served as Senior Vice President, Chief Financial Officer and director (2004-2005) of
Westlake Chemical Corporation. Prior to joining
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Westlake Chemical Corporation, Ms. Dreessen served JPMorgan Chase & Co. (formerly Chase Manhattan Corporation) in several executive positions, most
recently as Managing Director, Global Chemicals Group, in Houston, Texas, where she focused on leveraged and private equity transactions in chemicals and
related industries. Ms. Dreessen holds an M.S. in International Affairs from Columbia University and a B.A. in European History from New College of Florida.
We believe Ms. Dreessen’s qualifications to sit on our Board include her years of experience as an executive in the chemicals industry and her experience serving
on other public company boards.
Samir Kaul, has been a member of our Board of Directors since March 2013. Mr. Kaul has been a General Partner at Khosla Ventures, a venture capital
firm with a substantial focus on clean technologies, since February 2006. Previously, Mr. Kaul was a member of Flagship Ventures, a venture capital firm, from
2002 to May 2006. Prior to Flagship, Mr. Kaul worked at The Institute for Genomic Research. Mr. Kaul currently serves on the board of directors of KiOR, Inc.,
as well as the boards of directors of several private companies, and he previously served on the board of directors of Amyris, Inc. from 2006 to 2012. Mr. Kaul
holds a B.S. in Biology from the University of Michigan, an M.S. in Biochemistry from the University of Maryland and an MBA from Harvard Business School.
Mr. Kaul provides our Board of Directors with wide-ranging experience in clean technology companies and insight in the management of startup companies and
the building of companies from early stage to commercial scale.
Ganesh M. Kishore, Ph.D. has served as a director of the Company since 2008. Since 2011, Dr. Kishore has also served as a director of Evolva Holding SA
and as a director of Kaiima, where he currently serves as a member of the advisory board and the compensation committee. Between 2002 and 2007, he served as
a director of Embrex, Inc., serving as a member of the compensation committee and nominations committee during that time. Since April 2007, he has served as
Chief Executive Officer of Malaysian Life Sciences Capital Fund, where he oversees fund management, investment portfolio management and governance of
companies in which Malaysian Life Sciences Capital Fund has made investments. Since January 2009, he has also served as President and Chief Executive
Officer of K Life Sciences, LLC where he provides advisory services to life science businesses. Between April 2007 and December 2008, Dr. Kishore served as a
Managing Director of Burrill & Company, where his responsibilities included fund management, fund raising and governance of companies in which Burrill &
Company invested. Prior to joining Burrill & Company, Dr. Kishore served as Chief Biotechnology Officer at E.I. du Pont de Nemours and Company (“DuPont”)
from 2005 to 2007, where he was responsible for overall biotechnology leadership for DuPont’s life science businesses. Previously, he was Vice President,
Technology, and Chief Technology Officer for DuPont’s Agriculture and Nutrition Division from 2002 to 2005. In his time at DuPont, Dr. Kishore focused on
research and development related to biotechnology. Before joining DuPont, Dr. Kishore held several positions between 1980 and 2000 at Monsanto Company
(“Monsanto”), including Co-President, Nutrition and Consumer Sector, and Assistant Chief Scientist/Chief Biotechnologist. His contributions include the
discovery, development and commercialization of agricultural biotechnology products such as ROUNDUP READY SOY, the development of a manufacturing
process for Nutrasweet and aiding in transforming Monsanto into a leading food and nutrition company. Dr. Kishore co-founded the plant biotechnology and
informatics company Metahelix Life Sciences Pvt Ltd in India, Mogene LC in St. Louis, Missouri and Abunda in San Francisco, California. He serves or has
served on the boards of numerous nonprofit institutions, including the School of Nutrition and Policy at Tufts University, the St. Louis RCGA and the National
Research Advisory Board of Washington University at St. Louis. He is also a member of the American Association for the Advancement of Science. Dr. Kishore
holds a Ph.D. in biochemistry from the Indian Institute of Science, an M.S. in biochemistry from the University of Mysore and a B.S. in physics and chemistry
from the University of Mysore. We believe Dr. Kishore’s qualifications to sit on our board include his years of experience as an executive in the field of
agricultural biotechnology and his experience in advising and managing startup companies.
®
Gary W. Mize has served as a director of the Company since September 2011. Since October 2009, Mr. Mize has held the position of partner and owner at
MR & Associates. Mr. Mize served as President of Rawhide Energy LLC, an ethanol company, from April 2007 to April 2009. Mr. Mize also served as non-
executive Chairman at Ceres Global AG, a Canadian public company that serves as a vehicle for agribusiness
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investments, from December 2007 to April 2010. Mr. Mize has also served Noble Group, Hong Kong, as Chief Operations Officer and Executive Director from
2003 to 2005, Global Chief Operating Officer and Executive Director from July 2003 to December 2005 and Non-Executive Director from December 2005 to
December 2006. Previously, he was President of the Grain Processing Group at ConAgra Foods, Inc., President and Chief Executive Officer of ConAgra Malt and
held various positions at Cargill, Inc. Mr. Mize holds a B.A. in Business and Marketing from Michigan State University. Mr. Mize brings international business
experience to the board having previously held expatriate positions in Switzerland, Brazil and Hong Kong. We believe Mr. Mize’s qualifications to sit on our
board include his international experience, coupled with more than 35 years of experience in agribusiness.
Bruce A. Smith has served as a director of the Company since June 2010. Since January 2012, Mr. Bruce Smith has also served as a director of Ventech
Engineers, Inc., a fully integrated engineering and procurement services company for the petroleum industry. Since December 2011, he has also served as a
director and Chief Executive Officer of One Cypress Energy, a private crude logistics and marketing company. Since July 2010, he has also served as a member
of the supervisory board of LyondellBasell Industries N.V., a publicly traded independent chemical company. Mr. Bruce Smith served as Chairman of Tesoro
Corp. (“Tesoro”) from 1996 until June 2010, and from 1995 until May 2010 he served as Tesoro’s President and Chief Executive Officer. Between 1992 and
1995, Mr. Bruce Smith held positions as Tesoro’s Chief Operating Officer, Executive Vice President, Exploration and Production, and Chief Financial Officer.
Under Mr. Bruce Smith’s leadership, Tesoro went from a small integrated oil company to a Fortune 100 refining and marketing company with a global supply
chain and 650,000 barrels per day of production in the western U.S. From March 2002 to February 2008, Mr. Bruce Smith also served as a director of Noble
Energy Corp., a publicly traded oil exploration and production company, where he served on the audit, compensation and corporate governance and nominating
committees, including service as chair of the audit committee in 2005 and 2006 and chair of the compensation committee in 2003 and 2004. Mr. Bruce Smith
holds an M.B.A. in finance from the University of Kansas and a B.A. in biology from Westminster College. We believe Mr. Bruce Smith’s qualifications to sit on
our board include his extensive senior leadership experience in the refining and marketing industry, his substantial management background and his previous
experience serving as a director and chairman of the audit and compensation committees of a publicly traded company.
Stacy J. Smith has served as a director of the Company since June 2010. Since November 2011, Mr. Stacy Smith has also served as a director of Autodesk,
Inc. Mr. Stacy Smith currently serves as Executive Vice President at Intel Corporation (“Intel”), a position he has held since 2010, as well as Chief Financial
Officer, a position he has held since 2007, and director of Corporate Strategy. Previously, he was Intel’s Assistant Chief Financial Officer from 2006 to 2007, and
Vice President, Finance and Enterprise Services and Chief Information Officer from 2004 to 2006, where he was responsible for Intel’s Information Technology
Group. From 2002 to 2004, Mr. Stacy Smith was Intel’s Vice President, Sales and Marketing Group, and General Manager of Intel Europe, Middle East and
Africa, where he was responsible for product sales and marketing across that region. Before then, he served in various finance positions at Intel, where he has
been employed since 1988, working in the U.S., Asia, Europe and Latin America. Mr. Stacy Smith holds an M.B.A. in finance from the University of Texas and a
B.A. in finance from the University of Texas. Mr. Stacy Smith brings global business leadership experience to the board from his current position as Senior Vice
President, Finance, and Chief Financial Officer of Intel. We believe that Mr. Stacy Smith’s qualifications to sit on our board include his experience serving for
over 20 years in various finance and senior management positions for Intel and his experience overseeing and advising on strategy and financial matters,
including financial reporting.
Corporate Information
We were incorporated in Delaware in June 2005 under the name Methanotech, Inc. and filed an amendment to our certificate of incorporation changing our
name to Gevo, Inc. on March 29, 2006. Our principal executive offices are located at 345 Inverness Drive South, Building C, Suite 310, Englewood, CO 80112,
and our telephone number is (303) 858-8358.
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Website Access to SEC Filings
We are subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, we are required
to file reports and information with the SEC, including reports on the following forms: annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports and other
information concerning us may be accessed through the SEC’s website at http://www.sec.gov and on our website at www.gevo.com. Such filings are placed on
our website as soon as reasonably practical after they are filed with the SEC. Any information contained in, or that can be accessed through our website, is not
incorporated by reference into, nor is it in any way part of, this Report.
Item 1A.
Risk Factors
You should carefully consider the risks described below before investing in our publicly-traded securities. The risks described below are not the only ones
facing us. Our business is also subject to the risks that affect many other companies, such as competition, technological obsolescence, labor relations, general
economic conditions, geopolitical changes and international operations. Additional risks not currently known to us or that we currently believe are immaterial
also may impair our business operations and our liquidity. The risks described below could cause our actual results to differ materially from those contained in
the forward-looking statements we have made in this Report, the information incorporated herein by reference and those forward-looking statements we may
make from time to time.
Certain Risks Related to Our Business and Strategy.
We are a development stage company with a history of net losses, and we may not achieve or maintain profitability.
We have incurred net losses since our inception, including losses of $60.7 million, $48.2 million and $40.1 million during the years ended December 31,
2012, 2011 and 2010, respectively. As of December 31, 2012, we had an accumulated deficit of $195.3 million. We expect to incur losses and negative cash flow
from operating activities for the foreseeable future. We are a development stage company and, to date, our revenues have been extremely limited and we have not
generated significant revenues from the sale of isobutanol. Prior to September 2010, our revenues were primarily derived from government grants and
cooperative agreements. From the completion of our acquisition of Agri-Energy in September 2010 until the commencement of our initial start-up operations for
isobutanol production in May 2012, we had also generated revenue from the sale of ethanol and related products. Similarly, we expect to derive revenue from the
sale of ethanol and related products during any period in which the production of isobutanol is temporarily paused and our management decides, based on the
then-current economic conditions for the production of ethanol, that the Agri-Energy Facility will be temporarily reverted to ethanol production. Additionally, we
have generated some limited revenue from the sale of products such as ATJ fuel that has been used for engine qualification and flight demonstration by the USAF.
Following the commencement of full-scale commercial production of isobutanol, we do not expect to generate significant future revenues from the sale of ethanol
at the Agri-Energy Facility. If our existing grants and cooperative agreements are canceled prior to the expected end dates or we are unable to obtain new grants
and cooperative agreements or our ATJ supply contracts are cancelled or we are unable to produce suitable ATJ material, our revenues could be adversely
affected.
Furthermore, we expect to spend significant amounts on further development of our technology, including on optimizing specific parts of our isobutanol
production technology in place at the Agri-Energy Facility, acquiring or otherwise gaining access to ethanol plants and retrofitting them for isobutanol production,
marketing, general and administrative expenses associated with our planned growth and management of operations as a public company. In addition, the cost of
preparing, filing, prosecuting, maintaining and enforcing patent, trademark and other intellectual property rights and defending ourselves against claims by others
that we may be violating their intellectual property rights may be significant.
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In particular, over time, the costs of our litigation with Butamax have been and may continue to be significant. As a result, even if our revenues increase
substantially, we expect that our expenses will exceed revenues for the foreseeable future. We do not expect to achieve profitability during the foreseeable future,
and may never achieve it. If we fail to achieve profitability, or if the time required to achieve profitability is longer than we anticipate, we may not be able to
continue our business. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.
Our retrofits of the Agri-Energy Facility and the Redfield Facility will be our first commercial retrofits and, as a result, our production of isobutanol could be
delayed or we could experience significant cost overruns in comparison to our current estimates.
In September 2010, we acquired ownership of an ethanol production facility, the Agri-Energy Facility in Luverne, Minnesota, and in June 2011, we
acquired access to a second ethanol production facility, the Redfield Facility in Redfield, South Dakota, pursuant to our joint venture with Redfield. We intend to
retrofit both facilities to produce isobutanol, and will need access to additional capital in order to complete the retrofit of the Redfield Facility. Cost overruns or
other unexpected difficulties could cause the retrofits to cost more than we anticipate which could further increase our need for funding. Such funds may not be
available when we need them, on terms that are acceptable to us or at all, which could delay our commercial scale production of isobutanol. If additional funding
is not available to us, or not available on terms acceptable to us, our ability to optimize the isobutanol production technology currently in place at the Agri-Energy
Facility, complete the retrofit of the Redfield Facility, which is not yet underway, or acquire access to or retrofit additional ethanol plants may be limited. Such a
result could reduce the scope of our business plan and have an adverse effect on our results of operations.
Our ability to compete may be adversely affected if we are unsuccessful in defending against any claims by competitors or others that we are infringing upon
their intellectual property rights, such as if Butamax is successful in its lawsuits alleging that we are infringing its patents for the production of isobutanol
using certain microbial host cells.
The various bioindustrial markets in which we plan to operate are subject to frequent and extensive litigation regarding patents and other intellectual
property rights. In addition, many companies in intellectual property-dependent industries, including the renewable energy industry, have employed intellectual
property litigation as a means to gain an advantage over their competitors. As a result, we may be required to defend against claims of intellectual property
infringement that may be asserted by our competitors against us and, if the outcome of any such litigation is adverse to us, it may affect our ability to compete
effectively. Currently, we are defending against nine lawsuits filed by Butamax alleging that we have infringed patents for certain recombinant microbial host
cells that produce isobutanol and methods for the production of isobutanol using such host cells, a patent covering a modified Pseudomonas KARI enzyme, a
patent covering a modified E. coli KARI enzyme, and a patent covering the use of L. lactis and S. mutans dihydroxy acid dehydratase enzymes in yeast. The
litigation with Butamax is dynamic. We have filed complaints alleging infringement of certain of our patents by Butamax and we anticipate that additional patents
involving the isobutanol production process that are issued to Butamax, its members or us will be involved in litigation. The trial for the earliest-filed Butamax
litigation is currently scheduled for August 2013 and additional trials are currently scheduled for July 2014 and August 2015.
Our involvement in litigation, interferences, opposition proceedings or other intellectual property proceedings inside and outside of the U.S. may divert
management time from focusing on business operations, could cause us to spend significant amounts of money and may have no guarantee of success. Any
current and future intellectual property litigation also could force us to do one or more of the following:
•
•
stop selling, incorporating, manufacturing or using our products that use the subject intellectual property;
obtain from a third party asserting its intellectual property rights, a license to sell or use the relevant technology, which license may not be available
on reasonable terms, or at all;
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•
•
redesign those products or processes, such as our process for producing isobutanol, that use any allegedly infringing or misappropriated technology,
which may result in significant cost or delay to us, or which redesign could be technically infeasible; or
pay damages, including the possibility of treble damages in a patent case if a court finds us to have willfully infringed certain intellectual property
rights.
We are aware of a significant number of patents and patent applications relating to aspects of our technologies filed by, and issued to, third parties,
including, but not limited to Butamax. We cannot assure you that we will ultimately prevail if any of this third-party intellectual property is asserted against us or
that we will ultimately prevail in the patent infringement litigation with Butamax.
Following completion of its retrofit to isobutanol production, the Agri-Energy Facility will be our first commercial isobutanol production facility, and, as a
result, our production of isobutanol could be delayed or we could experience significant cost overruns in comparison to our current estimates of production
costs or be unable to produce planned quantities of isobutanol.
In May 2012, we announced that we had commenced initial start-up operations for the retrofit of the Agri-Energy Facility to isobutanol production. In
September 2012, we updated our initial production expectations for the Agri-Energy Facility noting that we had temporarily paused isobutanol production in
order to optimize certain specific parts of our isobutanol production technology to further enhance isobutanol production rates. We do not expect to complete our
work to optimize specific parts of our isobutanol production technology or reach technical completion of the retrofit of the Agri-Energy Facility until later this
year. Even with technical completion of the Agri-Energy Facility, we expect that initial production volumes will be lower than the projected nameplate capacity
for isobutanol production at the facility. We intend to resume isobutanol production at the Agri-Energy Facility in support of future commercial operations once
this work has been completed. Based on our progress to date we anticipate resuming a limited commercial scale campaign of isobutanol production at the Agri-
Energy Facility in 2013 to demonstrate commercial scale capacity and sell resulting product. However, we may encounter further production challenges,
including, but not limited to, adding additional processing steps to achieve target customer product specifications, during the completion of the retrofit and the
projected ramp up in production rates. Any such production challenges may prevent us from producing significant quantities of isobutanol or may significantly
increase our cost to produce isobutanol which could have a material adverse effect on our business, financial condition and results of operations.
Some of our retrofits, including the retrofit of the Agri-Energy Facility, will include additional equipment that we believe will allow us to switch between
ethanol and isobutanol production but we cannot guarantee that we will be successful in switching between isobutanol and ethanol production in a timely or
efficient manner at these facilities.
While we have designed the retrofit of the Agri-Energy Facility to allow the capability to switch between isobutanol and ethanol production, which may,
subject to regulatory factors and depending on market conditions, mitigate certain significant risks associated with start-up operations for isobutanol production,
there can be no assurance that we will be able to revert to ethanol production or that it will make sense, based on the then-current economic conditions for the
production of ethanol, to do so. In September 2012, we announced that we had made the strategic decision to temporarily pause isobutanol production at the Agri-
Energy Facility for a period of time during which we may, based on the economic conditions for the production of ethanol, produce ethanol at the Agri-Energy
Facility while we focus on optimizing specific parts of our technology to further enhance isobutanol production rates. Even if we are able to revert to ethanol
production, the facility may produce ethanol less efficiently or in lower volumes than it did prior to the retrofit and such ethanol production may not generate
positive economic returns. If we are unable to produce isobutanol at the volumes, rates and costs that we expect and are unable to revert back to ethanol
production at full capacity, we would be unable to match the facility’s historical economic performance and our business, financial condition and results of
operations would be materially adversely affected.
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We may not be successful in the development of individual steps in, or an integrated process for, the production of commercial quantities of isobutanol from
plant feedstocks in a timely or economic manner, or at all.
As of the date of this Report, we have produced only limited quantities of isobutanol at commercial scale and we may not be successful in increasing our
production from these limited startup production levels to full-scale commercial production levels. The production of isobutanol requires multiple integrated
steps, including:
•
•
•
•
•
•
obtaining the plant feedstocks;
treatment with enzymes to produce fermentable sugars;
fermentation by organisms to produce isobutanol from the fermentable sugars;
distillation of the isobutanol to concentrate and separate it from other materials;
purification of the isobutanol; and
storage and distribution of the isobutanol.
Our future success depends on our ability to produce commercial quantities of isobutanol in a timely and economic manner. Our biocatalysts have not yet
produced full-scale commercial volumes of isobutanol. While we have produced isobutanol using our biocatalysts at our laboratories in Colorado, at the
demonstration facility and at the Agri-Energy Facility, such production was not at full commercial scale and in September 2012, we announced our plan to pause
isobutanol production while we focus on optimizing specific parts of our technology to further enhance isobutanol production rates. To date, we have focused the
majority of our research and development efforts on producing isobutanol from dextrose and challenges remain in achieving substantial production volumes with
other sugars, like corn mash. The risk of contamination and other problems rise as we increase the scale of our isobutanol production. If we are unable to
successfully manage these risks, we may encounter difficulties in achieving our target isobutanol production yield, rate, concentration or purity at a commercial
scale, which could delay or increase the costs involved in commercializing our isobutanol production. In addition, we have limited experience sourcing large
quantities of feedstocks and in storing and/or distributing significant volumes of isobutanol. The technological and logistical challenges associated with each of
the processes involved in production, sale and distribution of isobutanol are extraordinary, and we may not be able to resolve any difficulties that arise in a timely
or cost effective manner, or at all. Even if we are successful in developing an economical process for converting plant feedstocks into commercial quantities of
isobutanol, we may not be able to adapt such process to other biomass raw materials, including cellulosic biomass.
Prior to commencement of the Agri-Energy Facility retrofit, neither we nor ICM had ever built (through retrofit or otherwise) or operated a commercial
isobutanol facility. We assume that we understand how the engineering and process characteristics of the one MGPY demonstration facility will scale up to larger
facilities, but these assumptions may prove to be incorrect. Accordingly, we cannot be certain that we can manufacture isobutanol in an economical manner in
commercial quantities. If our costs to build large-scale commercial isobutanol facilities are significantly higher than we expect or if we fail to manufacture
isobutanol economically on a commercial scale or in commercial volumes, our commercialization of isobutanol and our business, financial condition and results
of operations will be materially adversely affected.
We may not be able to successfully identify and acquire access to additional ethanol production facilities suitable for efficient retrofitting, or acquire access to
sufficient capacity to be commercially viable or meet customer demand.
Our strategy currently includes accessing and retrofitting, either independently or with potential development partners or licensees, existing ethanol
facilities for the production of large quantities of isobutanol for commercial distribution and sale. We have acquired one 22 MGPY ethanol production facility and
we have acquired access to one 50 MGPY ethanol production facility pursuant to our joint venture with Redfield.
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However, we may not find future development partners with whom we can implement this growth strategy, and we may not be able to identify facilities suitable
for joint venture, acquisition, lease or license.
Even if we successfully identify a facility suitable for efficient retrofitting, we may not be able to acquire access to such facility in a timely manner, if at all.
The owners of the ethanol facility may reach an agreement with another party, refuse to consider a joint venture, acquisition, lease or license, or demand more or
different consideration than we are willing to provide. In particular, if the profitability of ethanol production increases, plant owners may be less likely to consider
modifying their production, and thus may be less willing to negotiate with us or agree to allow us to retrofit their facilities for isobutanol production. We may also
find that it is necessary to offer special terms, incentives and/or rebates to owners of ethanol facilities that allow us to access and retrofit their facilities before our
production technology has been proven on a commercial scale. Even if the owners of a facility are interested in reaching an agreement that grants us access to the
plant, negotiations may take longer or cost more than we expect, and we may never achieve a final agreement. Further, we may not be able to raise capital on
acceptable terms, or at all, to finance our joint venture, acquisition, participation or lease of facilities.
Even if we are able to access and retrofit several facilities, we may fail to access enough capacity to be commercially viable or meet the volume demands
or minimum requirements of our customers, including pursuant to definitive supply or distribution agreements that we may enter into, which may subject us to
monetary damages. For example, under the terms of our international off-take and distribution agreement with Sasol, we are required to pay certain shortfall fees
if we are not able to supply Sasol with certain minimum quantities of product. Failure to acquire access to sufficient capacity in a timely manner and on favorable
terms may slow or stop our commercialization process, which could have a material adverse effect on our business, financial condition and results of operations.
Once we acquire access to ethanol facilities, we may be unable to successfully retrofit them to produce isobutanol, or we may not be able to retrofit them in a
timely and cost-effective manner.
For each ethanol production facility to which we acquire access, we will be required to obtain numerous regulatory approvals and permits to retrofit and
operate the facility. In the U.S., these include such items as a modification to the air permit, fuel registration with the EPA, ethanol excise tax registration and
others. These requirements may not be satisfied in a timely manner, or at all. Later-enacted federal and state governmental requirements may also substantially
increase our costs or delay or prevent the completion of a retrofit, which could have a material adverse effect on our business, financial condition and results of
operations.
No two ethanol facilities are exactly alike, and each retrofit will require individualized engineering and design work. There is no guarantee that we or any
contractor we retain will be able to successfully design a commercially viable retrofit, or properly complete the retrofit once the engineering plans are completed.
Prior to commencement of the Agri-Energy Facility retrofit, neither we nor ICM had ever built, via retrofit or otherwise, a full-scale commercial isobutanol
facility. Despite our experience with the retrofit of the Agri-Energy Facility, our estimates of the capital costs that we will need to incur to retrofit a commercial-
scale ethanol facility may prove to be inaccurate, and each retrofit may cost materially more to engineer and build than we currently anticipate. For example, our
estimates assume that each plant we retrofit will be performing at full production capacity, and we may need to expend substantial sums to repair underperforming
facilities prior to retrofit.
Our retrofit design was developed in cooperation with ICM and is based on ICM technology. There is no guarantee that our retrofit design will be
compatible with existing ethanol facilities that do not utilize ICM technology. Before we can retrofit such facilities, we may need to modify them to be compatible
with our retrofit design. This may require significant additional expenditure of time and money, and there is no guarantee such modification will be successful.
Furthermore, the retrofit of acquired facilities will be subject to the risks inherent in the build-out of any manufacturing facility, including risks of delays
and cost overruns as a result of factors that may be out of our
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control, such as delays in the delivery of equipment and subsystems or the failure of such equipment to perform as expected once delivered. In addition, we will
depend on third-party relationships in expanding our isobutanol production capacity and such third parties may not fulfill their obligations to us under our
arrangements with them. Delays, cost-overruns or failures in the retrofit process will slow our commercial production of isobutanol and harm our performance.
Though our retrofit design for the Agri-Energy Facility includes the capability to switch between isobutanol and ethanol production, we may be unable to
successfully revert to ethanol production after its retrofit to an isobutanol facility is complete, or the facility may produce ethanol less efficiently or in lower
volumes than it did before the retrofit. In addition, we may be unable to secure the necessary regulatory approvals and permits to switch between isobutanol and
ethanol production in a timely manner, or at all. Thus, if we fail to achieve commercial levels of isobutanol production at a retrofitted facility, we may be unable
to rely on ethanol production as an alternative revenue source, which could have a material adverse effect on our prospects.
Our facilities and process may fail to produce isobutanol at the volumes, rates and costs we expect.
Some or all of the facilities we choose to retrofit may be in locations distant from corn or other feedstock sources, which could increase our feedstock costs
or prevent us from acquiring sufficient feedstock volumes for commercial production. General market conditions might also cause increases in feedstock prices,
which could likewise increase our production costs.
Even if we secure access to sufficient volumes of feedstock, the facilities we retrofit for isobutanol production may fail to perform as expected. The
equipment and subsystems installed during the retrofit may never operate as planned. Our systems may prove incompatible with the original facility, or require
additional modification after installation. Our biocatalyst may perform less efficiently than it did in testing, if at all. Contamination of plant equipment may
require us to replace our biocatalyst more often than expected, or cause our fermentation process to yield undesired or harmful by-products. Likewise, our
feedstock may contain contaminants like wild yeast, which naturally ferments feedstock into ethanol. The presence of contaminants, such as wild yeast, in our
feedstock could reduce the purity of the isobutanol that we produce and require us to invest in more costly isobutanol separation processes or equipment.
Unexpected problems may force us to cease or delay production and the time and costs involved with such delays may prove prohibitive. Any or all of these risks
could prevent us from achieving the production throughput and yields necessary to achieve our target annualized production run rates and/or to meet the volume
demands or minimum requirements of our customers, including pursuant to definitive supply or distribution agreements that we may enter into, which may
subject us to monetary damages. For example, under the terms of our international off-take and distribution agreement with Sasol, we are required to pay certain
shortfall fees if we are not able to supply Sasol with certain minimum quantities of product. Failure to achieve these rates or meet these minimum requirements,
or achieving them only after significant additional expenditures, could substantially harm our commercial performance.
We may be unable to produce isobutanol in accordance with customer specifications.
Even if we produce isobutanol at our targeted rates, we may be unable to produce isobutanol that meets customer specifications. We may need to add
additional processing steps or incur capital expenditures in order to meet customer specifications which could add significant costs to our production process. If
we fail to meet specific product or volume specifications contained in a supply agreement, the customer may have the right to seek an alternate supply of
isobutanol and/or terminate the agreement completely, and we could be required to pay shortfall fees or otherwise be subject to damages. For example, under the
terms of our international off-take and distribution agreement with Sasol, we are required to meet defined high-purity isobutanol product standards. A failure to
successfully meet the specifications of our potential customers could decrease demand, and significantly hinder market adoption of our products.
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We lack significant experience operating commercial-scale ethanol and isobutanol facilities, and may encounter substantial difficulties operating commercial
plants or expanding our business.
We have very limited experience operating commercial-scale ethanol and isobutanol facilities. Accordingly, we may encounter significant difficulties
operating at a commercial scale. We believe that our future facilities will, like the Agri-Energy Facility, be able to continue producing ethanol during much of the
retrofit process. We will need to successfully administer and manage this production. Though ICM and the employees of Agri-Energy and Redfield are
experienced in the operation of ethanol facilities, and our future development partners or the entities that we acquire may likewise have such experience, we may
be unable to manage ethanol-producing operations, especially given the possible complications associated with a simultaneous retrofit. Once we complete a
commercial retrofit, operational difficulties may increase, because neither we nor anyone else has significant experience operating a pure isobutanol fermentation
facility at a commercial scale. The skills and knowledge gained in operating commercial ethanol facilities or small-scale isobutanol plants may prove insufficient
for successful operation of a large-scale isobutanol facility, and we may be required to expend significant time and money to develop our capabilities in
isobutanol facility operation. We may also need to hire new employees or contract with third parties to help manage our operations, and our performance will
suffer if we are unable to hire qualified parties or if they perform poorly.
We may face additional operational difficulties as we further expand our production capacity. Integrating new facilities with our existing operations may
prove difficult. Rapid growth, resulting from our operation of, or other involvement with, isobutanol facilities or otherwise, may impose a significant burden on
our administrative and operational resources. To effectively manage our growth and execute our expansion plans, we will need to expand our administrative and
operational resources substantially and attract, train, manage and retain qualified management, technicians and other personnel. We may be unable to do so.
Failure to meet the operational challenges of developing and managing increased isobutanol production, or failure to otherwise manage our growth, may have a
material adverse effect on our business, financial condition and results of operations.
We may have difficulty adapting our technology to commercial-scale fermentation, which could delay or prevent our commercialization of isobutanol.
While we have succeeded in reaching our commercial fermentation performance targets for isobutanol concentration, fermentation productivity and
isobutanol yield in laboratory tests, and we have demonstrated the ability to produce isobutanol under the demonstration plant operating conditions and under
commercial scale operating conditions at the Agri-Energy Facility, we have not yet accomplished these targets in a commercial plant environment. We are
currently optimizing certain specific parts of our isobutanol production technology to enhance our isobutanol production rates at the Agri-Energy Facility. This
process, if it succeeds, may take longer or cost more than expected. Our yeast biocatalyst may not be able to meet the commercial performance targets at a
commercial-scale retrofitted plant in a timely manner, or ever. In addition, the risk of contamination and other problems may increase at commercial-scale
isobutanol production facilities, which could negatively impact our cost of production. If we encounter difficulties in optimizing our production, our
commercialization of isobutanol and our business, financial condition and results of operations will be materially adversely affected.
We may have difficulties gaining market acceptance and successfully marketing our isobutanol to customers, including chemical producers and refiners.
A key component of our business strategy is to market our isobutanol to chemical producers and refiners. We have no experience marketing isobutanol on a
commercial scale and we may fail to successfully negotiate marketing agreements in a timely manner or on favorable terms. If we fail to successfully market our
isobutanol to refiners and chemical producers, our business, financial condition and results of operations will be materially adversely affected.
We also intend to market our isobutanol to chemical producers for use in making various chemicals such as isobutylene, a type of butene that can be
produced through the dehydration of isobutanol. Although a significant
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market currently exists for isobutylene produced from petroleum, which is widely used in the production of plastics, specialty chemicals, alkylate for gasoline
blending and high octane aviation fuel, no one has successfully created isobutylene on a commercial scale from bio-based isobutanol. Therefore, to gain market
acceptance and successfully market our isobutanol to chemical producers, we must show that our isobutanol can be converted into isobutylene at a commercial
scale. As no company currently dehydrates commercial volumes of isobutanol into isobutylene, we must demonstrate the large-scale feasibility of the process and
reach agreements with companies that are willing to invest in the necessary dehydration infrastructure. Failure to reach favorable agreements with these
companies, or the inability of their plants to convert isobutanol into isobutylene at sufficient scale, will slow our development in the chemicals market and could
significantly affect our profitability.
Obtaining market acceptance in the chemicals industry is complicated by the fact that many potential chemicals industry customers have invested
substantial amounts of time and money in developing petroleum-based production channels. These potential customers generally have well-developed
manufacturing processes and arrangements with suppliers of chemical components, and may display substantial resistance to changing these processes. Pre-
existing contractual commitments, unwillingness to invest in new infrastructure, distrust of new production methods and lengthy relationships with current
suppliers may all slow market acceptance of isobutanol.
No market currently exists for isobutanol as a fuel or fuel blendstock. Therefore, to gain market acceptance and successfully market our isobutanol to
refiners, we must effectively demonstrate the commercial advantages of using isobutanol over other biofuels and blendstocks, as well as our ability to produce
isobutanol reliably on a commercial scale at a sufficiently low cost. We must show that isobutanol is compatible with existing infrastructure and does not damage
pipes, engines, storage facilities or pumps. We must also overcome marketing and lobbying efforts by producers of other biofuels and blendstocks, including
ethanol, many of whom may have greater resources than we do. If the markets for isobutanol as a fuel or fuel blendstock do not develop as we currently
anticipate, or if we are unable to penetrate these markets successfully, our revenue and revenue growth rate, if any, could be materially and adversely affected.
We believe that consumer demand for environmentally sensitive products will drive demand among large brand owners for renewable hydrocarbon sources.
One of our marketing strategies is to leverage this demand to obtain commitments from large brand owners to purchase products made from our isobutanol by
third parties. We believe these commitments will, in turn, promote chemicals industry demand for our isobutanol. If consumer demand for environmentally
sensitive products fails to develop at sufficient scale or if such demand fails to drive large brand owners to seek sources of renewable hydrocarbons, our revenue
and growth rate could be materially and adversely affected.
We may face substantial delay in getting regulatory approvals for use of our isobutanol in the fuels and chemicals markets, which could substantially hinder
our ability to commercialize our products.
Commercialization of our isobutanol will require approvals from state and federal agencies. Before we can sell isobutanol as a fuel or fuel blendstock
directly to large petroleum refiners, we must receive EPA fuel certification. We are currently conducting Tier 1 EPA testing, and the approval process may require
significant time. Approval can be delayed for years, and there is no guarantee of receiving it. Additionally, California requires that fuels meet both its fuel
certification requirements and a separate state low-carbon fuel standard. Any delay in receiving approval will slow or prevent the commercialization of our
isobutanol for fuel markets, which could have a material adverse effect on our business, financial condition and results of operations.
With respect to the chemicals markets, we plan to focus on isobutanol production and sell to companies that can convert our isobutanol into other
chemicals, such as isobutylene. However, should we later decide to produce these other chemicals ourselves, we may face similar requirements for EPA and other
regulatory approvals.
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Approval, if ever granted, could be delayed for substantial amounts of time, which could significantly harm the development of our business and prevent the
achievement of our goals.
Our isobutanol fermentation process utilizes a genetically modified organism which, when used in an industrial process, is considered a new chemical
under the EPA’s TSCA. The TSCA requires us to comply with the EPA’s Microbial Commercial Activity Notice process to operate plants producing isobutanol
using our biocatalysts. The TSCA’s new chemicals submission policies may change and additional government regulations may be enacted that could prevent or
delay regulatory approval of our isobutanol production.
There are various third-party certification organizations, such as ASTM and Underwriters’ Laboratories, Inc., involved in standard-setting regarding the
transportation, dispensing and use of liquid fuel in the U.S. and abroad. These organizations may change the current standards and additional requirements may be
enacted that could prevent or delay approval of our products. The process of seeking required approvals and the continuing need for compliance with applicable
standards may require the expenditure of substantial resources, and there is no guarantee that we will satisfy these standards in a timely manner, if ever.
In addition, to retrofit ethanol facilities and operate the retrofitted plants to produce isobutanol, we will need to obtain and comply with a number of permit
requirements. As a condition to granting necessary permits, regulators may make demands that could increase our retrofit or operations costs, and permit
conditions could also restrict or limit the extent of our operations, which could delay or prevent our commercial production of isobutanol. We cannot guarantee
that we will be able to meet all regulatory requirements or obtain and comply with all necessary permits to complete our planned ethanol plant retrofits, and
failure to satisfy these requirements in a timely manner, or at all, could have a substantial negative effect on our performance.
Jet fuels must meet various statutory and regulatory requirements before they may be used in commercial aviation. In the U.S., the use of specific jet fuels
is regulated by the Federal Aviation Administration (“FAA”). Rather than directly approving specific fuels, the FAA certifies individual aircraft for flight. This
certification includes authorization for an aircraft to use the types of fuels specified in its flight manual. To be included in an aircraft’s flight manual, the fuel must
meet standards set by ASTM. The current ASTM requirements do not permit the use of jet fuel derived from isobutanol, and we will need to give ASTM
sufficient data to justify creating a new standard applicable to ATJ. Though our work testing isobutanol-based ATJ with the U.S. Air Force Research Laboratory
has provided us with data we believe ASTM will take into consideration, the process of seeking required approvals and the continuing need for compliance with
applicable statutes and regulations will require the expenditure of substantial resources. Failure to obtain regulatory approval in a timely manner, or at all, could
have a significant negative effect on our operations.
We may be unable to successfully negotiate final, binding terms related to our current non-binding isobutanol supply and distribution agreements, which
could harm our commercial prospects.
We have engaged in negotiations with a number of companies, and have agreed to preliminary terms regarding supplying isobutanol or the products
derived from it to various companies for their use or further distribution, including Toray Industries, LANXESS, United Airlines, and TOTAL
PETROCHEMICALS USA, Inc. However, as of December 31, 2012, we are not party to any final, definitive supply or distribution agreements for our
isobutanol, other than our exclusive supply agreement with LANXESS, our international off-take and distribution agreement with Sasol, our commercial off-take
agreement with Mansfield, our joint development agreement with Toray Industries, our offtake and marketing agreement with Land O’Lakes Purina Feed, and our
contracts from the DLA. We may be unable to negotiate final terms with other companies in a timely manner, or at all, and there is no guarantee that the terms of
any final agreement will be the same or similar to those currently contemplated in our preliminary agreements. Final terms may include less favorable pricing
structures or volume commitments, more expensive delivery or purity requirements, reduced contract durations and other adverse changes. Delays in negotiating
final contracts could slow our initial isobutanol commercialization, and failure to agree to definitive terms for sales of sufficient volumes of isobutanol could
prevent us from growing our business. To the extent that terms in our initial supply and distribution contracts
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may influence negotiations regarding future contracts, the failure to negotiate favorable final terms related to our current preliminary agreements could have an
especially negative impact on our growth and profitability. Additionally, as we have yet to produce or supply commercial volumes of isobutanol to any customer,
we have not demonstrated that we can meet the production levels contemplated in our current non-binding supply agreements. If our production scale-up
proceeds more slowly than we expect, or if we encounter difficulties in successfully completing plant retrofits, potential customers, including those with whom
we have current letters of intent, may be less willing to negotiate definitive supply agreements, or demand terms less favorable to us, and our performance may
suffer.
Even if we are successful in producing isobutanol on a commercial scale, we may not be successful in negotiating sufficient supply agreements for our
production.
We expect that many of our customers will be large companies with extensive experience operating in the fuels or chemicals markets. As a development
stage company, we lack commercial operating experience, and may face difficulties in developing marketing expertise in these fields. Our business model relies
upon our ability to successfully negotiate and structure long-term supply agreements for the isobutanol we produce. Many of our potential customers may be
more experienced in these matters than we are, and we may fail to successfully negotiate these agreements in a timely manner or on favorable terms which, in
turn, may force us to slow our production, delay our acquiring and retrofitting of additional plants, dedicate additional resources to increasing our storage capacity
and/or dedicate resources to sales in spot markets. Furthermore, should we become more dependent on spot market sales, our profitability will become
increasingly vulnerable to short-term fluctuations in the price and demand for petroleum-based fuels and competing substitutes.
Our isobutanol may encounter physical or regulatory issues, which could limit its usefulness as a fuel blendstock.
In the fuel blendstock market, isobutanol can be used in conjunction with, or as a substitute for, ethanol and other widely-used fuel oxygenates, and we
believe our isobutanol will be physically compatible with typical gasoline engines. However, there is a risk that under actual engine conditions, isobutanol will
face significant limitations, making it unsuitable for use in high percentage gasoline blends. Additionally, current regulations limit fuel blends to low percentages
of isobutanol, and also limit combination isobutanol-ethanol blends. Government agencies may maintain or even increase the restrictions on isobutanol fuel
blends. As we believe that the potential to use isobutanol in higher percentage blends than is feasible for ethanol will be an important factor in successfully
marketing isobutanol to refiners, a low blend wall could significantly limit commercialization of isobutanol as a fuel blendstock.
Our isobutanol may be less compatible with existing refining and transportation infrastructure than we believe, which may hinder our ability to market our
product on a large scale.
We developed our business model based on our belief that our isobutanol is fully compatible with existing refinery infrastructure. For example, when
making isobutanol blends, we believe that gasoline refineries will be able to pump our isobutanol through their pipes and blend it in their existing facilities
without damaging their equipment. If our isobutanol proves unsuitable for such handling, it will be more expensive for refiners to use our isobutanol than we
anticipate, and they may be less willing to adopt it as a fuel blendstock, forcing us to seek alternative purchasers.
Likewise, our plans for marketing our isobutanol are based upon our belief that it will be compatible with the pipes, tanks and other infrastructure currently
used for transporting, storing and distributing gasoline. If our isobutanol or products incorporating our isobutanol cannot be transported with this equipment, we
will be forced to seek alternative transportation arrangements, which will make our isobutanol and products produced from our isobutanol more expensive to
transport and less appealing to potential customers. Reduced compatibility with either refinery or transportation infrastructure may slow or prevent market
adoption of our isobutanol, which could substantially harm our performance.
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We may be required to obtain additional regulatory approvals for use of our iDGs™ as animal feed, which could delay our ability to sell iDGs™ increasing
our net cost of production and harming our operating results.
Most of the ethanol plants we initially plan to retrofit use dry-milled corn as a feedstock. Once we have optimized our full-scale commercial isobutanol
production process, we plan to sell, as animal feed, the iDGs™ left as a co-product of fermenting isobutanol from dry-milled corn. We believe that this will
enable us to offset a significant portion of the expense of purchasing corn for fermentation. We are currently approved to sell iDGs™ as animal feed through a
self-assessed GRAS process via third party scientific review. In order to improve the value of our iDGs™, we are also in the process of obtaining U.S. Food and
Drug Administration (“FDA”) approval for the marketing of our iDGs™. We believe obtaining FDA approval will increase the value of our iDGs™ by offering
customers of our iDGs™ further assurance of the safety of our iDGs™. If we make changes in our biocatalyst whereby we can no longer rely on our GRAS
process, we would be required to obtain FDA approval for marketing our iDGs™. FDA testing and approval can take a significant amount of time, and there is no
guarantee that we will ever receive such approval. If FDA approval is delayed or never obtained, or if we are unable to secure market acceptance for our iDGs™,
our net cost of production will increase, which may hurt our operating results.
Our development strategy relies heavily on our relationship with ICM.
We rely heavily upon our relationship with ICM. In October 2008, we entered into a development agreement and a commercialization agreement with
ICM, each of which has since been amended. Pursuant to the terms of the development agreement, ICM engineers helped us install the equipment necessary to
test and develop our isobutanol fermentation process at ICM’s one MGPY ethanol demonstration facility, and ICM agreed to assist us in running and maintaining
the converted plant. We have used the demonstration plant to improve our biocatalysts and to develop processes for commercial-scale production of isobutanol.
Under the commercialization agreement, as amended, ICM serves as our exclusive engineering, procurement and construction (“EPC”) contractor for the retrofit
of ethanol plants, and we serve as ICM’s exclusive technology partner for the production of butanols, pentanols and propanols from the fermentation of sugars. In
August 2011, we entered into a work agreement with ICM. Pursuant to the terms of the work agreement, ICM provides EPC services for the retrofit of ethanol
plants.
Because ICM has designed a significant number of the current operating ethanol production facilities in the U.S., we believe that our exclusive alliance
with ICM will provide us with a competitive advantage and allow us to more quickly achieve commercial-scale production of isobutanol. However, ICM may fail
to fulfill its obligations to us under our agreements and under certain circumstances, such as a breach of confidentiality by us, can terminate the agreements. In
addition, ICM may assign the agreements without our consent in connection with a change of control. Since adapting our technology to commercial-scale
production of isobutanol and then retrofitting ethanol plants to use our technology is a major part of our commercialization strategy, losing our exclusive alliance
with ICM would slow our technological and commercial development. It could also force us to find a new contractor with less experience than ICM in designing
and building ethanol plants, or to invest the time and resources necessary to retrofit plants on our own. Such retrofits may be less successful than if performed by
ICM engineers, and retrofitted plants might operate less efficiently than expected. This could substantially hinder our ability to expand our production capacity,
and could severely impact our performance. If ICM fails to fulfill its obligations to us under our agreements and our competitors obtain access to ICM’s expertise,
our ability to realize continued development and commercial benefits from our alliance could be affected. Accordingly, if we lose our exclusive alliance with
ICM, if ICM terminates or breaches its agreements with us, or if ICM assigns its agreements with us to a competitor of ours or to a third party that is not willing
to work with us on the same terms or commit the same resources, our business and prospects could be harmed.
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We will require substantial additional financing to achieve our goals, and a failure to obtain this capital when needed or on acceptable terms could force us to
delay, limit, reduce or terminate our development and commercialization efforts.
Since our inception, a significant portion of our resources have been dedicated to research and development, as well as demonstrating the effectiveness of
our technology, including through the retrofit of the Agri-Energy Facility. We believe that we will continue to expend substantial resources for the foreseeable
future on further developing our technologies, developing future markets for our isobutanol and accessing and retrofitting facilities necessary for the production
of isobutanol on a commercial scale. These expenditures will include costs associated with research and development, accessing existing ethanol plants,
retrofitting the plants to produce isobutanol including the Redfield Facility, obtaining government and regulatory approvals, acquiring or constructing storage
facilities and negotiating supply agreements for the isobutanol we produce. In addition, other unanticipated costs may arise. Because the costs of developing our
technology at a commercial scale are highly uncertain, we cannot reasonably estimate the amounts necessary to successfully commercialize our production.
To date, we have funded our operations primarily through equity offerings, issuances of debt, borrowing under our secured debt financing arrangements
and revenues earned primarily from the sale of ethanol. Based on our current plans and expectations, we will require additional funding to achieve our goals. In
addition, the cost of preparing, filing, prosecuting, maintaining and enforcing patent, trademark and other intellectual property rights and defending against claims
by others that we may be violating their intellectual property rights, including the current litigation with Butamax, will be significant. Moreover, our plans and
expectations may change as a result of factors currently unknown to us, and we may need additional funds sooner than planned. We may also choose to seek
additional capital sooner than required due to favorable market conditions or strategic considerations.
Our future capital requirements will depend on many factors, including:
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the timing of, and costs involved in developing and optimizing our technologies for commercial-scale production of isobutanol;
the timing of, and costs involved in accessing existing ethanol plants;
the timing of, and costs involved in retrofitting the plants we access with our technologies;
the costs involved in establishing an enhanced yeast seed train;
the cost of operating, maintaining and increasing production capacity of the retrofitted plants;
our ability to negotiate agreements supplying suitable biomass to our plants, and the timing and terms of those agreements;
the timing of, and the costs involved in developing adequate storage facilities for the isobutanol we produce;
our ability to gain market acceptance for isobutanol as a specialty chemical, gasoline blendstock and as a raw material for the production of
hydrocarbons;
our ability to negotiate supply agreements for the isobutanol we produce, and the timing and terms of those agreements;
our ability to negotiate sales of our isobutanol for commercial-scale production of butenes and other industrially useful chemicals and fuels, and the
timing and terms of those sales;
our ability to sell the iDGs™ left as a co-product of fermenting isobutanol from corn as animal feedstock;
our ability to establish and maintain strategic partnerships, licensing or other arrangements and the timing and terms of those arrangements; and
the cost of preparing, filing, prosecuting, maintaining, defending and enforcing patent, trademark and other intellectual property claims, including
litigation costs and the outcome of such litigation.
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Additional funds may not be available when we need them, on terms that are acceptable to us, or at all. If needed funds are not available to us on a timely
basis, we may be required to delay, limit, reduce or terminate:
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our research and development activities;
our plans to access and/or retrofit existing ethanol facilities;
our production of isobutanol at retrofitted plants; and/or
our activities in developing storage capacity and negotiating supply agreements that may be necessary for the commercialization of our isobutanol
production.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our technologies.
We may seek additional capital through a combination of public and private equity offerings, debt financings, strategic partnerships and licensing
arrangements. To the extent that we raise additional capital through the sale or issuance of equity, warrants or convertible debt securities, your ownership interest
will be diluted, and the terms of such securities may include liquidation or other preferences that adversely affect your rights as a stockholder. If we raise capital
through debt financing, it may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional
debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic partnerships or licensing agreements with third parties, we
may have to relinquish valuable rights to our technologies, or grant licenses on terms that are not favorable to us. If we are unable to raise additional funds when
needed, we may be required to delay, limit, reduce or terminate our development and commercialization efforts.
We may pay vendors in stock as consideration for their services; this may result in additional costs and may cause dilution to our existing stockholders.
In order for us to preserve our cash resources, we may in the future pay vendors, including technology partners, in shares, warrants or options to purchase
shares of our common stock rather than cash. Payments for services in stock may materially and adversely affect our stockholders by diluting the value of
outstanding shares of our common stock. In addition, in situations where we agree to register the shares issued to a vendor, this will generally cause us to incur
additional expenses associated with such registration.
Our quarterly operating results may fluctuate in the future. As a result, we may fail to meet or exceed the expectations of investment research analysts or
investors, which could cause our stock price to decline.
Our financial condition and operating results have varied significantly in the past and may continue to fluctuate from quarter to quarter and year to year in
the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations are
described elsewhere in this Report. Accordingly, the results of any prior quarterly or annual periods should not be relied upon as indications of our future
operating performance.
Fluctuations in the price of corn and other feedstocks may affect our cost structure.
Our approach to the biofuels and chemicals markets will be dependent on the price of corn and other feedstocks that will be used to produce isobutanol. A
decrease in the availability of plant feedstocks or an increase in the price may have a material adverse effect on our financial condition and operating results. At
certain levels, prices may make these products uneconomical to use and produce, as we may be unable to pass the full amount of feedstock cost increases on to
our customers.
The price and availability of corn and other plant feedstocks may be influenced by general economic, market and regulatory factors. These factors include
weather conditions, farming decisions, government policies and subsidies with respect to agriculture and international trade, and global demand and supply. For
example,
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corn prices have recently increased significantly in response to drought conditions in the Midwestern region of the U.S. and concern that a resulting decrease in
the supply of corn could lead to the restriction of corn supplies, which could cause further increases in the price of corn. The significance and relative impact of
these factors on the price of plant feedstocks is difficult to predict, especially without knowing what types of plant feedstock materials we may need to use.
Fluctuations in the price and availability of natural gas may harm our performance.
The ethanol facilities that we have retrofitted or plan to retrofit to produce isobutanol, including the Agri-Energy Facility in Luverne, Minnesota, and the
Redfield Facility in Redfield, South Dakota, use significant amounts of natural gas to produce ethanol. After retrofit with our GIFT technology, these facilities
will continue to require natural gas to produce isobutanol. Accordingly, our business is dependent upon natural gas supplied by third parties. Should the price of
natural gas increase, our performance could suffer. Likewise, disruptions in the supply of natural gas could have a material impact on our business and results of
operations.
®
Fluctuations in petroleum prices and customer demand patterns may reduce demand for biofuels and bio-based chemicals.
We anticipate marketing our biofuel as an alternative to petroleum-based fuels. Therefore, if the price of oil falls, any revenues that we generate from
biofuel products could decline, and we may be unable to produce products that are a commercially viable alternative to petroleum-based fuels. Additionally,
demand for liquid transportation fuels, including biofuels, may decrease due to economic conditions or otherwise. We will encounter similar risks in the
chemicals industry, where declines in the price of oil may make petroleum-based hydrocarbons less expensive, which could reduce the competitiveness of our
bio-based alternatives.
Changes in the prices of distiller’s grains and iDGs™ could have a material adverse effect on our financial condition.
From September 2010 through May 2012, we sold distiller’s grains as a co-product from the production of ethanol at the Agri-Energy Facility in Luverne,
Minnesota. Similarly, we plan to sell distiller’s grains during any period in which the production of isobutanol is temporarily paused and our management
decides, based on the then-current economic conditions for the production of ethanol, that the Agri-Energy Facility will be temporarily reverted to ethanol
production. We may also sell distiller’s grains produced by other ethanol facilities that we acquire, enter into a joint venture or tolling arrangement with, or license
to in the future. We also plan to sell the iDGs™ that will be produced as a co-product of our commercial isobutanol production. Distiller’s grains and iDGs™
compete with other animal feed products, and decreases in the prices of these other products could decrease the demand for and price of distiller’s grains and
iDGs™. Additionally, we have not yet produced commercial iDGs™ and, as such, there is a risk that our iDGs™ may not meet market requirements. If the price
of distiller’s grains and iDGs™ decreases or our iDGs™ do not meet market requirements, our revenue from the sale of distiller’s grains and future revenue from
the sale of iDGs™ could suffer, which could have a material adverse effect on our financial condition.
To the extent that we produce ethanol at accessed plants before commencing isobutanol production, or during periods in which we make the strategic
decision to revert to ethanol production, we will be vulnerable to fluctuations in the price of and cost to produce ethanol.
We believe that, like the Agri-Energy Facility, the other ethanol production facilities we access can continue to produce ethanol during most of the retrofit
process. In certain cases, we expect to obtain income from this ethanol production. Further, we have designed our isobutanol production technology to allow us to
revert to ethanol production at certain facilities, such as the Agri-Energy Facility, when the economic conditions for ethanol production make such reversion
desirable. Our earnings from ethanol revenue will be dependent on the price of, demand for and cost to produce ethanol. Decreases in the price of ethanol,
whether caused by decreases in gasoline prices, changes in regulations, seasonal fluctuations or otherwise, will reduce our revenues, while
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increases in the cost of production will reduce our margins. Many of these risks, including fluctuations in feedstock costs and natural gas costs, are identical to
risks we will face in the production of isobutanol. To the extent that ethanol production costs increase or price decreases, earnings from ethanol production could
suffer, which could have a material adverse effect on our business.
Due to unfavorable weather conditions, corn prices have recently increased significantly. These unfavorable weather conditions led to a smaller than
expected corn harvest across affected areas of the U.S. Midwest region in the fall of 2012. This, along with smaller corn carryover in the last two crop years and
higher export demand for corn has led to higher corn prices and increased corn price volatility. The price of ethanol has not kept pace with rising corn prices
which has resulted in lower and, in some instances negative, operating margins in the ethanol industry. As a result of these lower operating margins, our
management has determined that the production of ethanol at the Agri-Energy Facility during the period that we have paused the production of isobutanol would
not produce a positive margin versus maintaining the Agri-Energy Facility at idle. In addition, we currently have an inventory of corn that is not being used while
production at the Agri-Energy Facility remains paused. We have opted to sell some of our corn inventory on hand to reduce corn inventory levels. Our sales of
corn on the spot market subject us to the risk that corn prices will be even higher when production at the facility resumes. Our inability to rely on ethanol
production as an alternative revenue source while we focus on optimizing specific parts of our technology could have a material adverse effect on our on our
business, financial condition and results of operations
Reductions or changes to existing regulations and policies may present technical, regulatory and economic barriers, all of which may significantly reduce
demand for biofuels or our ability to supply isobutanol.
The market for biofuels is heavily influenced by foreign, federal, state and local government regulations and policies. For example, in 2007, the U.S.
Congress passed an alternative fuels mandate that required nearly 14 billion gallons of liquid transportation fuels sold in 2011 to come from alternative sources,
including biofuels, a mandate that grows to 36 billion gallons by 2022. Of this amount, a minimum of 21 billion gallons must be advanced biofuels. The EPA has
proposed 2013 volumes of 13.8 billion gallons under this mandate. In the U.S. and in a number of other countries, these regulations and policies have been
modified in the past and may be modified again in the future. Any reduction in mandated requirements for fuel alternatives and additives to gasoline may cause
demand for biofuels to decline and deter investment in the research and development of biofuels. For example, in December 2011, the U.S. Congress did not
renew legislation that extended tax credits to blenders of certain biofuel products and is not likely to renew them retroactively. The absence of tax credits,
subsidies and other incentives in the U.S. and foreign markets for biofuels, or any inability of our customers to access such credits, subsidies and incentives, may
adversely affect demand for our products which would adversely affect our business. In addition, in December 2011, a U.S. federal court found the State of
California’s Low Carbon Fuel Standard unconstitutional and the case is currently on appeal in the Ninth Circuit. An affirmation of this ruling could have a
negative impact on the demand for advanced biofuels. The resulting market uncertainty regarding this and future standards and policies may also affect our ability
to develop new renewable products or to license our technologies to third parties and to sell products to our end customers.
Concerns associated with biofuels, including land usage, national security interests and food crop usage, continue to receive legislative, industry and public
attention. This attention could result in future legislation, regulation and/or administrative action that could adversely affect our business. Any inability to address
these requirements and any regulatory or policy changes could have a material adverse effect on our business, financial condition and results of operations
Additionally, like the ethanol facilities that we retrofit, our isobutanol plants will emit greenhouse gases. Any changes in state or federal emissions
regulations, including the passage of cap-and-trade legislation or a carbon tax, could limit our production of isobutanol and iDGs™ and increase our operating
costs, which could have a material adverse effect on our business, financial condition and results of operations.
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If we engage in additional acquisitions, we will incur a variety of costs and may potentially face numerous risks that could adversely affect our business and
operations.
If appropriate opportunities become available, we expect to acquire businesses, assets, technologies or products to enhance our business in the future. In
connection with any future acquisitions, we could:
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issue additional equity securities which would dilute our current stockholders;
incur substantial debt to fund the acquisitions; or
assume significant liabilities.
Acquisitions involve numerous risks, including problems integrating the purchased operations, technologies or products, unanticipated costs and other
liabilities, diversion of management’s attention from our core business, adverse effects on existing business relationships with current and/or prospective partners,
customers and/or suppliers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees. Other
than our acquisition of Agri-Energy, we have not engaged in acquisitions in the past, and do not have experience in managing the integration process. Therefore,
we may not be able to successfully integrate any businesses, assets, products, technologies or personnel that we might acquire in the future without a significant
expenditure of operating, financial and management resources, if at all. The integration process could divert management time from focusing on operating our
business, result in a decline in employee morale and cause retention issues to arise from changes in compensation, reporting relationships, future prospects or the
direction of the business. In addition, we may acquire companies that have insufficient internal financial controls, which could impair our ability to integrate the
acquired company and adversely impact our financial reporting. If we fail in our integration efforts with respect to acquisitions and are unable to efficiently
operate as a combined organization, our business, financial condition and results of operations may be materially adversely affected.
If we engage in additional joint ventures, we will incur a variety of costs and may potentially face numerous risks that could adversely affect our business and
operations.
If appropriate opportunities become available, we expect to enter into joint ventures with the owners of existing ethanol production facilities in order to
acquire access to additional isobutanol production capacity. We currently anticipate that in each such joint venture, the ethanol producer would contribute access
to its existing ethanol production facility and we would be responsible for retrofitting such facility to produce isobutanol. Upon completion of the retrofit, and in
some cases the attainment of certain performance targets, both parties to the joint venture would receive a portion of the profits from the sale of isobutanol,
consistent with our business model. In connection with these joint ventures, we could incur substantial debt to fund the retrofit of the accessed facilities and we
could assume significant liabilities.
Realizing the anticipated benefits of joint ventures, including projected increases to production capacity and additional revenue opportunities, involves a
number of potential challenges. The failure to meet these challenges could seriously harm our financial condition and results of operations. Joint ventures are
complex and time-consuming and we may encounter unexpected difficulties or incur unexpected costs related to such arrangements, including:
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difficulties negotiating joint venture agreements with favorable terms and establishing relevant performance metrics;
difficulties completing the retrofits of the accessed facilities using our integrated fermentation technology;
the inability to meet applicable performance targets related to the production of isobutanol;
difficulties obtaining the permits and approvals required to produce and sell our products in different geographic areas;
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complexities associated with managing the geographic separation of accessed facilities;
diversion of management attention from ongoing business concerns to matters related to the joint ventures;
difficulties maintaining effective relationships with personnel from different corporate cultures; and
the inability to generate sufficient revenue to offset retrofit costs.
Additionally, our joint venture partners may have liabilities or adverse operating issues that we fail to discover through due diligence prior to entering into
the joint ventures. In particular, to the extent that our joint venture partners failed to comply with or otherwise violated applicable laws or regulations, or failed to
fulfill their contractual obligations, we may suffer financial harm and/or reputational harm for these violations or otherwise be adversely affected.
Our joint venture partners may have significant amounts of existing debt and may not be able to service their existing debt obligations, which could cause
the failure of a specific project and the loss by us of any investment we have made to retrofit the facilities owned by the joint venture partner. In addition, if we
are unable to meet specified performance targets related to the production of isobutanol at a facility owned by one of our joint venture partners, we may never
become eligible to receive a portion of the profits of the joint venture and may be unable to recover the costs of retrofitting the facility.
Additionally, we plan to be the sole marketer for all isobutanol and co-products produced using our proprietary technology including, without limitation, all
isobutanol that is produced by any facilities that we access via joint venture. Marketing agreements can be very complex and the obligations that we assume as
the sole marketer of isobutanol may be time consuming. We have no experience marketing isobutanol on a commercial scale and we may fail to successfully
negotiate marketing agreements in a timely manner or on favorable terms. If we fail to successfully market the isobutanol produced using our proprietary
technology to refiners and chemical producers, our business, financial condition and results of operations will be materially adversely affected.
If we lose key personnel, including key management personnel, or are unable to attract and retain additional personnel, it could delay our product
development programs and harm our research and development efforts, we may be unable to pursue partnerships or develop our own products and it may
trigger an event of default under our loan agreements with TriplePoint.
Our business is complex and we intend to target a variety of markets. Therefore, it is critical that our management team and employee workforce are
knowledgeable in the areas in which we operate. The loss of any key members of our management, including our named executive officers, or the failure to
attract or retain other key employees who possess the requisite expertise for the conduct of our business, could prevent us from developing and commercializing
our products for our target markets and entering into partnerships or licensing arrangements to execute our business strategy. In addition, the loss of any key
scientific staff, or the failure to attract or retain other key scientific employees, could prevent us from developing and commercializing our products for our
target markets and entering into partnerships or licensing arrangements to execute our business strategy. We may not be able to attract or retain qualified
employees in the future due to the intense competition for qualified personnel among biotechnology and other technology-based businesses, particularly in the
advanced biofuels area, or due to the limited availability of personnel with the qualifications or experience necessary for our renewable chemicals and advanced
biofuels business. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints
that will adversely affect our ability to meet the demands of our partners and customers in a timely fashion or to support our internal research and development
programs. In particular, our product and process development programs are dependent on our ability to attract and retain highly skilled scientists. Competition for
experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to do so on
acceptable terms. Additionally, certain changes in our management could trigger an event of default
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under the Amended Agri-Energy Loan Agreement, and we could be forced to pay the outstanding balance of the loan(s) in full. All of our employees are at-will
employees, meaning that either the employee or we may terminate their employment at any time.
Our planned activities will require additional expertise in specific industries and areas applicable to the products and processes developed through our
technology platform or acquired through strategic or other transactions, especially in the end markets that we seek to penetrate. These activities will require the
addition of new personnel, and the development of additional expertise by existing personnel. The inability to attract personnel with appropriate skills or to
develop the necessary expertise could impair our ability to grow our business.
Our ability to compete may be adversely affected if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property
rights through costly litigation or administrative proceedings.
Our success will depend in part on our ability to obtain patents and maintain adequate protection of our intellectual property covering our technologies and
products and potential products in the U.S. and other countries. We have adopted a strategy of seeking patent protection in the U.S. and in certain foreign
countries with respect to certain of the technologies used in or relating to our products and processes. As such, as of December 31, 2012, we exclusively licensed
rights to 93 issued patents and filed patent applications in the U.S. and in various foreign jurisdictions, and we owned rights to approximately 375 issued patents
and filed patent applications in the U.S. and in various foreign jurisdictions. When and if issued, patents would expire at the end of their term and any patent
would only provide us commercial advantage for a limited period of time, if at all. Our patent applications are directed to our enabling technologies and to our
methods and products which support our business in the advanced biofuels and renewable chemicals markets. We intend to continue to apply for patents relating
to our technologies, methods and products as we deem appropriate.
Only 13 of the patent applications that we have filed in the U.S. or in any foreign jurisdictions, and only certain of the patent applications filed by third
parties in which we own rights, have been issued. A filed patent application does not guarantee a patent will issue and a patent issuing does not guarantee its
validity, nor does it give us the right to practice the patented technology or commercialize the patented product. Third parties may have or obtain rights to
“blocking patents” that could be used to prevent us from commercializing our products or practicing our technology. The scope and validity of patents and
success in prosecuting patent applications involve complex legal and factual questions and, therefore, issuance, coverage and validity cannot be predicted with
any certainty. Patents issuing from our filed applications may be challenged, invalidated or circumvented. Moreover, third parties could practice our inventions in
secret and in territories where we do not have patent protection. Such third parties may then try to sell or import products made using our inventions in and into
the U.S. or other territories and we may be unable to prove that such products were made using our inventions. Additional uncertainty may result from
implementation of the Leahy-Smith America Invents Act, enacted in September 2011, as well as other potential patent reform legislation passed by the U.S.
Congress and from legal precedent as handed down by the U.S. Court of Appeals for the Federal Circuit and the U.S. Supreme Court, as they determine legal
issues concerning the scope, validity and construction of patent claims. Because patent applications in the U.S. and many foreign jurisdictions are typically not
published until 18 months after filing, or in some cases not at all, and because publication of discoveries in the scientific literature often lags behind the actual
discoveries, there is additional uncertainty as to the validity of any patents that may issue and the potential for “blocking patents” coming into force at some
future date. Accordingly, we cannot ensure that any of our currently filed or future patent applications will result in issued patents, or even if issued, predict the
scope of the claims that may issue in our and other companies’ patents. Given that the degree of future protection for our proprietary rights is uncertain, we
cannot ensure that (i) we were the first to make the inventions covered by each of our filed applications, (ii) we were the first to file patent applications for these
inventions, (iii) the proprietary technologies we develop will be patentable, (iv) any patents issued will be broad enough in scope to provide commercial
advantage and prevent circumvention, and (v) competitors and other parties do not have or will not obtain patent protection that will block our development and
commercialization activities.
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These concerns apply equally to patents we have licensed, which may likewise be challenged, invalidated or circumvented, and the licensed technologies
may be obstructed from commercialization by competitors’ “blocking patents.” In addition, we generally do not control the patent prosecution and maintenance
of subject matter that we license from others. Generally, the licensors are primarily or wholly responsible for the patent prosecution and maintenance activities
pertaining to the patent applications and patents we license, while we may only be afforded opportunities to comment on such activities. Accordingly, we are
unable to exercise the same degree of control over licensed intellectual property as we exercise over our own intellectual property and we face the risk that our
licensors will not prosecute or maintain it as effectively as we would like.
In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our
intellectual property is difficult, particularly where, as here, the end products reaching the market generally do not reveal the processes used in their manufacture,
and particularly in certain foreign countries where the local laws may not protect our proprietary rights as fully as in the U.S., so we cannot be certain that the
steps we have taken in obtaining intellectual property and other proprietary rights will prevent unauthorized use of our technology. If competitors are able to use
our technology without our authorization, our ability to compete effectively could be adversely affected. Moreover, competitors and other parties such as
universities may independently develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, the potential
competitive advantages provided by our intellectual property may be adversely affected. We may then need to license these competing technologies, and we may
not be able to obtain licenses on reasonable terms, if at all, which could cause material harm to our business. Accordingly, litigation may be necessary for us to
assert claims of infringement, enforce patents we own or license, protect trade secrets or determine the enforceability, scope and validity of the intellectual
property rights of others.
Our commercial success also depends in part on not infringing patents and proprietary rights of third parties, and not breaching any licenses or other
agreements that we have entered into with regard to our technologies, products and business. We cannot be certain that patents have not or will not issue to third
parties that could block our ability to obtain patents or to operate our business as we would like, or at all. There may be patents in some countries that, if valid,
may block our ability to commercialize products in those countries if we are unsuccessful in circumventing or acquiring rights to these patents. There may also be
claims in patent applications filed in some countries that, if granted and valid, may also block our ability to commercialize products or processes in these
countries if we are unable to circumvent or license them.
As is commonplace in the biotechnology industries, some of our directors, employees and consultants are or have been employed at, or associated with,
companies and universities that compete with us or have or will develop similar technologies and related intellectual property. While employed at these
companies, these employees, directors and consultants may have been exposed to or involved in research and technology similar to the areas of research and
technology in which we are engaged. Though we have not received such a complaint, we may be subject to allegations that we, our directors, employees or
consultants have inadvertently or otherwise used, misappropriated or disclosed alleged trade secrets or confidential or proprietary information of those companies.
Litigation may be necessary to defend against such allegations and the outcome of any such litigation would be uncertain.
Under some of our research agreements, our partners share joint rights in certain intellectual property we develop. For example, under our development
agreement with ICM, we have exclusive rights to all intellectual property developed within the defined scope of the project, but all other intellectual property
developed pursuant to the agreement is to be jointly owned. Such provisions may limit our ability to gain commercial benefit from some of the intellectual
property we develop, and may lead to costly or time-consuming disputes with parties with whom we have commercial relationships over rights to certain
innovations.
If any other party has filed patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in interference,
derivation or other proceedings declared by the United States Patent and Trademark Office (the “USPTO”) to determine priority of invention and, thus, the right
to the patents for
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these inventions in the U.S. These proceedings could result in substantial cost to us even if the outcome is favorable. Even if successful, such a proceeding may
result in the loss of certain claims. Even successful outcomes of such proceedings could result in significant legal fees and other expenses, diversion of
management time and efforts and disruption in our business. Uncertainties resulting from initiation and continuation of any patent or related litigation could harm
our ability to compete.
Our government grants are subject to uncertainty, which could harm our business and results of operations.
We have received various government grants, including a cooperative agreement, to complement and enhance our own resources. We may seek to obtain
government grants and subsidies in the future to offset all or a portion of the costs of retrofitting existing ethanol manufacturing facilities and the costs of our
research and development activities. We cannot be certain that we will be able to secure any such government grants or subsidies. Any of our existing grants or
new grants that we may obtain may be terminated, modified or recovered by the granting governmental body under certain conditions.
We may also be subject to audits by government agencies as part of routine audits of our activities funded by our government grants. As part of an audit,
these agencies may review our performance, cost structures and compliance with applicable laws, regulations and standards. Funds available under grants must be
applied by us toward the research and development programs specified by the granting agencies, rather than for all of our programs generally. If any of our costs
are found to be allocated improperly, the costs may not be reimbursed and any costs already reimbursed may have to be refunded. Accordingly, an audit could
result in an adjustment to our revenues and results of operations.
We have received funding from U.S. government agencies, which could negatively affect our intellectual property rights.
Some of our research has been funded by grants from U.S. government agencies. When new technologies are developed with U.S. government funding, the
government obtains certain rights in any resulting patents and technical data, generally including, at a minimum, a nonexclusive license authorizing the
government to use the invention or technical data for noncommercial purposes. U.S. government funding must be disclosed in any resulting patent applications,
and our rights in such inventions will normally be subject to government license rights, periodic progress reporting, foreign manufacturing restrictions and march-
in rights. March-in rights refer to the right of the U.S. government, under certain limited circumstances, to require us to grant a license to technology developed
under a government grant to a responsible applicant or, if we refuse, to grant such a license itself. March-in rights can be triggered if the government determines
that we have failed to work sufficiently towards achieving practical application of a technology or if action is necessary to alleviate health or safety needs, to meet
requirements of federal regulations or to give preference to U.S. industry. If we breach the terms of our grants, the government may gain rights to the intellectual
property developed in our related research. The government’s rights in our intellectual property may lessen its commercial value, which could adversely affect our
performance.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the U.S. Many companies have
encountered significant problems in protecting and enforcing intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries,
particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to
bioindustrial technologies. This could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights.
Proceedings to enforce our patents and other proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from
other aspects of our business. Accordingly, our efforts to enforce our intellectual property rights in such countries may be inadequate to obtain a significant
commercial advantage from the intellectual property that we develop.
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If our biocatalysts, or the genes that code for our biocatalysts, are stolen, misappropriated or reverse engineered, others could use these biocatalysts or genes
to produce competing products.
Third parties, including our contract manufacturers, customers and those involved in shipping our biocatalysts, may have custody or control of our
biocatalysts. If our biocatalysts, or the genes that code for our biocatalysts, were stolen, misappropriated or reverse engineered, they could be used by other
parties who may be able to reproduce these biocatalysts for their own commercial gain. If this were to occur, it would be difficult for us to discover or challenge
this type of use, especially in countries with limited intellectual property protection.
Confidentiality agreements with employees and others may not adequately prevent disclosures of trade secrets and other proprietary information.
We rely in part on trade secret protection to protect our confidential and proprietary information and processes. However, trade secrets are difficult to
protect. We have taken measures to protect our trade secrets and proprietary information, but these measures may not be effective. We require new employees and
consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally
require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with
us be kept confidential and not disclosed to third parties. These agreements also generally provide that know-how and inventions conceived by the individual in
the course of rendering services to us shall be our exclusive property. Nevertheless, these agreements may not be enforceable, our proprietary information may be
disclosed, third parties could reverse engineer our biocatalysts and others may independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our
proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. In addition, an unauthorized
breach in our information technology systems may expose our trade secrets and other proprietary information to unauthorized parties.
We may face substantial competition, which could adversely affect our performance and growth.
We may face substantial competition in the markets for isobutanol, plastics, fibers, rubber, other polymers and hydrocarbon fuels. Our competitors include
companies in the incumbent petroleum-based industry as well as those in the nascent biorenewable industry. The incumbent petroleum-based industry benefits
from a large established infrastructure, production capability and business relationships. The incumbents’ greater resources and financial strength provide
significant competitive advantages that we may not be able to overcome in a timely manner. Academic and government institutions may also develop
technologies, which will compete with us in the chemicals, solvents and blendstock markets.
The biorenewable industry is characterized by rapid technological change. Our future success will depend on our ability to maintain a competitive position
with respect to technological advances. Technological development by others may impact the competitiveness of our products in the marketplace. Competitors
and potential competitors who have greater resources and experience than we do may develop products and technologies that make ours obsolete or may use their
greater resources to gain market share at our expense.
In the production of isobutanol, we face competition from Butamax, a joint venture between BP and DuPont. Additionally, a number of companies
including Cathay Industrial Biotech, Ltd., Green Biologics Ltd., METabolic Explorer, S.A., Eastman Chemical Company (which acquired TetraVitae Bioscience,
Inc. in November 2011) and Cobalt Technologies, Inc. are developing n-butanol production capability from a variety of renewable feedstocks.
In the plastics, fibers, rubber and other polymers markets, we face competition from incumbent petroleum-derived products, other renewable isobutanol
producers and renewable n-butanol producers. Our competitive position versus the incumbent petroleum-derived products and other renewable butanol producers
may not be favorable. Petroleum-derived products have dominated the market for many years and there is substantial
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existing infrastructure for production from petroleum sources, which may impede our ability to establish a position in these markets. Other isobutanol and n-
butanol companies may develop technologies that prove more effective than our isobutanol production technology, or such companies may be more adept at
marketing their production. Additionally, one small company in France, Global Bioenergies, S.A., is pursuing the production of isobutylene from renewable
carbohydrates directly. Since conversion of isobutanol to butenes such as isobutylene is a key step in producing many plastics, fibers, rubber and other polymers
from our isobutanol, this direct production of renewable isobutylene, if successful, could limit our opportunities in these markets.
In the gasoline blendstock market, we will compete with renewable ethanol producers (including those working to produce ethanol from cellulosic
feedstocks), producers of alkylate from petroleum and producers of other blendstocks, all of whom may reduce our ability to obtain market share or maintain our
price levels. For example, Coskata, Inc. is developing a hybrid thermochemical-biocatalytic process to produce ethanol from a variety of feedstocks. If any of
these competitors succeed in producing blendstocks more efficiently, in higher volumes or offering superior performance than our isobutanol, our financial
performance may suffer. Furthermore, if our competitors have more success marketing their products or reach development or supply agreements with major
customers, our competitive position may also be harmed.
In the production of other cellulosic biofuels, key competitors include Shell Oil Company, BP, DuPont-Danisco Cellulosic Ethanol LLC, Abengoa
Bioenergy, S.A., POET, LLC, ICM, Mascoma Corporation, Inbicon A/S, INEOS New Planet BioEnergy LLC, Coskata, Inc., Archer Daniels Midland Company,
BlueFire Ethanol, Inc., KL Energy Corporation, ZeaChem Inc., Iogen Corporation, Qteros, Inc., AE Biofuels, Inc. and many smaller start-up companies. If these
companies are successful in establishing low cost cellulosic ethanol or other fuel production, it could negatively impact the market for our isobutanol as a
gasoline blendstock.
In the markets for the hydrocarbon fuels that we plan to produce from our isobutanol, we will face competition from the incumbent petroleum-based fuels
industry. The incumbent petroleum-based fuels industry makes the vast majority of the world’s gasoline, jet and diesel fuels and blendstocks. It is a mature
industry with a substantial base of infrastructure for the production and distribution of petroleum-derived products. The size, established infrastructure and
significant resources of many companies in this industry may put us at a substantial competitive disadvantage, and delay or prevent the establishment and growth
of our business in the market for hydrocarbon fuels.
Biofuels companies may also provide substantial competition in the hydrocarbon fuels market. With respect to production of renewable gasoline, biofuels
competitors are numerous and include both large established companies and numerous start-ups. For example, Virent has developed a process for making gasoline
and gasoline blendstocks and Kior, Inc. has developed a technology platform to convert biomass into renewable crude oil. Many other competitors may do so as
well. In the jet fuel market, we will face competition from companies such as Synthetic Genomics, Inc., Solazyme, Inc., Sapphire Energy, Inc. and Exxon-Mobil
Corporation that are pursuing production of jet fuel from algae-based technology. LS9, Inc. (“LS9”) and others are also targeting production of jet fuels from
renewable biomass. We may also face competition from companies working to produce jet fuel from hydrogenated fatty acid methyl esters. In the diesel fuels
market, competitors such as Amyris and LS9 have developed technologies for production of alternative hydrocarbon diesel fuel.
In the plastics, fibers, rubber and other polymers markets and the hydrocarbon fuels market, we expect to face vigorous competition from existing
technologies. The companies we may compete with may have significantly greater access to resources, far more industry experience and/or more established sales
and marketing networks. Additionally, since we do not plan to produce most of these products directly, we depend on the willingness of potential customers to
purchase and convert our isobutanol into their products. These potential customers generally have well-developed manufacturing processes and arrangements
with suppliers of the chemical components of their products and may have a resistance to changing these processes and components. These potential customers
frequently impose lengthy and complex product qualification procedures on their suppliers, influenced by consumer preference, manufacturing considerations
such as process changes and capital and other costs associated with transitioning to alternative components, supplier operating history, regulatory
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issues, product liability and other factors, many of which are unknown to, or not well understood by, us. Satisfying these processes may take many months or
years. If we are unable to convince these potential customers that our isobutanol is comparable or superior to the alternatives that they currently use, we will not
be successful in entering these markets and our business will be adversely affected.
We also face challenges in marketing our isobutanol. Though we intend to enhance our competitiveness through partnerships and joint development
agreements, some competitors may gain an advantage by securing more valuable partnerships for developing their hydrocarbon products than we are able to
obtain. Such partners could include major petrochemical, refiner or end-user companies. Additionally, petrochemical companies may develop alternative
pathways for hydrocarbon production that may be less expensive, and may utilize more readily available infrastructure than that used to convert our isobutanol
into hydrocarbon products.
We plan to enter into partnerships through which we will sell significant volumes of our isobutanol to partners who will convert it into useful hydrocarbons
or use it as a fuel or fuel blendstock. However, if any of these partners instead negotiate supply agreements with other buyers for the isobutanol they purchase
from us, or sell it into the open market, they may become competitors of ours in the field of isobutanol sales. This could significantly reduce our profitability and
hinder our ability to negotiate future supply agreements for our isobutanol, which could have an adverse effect on our performance.
Our ability to compete successfully will depend on our ability to develop proprietary products that reach the market in a timely manner and are
technologically superior to and/or are less expensive than other products on the market. Many of our competitors have substantially greater production, financial,
research and development, personnel and marketing resources than we do. In addition, certain of our competitors may also benefit from local government
subsidies and other incentives that are not available to us. As a result, our competitors may be able to develop competing and/or superior technologies and
processes, and compete more aggressively and sustain that competition over a longer period of time than we could. Our technologies and products may be
rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors. As more companies
develop new intellectual property in our markets, the possibility of a competitor acquiring patent or other rights that may limit our products or potential products
increases, which could lead to litigation. Furthermore, to secure purchase agreements from certain customers, we may be required to enter into exclusive supply
contracts, which could limit our ability to further expand our sales to new customers. Likewise, major potential customers may be locked into long-term,
exclusive agreements with our competitors, which could inhibit our ability to compete for their business.
In addition, various governments have recently announced a number of spending programs focused on the development of clean technologies, including
alternatives to petroleum-based fuels and the reduction of carbon emissions. Such spending programs could lead to increased funding for our competitors or a
rapid increase in the number of competitors within those markets.
Our limited resources relative to many of our competitors may cause us to fail to anticipate or respond adequately to new developments and other
competitive pressures. This failure could reduce our competitiveness and market share, adversely affect our results of operations and financial position and
prevent us from obtaining or maintaining profitability.
The terms of the Amended Agri-Energy Loan Agreement and the Indenture governing the Convertible Notes may restrict our ability to engage in certain
transactions.
In August 2010, we entered into the Original Agri-Energy Loan Agreement under which our wholly owned subsidiary, Gevo Development, borrowed $12.5
million to finance its acquisition of Agri-Energy. In October 2011, the Original Agri-Energy Loan Agreement was amended to provide Agri-Energy with
additional term loan facilities of up to $15 million to pay a portion of the costs, expenses, and other amounts associated with the retrofit of the Agri-Energy
Facility to produce isobutanol. In October 2011, Agri-Energy borrowed a portion of the New Loan in the amount of $10.0 million under the Amended Agri-
Energy Loan Agreement. On January 6,
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2012, Agri-Energy borrowed an additional $5.0 million under the Amended Agri-Energy Loan Agreement, bringing the total borrowed under the New Loan at
December 31, 2012 to $15.0 million. Pursuant to the terms of the Amended Agri-Energy Loan Agreement, we cannot engage in certain actions, including
disposing of certain assets, granting or otherwise allowing the imposition of a lien against certain assets, incurring certain kinds of additional indebtedness or
acquiring or merging with other entities unless we receive the prior approval of TriplePoint. If TriplePoint does not consent to any of the actions that we desire to
take, we could be prohibited from engaging in transactions which could be beneficial to our business and our stockholders or could be forced to pay the
outstanding balance of the loan in full.
In June 2012, Gevo, Inc. entered into (i) the Security Agreement Amendment and (ii) the Gevo Loan Amendment. In addition, concurrently with the
execution of the Security Agreement Amendment and the Gevo Loan Amendment, Agri-Energy entered into an amendment to the Amended Agri Energy Loan
Agreement. These amendments, among other things: (i) permitted the issuance of the our Convertible Notes; (ii) removed Agri-Energy’s and our options to elect
additional interest-only periods upon the achievement of certain milestones (iii) permit Agri-Energy to make dividend payments and distributions to us for certain
defined purposes related to the Convertible Notes; (iv) add as an event of default the payment, repurchase or redemption of the Convertible Notes or of amounts
payable in connection therewith other than certain permitted payments related to the Convertible Notes; (v) add a negative covenant whereby we may not incur
any indebtedness other than as permitted under the Security Agreement; and (vi) add a prohibition on making any Coupon Make-Whole Payments in cash prior to
the payment of all remaining outstanding obligations in full under the Amended Agri-Energy Loan Agreement. If we take any of the actions contemplated in the
amendments, we could be forced to pay the outstanding balance of the loan in full. If holders of our Convertible Notes undertake their option to convert their
notes after January 1, 2013 and before July 1, 2017, and we have amounts of principal outstanding to TriplePoint, any issuances of stock that we make in
satisfaction of the Coupon Make-Whole Payments due to such note holders will cause dilution to our existing stockholders. As of March 22, 2013, we have issued
1,540,451 shares of our common stock in satisfaction of these Coupon Make-Whole Payments.
As of December 31, 2012, the aggregate outstanding principal and final payments under the Amended Agri-Energy Loan Agreement was approximately
$25.6 million.
With respect to the Convertible Notes, if a Fundamental Change (as defined in the Indenture) occurs prior to the maturity date of the Convertible Notes,
holders of the Convertible Notes will have the right, at their option, to require us to repurchase all or a portion of their Convertible Notes. In addition, if a
Fundamental Change occurs prior to the maturity date of the Convertible Notes, we will in some cases be required to increase the conversion rate for a holder that
elects to convert its Convertible Notes in connection with such Fundamental Change. In addition, the Indenture prohibits us from engaging in certain mergers or
acquisitions unless, among other things, the surviving entity assumes our obligations under the Convertible Notes. These and other provisions could prevent or
deter a third party from acquiring us, even where the acquisition could be beneficial to you.
Business interruptions could delay us in the process of developing our products and could disrupt our sales.
We are vulnerable to natural disasters and other events that could disrupt our operations, such as riots, civil disturbances, war, terrorist acts, floods,
infections in our laboratory or production facilities or those of our contract manufacturers and other events beyond our control. We do not have a detailed disaster
recovery plan. In addition, we may not carry sufficient business interruption insurance to compensate us for losses that may occur. Any losses or damages we
incur could have a material adverse effect on our cash flows and success as an overall business. Furthermore, ICM may terminate our commercialization
agreement if a force majeure event interrupts our operations for a specified period of time.
We engage in hedging transactions, which could harm our business.
We currently engage in hedging transactions to offset some of the effects of volatility in commodity prices. We expect to engage in similar transactions
once we begin commercial isobutanol production. We generally
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follow a policy of using exchange-traded futures contracts to reduce our net position in agricultural commodity inventories and forward purchase contracts to
manage price risk. Hedging activities may cause us to suffer losses, such as if we purchase a position in a declining market or sell a position in a rising market.
Furthermore, hedging exposes us to the risk that we may have under- or over-estimated our need for a specific commodity or that the other party to a hedging
contract may default on its obligation. If there are significant swings in commodity prices, or if we purchase more corn for future delivery than we can process,
we may have to pay to terminate a futures contract, resell unneeded corn inventory at a loss, or produce our products at a loss, all of which would have a material
adverse effect on our financial performance. We may vary the hedging strategies we undertake, which could leave us more vulnerable to increases in commodity
prices or decreases in the prices of isobutanol, distiller’s grains, iDGs™ or ethanol. Losses from hedging activities and changes in hedging strategy could have a
material adverse effect on our operations.
Ethical, legal and social concerns about genetically engineered products and processes, and similar concerns about feedstocks grown on land that could be
used for food production, could limit or prevent the use of our products, processes and technologies and limit our revenues.
Some of our processes involve the use of genetically engineered organisms or genetic engineering technologies. Additionally, our feedstocks may be grown
on land that could be used for food production, which subjects our feedstock sources to “food versus fuel” concerns. If we are not able to overcome the ethical,
legal and social concerns relating to genetic engineering or food versus fuel, our products and processes may not be accepted. Any of the risks discussed below
could result in increased expenses, delays or other impediments to our programs or the public acceptance and commercialization of products and processes
dependent on our technologies or inventions.
Our ability to develop and commercialize one or more of our technologies, products, or processes could be limited by the following factors:
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public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products and
processes, which could influence public acceptance of our technologies, products and processes;
public attitudes regarding, and potential changes to laws governing ownership of genetic material, which could harm our intellectual property rights
with respect to our genetic material and discourage others from supporting, developing or commercializing our products, processes and technologies;
public attitudes and ethical concerns surrounding production of feedstocks on land which could be used to grow food, which could influence public
acceptance of our technologies, products and processes;
governmental reaction to negative publicity concerning genetically engineered organisms, which could result in greater government regulation of
genetic research and derivative products; and
governmental reaction to negative publicity concerning feedstocks produced on land which could be used to grow food, which could result in greater
government regulation of feedstock sources.
The subjects of genetically engineered organisms and food versus fuel have received negative publicity, which has aroused public debate. This adverse
publicity could lead to greater regulation and trade restrictions on imports of genetically engineered products or feedstocks grown on land suitable for food
production.
The biocatalysts that we develop have significantly enhanced characteristics compared to those found in naturally occurring enzymes or microbes. While
we produce our biocatalysts only for use in a controlled industrial environment, the release of such biocatalysts into uncontrolled environments could have
unintended consequences. Any adverse effect resulting from such a release could have a material adverse effect on our business and financial condition, and we
may be exposed to liability for any resulting harm.
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Compliance with stringent laws and regulations may be time consuming and costly, which could adversely affect the commercialization of our biofuels
products and related co-products.
Any biofuels developed using our technologies will need to meet a significant number of regulations and standards, including regulations imposed by the
U.S. Department of Transportation, the EPA, the FDA, the FAA, various state agencies and others. Any failure to comply, or delays in compliance, with the
various existing and evolving industry regulations and standards could prevent or delay the commercialization of any biofuels developed using our technologies
and subject us to fines and other penalties.
We use hazardous materials in our business and we must comply with environmental laws and regulations. Any claims relating to improper handling, storage
or disposal of these materials or noncompliance with applicable laws and regulations could be time consuming and costly and could adversely affect our
business and results of operations.
Our research and development processes involve the use of hazardous materials, including chemical, radioactive and biological materials. Our operations
also produce hazardous waste. We cannot eliminate entirely the risk of accidental contamination or discharge and any resultant injury from these materials.
Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of, and human exposure to, these materials. We may be
sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. Although
we believe that our activities conform in all material respects with environmental laws, there can be no assurance that violations of environmental, health and
safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes. Compliance with applicable environmental laws
and regulations may be expensive, and the failure to comply with past, present, or future laws could result in the imposition of fines, third-party property damage,
product liability and personal injury claims, investigation and remediation costs, the suspension of production or a cessation of operations, and our liability may
exceed our total assets. Liability under environmental laws can be joint and several and without regard to comparative fault. Environmental laws could become
more stringent over time imposing greater compliance costs and increasing risks and penalties associated with violations, which could impair our research,
development or production efforts and harm our business.
As isobutanol has not previously been used as a commercial fuel in significant amounts, its use subjects us to product liability risks, and we may have
difficulties obtaining product liability insurance.
Isobutanol has not previously been used as a commercial fuel and research regarding its impact on engines and distribution infrastructure is ongoing.
Though we intend to test our isobutanol further before its commercialization, there is a risk that it may damage engines or otherwise fail to perform as expected.
If isobutanol degrades the performance or reduces the lifecycle of engines, or causes them to fail to meet emissions standards, market acceptance could be slowed
or stopped, and we could be subject to product liability claims. Furthermore, due to isobutanol’s lack of commercial history as a fuel, we are uncertain as to
whether we will be able to acquire product liability insurance on reasonable terms, or at all. A significant product liability lawsuit could substantially impair our
production efforts and could have a material adverse effect on our business, reputation, financial condition and results of operations.
During the ordinary course of business, we may become subject to lawsuits or indemnity claims, which could materially and adversely affect our business and
results of operations.
From time to time, we may in the ordinary course of business be named as a defendant in lawsuits, claims and other legal proceedings. These actions may
seek, among other things, compensation for alleged personal injury, worker’s compensation, employment discrimination, breach of contract, property damages,
civil penalties and other losses of injunctive or declaratory relief. In the event that such actions or indemnities are ultimately resolved unfavorably at amounts
exceeding our accrued liability, or at material amounts, the outcome could materially and adversely affect our reputation, business and results of operations. In
addition, payments of significant amounts, even if reserved, could adversely affect our liquidity position.
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We may not be able to use some or all of our net operating loss carry-forwards to offset future income.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to
limitation on its ability to utilize its pre-change net operating loss carry-forwards, or net operating losses, to offset future taxable income. We may have
experienced one or more ownership changes in prior years, and the issuance of shares in connection with our initial public offering may itself have triggered an
ownership change; hence, our ability to utilize our net operating losses to offset income if we attain profitability may be limited. In addition, these loss carry-
forwards expire at various times over the next 20 years. We believe that it is more likely than not that these carry-forwards will not result in any material future
tax savings.
Enacted and proposed changes in securities laws and regulations have increased our costs and may continue to increase our costs in the future.
In recent years, there have been several changes in laws, rules, regulations and standards relating to corporate governance and public disclosure, including
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Sarbanes-Oxley Act of 2002 and various other new regulations
promulgated by the SEC and rules promulgated by the national securities exchanges.
The Dodd-Frank Act, enacted in July 2010, expands federal regulation of corporate governance matters and imposes requirements on publicly-held
companies, including us, to, among other things, provide stockholders with a periodic advisory vote on executive compensation and also requires compensation
committee reforms and enhanced pay-for-performance disclosures. While some provisions of the Dodd-Frank Act are effective upon enactment, others will be
implemented upon the SEC’s adoption of related rules and regulations. The scope and timing of the adoption of such rules and regulations is uncertain and
accordingly, the cost of compliance with the Dodd-Frank Act is also uncertain.
These and other new or changed laws, rules, regulations and standards are, or will be, subject to varying interpretations in many cases due to their lack of
specificity. As a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in
continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. Our efforts to
comply with evolving laws, regulations and standards are likely to continue to result in increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities to compliance activities. Further, compliance with new and existing laws, rules, regulations
and standards may make it more difficult and expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced
coverage or incur substantially higher costs to obtain coverage. Members of our board of directors and our principal executive officer and principal financial
officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and
retaining qualified directors and executive officers, which could harm our business. We continually evaluate and monitor regulatory developments and cannot
estimate the timing or magnitude of additional costs we may incur as a result of such developments.
If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or prevent fraud; in that case,
our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our stock.
Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of
2002 (“Section 404”) requires us to evaluate and report on our internal control over financial reporting and have our principal executive officer and principal
financial officer certify as to the accuracy and completeness of our financial reports. The process of implementing our internal controls and complying with
Section 404 is expensive and time consuming, and requires significant attention of management. We cannot be certain that these measures will ensure that we
implement and maintain adequate controls over our financial processes and reporting in the future. Even if we conclude that our internal control over financial
reporting provides reasonable assurance regarding the reliability of financial reporting and
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the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations,
internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties
encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations.
Our management has concluded that there are no material weaknesses in our internal controls over financial reporting as of December 31, 2012. However,
there can be no assurance that our controls over financial processes and reporting will be effective in the future or that additional material weaknesses or
significant deficiencies in our internal controls will not be discovered in the future. If we, or our independent registered public accounting firm, discover a
material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock
price. In addition, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions, including SEC action, ineligibility for short
form resale registration, the suspension or delisting of our common stock from the stock exchange on which it is listed and the inability of registered broker-
dealers to make a market in our common stock, which would further reduce our stock price and could harm our business.
Certain Risks Related to Owning Our Securities.
We incurred significant indebtedness when we sold the Convertible Notes and we may incur additional indebtedness in the future. The indebtedness created
by the sale of the Convertible Notes and any future indebtedness we incur exposes us to risks that could adversely affect our business, financial condition and
results of operations.
As of December 31, 2012, the aggregate amount of the outstanding principal and final payments under the Amended Agri-Energy Loan from TriplePoint
was approximately $25.6 million. In addition, we incurred $45 million of senior indebtedness when we sold the Convertible Notes in July 2012. We may also
incur additional long-term indebtedness or obtain additional working capital lines of credit to meet future financing needs. Our indebtedness could have
significant negative consequences for our business, results of operations and financial condition, including:
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increasing our vulnerability to adverse economic and industry conditions;
limiting our ability to obtain additional financing;
requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of our
cash flow available for other purposes;
limiting our flexibility in planning for, or reacting to, changes in our business; and
placing us at a possible competitive disadvantage with less leveraged competitors and competitors that may have better access to capital resources.
We cannot assure you that we will continue to maintain sufficient cash reserves or that our business will generate cash flow from operations at levels
sufficient to permit us to pay principal, premium, if any, and interest on our indebtedness, or that our cash needs will not increase. If we are unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our existing
indebtedness, the Convertible Notes or any indebtedness which we may incur in the future, we would be in default, which would permit the holders of the
Convertible Notes and such other indebtedness to accelerate the maturity of the Convertible Notes and such other indebtedness and could cause defaults under the
Convertible Notes and such other indebtedness. Any default under the Convertible Notes or such other indebtedness could have a material adverse effect on our
business, results of operations and financial condition.
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We may incur substantially more debt or take other actions which would intensify the risks discussed above.
We, and any current and future subsidiaries of ours, may incur substantial additional debt in the future, subject to the specified limitations in our existing
financing documents and the Indenture governing the Convertible Notes. Under the terms of the Indenture governing the Convertible Notes, we will not be
restricted from incurring additional debt, securing future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the
Indenture governing the Convertible Notes and that could have the effect of diminishing our ability to make payments on the Convertible Notes when due. If new
debt is added to our or any of our subsidiaries’ debt levels, the risks described in this “Certain Risks Related to Owning our Securities” section could intensify.
Our stock price may be volatile, and your investment in our securities could suffer a decline in value. We expect that the trading value of the Convertible
Notes will be significantly affected by the price of our common stock.
The market price of shares of our common stock has experienced significant price and volume fluctuations. For example, since February 19, 2011, when
we became a public company, the closing sales price for one share of our common stock has reached a high of $26.36 and a low of $1.38. The market price of our
common stock, as well as the general level of interest rates and our credit quality, will likely significantly affect the market price of the Convertible Notes. This
may result in significantly greater volatility in the trading value of the Convertible Notes than would be expected for nonconvertible debt securities we may issue.
We cannot predict whether the price of our common stock or interest rates will rise or fall. A variety of factors may have a significant effect on our stock
price, including:
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actual or anticipated fluctuations in our financial condition and operating results;
the position of our cash and cash equivalents;
actual or anticipated changes in our growth rate relative to our competitors;
actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;
announcements of technological innovations by us, our partners or our competitors;
announcements by us, our partners or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
the entry into, modification or termination of licensing arrangements, marketing arrangements, and/or research, development, commercialization,
supply, off-take or distribution arrangements;
additions or losses of customers;
additions or departures of key management or scientific personnel;
competition from existing products or new products that may emerge;
issuance of new or updated research reports by securities or industry analysts;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
litigation involving us, our general industry or both;
disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our
technologies;
changes in existing laws, regulations and policies applicable to our business and products, including the RFS2 program, and the adoption of or failure
to adopt carbon emissions regulation;
announcements or expectations of additional financing efforts;
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sales of our common stock by us or our stockholders;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
general market conditions in our industry; and
general economic and market conditions, including the recent financial crisis.
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of
equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These
broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international
currency fluctuations, may negatively impact the market price of shares of our common stock, regardless of our operating performance, and cause the value of
your investment to decline. Because the Convertible Notes are convertible into our common stock, volatility or depressed prices of our common stock could have
an adverse effect on the trading price of the Convertible Notes. Holders who receive common stock upon conversion of the Convertible Notes also will be subject
to the risk of volatility and depressed prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling in our common
stock by market participants because the conversion of the Convertible Notes could depress the price of our common stock.
Additionally, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation
or other derivative shareholder lawsuits. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs
and divert our management’s attention from other business concerns, which could seriously harm our business regardless of the outcome.
The price of our common stock also could be affected by possible sales of common stock by investors who view the Convertible Notes as a more attractive
means of equity participation in us and by hedging or arbitrage activity involving our common stock that we expect to develop as a result of the issuance of the
Convertible Notes. The hedging or arbitrage could, in turn, affect the trading prices of the Convertible Notes, or any common stock that holders receive upon
conversion of the Convertible Notes.
Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that
the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. Stockholders as of
December 31, 2012 who own more than 5% of our outstanding common stock, which consists of four stockholders, collectively own approximately 37% of our
outstanding common stock. If one or more of them were to sell a substantial portion of the shares they hold, it could cause our stock price to decline.
In addition, as of December 31, 2012, there were 2.9 million shares subject to outstanding options that are or will become eligible for sale in the public
market to the extent permitted by any applicable vesting requirements and Rules 144 and 701 under the Securities Act of 1933, as amended (the “Securities Act”).
Moreover, certain holders of our outstanding common stock (including shares of our common stock issuable upon the exercise of outstanding warrants) have
rights, subject to some conditions, to require us to file registration statements covering their shares and to include their shares in registration statements that we
may file for ourselves or other stockholders.
We registered 6.8 million shares of common stock, which are reserved for issuance under our stock incentive plans and our employee stock purchase plan.
These shares can be freely sold in the public market upon issuance and once vested.
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We may not have the ability to pay interest on the Convertible Notes or to repurchase or redeem the Convertible Notes.
The Convertible Notes, which have a principal balance of $45 million at December 31, 2012, bear interest at a rate of 7.5% per year, payable in cash semi-
annually in arrears on January 1 and July 1 of each year, commencing in 2013. If a Fundamental Change occurs, holders of the Convertible Notes may require us
to repurchase, for cash, all or a portion of their Convertible Notes. If we elect to redeem the Convertible Notes prior to their maturity, the redemption price of any
Convertible Notes redeemed by us will be paid for in cash. Our ability to pay the interest on the Convertible Notes, to repurchase or redeem the Convertible
Notes, to refinance our indebtedness and to fund working capital needs and planned capital expenditures depends on our ability to generate cash flow in the
future. To some extent, this is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control.
We cannot assure you that we will continue to maintain sufficient cash reserves or that our business will generate cash flow from operations at levels sufficient to
permit us to pay the interest on the Convertible Notes, to repurchase or redeem the Convertible Notes or to pay cash upon conversion of the Convertible Notes, or
that our cash needs will not increase. In addition, any such repurchase or redemption of the Convertible Notes, even if such action would be in our best interests,
may result in a default under the agreements governing our current indebtedness with TriplePoint unless we are able to obtain TriplePoint’s consent prior to the
taking of such action.
Our failure to repurchase tendered Convertible Notes at a time when the repurchase is required by the Indenture would constitute a default under the
Convertible Notes and would permit holders of the Convertible Notes to accelerate our obligations under the Convertible Notes. Such default may also lead to a
default under the agreements governing any of our current and future indebtedness. If the repayment of the related indebtedness were to be accelerated after any
applicable notice or grace periods, we may not have sufficient funds to repay such indebtedness and repurchase the Convertible Notes or make cash payments
upon conversions thereof.
If we are unable to generate sufficient cash flow from operations in the future to service our indebtedness and meet our other needs, we may have to
refinance all or a portion of our indebtedness, obtain additional financing, reduce expenditures or sell assets that we deem necessary to our business. We cannot
assure you that any of these measures would be possible or that any additional financing could be obtained on favorable terms, or at all. The inability to obtain
additional financing on commercially reasonable terms could have a material adverse effect on our financial condition, which could cause the value of your
investment to decline.
Future issuances of our common stock or instruments convertible into our common stock, including in connection with conversions of Convertible Notes,
and hedging activities by holders of the Convertible Notes may materially and adversely affect the price of our common stock and the Convertible Notes and
cause dilution to our existing stockholders.
If we issue additional shares of common stock or instruments convertible into common stock, it may materially and adversely affect the price of our
common stock. In addition, the conversion of some or all of the Convertible Notes may dilute the ownership interests of existing stockholders, and any sales in
the public market of any of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. As of
March 22, 2013, approximately $9.2 million in principal amount of our Convertible Notes have been converted in exchange for 1,617,910 shares of our common
stock. The anticipated conversion of the remaining approximately $35.8 million in principal amount of Convertible Notes into shares of our common stock could
depress the trading price of our common stock.
Holders of our Convertible Notes that elect to convert some or all of their Convertible Notes on or after January 1, 2013 and prior to July 1, 2017, will be
entitled to receive a Coupon Make-Whole Payment for the Convertible Notes being converted. We have the option to issue our common stock to any converting
holder in lieu of making the Coupon Make-Whole Payment in cash. If we elect to issue our common stock for such payment, then the stock will be valued at 90%
of the simple average of the daily volume weighted average prices of our common stock for the 10 trading days ending on and including the trading day
immediately preceding the
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conversion date. Given that the agreements governing our secured indebtedness with TriplePoint prohibit us from paying, repurchasing or redeeming the
Convertible Notes or making cash payments in respect of the Coupon Make-Whole Payment upon a conversion, we may be unable to make such payment in cash.
As of March 22, 2013, we have issued 1,540,451 shares of our common stock in satisfaction of these Coupon Make-Whole Payments. If we elect to issue
additional shares of our common stock for such payments, this may cause significant additional dilution to our existing stockholders.
In addition, we have a limited number of shares of common stock available for future issuance which may hinder our ability to satisfy the Coupon Make-
Whole Payments. If we need to increase the number of our authorized shares of common stock, then under applicable Delaware law and the provisions of our
amended and restated certificate of incorporation, such an increase will require the approval of the holders of a majority of our issued and outstanding shares of
common stock. No assurance can be provided that we would be able to obtain the requisite vote to increase the number of our authorized shares of common stock.
A failure to increase our authorized share capital when needed would adversely affect our ability to satisfy our obligations under the Convertible Notes.
The price of our common stock also could be affected by possible sales of our common stock by investors who view the Convertible Notes as a more
attractive means of equity participation in our Company and by hedging or arbitrage trading activity that we expect to develop involving our common stock by
holders of the Convertible Notes.
We may not be permitted, by the agreements governing our secured indebtedness, to repurchase the Convertible Notes.
If a Fundamental Change occurs, the holders of the Convertible Notes may require us to repurchase all or a portion of their Convertible Notes for cash at a
repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the
repurchase date. However, the agreements governing our secured indebtedness with TriplePoint prohibit us from paying, repurchasing or redeeming the
Convertible Notes or any amounts payable in connection with a Fundamental Change or at our option. In the event that a Fundamental Change occurs at a time
when we are prohibited from repurchasing the Convertible Notes, we would need to seek the consent of TriplePoint to repurchase the Convertible Notes from the
holders or we would otherwise be risking an event of default under our agreements with TriplePoint. If we were unable to obtain such a consent, compliance with
the terms of the Convertible Notes would trigger an event of default under our indebtedness with TriplePoint.
Although the Convertible Notes are referred to as “senior notes,” the Convertible Notes are unsecured and are effectively subordinated to our secured
indebtedness and effectively subordinated to all liabilities of our subsidiaries from time to time outstanding.
The Convertible Notes are obligations only of Gevo, Inc. and are not guaranteed by our subsidiaries or secured by any of our or their properties or assets.
The Convertible Notes are effectively subordinated to all of our existing and future secured indebtedness and effectively subordinated to all existing and future
liabilities of our subsidiaries, including trade payables. Our subsidiaries are separate legal entities and have no obligation to pay any amounts due pursuant to the
Convertible Notes. Our subsidiaries conduct a significant amount of our business, and may incur significant liabilities in connection with such business. As of
December 31, 2012, our subsidiaries had indebtedness and other obligations in the principal amount of approximately $25.6 million. These amounts of
indebtedness structurally rank senior to the Convertible Notes.
In any liquidation, dissolution, bankruptcy or other similar proceeding, holders of our secured debt may assert rights against any assets securing such debt
in order to receive full payment of the debt before those assets may be used to pay the holders of the Convertible Notes. In such an event, we may not have
sufficient assets remaining to pay amounts due on any or all of the Convertible Notes. At December 31, 2012, on a consolidated
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basis, we had approximately $25.6 million in aggregate principal amount of secured indebtedness outstanding. In addition, our senior secured indebtedness to
TriplePoint prohibits us from making payments on the Convertible Notes that are not regularly scheduled payments.
We have made only limited covenants in the Indenture governing the Convertible Notes, and these limited covenants may not protect the value of an
investment in the Convertible Notes.
The Indenture governing the Convertible Notes does not:
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require us to maintain any financial ratios or specific levels of net worth, revenues, income, cash flows or liquidity and, accordingly, does not protect
holders of the Convertible Notes in the event that we experience significant adverse changes in our financial condition or results of operations;
limit our subsidiaries’ ability to incur indebtedness that would effectively rank senior to the Convertible Notes;
limit our ability to incur secured indebtedness that would effectively rank senior to the Convertible Notes or indebtedness that is equal in right of
payment to the Convertible Notes;
restrict our subsidiaries’ ability to issue securities that would be senior to the common stock of our subsidiaries held by us;
restrict our ability to repurchase our securities;
restrict our ability to pledge our assets or those of our subsidiaries; or
restrict our ability to make investments or to pay dividends or make other payments in respect of our common stock or other securities ranking junior
to the Convertible Notes.
Furthermore, the Indenture governing the Convertible Notes contains only limited protections in the event of a change in control. We could engage in many
types of transactions, such as acquisitions, refinancings or recapitalizations that could substantially affect our capital structure and the value of the Convertible
Notes and our common stock but would not constitute a “Fundamental Change” that permits holders to require us to repurchase their Convertible Notes.
Holders of Convertible Notes are not entitled to any rights with respect to our common stock, but will be subject to all changes made with respect to such
rights.
Holders of Convertible Notes are not entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to
receive any dividends or other distributions on our common stock), but holders of Convertible Notes will be subject to all changes affecting our common stock.
For example, if an amendment is proposed to our amended and restated certificate of incorporation or amended and restated bylaws requiring stockholder
approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to a holder’s conversion of its Convertible
Notes, such holder will not be entitled to vote on the amendment, although such holder will nevertheless be subject to any changes affecting our common stock
that result from such amendment.
The adjustment to the conversion rate for Convertible Notes converted in connection with a Make-Whole Fundamental Change may not adequately
compensate holders of the Convertible Notes for the lost option value of the Convertible Notes as a result of such transaction.
If a Make-Whole Fundamental Change (as defined in the Indenture) occurs prior to maturity of the Convertible Notes, under certain circumstances, we will
increase the conversion rate by a number of additional shares of our common stock for Convertible Notes converted in connection with such Make-Whole
Fundamental
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Change. The increase in the conversion rate will be determined based on the date on which the specified corporate transaction constituting the Make-Whole
Fundamental Change becomes effective and the price paid (or deemed paid) per share of our common stock in such transaction. The adjustment to the conversion
rate for Convertible Notes converted in connection with a Make-Whole Fundamental Change may not adequately compensate holders of the Convertible Notes
for any lost value of the Convertible Notes as a result of such transaction. In addition, if the price of our common stock in the transaction is greater than $20.00
per share or less than $4.95 per share (in each case, subject to adjustment), no adjustment will be made to the conversion rate.
Our obligation to increase the conversion rate upon the occurrence of a Make-Whole Fundamental Change could be considered a penalty, in which case the
enforceability thereof would be subject to general principles of reasonableness of economic remedies.
The conversion rate of the Convertible Notes may not be adjusted for all dilutive events.
The conversion rate of the Convertible Notes is subject to adjustment for certain events, including, but not limited to, the issuance of stock dividends on our
common stock, the issuance of certain rights, options or warrants, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or
exchange offers. However, the conversion rate will not be adjusted for other events, such as a third-party tender or exchange offer or an issuance of common stock
or securities convertible or exercisable into common stock, that may adversely affect the trading price of the Convertible Notes or the consideration issued upon
conversion thereof. An event that adversely affects the value of the Convertible Notes may occur, and that event may not result in an adjustment to the conversion
rate.
Some significant restructuring transactions may not constitute a Fundamental Change, in which case we would not be obligated to offer to repurchase the
Convertible Notes.
Upon the occurrence of a Fundamental Change, holders have the right to require us to repurchase their Convertible Notes. However, the Fundamental
Change provisions will not afford protection to holders of Convertible Notes in the event of other transactions that could adversely affect the Convertible Notes.
For example, transactions such as leveraged recapitalizations, refinancings, restructurings or acquisitions initiated by us may not constitute a Fundamental Change
requiring us to repurchase the Convertible Notes. In the event of any such transaction, holders would not have the right to require us to repurchase their
Convertible Notes, even though each of these transactions could increase the amount of our indebtedness or otherwise adversely affect our capital structure or any
credit ratings, thereby adversely affecting the value of the Convertible Notes.
Holders of the Convertible Notes may not be able to accelerate the maturity of the Convertible Notes if we fail to make our SEC filings in a timely manner.
The Indenture governing the Convertible Notes requires us to furnish our SEC filings to the trustee no more than 15 days after the date on which we would
have been required to file them with the SEC. The Indenture also requires us to comply with certain filing requirements as set forth in the Trust Indenture Act of
1939, as amended. However, the Indenture does not require us to file any such reports on a timely basis with the SEC. Accordingly, holders of Convertible Notes
may not be able to accelerate the maturity of the Convertible Notes if we fail to make our SEC filings in a timely manner.
We cannot assure you that an active trading market will be maintained for the Convertible Notes. Holders of the Convertible Notes may be unable to sell their
Convertible Notes at the price they desire or at all.
We do not intend to apply for listing of the Convertible Notes on any securities exchange or to arrange for quotation on any interdealer quotation system.
We have been informed by the underwriters that purchased the Convertible Notes that they intend to make a market in the Convertible Notes. However, the
underwriters may cease their market-making in their sole discretion at any time without notice. In addition, the liquidity of the
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trading market in the Convertible Notes, and the market price quoted for these Convertible Notes, may be adversely affected by, among other things:
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changes in the overall market for debt securities;
changes in our financial performance or prospects;
the prospects for companies in our industry generally;
the number of holders of the Convertible Notes;
the interest of securities dealers in making a market for the Convertible Notes;
the time remaining to the maturity of the Convertible Notes;
the outstanding amount of the Convertible Notes;
the market price and volatility of our common stock; and
prevailing interest rates.
Historically, the market for convertible debt has been subject to disruptions that have caused volatility in prices. It is possible that the market for the
Convertible Notes will be subject to disruptions that may have a negative effect on holders of the Convertible Notes, regardless of our operating results, financial
performance or prospects.
As a result, we cannot assure holders of the Convertible Notes that an active trading market will be maintained for the Convertible Notes. If an active
trading market is not maintained, the market price and liquidity of the Convertible Notes may be adversely affected. In that case, investors in the Convertible
Notes may not be able to sell the Convertible Notes at a particular time or at a favorable price.
Any adverse rating of the Convertible Notes may cause their trading price to fall.
We do not intend to seek a rating on the Convertible Notes. However, if a rating service were to rate the Convertible Notes and if such rating service were
to lower its rating on the Convertible Notes below the rating initially assigned to the Convertible Notes or otherwise announce its intention to put the Convertible
Notes on credit watch, the trading price of the Convertible Notes could decline.
Developments in the convertible debt markets may adversely affect the market value of the Convertible Notes.
We expect that many investors in, and potential purchasers of, the Convertible Notes will employ, or seek to employ, a convertible arbitrage strategy with
respect to the Convertible Notes. Investors that employ a convertible arbitrage strategy with respect to convertible debt instruments typically implement that
strategy by selling short the common stock underlying the Convertible Notes and dynamically adjusting their short position while they hold the Convertible
Notes. As a result, any specific rules regulating short selling of securities or other governmental action that interferes with the ability of market participants to
effect short sales in our common stock could adversely affect the ability of investors in, or potential purchasers of, the Convertible Notes to conduct the
convertible arbitrage strategy that we believe they will employ, or seek to employ, with respect to the Convertible Notes. This could, in turn, adversely affect the
market price and liquidity of the Convertible Notes.
Holders of the Convertible Notes may be subject to tax if we make or fail to make certain adjustments to the conversion rate of the Convertible Notes even if
they do not receive a corresponding cash distribution.
The conversion rate of the Convertible Notes is subject to adjustment in certain circumstances, including the payment of cash dividends. If the conversion
rate is adjusted as a result of a distribution that is taxable to our common stockholders, such as a cash dividend, holders of the Convertible Notes may be deemed
to have received a dividend subject to U.S. federal income tax even if they have not received any cash. In addition, a failure to adjust (or to adequately adjust) the
conversion rate after an event that increases a Convertible Note
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holder’s proportionate interest in our assets and earnings could be treated as a deemed taxable dividend to the Convertible Note holder. If a Make-Whole
Fundamental Change occurs prior to the maturity date of the Convertible Notes, under some circumstances, we will increase the conversion rate for Convertible
Notes converted in connection with the Make-Whole Fundamental Change. Such increase may also be treated as a distribution subject to U.S. federal income tax
as a dividend.
We cannot assure our stockholders that our stock repurchase program will enhance long-term stockholder value, and stock repurchases could increase the
volatility of the price of our common stock and will diminish our cash availability.
In January 2013, our board of directors approved a stock repurchase program for up to $15 million of our common stock over a one-year period. We expect
to fund repurchases under the stock repurchase program with cash and cash equivalents on hand. The timing and actual number of shares repurchased will depend
on a variety of factors including the timing of open trading windows, price, corporate and regulatory requirements and other market conditions. The program may
be suspended or discontinued at any time without prior notice. Repurchases pursuant to our stock repurchase program could affect the price of our common stock
and increase its volatility. The existence of our stock repurchase program could also cause the price of our common stock to be higher than it would be in the
absence of such a program and could potentially reduce the market liquidity for our common stock. Additionally, repurchases under our stock repurchase program
will diminish our cash reserves, which could impact our ability to further develop our technology, access and/or retrofit additional facilities and service our
indebtedness. There can be no assurance that any stock repurchases will enhance stockholder value because the market price of our common stock may decline
below the levels at which we repurchased such shares. Any failure to repurchase shares after we have announced our intention to do so may negatively impact our
reputation and investor confidence in us and may negatively impact our stock price. Although our stock repurchase program is intended to enhance long-term
stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness.
We are subject to anti-takeover provisions in our amended and restated certificate of incorporation and amended and restated bylaws and under Delaware
law that could delay or prevent an acquisition of the Company, even if the acquisition would be beneficial to our stockholders.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may delay or prevent an acquisition of the
Company. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws provide for a board of directors that is
divided into three classes with staggered three-year terms, provide that all stockholder action must be effected at a duly called meeting of the stockholders and not
by a consent in writing, and further provide that only our board of directors may call a special meeting of the stockholders. These provisions may also frustrate or
prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our
board of directors, who are responsible for appointing the members of our management team. Furthermore, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits, with some exceptions, stockholders owning in excess of
15% of our outstanding voting stock from merging or combining with us. Finally, our charter documents establish advance notice requirements for nominations
for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings. Although we believe these provisions together
provide an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer to acquire
the Company may be considered beneficial by some stockholders.
Concentration of ownership among our existing officers, directors and principal stockholders may prevent other stockholders from influencing significant
corporate decisions and depress our stock price.
Our affiliates who held our common stock as of December 31, 2012 together control approximately 30% of our outstanding common stock, with a single
stockholder, Khosla Ventures I, L.P. and its affiliates, controlling approximately 18% of our outstanding common stock. If these officers, directors and principal
stockholders or a
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group of our principal stockholders act together, they will be able to exert a significant degree of influence over our management and affairs and control matters
requiring stockholder approval, including the election of directors and approval of mergers or other business combination transactions. The interests of this
concentration of ownership may not always coincide with our interests or the interests of other stockholders. For instance, officers, directors and principal
stockholders, acting together, could cause us to enter into transactions or agreements that we would not otherwise consider. Similarly, this concentration of
ownership may have the effect of delaying or preventing a change in control of the Company otherwise favored by our other stockholders. This concentration of
ownership could depress our stock price.
If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and
trading volume could decline. The trading market for our common stock will be influenced by the research and reports that securities or industry analysts
publish about us or our business.
We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our
stock price would likely decline which in turn would likely cause a decline in the value of the Convertible Notes. If one or more of these analysts cease coverage
of the Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price and the price of our
Convertible Notes to decline or the trading volume of our common stock to decline.
We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.
Under the terms of our Amended Agri-Energy Loan Agreement with TriplePoint, subject to certain limited exceptions, Agri-Energy is only permitted to
pay dividends if the following conditions are satisfied: (i) the retrofit of the Agri-Energy Facility is complete and the facility is producing commercial volumes of
isobutanol, (ii) its net worth is greater than or equal to $10 million, and (iii) no event of default has occurred and is continuing under the agreement. Agri-Energy
is also permitted to make dividends and distributions to Gevo, Inc. for certain defined purposes related to the Convertible Notes. Accordingly, even if we decide to
pay cash dividends in the future, we may not be able to access cash generated by Agri-Energy if amounts are then outstanding pursuant to the Amended Agri-
Energy Loan Agreement. We have never paid cash dividends on our common stock and we do not expect to pay cash dividends on our common stock at any time
in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other
factors that our board of directors will consider. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to
stockholders. Investors seeking cash dividends should not invest in our common stock.
We may not be able to comply with all applicable listing requirements or standards of the NASDAQ Global Market and NASDAQ could delist our common
stock.
Our common stock is listed on the NASDAQ Global Market. In order to maintain that listing, we must satisfy minimum financial and other continued
listing requirements and standards. There can be no assurances that we will be able to comply with applicable listing standards. In the event that our common
stock is not eligible for quotation on another market or exchange, trading of our common stock could be conducted in the over-the-counter market or on an
electronic bulletin board established for unlisted securities such as the Pink Sheets or the OTC Bulletin Board. In such event, it could become more difficult to
dispose of, or obtain accurate price quotations for, our common stock, and there would likely also be a reduction in our coverage by security analysts and the
news media, which could cause the price of our common stock to decline further. In addition, it may be difficult for us to raise additional capital if we are not
listed on a major exchange.
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Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our corporate headquarters and research and development laboratories, included in our Gevo, Inc. segment, are located in Englewood, Colorado, where we
occupy approximately 29,865 square feet of office and laboratory space. Our lease for this facility expires in July 2016. We believe that the facility that we
currently lease is adequate for our needs for the immediate future and that, should it be needed, additional space can be leased to accommodate any future growth.
Our subsidiary, Agri-Energy, included in our Gevo Development/Agri-Energy segment, owns and operates an ethanol production facility in Luverne, Minnesota
that we are currently retrofitting to isobutanol production. This production facility is on approximately 55 acres of land and contains approximately 50,000 square
feet of building space. The production facility was originally constructed in 1998. The land and buildings are owned by Agri-Energy which has granted to
TriplePoint a mortgage lien and security interest in such property to secure its obligations under the Amended Agri-Energy Loan Agreement with TriplePoint and
its guaranty of Gevo, Inc.’s obligations under the Gevo Loan Agreement with TriplePoint.
Item 3.
Legal Proceedings
On January 14, 2011, Butamax filed a complaint (the “Complaint”) in the United States District Court for the District of Delaware, as Case No. 1:11-cv-
00054-SLR, alleging that we are infringing one or more claims made in U.S. Patent No. 7,851,188 (the “’188 Patent”), entitled “Fermentive Production of Four
Carbon Alcohols.” The ’188 Patent, which has been assigned to Butamax, claims certain recombinant microbial host cells that produce isobutanol and methods
for the production of isobutanol using such host cells. Butamax is seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees
and expenses. On March 25, 2011, we filed a response to the Complaint, denying Butamax’s allegations of infringement and raising affirmative defenses.
On August 11, 2011, Butamax amended the Complaint to include allegations that we are infringing one or more claims made in U.S. Patent No. 7,993,889
(the “’889 Patent”), also entitled “Fermentive Production of Four Carbon Alcohols” (the “Amended Complaint”). The ’889 Patent, which has been assigned to
Butamax, claims methods for producing isobutanol using certain recombinant yeast microorganisms expressing an engineered isobutanol biosynthetic pathway.
We believe that the Amended Complaint is without merit and will continue to aggressively defend our freedom to operate.
On September 13, 2011, we filed an answer to the Amended Complaint in which we asserted counterclaims against Butamax and DuPont for infringement
of U.S. Patent No. 8,017,375, entitled “Yeast Organism Producing Isobutanol at a High Yield” and U.S. Patent No. 8,017,376, entitled “Methods of Increasing
Dihydroxy Acid Dehydratase Activity to Improve Production of Fuels, Chemicals, and Amino Acids,” both of which were recently awarded to us by the USPTO.
The counterclaim seeks a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees and expenses. These counterclaims have been set
for trial in August 2013.
On September 22, 2011, Butamax filed a motion for preliminary injunction with respect to the alleged infringement by us of one or more claims made in
the ’889 Patent.
On January 24, 2012, we filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-00070-SLR, alleging that
Butamax and DuPont are infringing one or more claims made in U.S. Patent No. 8,101,808 (the “’808 Patent”) entitled “Recovery of Higher Alcohols from
Dilute Aqueous Solutions.” The ’808 Patent claims methods to produce a C3-C6 alcohol—for example, isobutanol—through fermentation and to recover that
alcohol from the fermentation medium. We are seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees and expenses.
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On March 12, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-00298-SLR, alleging
that we are infringing one or more claims made in U.S. Patent No. 8,129,162, entitled “Ketol-Acid Reductoisomerase Using NADH.” This complaint is in
addition to the Amended Complaint discussed above. Butamax is seeking a declaratory judgment, injunctive relief, damages, interest, costs and expenses,
including attorney’s fees. We believe that we have meritorious defenses to these claims and intend to vigorously defend this lawsuit.
On March 13, 2012, we filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-00301-SLR, alleging that
Butamax and DuPont are infringing U.S. Patent No. 8,133,715 (the “’715 Patent”), entitled “Reduced By-Product Accumulation for Improved Production of
Isobutanol.” The ’715 Patent claims recombinant microorganisms, including yeast, with modifications for the improved production of isobutanol. We are seeking
a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees and expenses.
On April 10, 2012, we filed a complaint (the “Gevo Complaint”) in the United States District Court for the District of Delaware, as Case No. 1:12-cv-
00448-SLR, alleging that Butamax and DuPont are infringing one or more claims made in U.S. Patent No. 8,153,415 (the “’415 Patent”) entitled “Reduced By-
Product Accumulation for Improved Production of Isobutanol.” The ’415 Patent claims technology which eliminates two pathways that compete for isobutanol
pathway intermediates in yeast. We are seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees and expenses.
On April 17, 2012, we amended the Gevo Complaint to include allegations that Butamax and DuPont are infringing one or more claims made in U.S.
Patent No. 8,158,404 (the “’404 Patent”) entitled “Reduced By-Product Accumulation for Improved Production of Isobutanol.” The ’404 Patent claims the
reduction or elimination of important enzymes in a pathway in isobutanol-producing yeast. We are seeking a declaratory judgment, injunctive relief, damages and
costs, including attorney’s fees and expenses.
On May 9, 2012, coordinated discovery was ordered for Case Nos. 1:12-cv-00070-SLR, 1:12-cv-00298-SLR, 1:12-cv-00301-SLR, and 1:12-cv-00448-
SLR. By virtue of the same order, discovery in Case No. 1:12-cv-00602-SLR was also coordinated with these cases.
On May 15, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-00602-SLR, alleging
that we are infringing one or more claims made in U.S. Patent No. 8,178,328, entitled “Fermentive Production of Four Carbon Alcohols.” Butamax is seeking a
declaratory judgment, injunctive relief, damages, interest, costs and expenses, including attorney’s fees. We believe that we have meritorious defenses to these
claims and we intend to vigorously defend this lawsuit.
On June 19, 2012, the United States District Court for the District of Delaware denied the motion for preliminary injunction which was filed by Butamax
on September 22, 2011 with respect to the alleged infringement by us of one or more claims made in the ’889 Patent. As is normal and customary in patent
infringement actions of this nature, Butamax then filed a notice of appeal. In connection with their appeal, Butamax also filed a motion with the United States
District Court for the District of Delaware seeking a temporary order to limit our activities with respect to the automotive fuel blending market while Butamax
appeals the denial of its motion for preliminary injunction.
On July 6, 2012, the United States District Court for the District of Delaware issued a temporary order which stated, in part, that we could not deliver,
provide, distribute, ship, release or transfer in any way bio-based isobutanol produced at the Agri-Energy Facility to any third party for any use or purpose related
to the automotive fuel blending market while Butamax appealed the denial of its motion for preliminary injunction. We filed an appeal of the temporary order.
Under the temporary order, we remained free to operate in markets such as chemicals, jet fuel, marine fuel and small engine fuel. On August 10, 2012, the Federal
Circuit Court of
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Appeals granted Gevo’s motion to stay the status quo order entered on July 6, 2012 by the United States District Court for the District of Delaware. On
November 16, 2012, the Federal Circuit Court of Appeals affirmed the District Court’s denial of Butamax’s preliminary injunction motion.
On July 31, 2012, we filed a complaint in the United States District Court for the Eastern District of Texas, as Case No. 2:12-cv-00417, alleging that
Butamax, DuPont, BP p.l.c., and BP Biofuels North America LLC are infringing U.S. Patent No. 8,232,089 (the “’089 Patent), entitled “Cytosolic Isobutanol
Pathway Localization for the Production of Isobutanol.” We are seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees
and expenses. On December 17, 2012, this case was transferred to the United States District Court for the District of Delaware as Case No. 1:12-cv-01724-SLR.
On February 19, 2013, BP p.l.c. filed a motion seeking to dismiss our complaint for failure to state a claim against it. On March 8, 2013, we filed a response in
opposition to B.P. p.l.c.’s motion. On March 18, 2013, B.P. p.l.c. filed its reply brief, and the issue has been submitted to the court for decision.
On July 31, 2012, Butamax and DuPont filed a lawsuit in the United States District Court for the District of Delaware for declaratory judgment against us,
as Case No. 1:12-cv-00999-SLR, seeking a judicial determination that the ’089 Patent is invalid and that Butamax and DuPont do not infringe it. On January 28,
2013, this case was closed following a voluntary stipulation of dismissal filed by both parties.
On August 6, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-01014-SLR, alleging
that we are infringing U.S. Patent No. 8,222,017, entitled “Ketol-Acid Reductoisomerase Using NADH.” Butamax is seeking a declaratory judgment, injunctive
relief, damages and costs, including attorney’s fees and expenses. On January 22, 2013, discovery in this case was consolidated with Case Nos. 1:12-cv-00070-
SLR, 1:12-cv-00298-SLR, 1:12-cv-00301-SLR, 1:12-cv-00448-SLR, and 1:12-cv-00602-SLR.
On August 14, 2012, we filed a lawsuit in the United States District Court for the Eastern District of Texas for declaratory judgment against Butamax,
DuPont, BP p.l.c., BP Corporation North America Inc. and BP Biofuels North America LLC, as Case No. 2:12-cv-00435, seeking a judicial determination that a
recently issued Butamax U.S. Patent No. 8,241,878 (the “’878 Patent”), entitled “Recombinant Yeast Host Cell with Fe-S Cluster Proteins and Methods of Using
Thereof” is invalid and that Gevo does not infringe it. On December 17, 2012, this case was transferred to the United States District Court for the District of
Delaware as Case No. 1:12-cv-01725-SLR. On January 28, 2013, this case was closed following a voluntary stipulation of dismissal filed by both parties.
On August 14, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-01036-SLR, alleging
that we are infringing the ’878 Patent. Butamax is seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees and expenses.
On September 25, 2012, we filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-01202-SLR, alleging that
Butamax and DuPont are infringing U.S. Patent No. 8,273,565 (the “’565 Patent”), entitled “Methods of Increasing Dihydroxy Acid Dehydratase Activity to
Improve Production of Fuels, Chemicals, and Amino Acids.” We are seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s
fees and expenses. On September 25, 2012, Butamax and DuPont filed a lawsuit in the United States District Court for the District of Delaware for declaratory
judgment against us, as Case No. 1:12-cv-01201, seeking a judicial determination that the ’565 Patent is invalid and that Butamax and DuPont do not infringe it.
On September 25, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-01200-SLR,
alleging that we are infringing U.S. Patent No. 8,273,558, entitled “Fermentive Production of Four Carbon Alcohols.” Butamax is seeking a declaratory
judgment, injunctive relief, damages and costs, including attorney’s fees and expenses.
On October 8, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-01300-SLR, alleging
that we are infringing U.S. Patent No. 8,283,144, entitled
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“Fermentive Production of Four Carbon Alcohols.” Butamax is seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees and
expenses.
On October 8, 2012, Butamax filed a lawsuit in the United States District Court for the District of Delaware for declaratory judgment against us, as Case
No. 1:12-cv-01301-SLR, seeking a judicial determination that Butamax is not infringing Gevo’s recently issued U.S. Patent No. 8,283,505, entitled “Recovery of
Higher Alcohols from Dilute Aqueous Solutions.”
On February 13, 2013, coordinated discovery was ordered for Case Nos. 1:12-cv-1036-SLR, 1:12-cv-1200-SLR, 1:12-cv-1201-SLR, 1:12-cv-1202-SLR,
1:12-cv-1300-SLR, 1:12-cv-1301-SLR, and 1:12-cv-1724-SLR. These cases are set for trial in August 2015.
On March 19, 2013, the U.S. District Court of Delaware issued an order regarding claim construction and summary judgment in the patent suit involving
Butamax patents 7,851,188 and 7,993,889. Both parties had asked the Court to resolve certain issues regarding Butamax’s ‘188 and ‘889 patents without a trial by
seeking summary judgment from the court. The summary judgment procedure permits, but does not require, a court to dispose of some or all issues prior to
trial. Butamax had requested summary judgment that we infringed its patents, but the court denied Butamax’s request in its entirety. We moved for summary
judgment of noninfringement, both as a matter of literal infringement and infringement under the doctrine of equivalents, and the court granted our motion
regarding doctrine of equivalents infringement. We also requested summary judgment of invalidity of various claims in Butamax’s patents. The court granted this
motion in part, ruling that Butamax’s claims related to the inactivation of competing pathways for carbon flow were invalid.
The court also provided certain claim construction rulings, including a ruling that Butamax’s patent claims were limited to an “acetohydroxy acid
isomeroreductase” enzyme that is “NADPH-dependent.” The remaining issues were to be resolved by a jury trial, scheduled to commence on April 1, 2013.
On March 20, 2013, the U.S. District Court for the District of Delaware held the final pre-trial hearing leading up to the trial on Butamax’s patents,
7,851,188 and 7,993,889 scheduled to commence April 1, 2013. During the hearing, Butamax’s attorney acknowledged that Gevo does not infringe Butamax’s
patents under the court’s construction of a key claim term in Butamax’s patents, “acetohydroxy acid isomeroreductase.” Butamax offered to stipulate to no literal
infringement under the Court’s construction. In view of the Court’s prior ruling of no infringement under Butamax’s alternative infringement theory, the doctrine
of equivalents, judgment of no infringement is expected to be entered in favor of Gevo. Butamax has announced that it will appeal the court’s claim construction
and summary judgment rulings.
Due to the nature and status of this litigation, we have determined that the possible loss or range of loss related to this litigation cannot be reasonably
estimated at this time. The trial on Gevo’s patents on PDC deletions and overexpression of AFT proteins is set for August 2013, and additional trials are currently
scheduled for July 2014 and August 2015. We expect to continue to incur significant costs through the foregoing trial dates.
Item 4.
Mine Safety Disclosures
Not Applicable.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market for Common
Stock
Our common stock has been traded on the NASDAQ Global Market under the symbol “GEVO” since February 9, 2011. The following table sets forth, for
the period indicated, the high and low sales prices for our common stock, as reported by the NASDAQ Global Market, for the periods indicated below.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Holders of Record
Common Stock
Price 2012
Price 2011
High
10.49
9.99
4.95
2.18
Low
5.53
4.95
1.84
1.38
High
N/A
26.36
18.75
8.86
Low
N/A
12.79
5.44
5.18
The last sale price of our common stock on March 19, 2013, as reported by the NASDAQ Global Market, was $1.93 per share. As of February 28, 2013,
there were approximately 35 holders of record of our common stock. We believe that the number of beneficial owners is substantially greater than the number of
record holders because a large portion of our common stock is held of record through brokerage firms in “street name.”
Dividends
No cash dividends have been paid on our common stock to date, nor do we anticipate paying dividends in the foreseeable future.
Equity Compensation Plan Information
The information required by Item 201(d) of Regulation S-K will be included in the definitive proxy statement for our 2013 annual meeting of stockholders
or an amendment to this Report to be filed with the SEC within 120 days after our fiscal year ended December 31, 2012, and is incorporated into this Report by
reference.
Performance Graph
Set forth below is a graph comparing the yearly change in the cumulative total return of Gevo’s common stock with the cumulative total return of the
Standard & Poor’s SmallCap 600 Value Index and with the NASDAQ Clean Edge Green Energy Index over the period from the Company’s inception of February
2011.
It is assumed in the graph that $100 was invested (1) in our common stock; (2) in the stocks of the companies in the Standard & Poor’s SmallCap 600
Value Index; and (3) in the stocks of the NASDAQ Clean Edge Green Energy Index, just prior to the commencement of the.
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The stock price performance shown on the following graph is not indicative of future price performance.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6.
Selected Financial Data
The following selected historical consolidated financial data should be read together with our consolidated financial statements and the accompanying
notes appearing in Part II, Item 8 of this Report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected
historical consolidated financial data in this section is not intended to replace our historical consolidated financial statements and the accompanying notes. Our
historical results are not necessarily indicative of our future results.
We derived the consolidated statements of operations data for the years ended December 31, 2012, 2011 and 2010 and the consolidated balance sheet data
as of December 31, 2012 and 2011 from our audited consolidated financial statements in Part II, Item 8 of this Report. The consolidated statement of operations
data for the years ended December 31, 2009 and 2008 and the consolidated balance sheet data as of December 31, 2010, 2009 and 2008 has been derived from
our audited consolidated financial statements not included in this Report. The data
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should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein.
(In Thousands except share and per share amounts)
Consolidated statement of operations data:
Total revenue (1) (2)
Costs of goods sold (1)
Operating expenses
Loss from operations
Net loss (3)
Net loss attributable to Gevo, Inc. common stockholders
Net loss per share attributable to Gevo, Inc. common
stockholders—basic and diluted
Weighted-average number of common shares outstanding—
2012
2011
2010
2009
2008
Years Ended December 31,
$
24,385
32,410
63,412
(71,437)
(60,712)
(60,712)
$
64,549
60,588
48,654
(44,693)
(48,214)
(49,308)
$
16,396
13,446
38,463
(35,513)
(40,112)
(42,890)
$
660
—
19,229
(18,569)
(19,885)
(19,885)
$
208
—
13,519
(13,311)
(14,542)
(14,542)
(1.86)
(2.15)
(37.44)
(18.07)
(13.83)
basic and diluted
32,619,091
22,909,916
1,145,500
1,100,294
1,051,848
Consolidated balance sheet data:
Cash and cash equivalents
Total assets
Fair value of warrant liabilities
Secured debt
Convertible debt
Total liabilities
Accumulated deficit
Total stockholders’ equity
2012
2011
As of December 31,
2010
2009
2008
$
66,744
156,111
—
23,958
25,554
58,280
(195,347)
97,831
$
94,225
133,030
—
28,243
—
40,893
(134,635)
92,137
$
15,274
51,609
2,034
20,432
—
31,650
(85,327)
19,959
$
21,240
26,383
982
7,701
—
11,300
(42,437)
15,083
$
9,635
13,094
—
8,178
—
9,936
(23,137)
3,158
(1) We commenced the sale of ethanol in the fourth quarter of 2010 upon acquiring Agri Energy.
(2) During the second quarter of 2012, we suspended the production of ethanol and commenced initial startup operations for the production of isobutanol.
(3) We recognized a gain of $17.0 million during 2012 associated with a change in the fair value of the derivatives embedded in our Convertible Notes.
The following table reflects our unaudited summarized quarterly consolidated financial statements for each of the twelve months ended December 31, 2012
and 2011 (in thousands, except per share and unit amounts). This information has been derived from unaudited consolidated financial statements that, in the
opinion of
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management, include all recurring adjustments necessary for a fair statement of such information (in thousands except share and per share amounts).
First
Second
Third
Fourth
Quarter
2012
2011
Revenue (1)
Gross loss (2)
Loss from operations
Net loss (3)
Net loss attributable to Gevo, Inc. common
stockholders
Net loss per share attributable to Gevo, Inc. common
stockholders—basic and diluted
Weighted-average number of common shares
outstanding—basic and diluted
$
14,872
(138)
(18,220)
(19,307)
(19,307)
$
7,027
(1,483)
(15,746)
(16,177)
(16,177)
$
562
(5,517)
(24,426)
(12,051)
(12,051)
$
1,924
(887)
(13,045)
(13,177)
(13,177)
$
(0.74)
$
(0.62)
$
(0.31)
$
(0.34)
26,186,133
26,242,940
38,547,441
39,300,054
First
Second
Third
Fourth
Quarter
Revenue
Gross margin
Loss from operations
Net loss
Net loss attributable to Gevo, Inc. common
stockholders
Net loss per share attributable to Gevo, Inc. common
stockholders—basic and diluted
Weighted-average number of common shares
outstanding—basic and diluted
$
15,281
88
(8,412)
(9,283)
(10,377)
$
14,533
896
(11,633)
(12,466)
(12,466)
$
17,506
1,274
(11,524)
(12,305)
(12,305)
$
17,229
1,703
(13,124)
(14,160)
(14,160)
$
(0.76)
$
(0.48)
$
(0.48)
$
(0.54)
13,744,337
25,852,185
25,870,060
26,005,744
(1) During the 2012 second quarter, we suspended the production of ethanol and commenced initial startup operations for the production of isobutanol.
(2) Gross loss during the 2012 third quarter includes $7.6 million of start-up costs related to isobutanol production
(3) Net loss during the third and fourth quarters of 2012 includes gains of $15.0 million and $2.0 million, respectively, associated with the change in the fair
value of our embedded derivatives.
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial
statements and related notes that appear elsewhere in this Report. In addition to historical financial information, the following discussion contains forward-
looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in this Report, particularly in “Risk Factors.”
We are a renewable chemicals and next generation biofuels company. Our overall strategy is to commercialize bio-based alternatives to petroleum-based
products using a combination of synthetic biology and chemical technology. In order to implement this strategy, we are taking a building block approach. Initially,
we intend to produce and sell isobutanol from renewable feedstocks. 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 as a value-added fuel blendstock. Isobutanol can also be converted into butenes using straightforward
dehydration chemistry deployed in the refining and petrochemicals industries today. The convertibility of isobutanol into butenes is important because butenes are
primary hydrocarbon building blocks used in the production of lubricants, rubber, plastics, fibers, other polymers and hydrocarbon fuels.
We believe that products derived from our isobutanol will be drop-in products, which means that our customers will be able to replace petroleum-based
intermediate products with bio-isobutanol-based intermediate products without modification to their equipment or production processes. The final products
produced from our bio-isobutanol-based intermediate products will be chemically and visually identical to those produced from petroleum-based intermediate
products, except that they will contain carbon from renewable sources. Customer interest in our isobutanol is primarily driven by our production route, which we
believe will be cost-efficient, and our isobutanol’s potential to serve as a cost-effective, environmentally sensitive alternative to the petroleum-based intermediate
products that they currently use. We believe that at every step of the value chain, renewable products that are chemically identical to the incumbent petrochemical
products will have lower market adoption hurdles in contrast with other bio-industrial products because the infrastructure and applications for such products
already exist. In addition, we believe that products made from bio-based isobutanol will be subject to less cost volatility than the petroleum-based products in use
today based on the historical cost volatility of agricultural feedstocks compared to oil.
In order to produce and sell isobutanol made from renewable sources, we have developed GIFT , an integrated technology platform for the efficient
®
®
production and separation of isobutanol. GIFT consists of two components, proprietary biocatalysts, which convert sugars derived from multiple renewable
feedstocks into isobutanol through fermentation, and a proprietary separation unit, which is designed to continuously separate isobutanol from water during the
fermentation process. We developed our technology platform to be compatible with the existing approximately 23 billion gallons per year of global operating
ethanol production capacity, as estimated by the Renewable Fuels Association. GIFT is designed to allow relatively low capital expenditure retrofits of existing
ethanol facilities, enabling a rapid route to isobutanol production from the fermentation of renewable feedstocks. We believe that our production route will be
cost-efficient and will enable rapid deployment of our technology platform and allow our isobutanol and the products produced from it to be economically
competitive with many of the petroleum-based products used in the chemicals and fuels markets today.
®
We expect that the combination of our efficient proprietary technology, our marketing focus on providing drop-in substitutes for incumbent petrochemical
products and our relatively low capital investment retrofit approach will mitigate many of the historical issues associated with the commercialization of renewable
chemicals and fuels.
In September 2009, Gevo, Inc. formed Gevo Development to develop isobutanol production assets using GIFT . Gevo Development has a flexible
business model and aims to secure access to existing ethanol capacity either through joint venture, licensing arrangements, tolling arrangements or direct
acquisition.
®
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Agri-Energy
In September 2010, we acquired the Agri-Energy Facility, a 22 MGPY ethanol production facility in Luverne, Minnesota. The Agri-Energy Facility is a
traditional dry-mill facility, which means that it uses corn as a feedstock. In partnership with ICM, we have developed a detailed retrofit design for this facility
and began the retrofit in 2011. In May 2012, we commenced initial startup operations for the production of isobutanol at this facility. During initial startup
operations we produced approximately 100,000 gallons of bio-based isobutanol for sale and future customer testing. These initial startup operations included
production of initial quantities of isobutanol produced at commercial scale, completion of initial commissioning of new equipment and development of operating
discipline at commercial scale. In September 2012, as a result of a lower than planned production rate of isobutanol, we made the strategic decision to pause
isobutanol production at the Agri-Energy Facility for a period of time to focus on optimizing specific parts of our technology to further enhance isobutanol
production rates. Factors that contributed to this strategic decision included, among others, that producing isobutanol at startup production rates while working to
improve those production rates would result in operating the Agri-Energy Facility at significantly below break-even cash flow level and that we believed that we
had generated the necessary information required from our startup operations to work on enhancing our production rates at our testing laboratory in Colorado. We
intend to resume isobutanol production at the Agri-Energy Facility in support of future commercial operations once this work has been completed. Based on our
progress to date, we anticipate resuming isobutanol production at the Agri-Energy Facility in 2013.
Through December 31, 2012, we have incurred capital costs of approximately $56.1 million on the retrofit of the Agri-Energy Facility. The retrofit of the
Agri-Energy Facility includes a number of additional capital costs that are unique to the design of the facility, including additional equipment that we believe will
allow us to switch between ethanol and isobutanol production, modifications to increase the potential production capacity of GIFT at this facility and the
establishment of an enhanced yeast seed train to accelerate the adoption of improved yeast strains at the Agri-Energy Facility and at future plants. Capital
expenditures at the Agri-Energy Facility also include upfront design and engineering expenses, plant modifications identified as necessary during initial startup
operations for the production of isobutanol as well as sales tax on equipment and capitalized interest. We have incurred approximately $21.7 million in capital
expenditures associated with these additional design features and other costs. We do not anticipate installing an advanced yeast seed train at each future retrofit
site.
®
Until May 2012, when we commenced initial startup operations for the production of isobutanol at the Agri-Energy Facility, we derived revenue from the
sale of ethanol, distiller’s grains and other related products produced as part of the ethanol production process at the Agri-Energy Facility. Continued ethanol
production during the retrofit process allowed us to retain local staff for the future operation of the plant, maintain the equipment and generate cash flow.
However, the continued production of ethanol is not our intended business and our future return on invested capital depends on our ability to produce and market
isobutanol and products derived from isobutanol, not on continued production and sales of ethanol. We believe that we will be able to transition back to the
production and sale of ethanol and related products at the Agri-Energy Facility, other than during certain periods while we are working to optimize certain parts of
our isobutanol production technology, if we were to project positive cash flows from ethanol operations versus maintaining the facility at idle, including any costs
related to the transition, but there is no guarantee that this will be the case. Through the filing of this Annual Report, we have not transitioned back to ethanol
production because, based on current ethanol operating conditions, we believe that we would generate greater negative cash flows compared to maintaining the
Agri-Energy Facility at idle. Following the commencement of full-scale commercial production of isobutanol, we do not expect to generate significant future
revenues from the sale of ethanol produced at the Agri-Energy Facility. Accordingly, the historical operating results of our subsidiary, Agri-Energy, and the
operating results reported during the retrofit to isobutanol production may not be indicative of future operating results for Agri-Energy or Gevo once commercial
scale isobutanol production commences at this facility.
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Revenues, Cost of Goods Sold and Operating Expenses
Revenues
During the years ended December 31, 2012, 2011 and 2010, we derived revenue primarily from the sale of ethanol. Substantially all ethanol sold through
Agri-Energy from the date of acquisition through December 31, 2012 was sold to C&N, a subsidiary of Mansfield Oil Company, pursuant to an ethanol purchase
and marketing agreement. Our revenue also includes the sale of distiller’s grains and other products produced as part of the ethanol production process to third
parties.
We also derived revenue from our grant and research and development programs. Our grant, research and development program and other revenue
primarily consists of the following: (i) revenues relating to government research grants; (ii) revenues relating to cooperative agreements; (ii) research services;
(iii) sale of inventory assets; and (iv) the procurement of our products for purposes of certification and testing.
Cost of Goods Sold and Gross (Loss) Margin
Our cost of goods sold includes costs incurred in conjunction with the initial startup operations for the production of isobutanol at the Agri-Energy Facility
and costs directly associated with our ethanol production process such as costs for direct materials, direct labor and certain plant overhead costs. Direct materials
consist of corn feedstock, denaturant and process chemicals. Direct labor includes compensation of personnel directly involved in production operations at the
Agri-Energy Facility. Plant overhead costs primarily consist of plant utilities and plant depreciation. Cost of goods sold is mainly affected by the cost of corn and
natural gas. Corn is the most significant raw material cost. We purchase natural gas to power steam generation in the ethanol production process and to dry the
distiller’s grains. We enter into forward purchase contracts and exchange-traded futures contracts associated with corn. Accordingly, our cost of goods sold also
includes gains or losses and/or changes in fair value from our forward purchase contracts and exchange-traded futures contracts. See the discussion of accounting
for derivatives below under the heading “Critical Accounting Policies and Estimates.”
Our gross (loss) margin is defined as our total revenues less our cost of goods sold.
Research and Development
Our research and development costs consist of expenses incurred to identify, develop and test our technologies for the production of isobutanol and the
development of downstream applications thereof. Research and development expense includes personnel costs (including stock-based compensation), consultants
and related contract research, facility costs, supplies, depreciation and amortization expense on property, plant and equipment used in product development,
license fees paid to third parties for use of their intellectual property and patent rights and other overhead expenses incurred to support our research and
development programs. Research and development expenses also include upfront fees and milestone payments made under licensing agreements and payments
for sponsored research and university research gifts to support research at academic institutions.
Selling, General and Administrative
Selling, general and administrative expenses consist of personnel costs (including stock-based compensation), consulting and service provider expenses
(including patent counsel-related costs), legal fees, marketing costs, corporate insurance costs, occupancy-related costs, depreciation and amortization expenses
on property, plant and equipment not used in our product development programs or recorded in cost of goods sold, travel and relocation and hiring expenses.
We also record selling, general and administrative expenses for the operations of the Agri-Energy Facility that include administrative and oversight, certain
personnel-related expenses, insurance and other operating expenses.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various
other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes
adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly
different in the future.
While our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included in this Report, we believe
that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and reflect the more
significant judgments and estimates that we use in the preparation of our consolidated financial statements.
Accounting for Convertible Debt and Embedded Derivatives
In July 2012, we sold $45.0 million in aggregate principal amount of Convertible Notes. Terms of the Convertible Notes, include, among others: (i) rights
to convert into shares of our common stock, including upon a Fundamental Change; and (ii) a Coupon Make-Whole Payment in the event of a conversion by the
holders of the Convertible Notes on or after January 1, 2013 but prior to July 1, 2017. We have determined that these specific terms are considered to be
embedded derivatives in accordance with U.S. GAAP. U.S. GAAP requires embedded derivatives be separated from the host contract, the Convertible 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. We have concluded that the
embedded derivatives within the Convertible Notes meet these criteria and, as such, must be valued separate and apart from the Convertible Notes and recorded at
fair value each reporting period.
For purposes of accounting and financial reporting, we combine these embedded derivatives and value them together as one unit of accounting. At each
reporting period, we record these embedded derivatives at fair value which is included as a component of the Convertible Notes on our consolidated balance
sheets.
We have used a binomial lattice model in order to estimate the fair value of the embedded derivative in the Convertible Notes. A binomial lattice model
generates two probable outcomes — one up and another 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 Convertible Notes would be converted, called or held at each decision point. Within the lattice model, the following
assumptions are made: (i) the Convertible Notes will be converted early if the conversion value is greater than the holding value; or (ii) the Convertible Notes will
be called if the holding value is greater than both (a) the Redemption Price (as defined in the Indenture) and (b) the conversion value plus the Coupon Make-
Whole Payment at the time. If the Convertible Notes are called, then the holder will maximize their value by finding the optimal decision between (1) redeeming
at the Redemption Price and (2) converting the Convertible Notes.
Using this lattice, we valued the embedded derivatives using the “with-and-without method,” where the value of the Convertible Notes including the
embedded derivatives is defined as the “with,” and the value of the Convertible Notes excluding the embedded derivatives is defined as the “without.” This
method estimates the value of the embedded derivatives by looking at the difference in the values between the Convertible Notes with the embedded derivatives
and the value of the Convertible Notes without the embedded derivatives.
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The lattice model requires the following inputs: (i) price of our common stock; (ii) Conversion Rate (as defined in the Indenture); (iii) Conversion Price (as
defined in the Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated stock volatility; and (vii) estimated credit spread for the Company.
The following table sets forth the inputs to the lattice model used to value the embedded derivative.
Stock price
Conversion Rate
Conversion Price
Maturity date
Risk-free interest rate
Estimated stock volatility
Estimated credit spread
December 31, 2012
1.54
$
175.6697
5.69
July 1, 2022
$
1.68%
79%
37%
Issuance Date
4.95
$
175.6697
5.69
$
July 1, 2022
1.62%
72%
30%
The following table sets forth the value of the Convertible Notes with and without the embedded derivatives, and the fair value of the embedded derivatives
as of the issuance date and December 31, 2012 (in thousands).
Fair value of Convertible Notes:
With the embedded derivatives
Without the embedded derivatives
Estimated fair value of the embedded derivatives
December 31, 2012
Issuance Date
$
$
26,000
15,000
11,000
$
$
45,000
17,000
28,000
Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the embedded derivatives. For
example, a decrease in the estimated credit spread for the Company results in an increase in the estimated value of the embedded derivatives. Conversely, a
decrease in the price of our common stock results in a decrease in the estimated fair value of the embedded derivatives. From the date the Convertible Notes were
issued through December 31, 2012, we observed a significant decline in the market price of our common stock which resulted in a $17.0 million decline in the
estimated fair value of our embedded derivatives from issuance through December 31, 2012.
Impairment of Property, Plant and Equipment
Our property, plant and equipment consist primarily of assets associated with the acquisition and retrofit of the Agri-Energy Facility. We assess impairment
of property, plant and equipment for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable.
Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in
the business climate, legal or regulatory factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction
of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset;
or expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. The carrying amount of a
long-lived asset is considered to be impaired if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the
asset.
We evaluated our Agri-Energy Facility for impairment as of December 31, 2012 primarily due to the loss from operations and negative cash flows
generated at Agri-Energy during the year ended December 31, 2012 and the strategic decision to pause isobutanol production in September 2012. This evaluation
included comparing the carrying amount of the acquisition and retrofit of the Agri-Energy Facility to the estimated undiscounted future
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cash flows at the Agri-Energy Facility as this represents the lowest level of identifiable cash flows. Significant assumptions included in the estimated
undiscounted future cash flows include, among others, estimates of the:
•
•
•
•
sales price of isobutanol and by-products such as dried distiller grains;
purchase price of corn;
production levels of isobutanol; and
costs to produce isobutanol.
Factors which can impact these assumptions include, but are not limited to;
•
•
•
effectiveness of yeast growth to produce isobutanol;
demand for isobutanol and oil prices; and
harvest levels of corn.
Based upon our evaluation at December 31, 2012, we concluded that the estimated undiscounted future cash flows from Agri-Energy exceeded the carrying
value of the Agri-Energy Facility and, as such, these assets were not impaired. Although our cash flow forecasts are based on assumptions that are consistent with
our planned use of the assets, these estimates required significant exercise of judgment and are subject to change in future reporting periods as facts and
circumstances change. Additionally, we may make changes to our business plan that could result in changes to the expected cash flows. As a result, it is possible
that a long- lived asset may be impaired in future reporting periods.
Stock-Based Compensation
Our stock-based compensation expense includes expenses associated with stock-based awards granted to employees, board members, non-employees and
expenses associated with our employee stock purchase plan (“ESPP”). The estimated fair value of stock options and ESPP awards is determined on the date of
grant and recorded to expense over the requisite service period, generally the vesting period. We estimate the fair value of stock option awards using the Black-
Scholes option-pricing model which requires judgments to be made, including estimating: (i) the expected life of an award; (ii) stock price volatility; and
(iii) prior to our initial public offering in February 2011, estimating the fair value of our common stock.
The Black-Scholes option-pricing model calculates the estimated fair value of stock options using the following inputs: (i) expected stock option life;
(ii) expected volatility; (iii) risk-free interest rate; (iv) expected dividend yield rate; (v) exercise price; and (vi) closing price of our common stock on the date of
grant.
Due to our limited history of grant activity, we use the “simplified method” to estimate the expected stock option life permitted by the SEC as the
arithmetic average of the total contractual term of the option and its vesting period. We calculate the estimated volatility rate based on selected comparable public
companies, due to a lack of historical information regarding the volatility of our stock price. We will continue to analyze the historical stock price volatility
assumption as more historical data for our common stock becomes available. The risk-free interest rate assumption is based on the U.S. Treasury yield curve in
effect on the date of grant for instruments with a term similar to the expected life of the related option. No dividends are expected to be paid.
The estimated fair value of a stock option using the Black-Scholes option-pricing model is impacted significantly by changes in a company’s stock price.
For example, all other assumptions being equal, the estimated fair value of a stock option will increase as the closing price of a company’s stock increases, and
vice versa. Prior to the closing of our initial public offering, we were a private company and, as such, we were required to estimate the fair value of our common
stock. In the absence of a public trading market, we determined a reasonable estimate of the then-current fair value of our common stock for purposes of granting
stock-based compensation based on multiple criteria. We determined the fair value of our common stock utilizing methodologies, approaches and assumptions
consistent with the American Institute of Certified Public
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Accountants Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation.” After the closing of our initial public offering in
February 2011, the fair value of our common stock is no longer an estimate as it is based upon the closing price of our stock on the NASDAQ Global Market on
the date of grant
Revenue Recognition
Following consummation of the Agri-Energy acquisition on September 22, 2010, we recorded revenue from the sale of ethanol and related products
through commencement of startup isobutanol production in May 2012. We have not shipped significant quantities of ethanol and related products since May
2012. We recognize revenue when all of the following criteria are satisfied: persuasive evidence of an arrangement exists; risk of loss and title transfer to the
customer; the price is fixed or determinable; and collectability is reasonably assured. Ethanol and related products are generally shipped free on board shipping
point. Collectability of revenue is reasonably assured based on historical evidence of collectability between us and our customers. In accordance with our
agreements for the marketing and sale of ethanol and related products, commissions due to marketers were deducted from the gross sales price at the time
payment was remitted. Ethanol and related products sales were recorded net of commissions.
Revenue related to our government research grants and cooperative agreements is recognized in the period during which the related costs are incurred or
over the contract period, provided that the conditions under the awards have been met and only perfunctory obligations are outstanding.
Other research and development program revenue consists of research services and the procurement of our products for purposes of certification and
testing, such as that conducted by the USAF. Revenue from research services is recognized over the relevant performance period of the contract. Revenue from
the procurement of our products for purposes of certification and testing is recognized upon the transfer of risk of loss and title to the customer.
Cost of Goods Sold and Derivatives
Our activities expose us to a variety of market risks, including the effects of changes in commodity prices. These financial exposures are monitored and
managed by our management as an integral part of our overall risk-management program. Our risk management program focuses on the unpredictability of
financial and commodities markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our cost of goods sold and
operating results.
We enter into forward purchase contracts for corn to be used in the production of ethanol. During 2011, we used the “normal purchases and normal sales
scope exception” guidance of U.S. GAAP for our forward purchase contracts and, as a result, they were not recorded at fair value during 2011. To qualify for the
normal purchases and normal sales scope exception, a contract must be appropriately designated and must provide for the purchase or sale of physical
commodities in quantities that are expected to be used or sold over a reasonable period of time in the normal course of operations. Prior to January 1, 2011 and for
new contracts entered into beginning January 1, 2012, we did not apply the “normal purchases and normal sale scope exception” to our forward purchase
contracts and, as a result, we began to record forward purchase contracts at fair value. Changes in fair value associated with our forward purchase contracts have
been included as a component of cost of goods sold in our consolidated statements of operations.
We also enter into exchange-traded futures contracts for corn as a means of managing exposure to changes in corn prices. These contracts are recorded as a
derivative asset or liability on our consolidated balance sheets at fair value. Changes in the fair value during a reporting period are recognized as cost of goods
sold in our consolidated statements of operations.
Both our forward purchase and exchange-traded futures contracts are considered to be derivatives and they do not include any credit risk related contingent
features. We have not entered into these derivative financial
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instruments for trading or speculative purposes, and we have not designated any of our derivatives as hedges for financial accounting purposes.
Result of Operations
Comparison of the years ended December 31, 2012 and 2011 (in thousands)
Revenue and cost of goods sold
Ethanol sales and related products, net
Grant revenue, research and development program revenue and other revenue
Total revenues
Cost of goods sold
Gross (loss) margin
Operating expenses
Research and development
Selling, general and administrative
Other operating expenses
Total operating expenses
Loss from operations
Other income (expense)
Interest expense
Gain from change in fair value of embedded derivatives
Other income
Total other income (expense)
Net loss
Deemed dividend—amortization of beneficial conversion feature on Series D-1 preferred stock
Net loss attributable to Gevo, Inc. common stockholders
N/M—Not Meaningful
Years Ended
December 31,
Change
2012
2011
Amount
Percent
$ 19,908
4,477
24,385
32,410
(8,025)
19,431
43,981
—
63,412
(71,437)
(6,338)
17,000
63
10,725
(60,712)
—
$ (60,712)
$ 63,742
807
64,549
60,588
3,961
19,753
28,890
11
48,654
(44,693)
(3,577)
—
56
(3,521)
(48,214)
(1,094)
$ (49,308)
$ (43,834)
3,670
(40,164)
(28,178)
(11,986)
(322)
15,091
(11)
14,758
(26,744)
(2,761)
17,000
7
14,246
(12,498)
1,094
$ (11,404)
-69%
455%
-62%
-47%
-303%
-2%
52%
-100%
30%
60%
77%
N/M
13%
N/M
26%
-100%
23%
Ethanol sales and related products, net. During fiscal year 2011, our Agri-Energy Facility produced and shipped ethanol and related products for the full
year but, during fiscal year 2012, the facility produced and shipped ethanol and related products only during the period from January 2012 through May 2012.
The decrease in ethanol sales and related products was due to our commencement of initial start-up production of isobutanol at the Agri-Energy Facility in May
2012.
Grant revenue, research and development program revenue and other revenue. The increase in grant revenue primarily resulted from agreements with the
USAF and the U.S. Department of Agriculture that generated $2.1 million in revenue during 2012 compared with $0.7 million during 2011 as these contracts
were either in place for the entire 2012 period or new to 2012. We also had an increase in revenue associated with our research and development contract with
Coca-Cola which we entered into during the fourth quarter of 2011 and had other revenue in 2012 associated with the proceeds from sales of our corn inventory
during the fourth quarter of 2012.
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Cost of goods sold. Our cost of goods sold during the year ended December 31, 2012 primarily resulted from $22.0 million of costs related to the
production of ethanol and distiller’s grains. We also incurred $6.6 million of start-up costs related to isobutanol production at our Agri-Energy Facility. During the
year ended December 31, 2011, our cost of goods sold related primarily to the production of ethanol and distiller’s grains.
Research and development. Research and development expense decreased approximately $0.3 million for the year ended December 31, 2012 compared to
the year ended December 31, 2011. Contributing to this decrease were the following: (i) a $2.0 million decrease in laboratory costs and other costs associated with
the construction of a hydrocarbon demonstration facility on the South Hampton Resources. site during the year ended December 31, 2011, costs which were not
repeated in 2012; and (ii) a $1.4 million decline in depreciation expense. These items were partially offset by an increase of $2.6 million in salary and
compensation-related expenses, including stock-based compensation, and an increase of $0.5 million in travel-related expenses. These increases primarily
resulted from our increased headcount and travel in support of initial startup operations for the production of isobutanol and testing activities at our Agri-Energy
Facility.
Selling, general and administrative. The increase in selling, general and administrative expenses during the year ended December 31, 2012 primarily
resulted from the following increases: (i) $12.0 million in legal-related expenses primarily attributable to our ongoing litigation with Butamax; (ii) $1.7 million in
salary and compensation-related expenses primarily resulting from severance payments due to the departure of four of our Executive Vice Presidents; and
(iii) $1.1 million in stock-based compensation expenses primarily due to the accelerated vesting of certain equity awards upon the departure of three of our
Executive Vice Presidents in accordance with the terms of their respective employment agreements.
Interest expense. Interest expense increased during the year ended December 31, 2012 primarily as a result of the following: (i) $2.0 million in accrued
interest and amortization of debt discounts and issue costs associated with our offering of Convertible Notes completed in July 2012; and (ii) increases in cash and
non-cash interest expenses primarily related to our debt with TriplePoint as a result of additional borrowing for the retrofit of the Agri-Energy Facility in October
2011 and January 2012.
Change in fair value of embedded derivatives. During the year ended December 31, 2012, we reported a $17.0 million gain associated with the decrease in
the fair value of derivatives embedded in our Convertible Notes. As more fully described above under the heading “Critical Accounting Policies and Estimates–
Accounting for Convertible Debt and Embedded Derivatives,” the decrease in the fair value of the embedded derivatives primarily resulted from a decline in the
price of our common stock between the date that the Convertible Notes were issued and December 31, 2012.
Deemed dividend—amortization of beneficial conversion feature on Series D-1 preferred stock. We incurred a deemed dividend—amortization of beneficial
conversion feature on our Series D-1 preferred stock of $1.1 million during the year ended December 31, 2011 related to the issuances of our Series D-1 preferred
stock between March and May of 2010. Upon the closing of our initial public offering on February 14, 2011, all outstanding shares of our preferred stock,
including our Series D-1 preferred stock, were automatically converted into shares of common stock. Following the closing of our initial public offering, no
additional amortization of the beneficial conversion feature relating to our Series D-1 preferred stock has been recorded.
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Comparison of years ended December 31, 2011 and 2010 (in thousands)
Revenue and cost of goods sold
Ethanol sales and related products, net
Grant revenue, research and development program revenue and other
revenue
Total revenues
Cost of goods sold
Gross margin
Operating expenses
Research and development
Selling, general and administrative
Other operating expenses
Total operating expenses
Loss from operations
Other income (expense)
Interest expense
Other income
Change in fair value of warrant liabilities
Total other income (expense)
Net loss
Deemed dividend—amortization of beneficial conversion feature on Series D-1
preferred stock
Net loss attributable to Gevo, Inc. common stockholders
N/M—Not Meaningful
Years Ended December 31,
2010
2011
Change
Amount
Percent
$ 63,742
$ 14,765
$48,977
332%
807
64,549
60,588
3,961
19,753
28,890
11
48,654
(44,693)
(3,577)
85
(29)
(3,521)
(48,214)
1,631
16,396
13,446
2,950
14,820
23,643
—
38,463
(35,513)
(2,374)
108
(2,333)
(4,599)
(40,112)
(1,094)
$ (49,308)
(2,778)
$ (42,890)
(824)
48,153
47,142
1,011
4,933
5,247
11
10,191
(9,180)
(1,203)
(23)
2,304
1,078
(8,102)
1,684
$ (6,418)
-51%
294%
351%
34%
33%
22%
N/M
26%
26%
51%
-21%
-99%
-23%
20%
-61%
15%
Ethanol sales and related products, net. The increase in ethanol sales and related products during the year ended December 31, 2011 is due to our
acquisition of Agri-Energy on September 22, 2010.
Grant revenue and research and development program revenue. The decrease in grant and research and development program revenue primarily relates to
a grant award from the U.S. Department of Energy that ended in August 2010.
Cost of goods sold. The increase in cost of goods sold relates to our acquisition of Agri-Energy. Prior to our acquisition of Agri-Energy, we did not incur or
report cost of goods sold.
Research and development. The increase in research and development expense during the year ended December 31, 2011 was primarily driven by the
following increases: (i) $3.2 million in operating expenses at our demonstration facilities and for laboratory supplies and services used in our development efforts;
(ii) $2.4 million in salary and compensation-related expenses, including $1.0 million in stock-based compensation; and (iii) $0.4 million associated with
consulting, contractor and outside service provider expenses. These items were partially offset by achievement of a research milestone under our licensing
agreement with Cargill, for which we recorded $1.6 million in expense during the year ended December 31, 2010 and did not have an offsetting expense in 2011.
Selling, general and administrative. The increase in selling, general and administrative expense during the year ended December 31, 2011 was primarily
driven by the following increases: (i) $3.0 million in salary and
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compensation-related expenses and relocation and recruiting expenses; (ii) $2.9 million in litigation-related costs; (iii) $1.8 million in increased legal, accounting,
tax and public company filing and related fees; (iv) $1.0 million in public relations and corporate development costs; (v) $0.6 million in business development
consultant costs; and (vi) $0.3 million in administrative costs for Agri-Energy. These items were partially offset by a decrease in stock-based compensation of
$3.9 million and a decrease of $0.7 million in management fees paid to CDP.
Selling, general and administrative expense included stock-based compensation expense of $6.7 million and $10.6 million for the years ended
December 31, 2011 and 2010, respectively. Included in stock-based compensation expense for the year ended December 31, 2011, is $3.5 million related to the
warrant issued to CDP whereby we recognized stock-based compensation based on the fair value of the warrant on September 22, 2010. We valued the warrant at
$14.0 million on September 22, 2010, and recognized 50% of this amount as stock-based compensation on September 22, 2010. Included in stock-based
compensation expense for year ended December 31, 2010, is $7.9 million related to the warrant issued to CDP.
Interest expense. Interest expense increased during the year ended December 31, 2011 due to the incurrence of additional debt in the third quarter of 2010
and the fourth quarter of 2011, higher interest rates on our secured long-term debt facility and higher amortization of debt discounts and debt issue costs related to
our debt with Lighthouse Capital Partners V, L.P. (“Lighthouse”) and TriplePoint.
Change in fair value of warrant liabilities. The decrease in change in fair value of warrant liabilities during the year ended December 31, 2011 related to
the change in the fair value of our preferred stock warrants and the conversion of these warrants to common stock warrants upon the closing of our initial public
offering on February 14, 2011. The preferred stock warrants were recorded as derivatives and recognized in our consolidated balance sheet as a liability through
the closing date of our initial public offering. Upon the closing of our initial public offering and the conversion of the underlying preferred stock to common
stock, all outstanding warrants to purchase shares of preferred stock converted into warrants to purchase shares of our common stock and were no longer
considered to be derivatives.
Deemed dividend—amortization of beneficial conversion feature on Series D-1 preferred stock. The decrease in deemed dividend—amortization of
beneficial conversion feature on Series D-1 preferred stock during the year ended December 31, 2011 related to our issuance of Series D-1 preferred stock
between March and May of 2010. Following the closing of our initial public offering on February 14, 2011, no additional amortization of the beneficial
conversion feature relating to our Series D-1 preferred stock has been recorded.
Liquidity and Capital Resources
From inception to December 31, 2012, we have funded our operations primarily through equity offerings, issuances of debt, borrowings under our secured
debt financing arrangements and revenues earned primarily from the sale of ethanol and related products. Our cash and cash equivalents at December 31, 2012
totaled $66.7 million which is primarily being used for the following: (1) operating activities at our Agri-Energy Facility; (2) operating activities at our corporate
headquarters in Colorado, including research and development work; (3) capital improvements primarily associated with our Agri-Energy Facility; (4) litigation
defense costs associated with the ongoing litigation with Butamax; and (5) repayment of debt obligations. Based on our current plans, we anticipate capital
expenditures necessary to complete the retrofit of the Agri-Energy Facility will be significantly lower than the capital expenditures of $49.5 million incurred in
fiscal year 2012 for this project. We believe that actions taken during 2012 to reduce ongoing litigation expenses and other operating expenses will reduce 2013
operating expenses from fiscal year 2012 levels. We also have the ability to further limit some cash spend associated with the foregoing activities, including
limiting the usage of cash associated with research and development activities or delaying the timing of capital improvements, based on then-current facts and
circumstances. Notwithstanding our ability to further reduce our monthly cash usage, based on our current level of operations and anticipated growth, we believe
that our existing cash and cash equivalents on hand at December 31, 2012, will provide sufficient funds for ongoing operations, planned capital expenditures and
working capital requirements for at least the next 12 months.
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In 2014, if we exceed our planned capital expenditures as part of optimizing specific parts of our isobutanol production technology at the Agri-Energy
Facility, or other cost estimates to prepare for commercial production of isobutanol or derivative products of isobutanol or we exceed our estimates for ongoing
litigation and other operating expenses, we may need to raise additional capital. Depending on the timing and amounts of expected future cash flow requirements,
we expect we will be required to raise such additional capital in 2014. Finally, based on current estimates, additional financing will be required for us to finance
the retrofit of additional production capacity to isobutanol production, including further expansion of our Agri-Energy Facility. There are no assurances that we
will be able to raise additional funds, or achieve or sustain profitability or positive cash flow from operations.
As of December 31, 2012, our cash and cash equivalents totaled $66.7 million. In July 2012, we issued: (i) 12.5 million shares of common stock at an
offering price of $4.95 per share; and (ii) $45.0 million aggregate principal amount of Convertible Notes, in each case in a firm commitment underwritten public
offering (the “Equity Offering” and the “Note Offering,” respectively, and together, the “Offerings”). We received proceeds from the Offerings of $98.4 million,
net of expenses and fees to underwriters. We used $5.4 million of the proceeds from the Note Offering to pay in full all amounts outstanding under the Gevo Loan
Agreement.
On February 14, 2011, we completed our initial public offering issuing 8,222,500 shares of common stock at an offering price of $15.00 per share, resulting
in net proceeds of $110.4 million, after deducting underwriting discounts and commissions and other offering costs. During the period from April 1, 2011, the
approximate point in time where we began to use cash from our initial public offering, through September 30, 2012, we used all of the amounts received from our
initial public offering on a combination of working capital needs and the acquisition of property, plant and equipment.
The timing of possible future joint ventures, including our joint venture with Redfield, licensing arrangements, tolling arrangements or acquisitions
involving ethanol plant assets for retrofit to isobutanol production are subject to our raising additional capital through future public and private equity offerings,
debt financings or through other alternative financing arrangements. Successful completion of our research and development program and the attainment of
profitable operations are dependent upon future events, including completion of our development activities resulting in sales of isobutanol or isobutanol-derived
products and/or technology, achieving market acceptance and demand for our products and services and attracting and retaining qualified personnel.
Additionally, our future results of operations and cash flows will be impacted as a result of our ongoing litigation with Butamax. Our ongoing involvement
in litigation with Butamax could cause us to spend significant amounts of money and negative decisions by courts associated with pending litigation could also
negatively impact our future results of operations and cash flows. Specifically, negative decisions by the courts could force us to do one or more of the following:
•
•
•
•
stop selling, incorporating, manufacturing or using our products that use the subject intellectual property;
obtain from a third party asserting its intellectual property rights, a license to sell or use the relevant technology, which license may not be available
on reasonable terms, or at all;
redesign those products or processes, such as our process for producing isobutanol, that use any allegedly infringing or misappropriated technology,
which may result in significant cost or delay to us, or which redesign could be technically infeasible; or
pay damages, including the possibility of treble damages in a patent case if a court finds us to have willfully infringed certain intellectual property
rights.
The trial for the earliest-filed claim in the Butamax litigation is currently scheduled for April and August 2013 and additional trials are currently scheduled
for July 2014. We expect to continue to incur significant costs through the foregoing trial dates. For a summary of our ongoing litigation with Butamax, see the
disclosure under
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the heading “Legal Matters” in Part II, Item 1 of this Report, and for additional risks we face as a result of the litigation with Butamax, see the disclosure under
the heading “Risk Factors” in Part II, Item 1A of this Report.
The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Operating Activities
2012
$ (68,058)
(53,039)
93,616
Year Ended December 31,
2011
$ (33,611)
(8,033)
120,595
2010
$ (20,896)
(25,702)
40,632
Our primary uses of cash from operating activities are personnel-related expenses and research and development-related expenses including costs incurred
under development agreements, costs for licensing of technology, legal-related costs and expenses for start-up operations for the production of isobutanol at the
Agri-Energy Facility and for the operation of our demonstration production facilities.
During the year ended December 31, 2012, we used $68.1 million from operating activities resulting from a net loss of $64.2 million, excluding the impact
of $3.4 million in gains from non-cash transactions and $3.9 million primarily associated with changes in working capital. We used $2.8 million to increase our
inventory balance at December 31, 2012 as compared with 2011. The increase in inventory was primarily driven by the purchase of corn during 2012 in
anticipation of recommencing the production of ethanol at the Agri-Energy Facility in the fourth quarter. We also used $2.8 million to reduce our accounts
payable and accrued liabilities, primarily associated with payables for corn at December 31, 2011 that were paid for during the first quarter of 2012. Further, our
accounts receivable balance was reduced by $2.2 million due to the collection of receivables, primarily resulting from sales of ethanol during the fourth quarter of
2011 that were collected in 2012. We did not have any sales of ethanol or related products in the fourth quarter of 2012, following the commencement of
isobutanol startup activities in the second quarter of 2012 and our decision to pause those operations in the third quarter of 2012.
Cash used in operating activities of $33.6 million in 2011 reflected our net loss of $48.2 million partially offset by changes in operating assets and
liabilities of $2.1 million and non-cash charges totaling $12.5 million. Non-cash charges primarily included stock-based compensation of $6.8 million,
depreciation and amortization of $4.6 million, non-cash interest expense and amortization of debt discounts of $0.9 million, and loss from change in derivatives
of $0.1 million. The net source of cash from our operating assets and liabilities of $2.1 million primarily reflected an increase in accounts payable and accrued
expenses, including amounts payable to ICM for work performed on the retrofit of the Agri-Energy Facility.
Cash used in operating activities of $20.9 million in 2010 reflected our net loss of $40.1 million, partially offset by non-cash charges totaling $16.2 million
and changes in operating assets and liabilities of $3.0 million. Non-cash charges included depreciation and amortization of $3.2 million, stock-based
compensation of $10.5 million, loss from change in fair value of warrant liabilities of $2.3 million, and non-cash interest expense and amortization of debt
discounts of $0.8 million, which were offset by a gain in derivative assets of $0.6 million. The net source of cash from our operating assets and liabilities of $2.9
million primarily reflected accrued milestone payments under our Cargill license agreement that were payable in 2011 and 2012, an increase in the corn payable
account at Agri-Energy and amounts accrued for deferred offering costs and work performed by ICM.
Investing Activities
During the year ended December 31, 2012, we used $53.0 million in cash from investing activities primarily due to the following: (i) $49.5 million
associated with the retrofit of the Agri-Energy Facility to isobutanol
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production; (ii) $2.9 million for the acquisition of property and laboratory equipment; and (iii) $0.6 million for the purchase of patents and for planning work
associated with the planned retrofit of the Redfield Energy LLC facility (the “Redfield Energy LLC”).
In 2011, cash used in investing activities included $8.0 million for capital expenditures, including $6.3 million related to the retrofit of the Agri-Energy
Facility.
In 2010, cash used in investing activities included $0.8 million for capital expenditures and $24.9 million related to the purchase and acquisition of Agri-
Energy (aggregate cash purchase price of $25.5 million less cash acquired of $0.6 million).
Financing Activities
During the year ended December 31, 2012, we generated $93.6 million in cash from financing activities primarily resulting from the following: (i) $98.4
million associated with the Offerings, net of issue costs and discounts; (ii) $4.9 million borrowed under the amended and restated loan and security agreement,
dated October 20, 2011, by and between Agri-Energy and TriplePoint (the “Amended Agri-Energy Loan Agreement”), net of issue costs; and (iii) $0.9 million
from the exercise of stock options. Partially offsetting these sources of cash was $10.4 million in principal payments on our secured debt with TriplePoint and
Lighthouse Capital Partners V, L.P. (“Lighthouse”). During the year ended December 31, 2012, we paid Lighthouse $1.2 million as payment in full of all amounts
outstanding to Lighthouse and we paid TriplePoint $5.4 million from the proceeds from the Note Offering to pay in full all amounts outstanding under the Gevo
Loan Agreement.
In 2011, cash provided by financing activities was $120.6 million, primarily due to the net proceeds from our initial public offering and borrowings from
TriplePoint of $10.0 million. These items were partially offset by $1.9 million in principal repayments on our debt with Lighthouse.
In 2010, cash provided by financing activities was $40.6 million, primarily due to the net proceeds of $31.4 million from the sale of Series D-1 preferred
stock, borrowings from TriplePoint of $17.5 million, and proceeds from the exercise of a preferred stock warrant of $0.6 million. These items were partially offset
by $5.0 million of principal payments under our debt agreement with Lighthouse and $3.6 million in debt and equity offering costs.
Stock Repurchase Program
On January 2, 2013, our board of directors approved a stock repurchase program which authorizes us to repurchase up to $15.0 million of our common
stock over a one-year period. Repurchases under the stock repurchase program, if any, would be funded with cash and cash equivalents on hand. Under the
program, management is authorized to purchase shares of the Company’s common stock from time to time through open market purchases, privately negotiated
transactions or block transactions and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934,
subject to market conditions and other factors.
Agri-Energy Retrofit
In September 2010, we acquired the Agri-Energy Facility which we are currently retrofitting to produce isobutanol. As of December 31, 2012, we have
incurred capital costs of approximately $56.1 million on the retrofit of the Agri-Energy Facility. The retrofit of the Agri-Energy Facility includes a number of
additional capital costs that are unique to the design of the facility, including additional equipment that we believe will allow us to switch between ethanol and
isobutanol production, modifications to increase the potential production capacity of GIFT at the Agri-Energy Facility and the establishment of an enhanced
yeast seed train to accelerate the adoption of improved yeast at the Agri-Energy Facility and at future plants. Capital expenditures at the Agri-Energy Facility also
include upfront design and engineering costs, plant modifications identified as necessary during initial startup operations for the production of isobutanol as well
as sales tax on equipment and
®
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capitalized interest. We have incurred approximately $21.7 million in capital expenditures associated with these additional design features and other costs. In May
2012, we commenced initial startup operations for the production of isobutanol at the Agri-Energy Facility. During initial startup operations we produced
approximately 100,000 gallons of bio-based isobutanol for future sale and customer testing. In September 2012, we made the strategic decision to pause
isobutanol production at the Agri-Energy Facility for a period of time to focus on optimizing specific parts of our technology to further enhance isobutanol
production rates. We intend to resume isobutanol production at the Agri-Energy Facility in support of future commercial operations once this work has been
completed. Based on our progress to date we anticipate resuming isobutanol production at the Agri-Energy Facility in 2013.
Redfield Energy, LLC
On June 15, 2011, we entered into the Joint Venture Documents with Redfield. Under the terms of the Joint Venture Documents, we have agreed to work
with Redfield toward the retrofit of the Redfield Facility, an approximately 50 MGPY ethanol production facility located near Redfield, South Dakota for the
commercial production of isobutanol. Under the terms of the Joint Venture Agreement, Redfield has issued 100 Class G Units to our wholly-owned subsidiary,
Gevo Development. Gevo Development is the sole holder of Class G units, which entitle Gevo Development to certain information and governance rights with
respect to Redfield, including the right to appoint two members of Redfield’s 11-member board of managers. The Class G units currently carry no interest in the
allocation of profits, losses or other distributions of Redfield and no voting rights. Such rights will vest upon the commencement of commercial isobutanol
production at the Redfield Facility, at which time we anticipate consolidating Redfield’s operations because we anticipate we will control the activities that are
most significant to the entity.
We will be responsible for all costs associated with the retrofit of the Redfield Facility. Redfield will remain responsible for certain expenses incurred by
the facility including certain repair and maintenance expenses and any costs necessary to ensure that the facility is in compliance with applicable environmental
laws. We anticipate that the Redfield Facility will continue its current ethanol production activities during much of the retrofit. Following installation of the
retrofit assets, the ethanol production operations will be suspended to begin the Performance Testing Phase. During the Performance Testing Phase, we will be
entitled to receive all revenue generated by the Redfield Facility and will make the Facility Payments to Redfield to cover the costs incurred by Redfield to
operate the facility plus the profits, if any, that Redfield would have received if the facility had been producing ethanol during that period. We have also agreed to
maintain an escrow fund during the Performance Testing Phase as security for our obligation to make the Facility Payments.
If certain conditions are met, commercial production of isobutanol at the Redfield Facility will begin upon the earlier of the date upon which certain
production targets have been met or the date upon which the parties mutually agree that commercial isobutanol production at the Redfield Facility will be
commercially viable at the then-current production rate. At that time, (i) we will have the right to appoint a total of four members of Redfield’s 11-member board
of managers, and (ii) the voting and economic interests of the Class G units will vest and Gevo Development, as the sole holder of the Class G Units, will be
entitled to a percentage of Redfield’s profits, losses and distributions, to be calculated based upon the demonstrated isobutanol production capabilities of the
Redfield Facility.
Gevo Development, or one of its affiliates, will be the exclusive marketer of all products produced by the Redfield Facility once commercial production of
isobutanol at the Redfield Facility has begun. Additionally, we will license the technology necessary to produce isobutanol at the Redfield Facility to Redfield,
subject to the continuation of the marketing arrangement described above. In the event that the isobutanol production technology fails or Redfield is permanently
prohibited from using such technology, we will forfeit the Class G Units and lose the value of our investment in Redfield.
Gevo, Inc. entered into a guaranty effective as of June 15, 2011, pursuant to which it has unconditionally and irrevocably guaranteed the payment by Gevo
Development of any and all amounts owed by Gevo
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Development pursuant to the terms and conditions of the Joint Venture Agreement and certain other agreements that Gevo Development and Redfield expect to
enter into in connection with the retrofit of the Redfield Facility.
We have begun the project engineering and permitting process of the retrofit of the Redfield Facility. As of December 31, 2012, we have incurred $0.4
million in planning-related costs for the future retrofit of the Redfield Facility, which have been recorded on our balance sheets in deposits and other assets. Based
on estimates from our preliminary engineering process, we will need to raise additional debt or equity capital, which we may be unable to do on reasonable terms
or at all, in order to complete the retrofit of the Redfield Facility.
Cargill, Incorporated
During February 2009, we entered into a license agreement with Cargill to obtain certain biological materials and license patent rights to use a yeast
biocatalyst owned by Cargill. Under the agreement, Cargill has granted us an exclusive, royalty-bearing license, with limited rights to sublicense, to use the patent
rights in a certain field, as defined in the agreement. The agreement contains five milestone payments totaling approximately $4.3 million that are payable after
each milestone is completed.
During 2009, two milestones were completed and we recorded the related milestone amounts, along with an up-front signing fee, totaling $0.9 million to
research and development expense. During March 2010, we completed milestone number three and recorded the related milestone amount of $2.0 million to
research and development expense at its then-current present value of $1.6 million because the milestone payment was paid over a period greater than twelve
months from the date that it was incurred. As of December 2012, we had not completed milestone number four. Accordingly, we have agreed to pay a $0.5
million license fee which satisfies the terms of milestone number four under the agreement. This fee was settled in March 2013 through the issuance of 250,000
shares of our common stock. Milestone number five included in the license agreement representing potential payments of up to $1.0 million, which is due by
December 2015, has not been met as of December 31, 2012 and no amount has been recorded as a liability for these milestones. Upon commercialization of a
product which uses Cargill’s biological material or is otherwise covered by the patent rights under this agreement, a royalty based on net sales is payable by us,
subject to a minimum royalty amount per year, as defined in the agreement, and up to a maximum amount per year. We may terminate this agreement at any time
upon 90 days’ written notice. Unless terminated earlier, the agreement remains in effect until the later of December 31, 2025 and the date that no licensed patent
rights remain.
Sasol Chemical Industries Limited
On July 29, 2011, we entered into an international off-take and distribution agreement with Sasol to market and distribute renewable isobutanol globally.
The agreement has an initial term of three years and appoints Sasol as a non-exclusive distributor of high-purity isobutanol in North and South America and as the
exclusive distributor for high-purity isobutanol for solvent and chemical intermediate applications in the rest of the world. Beginning upon our first commercial
sale of high-purity isobutanol under the agreement, if Sasol desires to maintain its exclusive distribution rights, Sasol is obligated to either purchase certain
minimum quantities of high-purity isobutanol or pay us applicable shortfall fees and we are obligated to either supply Sasol with certain minimum quantities of
high-purity isobutanol or pay Sasol applicable shortfall fees. No amounts have been recorded under this agreement as of December 31, 2012.
Toray Industries, Inc.
In June 2011, we announced that we had successfully produced fully renewable and recyclable PET in cooperation with Toray Industries. Working directly
with Toray Industries, we employed prototypes of commercial operations from the petrochemical and refining industries to make PX from isobutanol. Toray
Industries used our bio-PX and commercially available renewable mono ethylene glycol to produce fully renewable PET films and fibers. On June 1, 2012, we
entered into a definitive agreement with Toray Industries for the joint development of an integrated supply chain for the production of bio-PET. Pursuant to the
terms of
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the agreement with Toray Industries, we received $1.0 million which we will use for the design, construction and/or operation of a pilot plant. We anticipate
producing bio-based PX at the pilot plant, some of which will be sold to Toray Industries. Toray Industries is obligated to purchase initial volumes of bio-PX. In
the event we are unable to produce and deliver a minimum quantity of bio-PX to Toray Industries by December 31, 2013, we will be required to refund the $1.0
million by January 31, 2014. Any excess bio-PX that is produced can be sold to other parties.
Convertible Notes
In July 2012, we sold $45.0 million in aggregate principal amount of Convertible Notes, with net proceeds of $40.9 million, after accounting for $2.7
million and $1.4 million of discounts and issue costs, respectively. The Convertible Notes bear interest at 7.5% which is to be paid semi-annually in arrears on
January 1 and July 1 of each year commencing on January 1, 2013. The Convertible Notes will mature on July 1, 2022, unless earlier repurchased, redeemed or
converted.
The Convertible Notes are convertible at an initial Conversion Rate of 175.6697 shares of Gevo, Inc. common stock per $1,000 principal amount of
Convertible Notes, subject to adjustment in certain circumstances as described in the Indenture. This is equivalent to an initial Conversion Price of approximately
$5.69 per share of common stock. Holders may convert the Convertible Notes at any time prior to the close of business on the third business day immediately
preceding the maturity date of July 1, 2022.
If a holder elects to convert its Convertible Notes after January 1, 2013 but prior to July 1, 2017, such holder shall be entitled to receive, in addition to the
consideration upon conversion, a Coupon Make-Whole Payment. The Coupon Make-Whole Payment is equal to the sum of the present values of the lesser of:
(i) eight semi-annual interest payments; or (ii) the number of semi-annual interest payments that would have been payable on the Convertible Notes that a holder
has elected to convert from the last day through which interest was paid, or the issue date if no interest has been paid, up to but excluding July 1, 2017, computed
using a discount rate of 2%. We may pay any Coupon Make-Whole Payment either in cash or in shares of common stock at our election. If we elect to pay in
common stock, the stock will be valued at 90% of the average of the daily volume weighted average prices of our common stock for the 10 trading days
preceding the date of conversion. Subsequent to December 31, 2012 and through March 22, 2013, certain holders of our Convertible Notes elected to convert
bonds totaling $9.2 million, reducing the Convertible Notes principal balance to $35.8 million. Upon conversion, the Convertible Note holders received 1,617,910
shares of our common stock as payment of principal of $9.2 million and, pursuant to the terms of the Indenture, such holders also received 1,540,451 shares of
our common stock in settlement of Coupon Make-Whole Payments of $2.6 million.
If a Make-Whole Fundamental Change occurs and a holder elects to convert its Convertible Notes prior to July 1, 2017, the Conversion Rate will increase
based upon reference to the table set forth in Schedule A of the Indenture. In no event will the Conversion Rate increase to more than 202.0202 per $1,000
principal amount of Convertible Notes.
If a Fundamental Change (as defined in the Indenture) occurs, at any time, then each holder will have the right to require us to repurchase all of such
holder’s Convertible Notes, or any portion thereof that is an integral multiple of $1,000 principal amount, for cash at a repurchase price of 100% of the principal
amount of such Convertible Notes plus any accrued and unpaid interest through the repurchase date. Additionally, on July 1, 2017, each holder will have the right
to require us to repurchase all of such holder’s Convertible Notes, or any portion thereof that is an integral multiple of $1,000 principal amount, for cash at a
repurchase price of 100% of the principal amount of Convertible Notes plus any accrued and unpaid interest through the repurchase date.
We have a provisional redemption right (“Provisional Redemption”), at our option, to redeem all or any part of the Convertible Notes at a price payable in
cash, beginning on July 1, 2015 and prior to July 1, 2017, provided that our common stock for 20 or more trading days in a period of 30 consecutive trading days
ending on the trading day immediately prior to the date of the redemption notice exceeds 150% of the Conversion Price in
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effect on such trading day. On or after July 1, 2017, we have an optional redemption right (“Optional Redemption”), at our option to redeem, all or any part of the
Convertible Notes at a price payable in cash. The price payable in cash for the Optional Redemption or Provisional Redemption is equal to 100% of the principal
amount of Convertible Notes plus any accrued and unpaid interest through the repurchase date.
If there is an Event of Default (as defined in the Indenture) under the Convertible Notes, the holders of not less than 25% in principal amount of
Outstanding Notes (as defined in the Indenture) by notice to us and the trustee may, and the trustee at the request of such holders shall, declare the principal of all
the Outstanding Notes and accrued and unpaid interest to be due and payable immediately.
Secured Long-Term Debt
Lighthouse Loan and Security Agreement. As of December 31, 2012, we have repaid all outstanding amounts under our loan and security agreement with
Lighthouse.
Gevo Loan Agreement. In August 2010, concurrent with the execution of the agreement to acquire Agri-Energy, Gevo, Inc. entered into the Gevo Loan
Agreement with TriplePoint, pursuant to which we borrowed $5.0 million. Under the terms of each of (i) the Gevo Loan Agreement and (ii) Gevo, Inc.’s
guarantee of Agri-Energy’s obligations under the Original Agri-Energy Loan Agreement described below, we are prohibited from granting a security interest in
our intellectual property assets to any other entity until both TriplePoint loans are paid in full. In July 2012, we used $5.4 million of the proceeds from the
Convertible Note offering that was completed in July 2012 to pay in full, all amounts outstanding under the Gevo Loan Agreement, including an end-of-term
payment equal to 8% of the amount borrowed.
Original Agri-Energy Loan Agreement. In August 2010, Gevo Development borrowed $12.5 million from TriplePoint to finance its acquisition of Agri-
Energy. In September 2010, upon completion of the acquisition, the Original Agri-Energy Loan Agreement was amended to make Agri-Energy the borrower
under the facility. The Original Agri-Energy Loan Agreement includes customary affirmative and negative covenants for agreements of this type and events of
default. The aggregate amount outstanding under the Original Agri-Energy Loan Agreement bears interest at a rate equal to 13% and is subject to an end-of-term
payment equal to 8% of the amount borrowed. The loan is secured by the equity interests of Agri-Energy held by Gevo Development and substantially all the
assets of Agri-Energy. The loan matures on September 1, 2014. The loan is guaranteed by Gevo, Inc. pursuant to a continuing guaranty executed by Gevo, Inc. in
favor of TriplePoint, which is secured by substantially all of the assets of Gevo, Inc., other than its intellectual property.
Amended Agri-Energy Loan Agreement. In October 2011, Agri-Energy entered into the Amended Agri-Energy Loan Agreement with TriplePoint which
amends and restates the Original Agri-Energy Loan Agreement. The Amended Agri-Energy Loan Agreement includes customary affirmative and negative
covenants for agreements of this type and events of default. The Amended Agri-Energy Loan Agreement provides Agri-Energy with additional term loan
facilities of up to $15.0 million (which amount is in addition to the Existing Loan, which is a $12.5 million term loan provided under the Original Agri-Energy
Loan Agreement, which Existing Loan remains in place under the Amended Agri-Energy Loan Agreement), the proceeds of which were used to pay a portion of
the costs, expenses, and other amounts associated with the retrofit of the Agri-Energy Facility to produce isobutanol. The aggregate amount outstanding under the
New Loan bears interest at a rate of 11% and is subject to an end-of-term payment equal to 5.75% of the amount borrowed.
On October 20, 2011, Agri-Energy borrowed a portion of the New Loan in the amount of $10.0 million under the Amended Agri-Energy Loan Agreement.
The October 2011 Loan matures on October 31, 2015. On January 6, 2012, Agri-Energy borrowed an additional $5.0 million under the Amended Agri-Energy
Loan Agreement, bringing the total borrowed under the New Loan to $15.0 million. The January 2012 Loan matures on December 31, 2015. At December 31,
2012, we were in compliance with the debt covenants under the Amended Agri-Energy Loan Agreement.
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The Amended Agri-Energy Loan Agreement provides that Agri-Energy will secure all of its obligations under the Amended Agri-Energy Loan Agreement
and any other loan documents by granting to TriplePoint a security interest in and lien upon all or substantially all of its assets. Gevo, Inc. has guaranteed Agri-
Energy’s obligations under the Amended Agri-Energy Loan Agreement. As additional security, concurrently with the execution of the Amended Agri-Energy
Loan Agreement, (i) Gevo Development entered into a limited recourse continuing guaranty in favor of TriplePoint, (ii) Gevo Development entered into an
amended and restated limited recourse membership interest pledge agreement in favor of TriplePoint, pursuant to which it pledged the membership interests of
Agri-Energy as collateral to secure the obligations under its guaranty and (iii) Gevo, Inc. entered into an amendment to the Gevo Security Agreement with
TriplePoint, which secures its guarantee of Agri-Energy’s obligations (including up to $32.5 million in term loans) under the Amended Agri-Energy Loan
Agreement.
As of December 31, 2012, we have made $9.2 million in principal payments due under the foregoing loan agreements with TriplePoint, including $5.4
million which was repaid upon the closing of the offering of the Convertible Note offering on July 5, 2012. Payments of outstanding principal under our loan
agreements with TriplePoint began during the third quarter of 2012.
June Amendments. In June 2012, Gevo, Inc. entered into (i) the Security Agreement Amendment and (ii) the Gevo Loan Amendment. In addition,
concurrently with the execution of the Security Agreement Amendment and the Gevo Loan Amendment, Agri-Energy entered into an amendment to the
Amended Agri Energy Loan Agreement.
These amendments, among other things: (i) permitted the issuance of the Company’s Convertible Notes; (ii) removed Agri-Energy’s and the Company’s
options to elect additional interest-only periods upon the achievement of certain milestones; (iii) permit Agri-Energy to make dividend payments and distributions
to the Company for certain defined purposes related to the Convertible Notes; (iv) add as an event of default the payment, repurchase or redemption of the
Convertible Notes or of amounts payable in connection therewith other than certain permitted payments related to the Convertible Notes; (v) add a negative
covenant whereby the Company may not incur any indebtedness other than as permitted under the Security Agreement; and (vi) add a prohibition on making any
Coupon Make-Whole Payments in cash prior to the payment in full of all remaining outstanding obligations under the Amended Agri-Energy Loan Agreement.
Contractual Obligations and Commitments
The following summarizes the future commitments arising from our contractual obligations at December 31, 2012 (in thousands).
Principal debt payments (1)
Interest payments on debt (2)
Operating leases (3)
Cargill License (4)
Software license agreement (5)
Base fee due to South Hampton Resources, Inc. (6)
Total
Less than
1 year
$ 9,369
5,518
1,567
500
148
88
$17,190
1-3 years
$15,799
8,100
3,150
—
310
—
$27,359
3-
5 years
$ 430
6,751
2,387
—
329
—
$9,897
5+ Years
$45,000
15,188
1,599
—
—
—
$61,787
Total
$ 70,598
35,557
8,703
500
787
88
$116,233
(1)
Principal debt payments include amounts due to TriplePoint under the Amended Agri-Energy Loan Agreement and $45.0 million of Convertible Notes
issued in July 2012. Subsequent to December 31, 2012 and through March 22, 2013, we issued 1,617,910 shares of our common stock in order to settle
$9.2 million in principal amount of Convertible Notes in accordance with the conversion rights of holders of the Convertible Notes.
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(2)
(3)
Interest payments due to TriplePoint under the Amended Agri-Energy Loan Agreement and to holders of the Convertible Notes. Subsequent to December
31, 2012 and through March 22, 2013, upon conversion of $9.2 million in principal amount of Convertible Notes, pursuant to the terms of the Indenture,
Convertible Note holders received 1,540,451 shares of our common stock in settlement of Coupon Make-Whole Payments of $2.6 million.
Commitments for operating leases primarily relate to our leased facility in Englewood, Colorado and our lease for rail cars for ethanol and isobutanol
shipments.
(4) We have agreed to pay a $0.5 million license fee which satisfies the terms of milestone number four under an agreement with Cargill. This fee was settled
in March through the issuance of 250,000 shares of our common stock.
(5) Amounts due under a software license agreement with a five year term.
(6)
In accordance with our pilot plant processing agreement with South Hampton Resources, Inc. we are obligated to pay $12,500 per month for the remainder
of the initial term of the agreement which ends in July 2013.
The table above reflects only payment obligations that are fixed and determinable. The above amounts exclude potential payments to be made under our
license and other agreements that are based on the achievement of future milestones or royalties on product sales.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any relationships with unconsolidated entities, such as entities often referred to
as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes.
Recent Accounting Pronouncements
Refer to Note 2 in the accompanying notes to our consolidated financial statements for a discussion of recent accounting pronouncements, if any.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
We produce ethanol and distiller’s grains from corn and our business is sensitive to changes in the price of corn. The price of corn is subject to fluctuations
due to unpredictable factors such as weather, corn planted and harvested acreage, changes in national and global supply and demand and government programs
and policies. We use natural gas in the ethanol production process and, as a result, our business is also sensitive to changes in the price of natural gas. The price of
natural gas is influenced by such weather factors as extreme heat or cold in the summer and winter, or other natural events like hurricanes in the spring, summer
and fall. Other natural gas price factors include North American exploration and production, and the amount of natural gas in underground storage during both the
injection and withdrawal seasons. Ethanol prices are sensitive to world crude oil supply and demand, crude oil refining capacity and utilization, government
regulation and consumer demand for alternative fuels. Distiller’s grains prices are sensitive to various demand factors such as numbers of livestock on feed, prices
for feed alternatives and supply factors, primarily production by ethanol plants and other sources.
We attempt to reduce the market risk associated with fluctuations in the price of corn by employing a variety of risk management and economic hedging
strategies. Strategies include the use of forward purchase contracts and exchange-traded futures contracts. Our exchange-traded futures contracts for corn are
recorded as a derivative asset or liability on our consolidated balance sheets at fair value. Changes in the fair value during a reporting period are recognized as
cost of goods sold in our consolidated statements of operations.
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Equity Price Risk
As of December 31, 2012, we had $45.0 million in principal amount of Convertible Notes due July 1, 2022. We are subject to equity price risk related to
the Coupon Make-Whole Payment feature of this debt. If a holder elects to convert its Convertible Notes after January 1, 2013 but prior to July 1, 2017, such
holder shall be entitled to receive, in addition to the consideration upon conversion, a Coupon Make-Whole Payment. The Coupon Make-Whole Payment is equal
to the sum of the present values of the lesser of: (i) eight semi-annual interest payments; or (ii) the number of semi-annual interest payments that would have been
payable on the Convertible Notes that a holder has elected to convert from the last day through which interest was paid, or the issue date if no interest has been
paid, up to but excluding July 1, 2017, computed using a discount rate of 2%. We may pay any Coupon Make-Whole Payment either in cash or in shares of
common stock at our election. If we elect to pay in common stock, the stock will be valued at 90% of the average of the daily volume weighted average prices of
our common stock for the 10 trading days preceding the date of conversion. Accordingly, based upon the number of semi-annual interest payments currently due
upon a conversion, at a $2.50 weighted average daily volume common stock price, if we elected to settle the Coupon Make-Whole Payment component of a
conversion, we would be required to issue 127,528 shares to settle the Coupon Make-Whole Payment upon conversion of $1.0 million principal amount of
Convertible Notes. With a $0.50 decline or increase in the weighted average daily volume common stock price, we would have to issue 159,410 or 106,273 shares
of common stock, respectively to settle the same Coupon Make-Whole Payment.
The Convertible Notes provide terms that are considered to be embedded derivatives, including the Coupon Make-Whole Payment (see Note 8). On a
quarterly basis, we are required to record these embedded derivatives at fair value with the changes being recorded as a component of our consolidated statement
of operations. Accordingly, our results of operations are subject to exposure associated with increases or decreases in the estimated fair value of our embedded
derivatives. Refer to “Critical Accounting Policies and Estimates” included in this Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for an additional discussion on the impact on our results of operations associated with our embedded derivatives.
Interest Rate Risk
We had cash and cash equivalents totaling $66.7 million at December 31, 2012. These amounts were invested primarily in demand deposit checking and
savings accounts and are held for working capital purposes. The primary objective of our investment activities is to preserve our capital for the purpose of funding
our operations and we do not enter into investments for trading or speculative purposes. Accordingly, we believe we do not have material exposure to changes in
fair value as a result of changes in interest rates.
The terms of our TriplePoint long-term debt facility and our Convertible Notes provide for fixed rates of interest, and are therefore not subject to
fluctuations in market interest rates.
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Item 8.
Financial Statements and Supplementary Data
Index to Gevo, Inc. Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets—As of December 31, 2012 and 2011
Consolidated Statements of Operations—For the years ended December 31, 2012, 2011 and 2010, and for the period from June 9, 2005 (date of
inception) to December 31, 2012
Consolidated Statements of Stockholders’ Equity—For the years ended December 31, 2012, 2011 and 2010, and for the period from June 9, 2005 (date
of inception) to December 31, 2012
Consolidated Statements of Cash Flows—For the years ended December 31, 2012, 2011 and 2010, and for the period from June 9, 2005 (date of
inception) to December 31, 2012
Notes to Consolidated Financial Statements
97
Page
98
99
100
101
105
107
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Gevo, Inc.
Englewood, CO
We have audited the accompanying consolidated balance sheets of Gevo, Inc. and subsidiaries (a development stage company) (the “Company”) as of
December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2012, and for the period from June 9, 2005 (date of incorporation) to December 31, 2012. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Gevo, Inc. and subsidiaries as of
December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, and for
the period from June 9, 2005 (date of incorporation) to December 31, 2012 in conformity with accounting principles generally accepted in the United States of
America.
The Company is a development stage enterprise engaged in conducting research and development, business development, business and financial planning,
establishing its facilities, recruiting personnel and raising capital. As discussed in Note 1 to the consolidated financial statements, successful completion of the
Company’s research and development program, and ultimately, the attainment of profitable operations are dependent upon future events, including completion of
its development activities resulting in sales of isobutanol or isobutanol-derived products and/or technology, obtaining adequate financing to complete its
development activities, obtaining adequate financing to acquire access to and complete the retrofit of ethanol plants to isobutanol production, market acceptance
and demand for its products and services and attracting and retaining qualified personnel.
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
March 25, 2013
98
GEVO, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
Table of Contents
Assets
Current assets:
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid expenses and other current assets
Derivative assets
Total current assets
Property, plant and equipment, net
Debt issue costs, net
Deposits and other assets
Total assets
Liabilities
Current liabilities:
Accounts payable and accrued liabilities
Current portion of secured debt, net of $856 and $969 discount at December 31, 2012 and 2011, respectively
Derivative liabilities
Total current liabilities
1
Long-term portion of secured debt, net of $784 and $1,504 discount at December 31, 2012 and 2011, respectively
Convertible notes, net of $17,000 change in fair value of embedded
derivative and net of $2,446 discount
Other long-term liabilities
Total liabilities
Commitments and Contingencies
Stockholders’ Equity
Preferred stock, $0.01 par value per share; 5,000,000 shares authorized; none issued and outstanding at December 31,
2012 and 2011
Common stock, $0.01 par value per share; 100,000,000 authorized; 39,606,668 and 26,382,058 shares issued and
outstanding at December 31, 2012 and 2011, respectively
Additional paid-in capital
Deficit accumulated during development stage
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2012
2011
$ 66,744
698
6,659
1,508
271
75,880
77,093
1,736
1,402
$ 156,111
$
8,244
8,513
12
16,769
15,445
25,554
512
58,280
$ 94,225
2,938
3,814
1,757
—
102,734
28,777
1,017
502
$ 133,030
$ 12,440
3,491
186
16,117
24,752
—
24
40,893
—
—
396
292,782
(195,347)
97,831
$ 156,111
264
226,508
(134,635)
92,137
$ 133,030
(1)
Liabilities of Gevo, Inc.’s consolidated subsidiaries for which creditors do not have recourse to the general credit of Gevo, Inc. were $0.1 million and $4.5
million at December 31, 2012 and 2011, respectively, and are recorded within current liabilities.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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Table of Contents
GEVO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Revenue and cost of goods sold
Ethanol sales and related products, net
Grant revenue, research and development program revenue and
other revenue
Total revenues
Cost of goods sold
Gross (loss) margin
Operating expenses
Research and development
Selling, general and administrative
Other operating expenses
Total operating expenses
Loss from operations
Other income (expense)
Interest expense
Gain from change in fair value of embedded derivative
Other income
Change in fair value of warrant liabilities
Total other income (expense)
Net loss
Deemed dividend—amortization of beneficial conversion feature on
Series D-1 preferred stock
Net loss attributable to Gevo, Inc. common stockholders
Net loss per share attributable to Gevo, Inc. common stockholders—
basic and diluted
Weighted-average number of common shares outstanding—basic and
$
$
Year Ended December 31,
2012
2011
2010
From June 9, 2005
(Date of Inception)
To
December 31,
2012
$
19,908
$
63,742
$
14,765
$
98,415
4,477
24,385
32,410
(8,025)
19,431
43,981
—
63,412
(71,437)
(6,338)
17,000
63
—
10,725
(60,712)
—
(60,712)
(1.86)
$
$
807
64,549
60,588
3,961
19,753
28,890
11
48,654
(44,693)
(3,577)
—
85
(29)
(3,521)
(48,214)
(1,094)
(49,308)
1,631
16,396
13,446
2,950
14,820
23,643
—
38,463
(35,513)
(2,374)
—
108
(2,333)
(4,599)
(40,112)
8,158
106,573
106,444
129
76,650
114,306
1,248
192,204
(192,075)
(14,917)
17,000
784
(2,852)
15
(192,060)
(2,778)
$ (42,890)
(3,872)
(195,932)
$
(2.15)
$
(37.44)
diluted
32,619,091
22,909,916
1,145,500
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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Table of Contents
GEVO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
BALANCE—June 9, 2005 (date of inception)
Issuance of common stock
Issuance of Series A-1 preferred stock
Stock issuance costs
Net loss
BALANCE—December 31, 2005
Issuance of Series A-2 preferred stock
Issuance of Series A-3 preferred stock
Issuance of warrants with secured long-term debt
Stock issuance costs
Non-cash stock-based compensation
Net loss
BALANCE—December 31, 2006
Issuance of Series A-4 preferred stock
Issuance of Series B preferred stock
Issuance of common stock
Issuance of restricted common stock
Issuance of warrants with secured long-term debt
Stock issuance costs
Non-cash stock-based compensation
Net loss
Convertible
Preferred Stock
Shares
Amount
— $ —
—
—
10
1,000,000
—
—
—
—
10
1,000,000
11
1,084,000
9
915,000
—
—
—
—
—
—
—
—
30
2,999,000
9
858,369
10
1,027,397
—
—
—
—
—
—
—
—
—
—
—
—
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Deficit
Accumulated
During the
Development
Stage
Total
Stockholders’
Equity
— $ — $ — $
950,000
10
—
—
—
—
—
—
950,000
10
—
—
—
—
—
—
—
—
—
—
—
—
950,000
10
—
—
—
—
—
22,000
187,500
2
—
—
—
—
—
—
—
—
(10)
490
(56)
—
424
892
1,592
10
(20)
2
—
2,900
1,991
2,990
10
(2)
33
(82)
55
—
— $
—
—
—
(259)
(259)
—
—
—
—
—
(1,110)
(1,369)
—
—
—
—
—
—
—
(7,226)
—
—
500
(56)
(259)
185
903
1,601
10
(20)
2
(1,110)
1,571
2,000
3,000
10
—
33
(82)
55
(7,226)
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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GEVO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
BALANCE—December 31, 2007
Issuance of Series C preferred stock converted from
promissory notes and accrued interest
Issuance of Series C preferred stock
Issuance of warrants with secured long-term debt
Issuance of warrants with convertible promissory notes
Beneficial conversion feature—convertible promissory
notes
Stock issuance costs
Non-cash stock-based compensation
Issuance of restricted common stock
Forfeiture of restricted common stock
Exercise of stock options to common stock
Net loss
BALANCE—December 31, 2008
Cumulative effect of reclassification of preferred stock
warrants from equity to liabilities
Issuance of Series D preferred stock
Stock issuance costs
Non-cash stock-based compensation
Forfeiture of restricted common stock
Exercise of stock options to common stock
Net loss
Convertible
Preferred Stock
Shares
4,884,766
Amount
49
555,346
2,546,844
—
—
6
25
—
—
—
—
—
—
—
—
—
7,986,956
—
4,616,483
—
—
—
—
—
—
—
—
—
—
—
—
80
—
46
—
—
—
—
—
Common Stock
Shares
1,159,500
Amount
12
7,895
Additional
Paid-In
Capital
Deficit
Accumulated
During the
Development
Stage
(8,595)
Total
Stockholders’
Equity
(639)
—
—
—
—
—
—
—
—
3,037
13,932
326
505
—
—
—
50,000
(64,583)
19,155
—
1,164,072
—
—
—
—
(13,530)
834
—
—
—
—
1
(1)
—
—
12
—
—
—
—
—
—
—
505
(210)
207
(1)
1
6
—
26,203
(874)
32,454
(1,346)
945
—
—
—
—
—
—
—
—
—
—
—
—
—
(14,542)
(23,137)
585
—
—
—
—
—
(19,885)
3,043
13,957
326
505
505
(210)
207
—
—
6
(14,542)
3,158
(289)
32,500
(1,346)
945
—
—
(19,885)
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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Table of Contents
GEVO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
BALANCE—December 31, 2009
Issuance of Series D-1 preferred stock
Beneficial conversion feature—Series D-1
Deemed dividend—amortization of beneficial conversion feature
on Series D-1 convertible preferred stock
Stock issuance costs
Non-cash stock-based
compensation
Forfeiture of restricted common stock
Exercise of stock options to common stock
Issuance of Series C preferred stock upon exercise of warrant
Net loss
BALANCE—December 31, 2010
Issuance of common stock in initial public offering, net of
underwriting discounts and commissions.
Conversion of preferred stock to common stock upon initial public
Convertible
Preferred Stock
Shares
12,603,439
1,902,087
—
Amount
126
19
—
—
—
—
—
Common Stock
Shares
1,151,376
Amount
12
—
—
—
—
—
—
—
—
—
108,076
—
14,613,602
—
—
—
1
—
146
—
(22,266)
31,547
—
—
1,160,657
—
—
—
—
—
12
Additional
Paid-In
Capital
57,382
26,801
5,744
2,778
(153)
10,511
—
16
2,049
—
105,128
—
—
8,222,500
82
110,326
offering
(14,613,602)
(146)
16,329,703
163
(17)
Conversion of preferred stock warrants to common stock warrants
upon initial public offering and reclassification of related
liability to additional paid-in capital
Deemed dividend—amortization of beneficial conversion feature
on Series D-1 convertible preferred stock
Non-cash stock-based compensation
Issuance of restricted common stock, net of forfeitures
Issuance of warrants with secured long-term debt
Issuance of common stock pursuant
to employee stock purchase plan
Exercise of stock options to common stock
Issuance of common stock upon cashless net exercise of warrant
Net loss
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
311,859
—
8,764
226,151
122,424
—
—
—
3
—
—
2
2
—
2,063
1,094
6,826
(3)
877
47
169
(2)
—
Deficit
Accumulated
During the
Development
Stage
Total
Stockholders’
Equity
(42,437)
—
—
(2,778)
—
—
—
—
—
(40,112)
(85,327)
—
—
—
(1,094)
—
—
—
—
—
—
(48,214)
15,083
26,820
5,744
—
(153)
10,511
—
16
2,050
(40,112)
19,959
110,408
—
2,063
—
6,826
—
877
47
171
—
(48,214)
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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GEVO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Convertible
Preferred Stock
Common Stock
BALANCE—December 31, 2011
Issuance of common stock, net
Issuance of common stock upon exercise of stock options,
warrants and pursuant to an employee stock purchase plan
Issuance of restricted stock
Issuance of warrants in conjunction with secured debt
Cancellation of restricted stock
Non-cash stock-based compensation
Net loss
Shares Amount
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Shares
26,382,058
12,500,000
Amount
264
125
Additional
Paid-In
Capital
226,508
57,305
Deficit
Accumulated
During the
Development
Stage
(134,635)
—
Total
Stockholders’
Equity
92,137
57,430
654,047
232,732
—
(162,169)
—
—
7
2
—
(2)
—
—
870
(2)
120
2
7,979
—
—
—
—
—
—
(60,712)
877
—
120
—
7,979
(60,712)
BALANCE—December 31, 2012
— $ —
39,606,668 $ 396 $292,782 $ (195,347) $
97,831
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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GEVO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Operating Activities
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash stock-based compensation
Depreciation and amortization
Non-cash interest expense
(Gain) loss from change in fair value of derivatives
Gain from change in fair value of embedded derivative
Loss from change in fair value of warrant liabilities
Other non-cash expenses
Changes in operating assets and liabilities (net of effects of acquisitions):
Accounts receivable
Inventories
Prepaid expenses and other current assets
Deposits and other assets
Accounts payable, accrued expenses, and long-term liabilities
Net cash used in operating activities
Investing Activities
Acquisitions of property, plant and equipment
Other
Acquisition of Agri-Energy, net of cash assumed
Restricted certificate of deposit
Net cash used in investing activities
Financing Activities
Proceeds from issuance of secured debt
Proceeds from issuance of convertible debt, net
Proceeds from issuance of common stock
Proceeds from issuance of common stock upon exercise of stock options and ESPP
Payments on secured debt
Deposit on secured debt and other
Proceeds from issuance of convertible preferred stock
Proceeds from issuance of convertible promissory notes with warrants
Proceeds from the exercise of warrants
Debt and equity offering costs
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents
Beginning of year
Ending of year
Year Ended December 31,
2012
2011
2010
From June 9, 2005
(Date of Inception)
To
December 31, 2012
$ (60,712)
$ (48,214)
$ (40,112)
$
(192,060)
7,979
3,313
2,207
(445)
(17,000)
—
500
2,240
(2,845)
197
(149)
(3,343)
(68,058)
(52,432)
(647)
—
40
(53,039)
5,000
42,300
61,875
877
(10,406)
(154)
—
—
—
(5,876)
93,616
(27,481)
6,826
4,600
928
142
—
29
11
(108)
(49)
(381)
—
2,605
(33,611)
(8,015)
(58)
—
40
(8,033)
10,000
—
114,704
218
(1,897)
(307)
—
—
—
(2,123)
120,595
78,951
10,511
3,188
762
(561)
—
2,333
—
(732)
(195)
315
1
3,594
(20,896)
(806)
(24,936)
40
(25,702)
17,500
—
—
16
(5,250)
—
31,564
—
592
(3,790)
40,632
(5,966)
94,225
$ 66,744
15,274
$ 94,225
21,240
$ 15,274
$
26,525
13,605
5,288
(864)
(17,000)
2,852
864
1,301
(3,089)
(33)
(239)
5,424
(157,426)
(68,687)
(700)
(24,936)
(39)
(94,362)
41,578
42,300
176,579
1,117
(18,696)
(460)
86,025
3,000
592
(13,503)
318,532
66,744
—
66,744
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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GEVO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(In thousands)
Supplemental disclosures of cash and non-cash investing and
financing transactions
Non-cash purchase of property, plant and equipment
Warrants issued with secured debt
Cash paid for interest, net of interest capitalized
Warrants issued with convertible promissory notes
Conversion of preferred stock warrants to common stock warrants upon initial public
offering and reclassification of related liability to additional paid-in-capital
Deemed dividend—amortization of beneficial conversion feature on Series D-1 preferred
stock
Promissory notes and accrued interest converted to Series C preferred stock
Issuance of Series C preferred stock upon exercise of warrant (amount reclassified from
liability to equity)
Issuance of Series D-1 preferred stock to ICM, Inc. in exchange for a credit against future
services
Reclassified deferred offering costs to additional paid-in-capital upon initial public offering
Accrued deferred offering costs
Year Ended December 31,
2012
$ 390
$ 120
$4,307
$ —
2011
$2,351
$ 877
$2,461
$ —
2010
$ 612
$ 177
$1,453
$ —
$ —
$2,063
$ —
$ —
$ —
$1,094
$ —
$2,778
$ —
$ —
$ —
$1,458
$ —
$ —
$ —
$ —
$4,296
$ —
$1,000
$ —
$ 548
From June 9, 2005
(Date of Inception)
To
December 31, 2012
390
$
$
$
$
$
$
$
$
$
$
$
1,746
9,458
505
2,063
3,872
3,043
1,458
1,000
4,296
—
The accompanying Notes are an integral part of these Consolidated Financial Statements.
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GEVO, INC.
Notes to Consolidated Financial Statements
1. Nature of Business and Financial Condition
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 biofuels company focused on the development and commercialization of alternatives to petroleum-based products based on
isobutanol produced from renewable feedstocks. Gevo, Inc. was incorporated in Delaware on June 9, 2005 (“Inception”). Gevo, Inc. formed Gevo Development,
LLC (“Gevo Development”) on September 18, 2009 to finance and develop biorefineries either through joint venture, licensing arrangements, tolling
arrangements or direct acquisition (see Note 13). Gevo Development became a wholly owned subsidiary of the Company on September 22, 2010. Gevo
Development purchased Agri-Energy, LLC (“Agri-Energy”) on September 22, 2010. Through May 2012, Agri-Energy, a wholly owned subsidiary of Gevo
Development, was engaged in the business of producing and selling ethanol and related products produced at its plant located in Luverne, Minnesota (the “Agri-
Energy Facility”). The Company commenced the retrofit of the Agri-Energy Facility in 2011 and commenced initial startup operations for the production of
isobutanol at this facility in May 2012. In September 2012, the Company made the strategic decision to pause isobutanol production at the Agri-Energy Facility
for a period of time while it focuses on optimizing specific parts of its technology to further enhance isobutanol production rates. The Company plans to resume
limited isobutanol production at the Agri-Energy Facility in 2013.
At December 31, 2012, the Company is considered to be in the development stage as its primary activities, since Inception, have been conducting research
and development, business development, business and financial planning, establishing its facilities including retrofitting the Agri-Energy Facility, initial startup
operations for isobutanol production at the Agri-Energy Facility, recruiting personnel and raising capital. Ultimately, the attainment of profitable operations are
dependent upon future events, including completion of its development activities resulting in sales of isobutanol or isobutanol-derived products and/or
technology, obtaining adequate financing to complete its development activities, obtaining adequate financing to acquire access to and complete the retrofit of
ethanol plants to isobutanol production, gaining market acceptance and demand for its products and services, and attracting and retaining qualified personnel.
Until May 24, 2012, when the Company commenced initial startup operations for the production of isobutanol at the Agri-Energy Facility, the Company
derived revenue from the sale of ethanol, distiller’s grains and other related products produced as part of the ethanol production process at this facility. The
production of ethanol is not the Company’s intended business and its future profitability depends on its ability to produce and market isobutanol, not on
production and sales of ethanol. The historical operating results of Agri-Energy and the operating results reported during the retrofit to isobutanol production, the
initial startup of isobutanol production and any period in which the production of isobutanol is temporarily paused and the Company’s management determines,
based on the then-current economic conditions for the production of ethanol, that the Agri-Energy Facility will be temporarily reverted to ethanol production may
not be indicative of future operating results for Agri-Energy or Gevo once commercial isobutanol production commences at this facility. Additionally, because the
production of ethanol is not the Company’s intended business, the Company will continue to report as a development stage company until it begins to generate
significant revenue from the sale of isobutanol or other products that are or become the Company’s intended business.
Financial Condition. The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. For the year ended December 31, 2012, the Company incurred a consolidated net loss of
$60.7 million and had an accumulated deficit of $195.3 million. The Company expects to incur future net losses as it continues to fund the development and
commercialization of its product candidates.
From inception to December 31, 2012, the Company has funded its operations primarily through equity offerings, issuances of debt, borrowings under its
secured debt financing arrangements and revenues earned
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
primarily from the sale of ethanol and related products. The Company’s cash and cash equivalents at December 31, 2012 totaled $66.7 million which is primarily
being used for the following: (1) operating activities at its Agri-Energy Facility; (2) operating activities at its corporate headquarters in Colorado, including
research and development work; (3) capital improvements primarily associated with its Agri-Energy Facility; (4) litigation defense costs associated with the
ongoing litigation with Butamax; and (5) repayment of debt obligations. Based on the Company’s current plans, the Company anticipates capital expenditures
necessary to complete the retrofit of the Agri-Energy Facility will be significantly lower than the capital expenditures of $49.5 million incurred in fiscal year 2012
for this project. The Company believes that actions taken during 2012 to reduce ongoing litigation expenses and other operating expenses will reduce 2013
operating expenses from fiscal year 2012 levels. The Company also has the ability to further limit some cash spend associated with the foregoing activities,
including limiting the usage of cash associated with research and development activities or delaying the timing of capital improvements, based on then-current
facts and circumstances. Notwithstanding the Company’s ability to further reduce its monthly cash usage, based on its current level of operations and anticipated
growth, the Company believes that its existing cash and cash equivalents on hand at December 31, 2012, will provide sufficient funds for ongoing operations,
planned capital expenditures and working capital requirements for at least the next 12 months.
In 2014, if the Company exceeds its planned capital expenditures as part of optimizing specific parts of its isobutanol production technology at the Agri-
Energy Facility, or other cost estimates to prepare for commercial production of isobutanol or derivative products of isobutanol or its exceeds its estimates for
ongoing litigation and other operating expenses, the Company may need to raise additional capital. Depending on the timing and amounts of expected future cash
flow requirements, the Company expects its will be required to raise such additional capital in 2014. Finally, based on current estimates, additional financing will
be required for the Company to finance the retrofit of additional production capacity to isobutanol production, including further expansion of s Agri-Energy
Facility. There are no assurances that the Company will be able to raise additional funds, or achieve or sustain profitability or positive cash flow from operations.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements of Gevo include the accounts of its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Reclassifications. The Company has condensed certain line items within the current period financial statements and, as such, certain immaterial prior
period balances have been reclassified to conform to the current year presentation. Such reclassifications had no impact on net income, cash flows or
stockholders’ equity previously reported.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
materially from those estimates.
Concentrations of Credit Risk. The Company’s financial instruments that are exposed to concentrations of credit risk consist of cash and cash equivalents in
excess of the federally insured limits. The Company’s cash and cash equivalents are deposited with high credit quality financial institutions and are primarily in
demand deposit accounts.
To date, substantially all ethanol sold through Agri-Energy from the date of acquisition was sold to C&N Ethanol Marketing (“C&N”). As of December 31,
2011, the Company had $1.7 million in receivables from
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
C&N. The remaining receivable balance of $1.2 million at December 31, 2011, primarily relates to the sale of distiller’s grains to other customers or amounts due
under grant and research and development programs. The Company’s receivable balance at December 31, 2012 primarily relates to amounts due under grant and
research and development programs. As of December 31, 2012, the Company had no receivable balance due from C&N.
Cash and Cash Equivalents. The Company maintains its cash and cash equivalents in highly liquid interest bearing money market accounts or non-interest
bearing checking accounts. The Company considers all highly liquid investments purchased with a remaining maturity of three months or less at the date of
acquisition to be cash equivalents.
Accounts Receivable. The Company records receivables for products shipped and services provided but for which payment has not yet been received. As of
December 31, 2012 and 2011, no allowance for doubtful accounts has been recorded, based upon the expected full collection of the accounts receivable.
Inventories. Inventory is recorded at the lower of cost or market value and cost of goods sold is determined by the first-in, first-out method. Ethanol and
isobutanol inventory cost consists of the applicable share of raw material, direct labor and manufacturing overhead costs.
Derivative Instruments. Since the acquisition of Agri-Energy on September 22, 2010, the Company’s activities expose it to a variety of market risks,
including the effects of changes in commodity prices for corn. These financial exposures are monitored and managed by the Company through derivative
instruments, including forward purchase contracts and exchange traded futures contracts, as an integral part of its overall risk management program. The
Company’s risk management program focuses on the unpredictability of financial and commodities markets and seeks to reduce the potentially adverse effects
that the volatility of these markets may have on its operating results.
The Company generally follows a policy of using exchange-traded futures contracts as a means of managing exposure to changes in corn prices. Exchange-
traded futures contracts are valued at fair value and were recorded as a derivative asset at December 31, 2012 and derivative liability at December 31, 2011 in the
consolidated balance sheets and changes in fair value are recorded in cost of goods sold in the consolidated statements of operations.
Forward purchase contracts are recorded at fair value unless a company elects to use the “normal purchases and normal sales scope exception” guidance of
U.S. GAAP. To qualify for the normal purchases and normal sales scope exception, a contract must be appropriately designated and must provide for the purchase
of sale of physical commodities in quantities that are expected to be used or sold over a reasonable period of time in the normal course of operations. During the
years ended December 31, 2012 and 2010, the Company did not elect the normal purchase and normal sales scope exception to its forward purchase contracts.
Accordingly, changes in the fair value of these contracts during the years ended December 31, 2012 and 2010 have been recorded in cost of goods sold in the
consolidated statements of operations. While these contracts were not material at December 31, 2012, they were recorded at their fair value which has been
included as a component of derivative liability in the consolidated balance sheets. At December 31, 2011 and during the year ended December 31, 2011, the
Company designated all of its forward purchase contracts for corn under the normal purchase and normal sales scope exception and therefore they were not
recorded at fair value.
The foregoing derivatives do not include any credit risk related contingent features and we have not entered into these derivative financial instruments for
trading or speculative purposes, and we have not designated any of our derivatives as hedges for financial accounting purposes. At December 31, 2012 and 2011,
the Company had $0.1 million and $0.5 million, respectively, held in a margin deposit account for its exchange-traded futures contract.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
The Company records realized and unrealized gains or losses on its derivative instruments as a component of cost of goods sold in the consolidated
statement of operations. The following table summarizes the realized and unrealized gains/ (losses) of the Company’s derivative instruments (in thousands).
Realized Gain / (Losses)
Exchange-traded futures contracts
Unrealized Gain / (Losses)
Exchange-traded futures contracts
Forward purchase contracts
2012
Year Ended December 31,
2011
2010
From Inception to
December 31, 2012
$(375)
$ 596
$(1,098)
$
(877)
457
(12)
219
(361)
243
318
919
(55)
The following table represents the Company’s net long and short positions regardless of whether the derivative instruments qualify for the normal purchase
and normal sales scope exception.
Year of Expiration
2012
2013
December 31, 2012
Corn Net Short
Position Bushels
—
683
December 31, 2011
Corn Net Short
Position Bushels
77
—
Property, Plant and Equipment. Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method over the assets’ estimated useful lives. Leasehold improvements are amortized over the term of the lease
agreement or the service lives of the improvements, whichever is shorter. Assets under construction are depreciated when they are placed into service.
Maintenance and repairs are charged to expense as incurred and expenditures for major improvements are capitalized.
The Company capitalized interest incurred in connection with the retrofit of the Agri-Energy Facility during the period of construction through the date it
became substantially complete, June 30, 2012.
Impairment of Property, Plant and Equipment. The Company’s property, plant and equipment consist primarily of assets associated with the acquisition and
retrofit of the Agri-Energy Facility. The Company assesses impairment of property, plant and equipment for recoverability when events or changes in
circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant
decreases in the market price of the asset; significant adverse changes in the business climate, legal or regulatory factors; accumulation of costs significantly in
excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of
losses or a forecast of continuing losses associated with the use of the asset; or expectations that the asset will more likely than not be sold or disposed of
significantly before the end of its estimated useful life. The carrying amount of a long-lived asset is considered to be impaired if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition of the assets.
The Company evaluated its Agri-Energy Facility for impairment as of December 31, 2012 primarily due to the loss from operations and negative cash
flows generated at Agri-Energy during the year ended December 31, 2012 and the strategic decision to pause isobutanol production in September 2012. This
evaluation included comparing the carrying amount of the acquisition and retrofit of the Agri-Energy Facility to the estimated undiscounted future cash flows at
the Agri-Energy Facility as this represents the lowest level of identifiable cash flows. Significant assumptions included in the estimated undiscounted future cash
flows include, among others, estimates of the:
•
sales price of isobutanol and by-products such as dried distiller grains;
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
•
•
•
purchase price of corn;
production levels of isobutanol; and
costs to produce isobutanol.
Factors which can impact these assumptions include, but are not limited to;
•
•
•
•
effectiveness of the Company’s technology to increase production of isobutanol above the levels observed in startup operations;
demand for renewable isobutanol
competitive prices for isobutanol derived from petroleum; and
harvest levels of corn.
Based upon the Company’s evaluation at December 31, 2012, the Company concluded that the estimated undiscounted future cash flows from Agri-Energy
Facility exceeded the carrying value and, as such, these assets were not impaired. Although the Company’s cash flow forecasts are based on assumptions that are
consistent with its planned use of the assets, these estimates required significant exercise of judgment and are subject to change in future reporting periods as facts
and circumstances change. Additionally, the Company may make changes to its business plan that could result in changes to the expected cash flows. As a result,
it is possible that a long- lived asset may be impaired in future reporting periods.
Debt Issue Costs. Debt issue costs are costs incurred in connection with the Company’s debt financings that have been capitalized and are being amortized
over the stated maturity period or estimated life of the related debt, using the effective interest method.
Revenue Recognition. The Company records revenue from the sale of ethanol and related products, including sale of corn inventory. The Company
recognizes revenue when all of the following criteria are satisfied: persuasive evidence of an arrangement exists; risk of loss and title transfer to the customer; the
price is fixed or determinable; and collectability is reasonably assured. Ethanol and related products are generally shipped free on board shipping point.
Collectability of revenue is reasonably assured based on historical evidence of collectability between the Company and its customers.
In accordance with the Company’s agreements for the marketing and sale of ethanol and related products, commissions due to marketers are deducted from
the gross sales price at the time payment is remitted to the Company. Ethanol and related products sales are recorded net of commissions.
Revenue related to government research grants and cooperative agreements is recognized in the period during which the related costs are incurred,
provided that the conditions under the awards have been met and only perfunctory obligations are outstanding.
Other research and development program revenue consists of research services and the procurement of the Company’s products for purposes of
certification and testing. Revenue from research services is recognized over the relevant performance period of the contract. Revenue from the procurement of the
Company’s products for purposes of certification and testing is recognized upon the transfer of risk of loss and title to the customer.
Cost of Goods Sold. Cost of goods sold includes costs incurred in conjunction with the initial start-up operations for the production of isobutanol at the
Agri-Energy Facility and costs directly associated with the ethanol production process such as costs for direct materials, direct labor and certain plant overhead
costs. Direct
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
materials consist of corn feedstock, denaturant and process chemicals. Direct labor includes compensation of personnel directly involved in the operation of the
Agri-Energy Facility. Plant overhead costs primarily consist of plant utilities and plant depreciation. Cost of goods sold is mainly affected by the cost of corn and
natural gas. Corn is the most significant raw material cost. The Company purchases natural gas to power steam generation in the ethanol production process and
to dry the distiller’s grains. The Company enters into forward purchase contracts and exchange-traded futures contracts associated with corn. Accordingly, the
Company’s cost of goods sold also includes gains or losses and/or changes in fair value from its forward purchase contracts and exchange-traded futures
contracts.
Patents. All costs related to filing and pursuing patent applications are expensed as incurred as recoverability of such expenditures is uncertain. Patent-
related legal expenses incurred are recorded as selling, general and administrative expense, and during the years ended December 31, 2012, 2011 and 2010, and
from Inception to December 31, 2012, were $2.7 million, $1.3 million, $1.0 million and $7.0 million, respectively.
Beneficial Conversion Feature. The Company recorded a beneficial conversion feature relating to the issuance of Series D-1 preferred stock between
March and May 2010 (Note 9). The beneficial conversion feature was recorded as a discount to the Series D-1 preferred stock and was being amortized to
retained earnings through September 30, 2011, unless converted earlier. On February 14, 2011, upon completion of the Company’s initial public offering, the
shares of Series D-1 preferred stock automatically converted to common stock at a rate of 1.9022 shares of common stock for each share of Series D-1 preferred
stock.
Research and Development. Research and development costs are expensed as incurred and are recorded as research and development expense in the
consolidated statements of operations. The Company’s research and development costs consist of expenses incurred to identify, develop, and test its technologies
for the production of isobutanol and the development of downstream applications thereof. Research and development expense includes personnel costs,
consultants and related contract research, facility costs, supplies, depreciation on property, plant and equipment used in development, license fees and milestone
payments paid to third parties for use of their intellectual property and patent rights, and other direct and allocated expenses incurred to support the Company’s
overall research and development programs.
Income Taxes. Deferred tax assets and liabilities are recognized based on the difference between the carrying amounts of assets and liabilities in the
financial statements and their respective tax bases. Deferred tax assets and liabilities are measured using currently enacted tax rates in effect in the years in which
those temporary differences are expected to reverse. Deferred tax assets should be reduced by a valuation allowance if, based on the weight of available evidence,
it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2012 and 2011, based upon current facts and
circumstances, the Company had recorded a valuation allowance against its deferred tax assets of $76.8 million and $53.3 million, respectively.
Stock-Based Compensation. The Company’s stock-based compensation expense includes expenses associated with stock-based awards granted to
employees, board members, non-employees and expenses associated with awards under its employee stock purchase plan (“ESPP”). Stock-based compensation
expense for all share-based payment awards granted is based on the grant date fair value. The grant date fair value for stock option awards is estimated using the
Black-Scholes option pricing model and the grant date fair value for restricted stock awards is based upon the closing price of the Company’s common stock on
the date of grant. The Company recognizes compensation costs for share-based payment awards granted to employees net of estimated forfeitures and recognizes
stock-based compensation expense for only those awards expected to vest on a straight-line basis over the requisite service period of the award, which is currently
the vesting term of up to four years. For performance based restricted stock awards, the Company recognizes expense over the requisite service
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
period. The fair values of the stock options and stock-based awards granted to non-employees are remeasured as the services are performed and the awards vest,
and the resulting change in value, if any, is recognized as expense during the period the related services are rendered.
Net Loss Per Share. Basic net loss per share is computed by dividing the net loss attributable to Gevo, Inc. common stockholders for the period by the
weighted-average number of common shares outstanding during the period. Diluted earnings 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 years ending December 31, 2012, 2011 and 2010 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 that could potentially dilute the calculation of diluted earnings per
share.
Convertible debt (see Note 8)
Outstanding options to purchase common stock
Warrants to purchase common stock
Unvested restricted common stock
Convertible preferred stock upon conversion to common stock (on an as-
converted basis)(1)
Warrants to purchase convertible preferred stock
Total
2012
7,905,137
2,940,352
1,229,998
183,416
Year Ended December 31,
2011
—
3,261,739
1,243,820
284,825
2010
—
2,894,265
858,000
5,729
—
—
12,258,903
—
—
4,790,384
16,329,703
398,032
20,485,729
(1)
The convertible preferred stock and convertible preferred stock warrants were computed on an as-converted basis using a one-to-one conversion rate for all
series of preferred stock, except for the Series D-1 preferred stock where the Company used a conversion rate of 1.9022, which was the conversion rate
applicable at the closing of the Company’s initial public offering on February 14, 2011.
3. Acquisition of Agri-Energy
In September 2010, Gevo Development acquired Agri-Energy and its ethanol production facility located in Luverne, Minnesota. The acquisition of Agri-
Energy was completed as part of the Company’s strategy of acquiring access to ethanol production facilities for future retrofit to produce isobutanol. Upon
completion of the acquisition, Gevo Development acquired effective control of Agri-Energy on September 22, 2010. The acquisition was accounted for under the
acquisition method of accounting which requires, among other things, that all assets acquired and liabilities assumed be recognized at their fair values as of the
acquisition date.
The results of Agri-Energy’s operations for the year ended December 31, 2012 and 2011, and for the period from September 23, 2010 through
December 31, 2010, are reflected in the Company’s consolidated statements of operations for the year ended December 31, 2012, 2011 and 2010, respectively.
The revenue and income from operations relating to Agri-Energy for the period from September 23, 2010 through December 31, 2010 was $14.8 million and $1.0
million, respectively.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
Pro forma results of operations for the Company as if the acquisition of Agri-Energy had occurred on January 1, 2009 are as follows (unaudited and in
thousands).
Revenues
Loss from operations
Net loss
Year Ended
December 31, 2010
46,890
$
(34,234)
$
(40,187)
$
The pro forma results above include the combined results of operations of the Company and Agri-Energy, after making certain adjustments, for the year
ended December 31, 2010, as if the Agri-Energy acquisition had occurred on January 1, 2009. There were no transactions between the Company and Agri-Energy
prior to the acquisition on September 22, 2010. There were no significant differences between the accounting policies of the Company and Agri-Energy. The
unaudited pro forma results above are prepared for illustrative purposes only and are not necessarily indicative of the results of operations that would have
actually been reported had the acquisition occurred on January 1, 2009 nor are they necessarily indicative of the future results of operations of the combined
Company.
4. Inventories
The following table sets forth the components of the Company’s inventory balances (in thousands).
Raw materials
Corn
Enzymes and other inputs
Finished goods
Work in process
Spare parts
Total inventories
December 31,
2012
2011
$4,174
656
85
648
1,096
$6,659
$2,408
151
366
456
433
$3,814
Work in process inventory included unfinished isobutanol inventory. The Company had $2.1 million, $2.1 million, $0.5 million and $4.7 million of
depreciation expenses included in cost of goods sold during the years ended December 31, 2012, 2011 and 2010 and from Inception to December 31, 2012,
respectively.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
5. Property, Plant and Equipment
The following table sets forth the Company’s property, plant and equipment by classification (in thousands).
Construction in progress
Plant machinery and equipment
Site improvements
Lab equipment, furniture and fixtures and vehicles
Demonstration plant
Buildings
Computer, office equipment and software
Leasehold improvements, pilot plant, land and support equipment
Total property, plant and equipment
Less accumulated depreciation and amortization
Property, plant and equipment, net
—
10 years
10 years
5 years
2 years
10 years
3 years
2-
5 years
December 31,
2012
$ 57,185
11,030
7,007
5,553
3,597
2,543
1,411
2,069
90,395
(13,302)
$ 77,093
2011
$ 8,403
10,822
6,994
4,035
3,597
2,543
614
1,759
38,767
(9,990)
$28,777
Construction in progress includes $56.1 million and $8.3 million at December 31, 2012 and 2011, respectively, related to the retrofit of the Agri-Energy
Facility to isobutanol production.
During the year ended December 31, 2012 and 2011, the Company capitalized interest on its secured debt associated with its qualifying assets, which
primarily related to the retrofit of the Agri-Energy Facility that was actively being developed during periods of 2012 and 2011. As a result, the Company
capitalized $1.3 million and $0.3 million of interest incurred during the years ended December 31, 2012 and 2011, respectively. No interest was capitalized prior
to 2011.
As of December 31, 2012, the Company has $0.7 million of capital lease assets included in computer, office equipment and software. The Company
includes amortization of capital lease assets, $0.1 million during the year ended December 31, 2012, as a component of depreciation and amortization in the
consolidated statements of cash flows. The Company did not have any capital leases prior to 2012.
6. 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).
Accrued legal-related fees
Accrued employee compensation
Accounts payable—trade
Deferred revenue
Accrued expenses—ICM, Inc.
Cargill license agreement
Other accrued liabilities
Total accounts payable and accrued liabilities
115
December 31,
2012
$2,757
1,109
1,211
1,000
99
500
1,568
$8,244
2011
$ 1,455
941
6,193
—
1,634
924
1,293
$12,440
Table of Contents
7. Embedded Derivatives
GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
In July 2012, the Company issued 7.5% convertible senior notes due 2022 (the “Convertible 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 Convertible
Notes (the “Indenture”)); and (ii) a Coupon Make-Whole Payment (as defined in the Indenture) in the event of a conversion by the holders of the Convertible
Notes on or after January 1, 2013 but prior to July 1, 2017. Embedded derivatives are separated from the host contract, the Convertible 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 the embedded
derivatives within the Convertible Notes meet these criteria and, as such, must be valued separate and apart from the Convertible Notes and recorded at fair value
each reporting period.
The Company combines these embedded derivatives and values them together as one unit of accounting. At each reporting period, the Company records
these embedded derivatives at fair value which is included as a component of convertible notes on the consolidated balance sheets.
The Company used a binomial lattice model in order to estimate the fair value of these embedded derivatives in the Convertible Notes. A binomial lattice
model generates two probable outcomes—one up and another 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 Convertible Notes would be converted, called or held at each decision point. Within the lattice model, the following
assumptions are made: (i) the Convertible Notes will be converted early if the conversion value is greater than the holding value; or (ii) the Convertible Notes will
be called if the holding value is greater than both (a) the Redemption Price (as defined in the Indenture) and (b) the conversion value plus the Coupon Make-
Whole Payment at the time. If the Convertible Notes are called, then the holders will maximize their value by finding the optimal decision between (1) redeeming
at the Redemption Price and (2) converting the Convertible Notes.
Using this lattice, the Company valued these embedded derivatives using a “with-and-without method,” where the value of the Convertible Notes including
the embedded derivatives, is defined as the “with”, and the value of the Convertible Notes excluding the embedded derivatives, is defined as the “without”. This
method estimates the value of the embedded derivatives by looking at the difference in the values between the Convertible Notes with the embedded derivatives
and the value of the Convertible Notes without the embedded derivatives. The lattice model requires the following inputs: (i) price of Gevo common stock;
(ii) Conversion Rate (as defined in the Indenture); (iii) Conversion Price (as defined in the Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated
stock volatility; and (vii) estimated credit spread for the Company.
The following table sets forth the inputs (Level 2 as defined in Note 19) to the lattice model that was used to value the embedded derivatives.
Stock price
Conversion Rate
Conversion Price
Maturity date
Risk-free interest rate
Estimated stock volatility
Estimated credit spread
December 31, 2012
1.54
$
175.6697
5.69
July 1, 2022
$
1.68%
79%
37%
Issuance Date
4.95
$
175.6697
$
5.69
July 1, 2022
1.62%
72%
30%
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the embedded derivatives. For
example, the estimated fair value of the embedded derivatives will generally decrease with; (1) a decline in the stock price; (2) increases in the estimated stock
volatility; and (3) increase in the estimated credit spread.
The following table sets forth the value of the Convertible Notes with and without the embedded derivatives, and the fair value of the embedded derivatives
as of the issuance date and December 31, 2012 (in thousands).
Fair value of Convertible Notes:
With the embedded derivatives
Without the embedded derivatives
Estimated fair value of the embedded derivatives
December 31, 2012
Issuance Date
$
$
26,000
15,000
11,000
$
$
45,000
17,000
28,000
The $17.0 million decrease in the estimated fair value of the embedded derivatives between the issue date and December 31, 2012 represents an unrealized
gain which has been recorded as gain from change in fair value of embedded derivatives in the consolidated statement of operations.
8. Secured Debt and Convertible Notes
The following table sets forth information pertaining to the Company’s secured debt issued to Lighthouse Capital Partners V, LP (“Lighthouse”) and
TriplePoint Capital LLC (“TriplePoint”) and the Convertible Notes, each of which is included in the Company’s consolidated balance sheets (in thousands).
Secured debt
Lighthouse—Paid in full at June 2012
TriplePoint—Paid in full at July 2012
TriplePoint—Matures September 2014
TriplePoint—Matures October 2015
TriplePoint—Matures January 2016
Total secured debt
Convertible senior notes
Total debt
Less:
Change in fair value of embedded derivative
Unamortized debt discounts
Less current portion of debt
Long-term portion of debt
December 31,
2012
2011
$ —
—
11,643
9,266
4,689
25,598
45,000
70,598
(17,000)
(4,086)
49,512
(8,513)
$ 40,999
$ 1,241
5,400
13,500
10,575
—
30,716
—
30,716
—
(2,473)
28,243
(3,491)
$24,752
Debt discounts incurred with the issuance of the Company’s secured debt and convertible notes are recorded on the consolidated balance sheets as a
reduction to associated debt balances. The Company amortizes debt discount to interest expense over the term of the debt or expected life of the debt using the
effective interest method.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
The following sets forth the Company’s obligations by year relating to its secured debt with TriplePoint and the Convertible Notes at December 31, 2012
(in thousands).
Lighthouse
2013
2014
2015
2016
2017 and thereafter
Total
Amount
$ 9,369
10,688
5,111
430
45,000
$70,598
As of December 31, 2012, the Company had repaid all outstanding amounts under its loan and security agreement with Lighthouse.
TriplePoint
Gevo Loan Agreement. In August 2010, concurrent with the execution of the agreement to acquire Agri-Energy, Gevo, Inc. entered into a loan and security
agreement with TriplePoint (the “Gevo Loan Agreement”), pursuant to which the Company borrowed $5.0 million. Under the terms of each of (i) the Gevo Loan
Agreement and (ii) Gevo, Inc.’s guarantee of Agri-Energy’s obligations under the Original Agri-Energy Loan Agreement described below, the Company is
prohibited from granting a security interest in its intellectual property assets to any other entity until both TriplePoint loans are paid in full. In July 2012, the
Company used $5.4 million of the proceeds from its Convertible Note offering that was completed in July 2012 to pay in full all amounts outstanding under the
Gevo Loan Agreement, including an end-of-term payment equal to 8% of the amount borrowed.
Original Agri-Energy Loan Agreement. In August 2010, Gevo Development borrowed $12.5 million from TriplePoint to finance its acquisition of Agri-
Energy. In September 2010, upon completion of the acquisition, the loan and security agreement was amended to make Agri-Energy the borrower under the
facility. This loan and security agreement (the “Original Agri-Energy Loan Agreement”) includes customary affirmative and negative covenants for agreements of
this type and events of default. The aggregate amount outstanding under the Original Agri-Energy Loan Agreement bears interest at a rate equal to 13% and is
subject to an end-of-term payment equal to 8% of the amount borrowed. The loan is secured by the equity interests of Agri-Energy held by Gevo Development
and substantially all the assets of Agri-Energy. The loan matures on September 1, 2014. The loan is guaranteed by Gevo, Inc. pursuant to a continuing guaranty
executed by Gevo, Inc. in favor of TriplePoint, which is secured by substantially all of the assets of Gevo, Inc., other than its intellectual property.
Amended Agri-Energy Loan Agreement. In October 2011, Agri-Energy entered into the Amended Agri-Energy Loan Agreement with TriplePoint which
amends and restates the Original Agri-Energy Loan Agreement. The Amended Agri-Energy Loan Agreement includes customary affirmative and negative
covenants for agreements of this type and events of default. The Amended Agri-Energy Loan Agreement provides Agri-Energy with additional term loan
facilities of up to $15.0 million (the “New Loan”) (which amount is in addition to the existing $12.5 million term loan (the “Existing Loan”) provided under the
Original Agri-Energy Loan Agreement, which Existing Loan remains in place under the Amended Agri-Energy Loan Agreement), the proceeds of which were
used to pay a portion of the costs, expenses, and other amounts associated with the retrofit of the Agri-Energy Facility to produce isobutanol. The aggregate
amount outstanding under the New Loan bears interest at a rate of 11% and is subject to an end-of-term payment equal to 5.75% of the amount borrowed.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
On October 20, 2011, Agri-Energy borrowed a portion of the New Loan in the amount of $10.0 million under the Amended Agri-Energy Loan Agreement
(the “October 2011 Loan”) that matures on October 31, 2015. On January 6, 2012, Agri-Energy borrowed an additional $5.0 million (the “January 2012 Loan”)
under the Amended Agri-Energy Loan Agreement that matures on December 31, 2015, bringing the total borrowed under the New Loan at December 31, 2012 to
$15.0 million. At December 31, 2012, the Company was in compliance with the debt covenants under the Amended Agri-Energy Loan Agreement.
The Amended Agri-Energy Loan Agreement provides that Agri-Energy will secure all of its obligations under the Amended Agri-Energy Loan Agreement
and any other loan documents by granting to TriplePoint a security interest in and lien upon all or substantially all of its assets. Gevo, Inc. has guaranteed Agri-
Energy’s obligations under the Amended Agri-Energy Loan Agreement. As additional security, concurrently with the execution of the Amended Agri-Energy
Loan Agreement, (i) Gevo Development entered into a limited recourse continuing guaranty in favor of TriplePoint, (ii) Gevo Development entered into an
amended and restated limited recourse membership interest pledge agreement in favor of TriplePoint, pursuant to which it pledged the membership interests of
Agri-Energy as collateral to secure the obligations under its guaranty and (iii) Gevo, Inc. entered into an amendment to its security agreement with TriplePoint
(the “Gevo Security Agreement”), which secures its guarantee of Agri-Energy’s obligations (including up to $32.5 million in term loans) under the Amended
Agri-Energy Loan Agreement.
June Amendments. In June 2012, Gevo, Inc. entered into (i) an amendment (the “Security Agreement Amendment”) to the Gevo Security Agreement and
(ii) an amendment (the “Gevo Loan Amendment”) to the Gevo Loan Agreement. In addition, concurrently with the execution of the Security Agreement
Amendment and the Gevo Loan Amendment, Agri-Energy entered into an amendment to the Amended Agri-Energy Loan Agreement.
These amendments, among other things: (i) permitted the issuance of the Company’s Convertible Notes; (ii) removed Agri-Energy’s and the Company’s
options to elect additional interest-only periods upon the achievement of certain milestones (iii) permit Agri-Energy to make dividend payments and distributions
to the Company for certain defined purposes related to the Convertible Notes; (iv) add as an event of default the payment, repurchase or redemption of the
Convertible Notes or of amounts payable in connection therewith other than certain permitted payments related to the Convertible Notes; (v) add a negative
covenant whereby the Company may not incur any indebtedness other than as permitted under the Security Agreement; and (vi) add a prohibition on making any
Coupon Make-Whole Payments in cash prior to the payment in full of all remaining outstanding obligations under the Amended Agri-Energy Loan Agreement.
Convertible Notes
In July 2012, the Company sold $45.0 million in aggregate principal amount of Convertible Notes, with net proceeds of $40.9 million, after accounting for
$2.7 million and $1.4 million of discounts and issue costs, respectively. The Convertible Notes bear interest at 7.5% which is to be paid semi-annually in arrears
on January 1 and July 1 of each year commencing on January 1, 2013. The Convertible Notes will mature on July 1, 2022, unless earlier repurchased, redeemed
or converted. During the year ended December 31, 2012, the Company recorded $0.4 million of expense related to the amortization of debt discounts and issue
costs and recorded $1.6 million of interest expense. The amortization of debt issue costs and debt discounts and cash interest are included as a component of
interest expense in the consolidated statements of operations. The Company amortizes debt discounts and debt issue costs associated using the effective interest
rate of 9.0% from the issuance date through July 1, 2017, a 5 year period, which represents the date the holders can require the Company to repurchase the
Convertible Notes.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
The Convertible Notes are convertible at an initial Conversion Rate of 175.6697 shares of the Company’s common stock per $1,000 principal amount of
Convertible Notes, subject to adjustment in certain circumstances as described in the Indenture. This is equivalent to an initial Conversion Price of approximately
$5.69 per share of common stock. Holders may convert the Convertible Notes at any time prior to the close of business on the third business day immediately
preceding the maturity date of July 1, 2022.
If a holder elects to convert its Convertible Notes after January 1, 2013 but prior to July 1, 2017, such holder shall be entitled to receive, in addition to the
consideration upon conversion, a Coupon Make-Whole Payment. The Coupon Make-Whole Payment is equal to the sum of the present values of the lesser of:
(a) eight semi-annual interest payments; or (b) the number of semi-annual interest payments that would have been payable on the Convertible Notes that a holder
has elected to convert from the last day through which interest was paid, or the issue date if no interest has been paid, up to but excluding July 1, 2017, computed
using a discount rate of 2%. The Company may pay any Coupon Make-Whole Payment either in cash or in shares of common stock at its election. If the
Company elects to pay in common stock, the stock will be valued at 90% of the average of the daily volume weighted average prices of the Company’s common
stock for the 10 trading days preceding the date of conversion. Subsequent to December 31, 2012 and through March 22, 2013, certain holders of the Convertible
Notes elected to convert bonds totaling $9.2 million, reducing the Convertible Notes principal balance to $35.8 million. Upon conversion, the Convertible Note
holders received 1,617,910 shares of common stock as payment of principal of $9.2 million and, pursuant to the terms of the Indenture, such holders also received
1,540,451 shares of common stock in settlement of Coupon Make-Whole Payments (as defined in the Indenture) of $2.7 million.
If a Make-Whole Fundamental Change (as defined in the Indenture) occurs and a holder elects to convert its Convertible Notes prior to July 1, 2017, the
Conversion Rate will increase based upon reference to the table set forth in Schedule A of the Indenture. In no event will the Conversion Rate increase to more
than 202.0202 per $1,000 principal amount of Convertible Notes.
If a Fundamental Change (as defined in the Indenture) occurs, at any time, then each holder will have the right to require the Company to repurchase all of
such holder’s Convertible Notes, or any portion thereof that is an integral multiple of $1,000 principal amount, for cash at a repurchase price of 100% of the
principal amount of such Convertible Notes plus any accrued and unpaid interest through the repurchase date. Additionally, on July 1, 2017, each holder will have
the right to require the Company to repurchase all of such holder’s Convertible Notes, or any portion thereof that is an integral multiple of $1,000 principal
amount, for cash at a repurchase price of 100% of the principal amount of Convertible Notes plus any accrued and unpaid interest through the repurchase date.
The Company shall have a provisional redemption right (“Provisional Redemption”), at its option, to redeem, all or any part of the Convertible Notes at a
price payable in cash, beginning on July 1, 2015 and prior to July 1, 2017, provided that the Company’s common stock for 20 or more trading days in a period of
30 consecutive trading days ending on the trading day immediately prior to the date of the redemption notice exceeds 150% of the Conversion Price in effect on
such trading day. On or after July 1, 2017, the Company shall have an optional redemption right (“Optional Redemption”), at its option to redeem, all or any part
of the Convertible Notes at a price payable in cash. The price payable in cash for the Optional Redemption or Provisional Redemption is equal to 100% of the
principal amount of Convertible Notes plus any accrued and unpaid interest through the repurchase date.
If there is an Event of Default (as defined in the Indenture) under the Convertible Notes, the holders of not less than 25% in principal amount of
Outstanding Notes (as defined in the Indenture) by notice to the Company and the trustee may, and the trustee at the request of such holders shall, declare the
principal of all the Outstanding Notes and accrued and unpaid interest to be due and payable immediately.
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9. Capital Stock
GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
Common Stock Offerings. In July 2012, the Company issued 12.5 million shares of its common stock at an offering price of $4.95 per share, resulting in net
proceeds of $57.4 million, after deducting underwriting discounts and commissions and other offering costs.
On February 14, 2011, the Company completed its initial public offering issuing 8,222,500 shares of common stock at an offering price of $15.00 per
share, resulting in net proceeds of $110.4 million, after deducting underwriting discounts and commissions and other offering costs. Upon the closing of the initial
public offering, the Company’s outstanding shares of convertible preferred stock were automatically converted into 16,329,703 shares of common stock and the
outstanding convertible preferred stock warrants were automatically converted into common stock warrants to purchase a total of 398,032 shares of common
stock.
In connection with the closing of the initial public offering, the Company amended and restated its certificate of incorporation to increase its authorized
number of shares of common stock to 100.0 million and to authorize the issuance of 5.0 million shares of preferred stock. The holder of each share of common
stock is entitled to one vote. The board of directors has the authority, without action by its stockholders, to designate and issue shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions thereof. The Company’s amended and restated certificate of incorporation provides that
the Company’s board of directors will be divided into three classes, with staggered three-year terms and provides that all stockholder actions must be effected at a
duly called meeting of the stockholders and not by a written consent. The amended and restated certificate of incorporation also provides that only the board of
directors may call a special meeting of the stockholders and requires the approval of either a majority of the directors then in office or 66 2/3% of the voting
power of all then outstanding capital stock for the adoption, amendment or repeal of any provision of the Company’s amended and restated bylaws. In addition,
the amendment or repeal of certain provisions of the Company’s amended and restated certificate of incorporation requires the approval of 66 2/3% of the voting
power of all then outstanding capital stock.
Convertible Preferred Stock. All shares of the Company’s convertible preferred stock automatically converted into shares of common stock upon the
Company’s initial public offering.
Series D-1 Preferred Stock. Between March and May 2010, the Company issued 1,843,675 shares of Series D-1 preferred stock at a price of $17.12 per
share for gross cash proceeds of approximately $31.6 million and issued 58,412 shares of Series D-1 preferred stock at $17.12 per share in exchange for $1.0
million of future services to be provided by ICM. The 58,412 shares issued to ICM in exchange for the credit against future services are fully vested, non-
forfeitable and non-cancellable.
The Series D-1 preferred stock was considered to have a beneficial conversion feature because the conversion ratio would adjust from the initial conversion
rate of one common share for each preferred share to two common shares for each preferred share if an initial public offering or qualified financing had not
occurred on or before September 30, 2011. At the issuance dates of the Series D-1 preferred stock between March and May 2010, the Company recorded the
beneficial conversion feature at its aggregate intrinsic value of approximately $5.7 million as a discount on the preferred stock with a corresponding credit to
additional paid-in capital. This discount was recorded as a deemed dividend and was being amortized as a debit to retained earnings and a credit to additional
paid-in capital.
For the period from January 1, 2011 to the closing of the Company’s initial public offering on February 14, 2011, the Company recorded a deemed
dividend — amortization of beneficial conversion feature on the Series D-1 preferred stock of $0.5 million relating to the issuance of Series D-1 preferred stock.
Upon closing of the initial public offering on February 14, 2011 and the automatic conversion of the Company’s Series D-1 preferred
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
stock to common stock, the Company recalculated the intrinsic value of the beneficial conversion feature using the adjusted conversion ratio applied against the
original commitment date estimated fair value of the underlying common stock. The amount of the recalculated intrinsic value of the beneficial conversion
feature exceeded the previously amortized amount of the beneficial conversion feature by $0.6 million, which amount was immediately amortized to retained
earnings and additional paid-in capital contemporaneously with the closing of the initial public offering. Upon the closing of the Company’s initial public
offering, no additional amortization of the beneficial conversion feature relating to the Series D-1 preferred stock will be recorded.
Common Stock Warrants. The following table sets forth warrants to purchase shares of the Company’s common stock that are outstanding as of
December 31, 2012.
CDP Gevo, LLC
TriplePoint Capital LLC
TriplePoint Capital LLC
TriplePoint Capital LLC
Virgin Green Fund I, L.P.
Total
Issue Date
September 2009
August 2010
October 2011
January 2012
February 2011
Expiration Date
September 2016
August 2017
October 2018
October 2018
February 2014
Outstanding
812,771
199,999
157,035
31,407
28,786
1,229,998
Exercise Price
2.70
$
9.00
$
7.96
$
7.96
$
5.48
$
See Note 13, for a discussion of the warrants issued to CDP Gevo, LLC (“CDP”) for the purchase of shares of the Company’s common stock.
In connection with signing its loan agreements with TriplePoint, the Company has issued warrants to purchase shares of its common stock. The fair values
of the warrants were estimated using the Black-Scholes option pricing model. The Company records the fair value of these warrants as debt discount which is
amortized to interest expense over the terms of the borrowing.
Preferred Stock Warrants. Prior to the Company’s initial public offering on February 14, 2011, the Company had issued warrants to purchase shares of
preferred stock. Upon the closing of the Company’s initial public offering, the preferred stock warrants which were accounted for as a derivative liability and
marked to fair value, were automatically converted to warrants to purchase common stock and were no longer recorded at fair value. Upon this conversion, the
fair value of the preferred stock warrant liability of $2.1 million was reclassified to additional paid-in capital. Changes in the fair value of the preferred stock
warrants were recorded in the Company’s consolidated statements of operations.
10. Equity Incentive Plans
2006 Omnibus Securities and Incentive Plan. During 2006, the Company established the Gevo, Inc. 2006 Omnibus Securities and Incentive Plan (the
“2006 Incentive Plan”). Pursuant to the 2006 Incentive Plan, the Company granted stock awards to employees, directors, and consultants of the Company. Upon
adoption of the Gevo, Inc. 2010 Stock Incentive Plan (the “2010 Plan”), no further grants can be made under the 2006 Incentive Plan. To the extent outstanding
awards under the 2006 Incentive Plan expire, or are forfeited, cancelled, settled, or become unexercisable without the issuance of shares, the shares of common
stock subject to such awards will be available for future issuance under the 2010 Plan.
2010 Stock Incentive Plan. In February 2011, the Company’s stockholders approved the 2010 Plan which provides for the grant of non-qualified stock
options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other equity awards to employees of the Company. Stock
options granted under the 2010 Plan have an exercise price that is at least equal to the fair market value of the Company’s common
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
stock on the date the stock option is granted and expire ten years after the date of grant. At December 31, 2012, a total of 2,571,286 shares of Gevo common stock
were reserved for issuance under the 2010 Plan, of which 1,340,974 shares were available for grant as of December 31, 2012.
Employee Stock Purchase Plan. In February 2011, the Company’s stockholders approved the ESPP. The offering periods for the ESPP are from January 1
to June 30 and from July 1 to December 31 of each calendar year. The Company has reserved 1,285,643 shares of common stock for issuance under the ESPP, of
which 1,230,484 shares as of December 31, 2012 are available for future issuance. The purchase price of the common stock under the ESPP is 85% of the lower
of the fair market value of a share of common stock on the first or last day of the purchase period.
11. Stock-Based Compensation
Stock-Based Compensation Expense. The following table sets forth the Company’s stock-based compensation expense (in thousands).
Stock options and ESPP awards
Research and development
Selling, general and administrative
Restricted stock awards
Research and development
Selling, general and administrative
Warrant issued to CDP
Selling, general and administrative
Non-cash stock-based compensation
Modified stock option awards
Selling, general and administrative
Purchase of Class B interests of Gevo Development from CDP for cash
Selling, general and administrative
Cash stock-based compensation
Total stock-based compensation
Year Ended December 31,
2012
2011
2010
Inception to
December 31, 2012
$ 808
2,628
328
1,599
2,616
7,979
$ 771
1,870
274
423
3,488
6,826
612
$
1,978
70
—
7,851
10,511
890
610
—
74
964
$8,943
296
906
$7,732
774
774
$11,285
$
$
2,477
7,269
802
2,022
13,955
26,525
1,500
1,144
2,644
29,169
Determining Fair Value of Share-Based Payment Awards. The following Black-Scholes option pricing model assumptions and resulting grant date fair
value for stock options granted are as follows.
Risk-free interest rate
Expected dividend yield
Expected volatility factor
Expected option life (in years)
Weighted average grant date fair value
Year Ended December 31,
2012
1.17%
None
78.86%
5.78
$ 4.74
2011
1.98%
None
79.04%
5.81
$10.74
2010
2.14%
None
78.64%
5.34
$ 6.99
Inception to
December 31, 2012
2.74%
None
75.66%
6.01
3.56
$
Due to the Company’s limited history of grant activity, the expected life of options granted was estimated using the “simplified method” in accordance with
Staff Accounting Bulletin 110, where the expected life equals
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
the arithmetic average of the vesting term and the original contractual term of the options. The volatility factor was determined based upon management’s
estimate using inputs from comparable public companies. The risk-free interest rate assumption is determined based upon observed interest rates appropriate for
the expected term of the Company’s employee stock options. The dividend yield assumption is based on the Company’s history of dividend payouts.
An annual forfeiture rate is estimated at the time of grant for all share-based payment awards, and revised, if necessary, in subsequent periods if the actual
forfeiture rate differs from the Company’s estimate. Forfeitures have been estimated by the Company based upon historical and expected forfeiture experience.
Estimated forfeiture rates used for the periods presented were 0% to 5%.
Stock Option Award Activity. Stock option activity under the Company’s option plans at December 31, 2012 and changes during the years ended
December 31, 2012, 2011 and 2010 were as follows.
Options outstanding at December 31, 2011
Granted
Canceled or forfeited
Exercised
Options outstanding at December 31, 2012
Options exercisable at December 31, 2012
Options vested and expected to vest at December 31, 2012
Number of
Options
3,261,739
550,442
(296,177)
(575,652)
2,940,352
1,746,443
2,919,573
Weighted-
Average
Exercise
Price
$
$
$
$
5.34
7.00
8.35
1.32
6.12
5.41
6.11
Weighted-
Average
Remaining
Contractual
Term
(years)
7.43
Aggregate
Intrinsic Value
10,620
$
7.04
6.40
7.03
$
$
$
693
610
693
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic values (the difference between the closing price of Gevo’s common
stock on the last trading day of the 2012 calendar year and the exercise price, multiplied by the number of in-the-money stock option shares) that would have been
received by the option holders had all in-the-money outstanding stock options been exercised on December 31, 2012. The total intrinsic value of options
exercised during the years ended December 31, 2012, 2011 and 2010 and from Inception to December 31, 2012 was $2.2 million, $1.7 million, $0.1 million, $4.0
million, respectively.
The following table summarizes information associated with outstanding and exercisable stock options at December 31, 2012.
Range of
Exercise
Prices
$0.17 to $0.49
$1.16 to $1.55
$2.70 to $8.73
$9.41 to $12.67
$14.81 to $19.14
Options Outstanding
Options Exercisable
Number of
Options
442,533
666,259
638,845
720,372
472,343
Weighted-
Average Exercise
Price
$
$
$
$
$
0.45
1.22
2.93
10.05
16.67
Weighted-
Average
Remaining
Contractual Life
in Years
4.35
6.34
7.28
8.25
8.36
Weighted-
Average
Exercise
Price
$
0.45
$
1.16
2.81
$
$ 10.25
$ 16.73
Weighted-
Average
Remaining
Contractual Life
in Years
4.35
5.68
6.91
7.77
8.35
Number of
Options
442,533
338,736
362,665
345,822
256,687
As of December 31, 2012, $4.4 million of total unrecognized compensation cost related to stock options is expected to be recognized as an expense by the
Company in the future over a weighted-average period of approximately 2 years.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
The Company settles stock option exercises with newly issued common shares. No tax benefits were realized by the Company in connection with these
exercises as the Company maintains net operating loss carryforwards and has established a valuation allowance against the entire tax benefit.
Restricted Stock. The Company periodically grants restricted stock awards to employees (including board members) and non-employee consultants. The
vesting period for restricted stock awards granted may be based upon a service period or based upon the attainment of performance objectives. The Company
recognizes stock-based compensation over the vesting period, generally three to six years, for awards that vest based upon a service period. For performance
based restricted stock awards, the Company recognizes expense over the requisite service period.
Non-vested restricted stock awards at December 31, 2012 and changes during the year ended December 31, 2012 were as follows.
Non-vested at December 31, 2011
Granted
Vested
Canceled or forfeited
Non-vested at December 31, 2012
Weighted-
Average
Grant-
Date
Fair Value
9.44
$
9.41
11.21
6.17
$ 10.63
Number of
Shares
284,825
232,732
(171,972)
(162,169)
183,416
During December 2011, the Company awarded shares of restricted common stock to employees some of which had a vesting schedule based primarily on
the attainment of performance objectives related to the start-up of isobutanol production at the Agri-Energy Facility. The performance objectives related to the
startup of isobutanol production at the Agri-Energy Facility were not met, resulting in the awards being cancelled and forfeited in full as of June 30, 2012. As a
result, no stock-based compensation expense was recorded for these awards during the year ended December 31, 2012.
The total fair value of restricted stock that vested during the year ended December 31, 2012 and 2011 was $0.9 million and $0.5 million, respectively. The
total fair value of restricted stock that vested during the year ended December 31, 2010 was immaterial. As of December 31, 2012, the total unrecognized
compensation expense, net of estimated forfeitures, relating to restricted stock awards was $1.8 million, which is expected to be recognized over a weighted-
average period of approximately 2 years.
12. Significant Agreements
Off-Take, Distribution and Marketing Agreements
International Off-Take and Distribution Agreement with Sasol. On July 29, 2011, the Company and Sasol Chemical Industries Limited (“Sasol”) entered
into an international off-take agreement to market and distribute renewable isobutanol globally. The agreement has an initial term of three years and appoints
Sasol as a non-exclusive distributor of high-purity isobutanol in North and South America and as the exclusive distributor for high-purity isobutanol for solvent
and chemical intermediate applications in the rest of the world. Beginning upon the Company’s first commercial sale of high-purity isobutanol under terms of the
agreement, if Sasol desires to maintain its exclusive distribution rights, Sasol is obligated to either purchase certain minimum quantities of high-purity isobutanol
or pay the Company applicable shortfall fees and the Company is obligated to either supply Sasol with certain minimum quantities of high-purity isobutanol or
pay Sasol applicable shortfall fees. No amounts have been recorded under this agreement as of December 31, 2012.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
Exclusive Supply Agreement with LANXESS. On January 14, 2011, the Company entered into an exclusive supply agreement, as amended, with LANXESS
Inc. (“LANXESS”) pursuant to which LANXESS has granted the Company an exclusive first right to supply LANXESS and its affiliates with certain of their
requirements for biobased isobutanol during the term of the agreement. The Company’s exclusive first right to supply biobased isobutanol to LANXESS and its
affiliates will be subject to the terms of a supply agreement to be mutually agreed upon by the parties at a later date. Additionally, pursuant to the terms of the
exclusive supply agreement the Company has granted LANXESS, subject to certain exceptions and conditions, (a) an exclusive first right to acquire its biobased
isobutanol to produce isobutylene and butenes for use and sale in the field of chemicals, and (b) an exclusive right to use the Company’s isobutanol to produce
butadiene and isobutylene for use in the production of polybutadiene and butyl rubber. The initial term of the mutual exclusivity is ten years, subject to mutual
extension. No amounts have been incurred under this agreement as of December 31, 2012.
Off-Take and Marketing Alliance Agreement and Renewable Fuels Supply Chain Agreement with Mansfield Oil Company. On August 12, 2011, the
Company entered into a commercial off-take agreement with Mansfield Oil Company (“Mansfield”), to distribute isobutanol-based fuel into the petroleum
market. The agreement allows Mansfield to blend the Company’s isobutanol for its own use, and to be a distributor of the Company’s isobutanol for a term of five
years. The Company also entered into a three-year supply services agreement with C&N, a Mansfield subsidiary, which will provide supply chain services
including logistics management, customer service support, invoicing and billing services. No amounts have been recorded under these agreements as of
December 31, 2012.
Ethanol Marketing Agreement with C&N, a subsidiary of Mansfield Oil Company. Substantially all ethanol sold through Agri-Energy from the date of
acquisition through December 31, 2012 was sold to C&N pursuant to an ethanol purchase and marketing agreement. The ethanol purchase and marketing
agreement with C&N was entered into on April 1, 2009 and automatically renews for subsequent one-year terms unless either party terminates the agreement 60
days before the end of a term. Under the terms of the agreement, C&N will market substantially all of Agri-Energy’s ethanol production from the Agri-Energy
Facility and will pay to Agri-Energy the gross sales price paid by the end customer less expenses and a marketing fee.
Jet Fuel Supply Agreement with the Defense Logistics Agency (U.S. Air Force). During September 2011, the Company was awarded a contract for the
procurement of up to 11,000 gallons of alcohol-to-jet (ATJ) fuel for the purposes of certification and testing by the U.S. Air Force. The term of the agreement was
through December 30, 2012. Revenue was recognized upon shipment of product to the U.S. Air Force which is when transfer of risk of loss and title occurred.
During the year ended December 31, 2012, the Company recorded $0.6 million of revenue under this contract. In September 2012, the Company was awarded an
additional contract for the procurement of up to 45,000 gallons of biojet fuel for delivery by October 31, 2013 which as of December 31, 2012, the Company has
not yet delivered any jet fuel under the September 2012 order.
Commercialization and Development Agreements
Development and Commercialization Agreements with ICM, Inc. In October 2008, the Company signed development and commercialization agreements
with ICM, Inc. (“ICM”).
Under the terms of the development agreement, the Company performed commercial-scale isobutanol production trials in ICM’s research plant and facility
in St. Joseph, Missouri, the demonstration plant. The Company was required to pay for or reimburse ICM for engineering fees, equipment, plant modification
costs, project fees and various operating expenses. In December 2011, the development agreement was amended to extend the term indefinitely. The development
agreement, as amended, may be cancelled by either party with 30 days’ written notice. The Company did not incur any operating expenses or capital expenditures
relating to the demonstration plant during the year ended December 31, 2012. During the years ended December 31, 2011 and
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
2010, the Company incurred $0.6 million and $0.4 million, respectively, in capital expenditures with ICM relating to the demonstration plant. The Company also
incurred operating expenses during the years ended December 31, 2011 and 2010 that were paid to ICM for production trials at the demonstration plant and
depreciation expense relating to the demonstration plant, which were recorded as research and development expenses in the consolidated statement of operations.
The commercialization agreement, which was amended and restated on August 11, 2011, is effective through October 15, 2018, and outlines the terms and
fees under which ICM acts as the Company’s exclusive provider of certain engineering and construction services. Also, under the commercialization agreement,
the Company is ICM’s exclusive technology partner for the production of butanols, pentanols and propanols from the fermentation of sugars.
In addition to amounts recorded under the development and commercialization agreements noted above, the Company has also engaged ICM to perform
engineering studies, plant evaluations and other services. In August 2011, the Company entered into a work agreement with ICM whereby ICM will provide
engineering, procurement and construction services for the retrofit of ethanol plants.
Beginning in 2010, the Company incurred capital expenditures with ICM related to the retrofit of the Agri-Energy Facility to isobutanol production of
$43.2 million, $6.8 million and $0.4 million during the years ended December 31, 2012, 2011 and 2010, respectively.
Joint Research, Development, License and Commercialization Agreement with The Coca-Cola Company. During November 2011, the Company entered
into a joint research, development, license and commercialization agreement with The Coca-Cola Company (“Coca-Cola”). During the first two years of the
agreement, Coca-Cola will pay the Company a fixed price fee for a research program as defined in the agreement. The Company recognizes these fees as revenue
over the performance period. The payments received are not refundable. During the years ended December 31, 2012 and 2011, the Company recognized $1.2
million and $0.1 million, respectively, of revenue under this agreement.
License Agreements
License Agreement with Cargill, Incorporated. During February 2009, the Company entered into a license agreement with Cargill, Incorporated (“Cargill”)
to obtain certain biological materials and license patent rights to use a biocatalyst owned by Cargill. Under the license agreement, Cargill has granted the
Company an exclusive, royalty-bearing license, with limited rights to sublicense, to use the patent rights in a certain field, as defined in the license agreement.
The license agreement contains five milestone payments totaling approximately $4.3 million that are payable after each milestone is completed. During
2009, two milestones were completed and the Company recorded the related milestone amounts, along with an up-front signing fee, totaling $0.9 million, to
research and development expense. During March 2010, the Company completed milestone number three and recorded the related milestone amount of $2.0
million to research and development expense at its then-current present value of $1.6 million because the milestone payment was paid over a period greater than
12 months from the date that it was incurred. As of December 2012, the Company had not completed milestone number four. However, the Company has agreed
to pay a $0.5 million license fee which satisfies the terms of milestone number four under the agreement. This fee was settled in March 2013 through the issuance
of 250,000 shares of common stock. The Company recorded the $0.5 million license fee as a component of accounts payable and accrued liabilities in the
consolidated balance sheets and research and development expense in the consolidated statement of operations. Milestone number five included in the license
agreement representing potential payments of up to $1.0 million, which is due by December 2015, has not been met as of December 31, 2012 and no amount has
been recorded as a liability for this milestone.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
Upon commercialization of a product which uses Cargill’s biological material or is otherwise covered by the patent rights under the license agreement, a
royalty based on net sales is payable by the Company, subject to a minimum royalty amount per year, as defined in the license agreement, and up to a maximum
amount per year.
The license agreement provides an option for Cargill to purchase a nonexclusive, royalty-bearing license for the use of a Company biocatalyst that utilizes
the Cargill biological material or licensed patents for a royalty rate equal to the lowest rate offered to any third party.
The Company may terminate the license agreement at any time upon 90 days’ written notice. Unless terminated earlier, the license agreement remains in
effect until the later of December 31, 2025 and the date that no licensed patent rights remain.
Other
In June 2011, the Company announced that it had successfully produced fully renewable and recyclable polyethylene terephthalate (“PET”) in cooperation
with Toray Industries, Inc. (“Toray Industries”). Working directly with Toray Industries, the Company employed prototypes of commercial operations from the
petrochemical and refining industries to make para-xylene (“PX”) from isobutanol. Toray Industries used the Company’s bio-PX and commercially available
renewable mono ethylene glycol to produce fully renewable PET films and fibers. On June 1, 2012, the Company entered into a definitive agreement with Toray
Industries for the joint development of an integrated supply chain for the production of bio-PET. Pursuant to the terms of the agreement with Toray Industries, the
Company received $1.0 million which shall be used by the Company for the design, construction and/or operation of a pilot plant. The Company anticipates
producing bio-based PX at the pilot plant, some of which will be sold to Toray Industries. Toray Industries is obligated to purchase initial volumes of bio-PX. Any
excess bio-PX that is produced can be sold to third parties. In the event that the Company is unable to produce and deliver a minimum quantity of bio-PX to
Toray Industries by December 31, 2013, the Company will be required to refund the $1.0 million by January 31, 2014. The Company has included the $1.0
million as a component of accounts payable and accrued liabilities in its consolidated balance sheets as of December 31, 2012.
Within its research and development activities, the Company routinely enters into research and license agreements with various entities. Future royalty
payments may apply under these license agreements if the technologies are used in future commercial products. In addition, the Company may from time to time
make gifts to universities and other organizations to expand research activities in its fields of interest. Any amounts paid under these agreements are generally
recorded as research and development expenses as incurred.
The Company has been awarded grants or cooperative agreements from a number of government agencies, including the U.S. Department of Energy, U.S.
National Science Foundation, U.S. Environmental Protection Agency, Army Research Labs and the U.S. Department of Agriculture. Revenues recorded related to
these grants and cooperative agreements are recorded within grant and research and development program revenue on the Company’s statements of operations.
13. Gevo Development
Gevo, Inc. currently owns 100% of the outstanding equity interests of Gevo Development. Gevo Development has two classes of membership interests
outstanding. Gevo, Inc. is the sole owner of the class A interests. Prior to September 22, 2010, CDP Gevo, LLC (“CDP”), was the sole owner of the class B
interests, which comprise 10% of the outstanding equity interests of Gevo Development. In September 2010, Gevo, Inc. became the sole owner of Gevo
Development by acquiring 100% of the class B interests in Gevo Development
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
from CDP pursuant to an equity purchase agreement. In exchange for the class B interests, CDP received aggregate consideration of $1.1 million.
The original issuance of the class B interests was considered to be a grant of non-employee stock-based compensation. As vesting of the awards was
dependent on counterparty performance conditions (the acquisition and retrofit of a biorefinery plant), no compensation expense had been recorded prior to
September 22, 2010 because the lowest aggregate fair value of the awards was zero. Upon the purchase of the class B interests on September 22, 2010, the
Company recorded stock-based compensation of $0.8 million, which reflected the amount paid during 2010 for the class B interests that were not dependent on
counterparty performance. The Company recorded stock compensation of $0.1 million and $0.3 million during the years ended December 31, 2012 and 2011,
respectively.
Gevo, Inc. made capital contributions to Gevo Development of $55.5 million, $4.9 million, $18.6 million and $79.8 million, respectively, during the years
ended December 31, 2012, 2011, 2010 and from Inception to December 31, 2012.
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 Gevo, Inc.’s capital contribution account based upon its capital contributions (for the period prior to
September 22, 2010) and 100% ownership (for the period after September 22, 2010).
Gevo Development Net Loss
Year Ended December 31,
2012
$ (15,870)
2011
$(691)
2010
$(2,327)
Inception
December 31,
2012
$ (19,619)
In connection with the formation of Gevo Development in September 2009, the Company granted CDP a warrant to purchase 858,000 shares of the
Company’s common stock. The warrants have an exercise price of $2.70 per share which represented the estimated fair value of Gevo, Inc.’s common stock on
the date of grant. The warrant expires in September 2016, unless terminated earlier as provided in the agreement.
On September 22, 2010, the beneficial owners of the equity interests of CDP became employees of Gevo, Inc. and the warrant agreement was amended and
restated to provide that 50% of the warrant shares granted under such warrant agreement would vest on September 22, 2010. The remaining warrant shares were
to vest over a two-year period beginning on September 22, 2010, subject to acceleration and termination in certain circumstances. The Company valued the
warrant shares at $14.0 million. Effective March 23, 2012, the employment of the beneficial owners of CDP was terminated. Pursuant to the terms of the warrant
agreement, all unvested warrant shares became immediately vested and, as such, the Company recorded $2.6 million of stock-based compensation expense during
the year ended December 31, 2012.
Since its formation, Gevo Development has been and continues to be considered a variable interest entity. Gevo, Inc., the primary beneficiary of Gevo
Development, has both (i) the power to direct the activities of Gevo Development that most significantly impact Gevo Development’s economic performance and
(ii) the obligation to absorb losses of Gevo Development that could potentially be significant to Gevo Development or the right to receive benefits from Gevo
Development that could potentially be significant to Gevo Development. As such, Gevo Development is consolidated. The accounts of Agri-Energy are
consolidated within Gevo Development as a wholly owned subsidiary. As of December 31, 2012 and 2011, Gevo Development does not have any assets that can
be used only to settle obligations of Gevo Development. However, under the terms of the Amended Agri-Energy Loan Agreement with TriplePoint, as amended,
subject to certain limited exceptions, Agri-Energy is only permitted to pay dividends if all principal balances due to TriplePoint have been paid. No gain or loss
was recognized by the Company upon the initial consolidation of Gevo Development.
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14. Redfield Energy, LLC
GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
On June 15, 2011, Gevo Development entered into an isobutanol joint venture agreement (the “Joint Venture Agreement”) with Redfield Energy, LLC, a
South Dakota limited liability company (“Redfield”), and executed the second amended and restated operating agreement of Redfield (together, the “Joint Venture
Documents”). Under the terms of the Joint Venture Documents, Gevo Development and Redfield have agreed to work together to retrofit Redfield’s
approximately 50 million gallon per year ethanol production facility located near Redfield, South Dakota (the “Redfield Facility”) for the commercial production
of isobutanol. Under the terms of the Joint Venture Agreement, Redfield has issued 100 Class G membership units in Redfield (the “Class G Units”) to Gevo
Development. Gevo Development is the sole holder of Class G units, which entitle Gevo Development to certain information and governance rights with respect
to Redfield, including the right to appoint two members of Redfield’s 11-member board of managers. The Class G units currently carry no interest in the
allocation of profits, losses or other distributions of Redfield and no voting rights. Such rights will vest upon the commencement of commercial isobutanol
production at the Redfield Facility, at which time Gevo Development anticipates consolidating Redfield’s operations because Gevo anticipates it will control the
activities that are most significant to the entity.
Gevo Development will be responsible for all costs associated with the retrofit of the Redfield Facility. Redfield will remain responsible for certain
expenses incurred by the facility including certain repair and maintenance expenses and any costs necessary to ensure that the facility is in compliance with
applicable environmental laws. The Company anticipates that the Redfield Facility will continue its current ethanol production activities during much of the
retrofit. Once the retrofit assets have been installed, the ethanol production operations will be suspended to enable testing of the isobutanol production capabilities
of the facility (the “Performance Testing Phase”). During the Performance Testing Phase, Gevo Development will be entitled to receive all revenue generated by
the Redfield Facility and will make payments to Redfield to cover the costs incurred by Redfield to operate the facility plus the profits, if any, that Redfield would
have received if the facility had been producing ethanol during that period (the “Facility Payments”). Gevo Development has also agreed to maintain an escrow
fund during the Performance Testing Phase as security for its obligation to make the Facility Payments.
If certain conditions are met, commercial production of isobutanol at the Redfield Facility will begin upon the earlier of the date upon which certain
production targets have been met or the date upon which the parties mutually agree that commercial isobutanol production at the Redfield Facility will be
commercially viable at the then-current production rate. At that time, (i) Gevo Development will have the right to appoint a total of four members of Redfield’s
11-member board of managers, and (ii) the voting and economic interests of the Class G units will vest and Gevo Development, as the sole holder of the Class G
Units, will be entitled to a percentage of Redfield’s profits, losses and distributions, to be calculated based upon the demonstrated isobutanol production
capabilities of the Redfield Facility.
Gevo Development, or one of its affiliates, will be the exclusive marketer of all products produced by the Redfield Facility once commercial production of
isobutanol has begun. Additionally, Gevo, Inc. will license the technology necessary to produce isobutanol at the Redfield Facility to Redfield, subject to the
continuation of the marketing arrangement described above. In the event that the isobutanol production technology fails or Redfield is permanently prohibited
from using such technology, Gevo Development will forfeit the Class G Units and lose the value of its investment in Redfield.
Gevo, Inc. entered into a guaranty effective as of June 15, 2011, pursuant to which it has unconditionally and irrevocably guaranteed the payment by Gevo
Development of any and all amounts owed by Gevo Development pursuant to the terms and conditions of the Joint Venture Agreement and certain other
agreements that Gevo Development and Redfield expect to enter into in connection with the retrofit of the Redfield Facility.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
The Company has undertaken the preliminary project engineering and permitting process for the Redfield Facility retrofit. As of December 31, 2012, the
Company has incurred $0.4 million in costs for the future retrofit of the Redfield Facility which have been recorded on the Company’s consolidated balance
sheets in deposits and other assets.
15. Income Taxes
There is no provision for income taxes because the Company has incurred operating losses since Inception. As of December 31, 2012, the Company had
federal and state net operating loss carryforwards of approximately $172.8 million which may be used to offset future taxable income. The Company also had
federal research and development tax credit carryforwards and other federal tax credit carryforwards which aggregate to $4.0 million at December 31, 2012.
These carryforwards expire at various times through 2032 and may be limited in their annual usage by Section 382 of the Internal Revenue Code, as amended,
relating to ownership changes.
The following table sets forth the tax effects of temporary differences that give rise to significant portions of the Company’s net deferred tax assets at
December 31, 2012 and 2011 (in thousands).
Deferred tax assets:
Net operating loss carryforwards
Research and other credits
Other temporary differences
Deferred tax assets—before valuation allowance
Valuation allowance
Net deferred tax assets—after valuation allowance
December 31,
2012
2011
$ 69,766
3,984
3,099
76,849
(76,849)
$ —
$ 41,237
3,984
8,030
53,251
(53,251)
$ —
The Company’s deferred tax assets represent an unrecognized future tax benefit. The Company has provided a full valuation allowance on its deferred tax
assets at December 31, 2012 and 2011, as management believes it is more likely than not that the related deferred tax asset will not be realized. The reported
amount of income tax expense differs from the amount that would result from applying domestic federal statutory tax rates to pretax losses, primarily because of
changes in the valuation allowance. The following table sets forth reconciling items from income tax computed at the statutory federal rate for the years ended
December 31, 2012, 2011 and 2010.
Federal income tax at statutory rate
State income taxes, net of federal benefits
Research and other credits
Permanent deductions
Valuation allowance
Effective tax rate
2012
35.0%
6.2%
0.0%
-2.5%
-38.7%
0.0%
Year Ended December 31,
2011
35.0%
5.7%
4.7%
-1.8%
-43.6%
0.0%
2010
35.0%
3.4%
2.4%
-2.6%
-38.2%
0.0%
Accounting literature regarding liabilities for unrecognized tax benefits provides guidance for the recognition and measurement in financial statements of
uncertain tax positions taken or expected to be taken in a tax return. The Company has concluded that there are no significant uncertain tax positions requiring
recognition
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
in the consolidated financial statements. The Company’s evaluation was performed for the tax periods from Inception to December 31, 2012, which remain
subject to examination by major tax jurisdictions as of December 31, 2012.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although there have been no such assessments historically,
with any material impact to its financial results.
16. Employee Benefit Plan
The Company’s employees participate in the Gevo, Inc. 401(k) Plan (the “401(k) Plan”). Subject to certain eligibility requirements, the 401(k) Plan covers
substantially all employees after three months of service with quarterly entry dates. Employee contributions are deposited by the Company into the 401(k) Plan
and may not exceed the maximum statutory contribution amount. The Company may make matching and/or discretionary contributions to the 401(k) Plan.
Effective January 1, 2008, the Company began providing an employer match of 100% up to a maximum of 5% of compensation per employee, which vests over a
period of approximately two years. Effective January 1, 2013, the Company elected to cease providing an employer match. During the years ended December 31,
2012, 2011 and 2010, and from Inception to December 31, 2012, the Company recorded $0.5 million, $0.4 million, $0.3 million and $1.5 million, respectively, in
matching contributions.
17. Related-Party Transactions
A founder, consultant and former director of the Company, who owns common stock of the Company and is a holder of Company stock options, is a
professor at the California Institute of Technology, which is a party to a license agreement and research agreements with the Company.
18. Commitments and Contingencies
Legal Matters. On January 14, 2011, Butamax Advanced Biofuels LLC (“Butamax”), a joint venture between BP p.l.c. (“BP”) and E.I. du Pont de
Nemours and Company (“DuPont”) filed a complaint (the “Complaint”) in the United States District Court for the District of Delaware, as Case No. 1:11-cv-
00054-SLR, alleging that the Company is infringing one or more claims made in U.S. Patent No. 7,851,188 (the “’188 Patent”), entitled “Fermentive Production
of Four Carbon Alcohols.” The ’188 Patent, which has been assigned to Butamax, claims certain recombinant microbial host cells that produce isobutanol and
methods for the production of isobutanol using such host cells. Butamax is seeking a declaratory judgment, injunctive relief, damages and costs, including
attorney’s fees and expenses. On March 25, 2011, the Company filed a response to the Complaint, denying Butamax’s allegations of infringement and raising
affirmative defenses.
On August 11, 2011, Butamax amended the Complaint to include allegations that the Company is infringing one or more claims made in U.S. Patent
No. 7,993,889 (the “’889 Patent”), also entitled “Fermentive Production of Four Carbon Alcohols” (the “Amended Complaint”). The ’889 Patent, which has been
assigned to Butamax, claims methods for producing isobutanol using certain recombinant yeast microorganisms expressing an engineered isobutanol biosynthetic
pathway. The Company believes that the Amended Complaint is without merit and will continue to aggressively defend its freedom to operate.
On September 13, 2011, the Company filed an answer to the Amended Complaint in which it asserted counterclaims against Butamax and DuPont for
infringement of U.S. Patent No. 8,017,375, entitled “Yeast Organism Producing Isobutanol at a High Yield” and U.S. Patent No. 8,017,376, entitled “Methods of
Increasing Dihydroxy Acid Dehydratase Activity to Improve Production of Fuels, Chemicals, and Amino Acids,” both of
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Notes to Consolidated Financial Statements (Continued)
which were recently awarded to the Company by the United States Patent and Trademark Office. The counterclaim seeks a declaratory judgment, injunctive
relief, damages and costs, including attorney’s fees and expenses. These counterclaims have been set for trial in August 2013.
On September 22, 2011, Butamax filed a motion for preliminary injunction with respect to the alleged infringement by the Company of one or more claims
made in the ’889 Patent.
On January 24, 2012, the Company filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-00070-SLR,
alleging that Butamax and DuPont are infringing one or more claims made in U.S. Patent No. 8,101,808 (the “’808 Patent”) entitled “Recovery of Higher
Alcohols from Dilute Aqueous Solutions.” The ’808 Patent claims methods to produce a C3-C6 alcohol—for example, isobutanol—through fermentation and to
recover that alcohol from the fermentation medium. The Company is seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s
fees and expenses.
On March 12, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-00298-SLR, alleging
that the Company is infringing one or more claims made in U.S. Patent No. 8,129,162, entitled “Ketol-Acid Reductoisomerase Using NADH.” This complaint is
in addition to the Amended Complaint discussed above. Butamax is seeking a declaratory judgment, injunctive relief, damages, interest, costs and expenses,
including attorney’s fees. The Company believes that it has meritorious defenses to these claims and intends to vigorously defend this lawsuit.
On March 13, 2012, the Company filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-00301-SLR,
alleging that Butamax and DuPont are infringing U.S. Patent No. 8,133,715 (the “’715 Patent”), entitled “Reduced By-Product Accumulation for Improved
Production of Isobutanol.” The ’715 Patent claims recombinant microorganisms, including yeast, with modifications for the improved production of isobutanol.
The Company is seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees and expenses.
On April 10, 2012, the Company filed a complaint (the “Gevo Complaint”) in the United States District Court for the District of Delaware, as Case
No. 1:12-cv-00448-SLR, alleging that Butamax and DuPont are infringing one or more claims made in U.S. Patent No. 8,153,415 (the “’415 Patent”) entitled
“Reduced By-Product Accumulation for Improved Production of Isobutanol.” The ’415 Patent claims technology which eliminates two pathways that compete for
isobutanol pathway intermediates in yeast. The Company is seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees and
expenses.
On April 17, 2012, the Company amended the Gevo Complaint to include allegations that Butamax and DuPont are infringing one or more claims made in
U.S. Patent No. 8,158,404 (the “’404 Patent”) entitled “Reduced By-Product Accumulation for Improved Production of Isobutanol.” The ’404 Patent claims the
reduction or elimination of important enzymes in a pathway in isobutanol- producing yeast. The Company is seeking a declaratory judgment, injunctive relief,
damages and costs, including attorney’s fees and expenses.
On May 9, 2012, coordinated discovery was ordered for Case Nos. 1:12-cv-00070-SLR, 1:12-cv-00298-SLR, 1:12-cv-00301-SLR, and 1:12-cv-00448-
SLR. By virtue of the same order, discovery in Case No. 1:12-cv-00602-SLR was also coordinated with these cases.
On May 15, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-00602-SLR, alleging
that the Company is infringing one or more claims made in U.S. Patent No. 8,178,328, entitled “Fermentive Production of Four Carbon Alcohols.” Butamax is
seeking a declaratory judgment, injunctive relief, damages, interest, costs and expenses, including attorney’s fees. The Company believes that it has meritorious
defenses to these claims and intends to vigorously defend this lawsuit.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
On June 19, 2012, the United States District Court for the District of Delaware denied the motion for preliminary injunction which was filed by Butamax
on September 22, 2011 with respect to the alleged infringement by the Company of one or more claims made in the ’889 Patent. As is normal and customary in
patent infringement actions of this nature, Butamax then filed a notice of appeal. In connection with their appeal, Butamax also filed a motion with the United
States District Court for the District of Delaware seeking a temporary order to limit the Company’s activities with respect to the automotive fuel blending market
while Butamax appeals the denial of its motion for preliminary injunction.
On July 6, 2012, the United States District Court for the District of Delaware issued a temporary order which stated, in part, that the Company could not
deliver, provide, distribute, ship, release or transfer in any way bio-based isobutanol produced at the Agri-Energy Facility to any third party for any use or purpose
related to the automotive fuel blending market while Butamax appealed the denial of its motion for preliminary injunction. The Company filed an appeal of the
temporary order. Under the temporary order, the Company remained free to operate in markets such as chemicals, jet fuel, marine fuel and small engine fuel. On
August 10, 2012, the Federal Circuit Court of Appeals granted Gevo’s motion to stay the status quo order entered on July 6, 2012 by the United States District
Court for the District of Delaware. On November 16, 2012, the Federal Circuit Court of Appeals affirmed the District Court’s denial of Butamax’s preliminary
injunction motion.
On July 31, 2012, the Company filed a complaint in the United States District Court for the Eastern District of Texas, as Case No. 2:12-cv-00417, alleging
that Butamax, DuPont, BP p.l.c., and BP Biofuels North America LLC are infringing U.S. Patent No. 8,232,089 (the “’089 Patent), entitled “Cytosolic Isobutanol
Pathway Localization for the Production of Isobutanol.” The Company is seeking a declaratory judgment, injunctive relief, damages and costs, including
attorney’s fees and expenses. On December 17, 2012, this case was transferred to the United States District Court for the District of Delaware as Case No. 1:12-
cv-01724-SLR. On February 19, 2013, BP p.l.c. filed a motion seeking to dismiss our complaint for failure to state a claim against it. On March 8, 2013, we filed
a response in opposition to B.P. p.l.c.’s motion. On March 18, 2013, B.P. p.l.c. filed its reply brief, and the issue has been submitted to the court for decision.
On July 31, 2012, Butamax and DuPont filed a lawsuit in the United States District Court for the District of Delaware for declaratory judgment against the
Company, as Case No. 1:12-cv-00999-SLR, seeking a judicial determination that the ’089 Patent is invalid and that Butamax and DuPont do not infringe it. On
January 28, 2013, this case was closed following a voluntary stipulation of dismissal filed by both parties.
On August 6, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-01014-SLR, alleging
that the Company is infringing U.S. Patent No. 8,222,017, entitled “Ketol-Acid Reductoisomerase Using NADH.” Butamax is seeking a declaratory judgment,
injunctive relief, damages and costs, including attorney’s fees and expenses. On January 22, 2013, discovery in this case was consolidated with Case Nos. 1:12-
cv-00070-SLR, 1:12-cv-00298-SLR, 1:12-cv-00301-SLR, 1:12-cv-00448-SLR, and 1:12-cv-00602-SLR.
On August 14, 2012, the Company filed a lawsuit in the United States District Court for the Eastern District of Texas for declaratory judgment against
Butamax, DuPont, BP p.l.c., BP Corporation North America Inc. and BP Biofuels North America LLC, as Case No. 2:12-cv-00435, seeking a judicial
determination that a recently issued Butamax U.S. Patent No. 8,241,878 (the “’878 Patent”), entitled “Recombinant Yeast Host Cell with Fe-S Cluster Proteins
and Methods of Using Thereof” is invalid and that the Company does not infringe it. On December 17, 2012, this case was transferred to the United States
District Court for the District of Delaware as Case No. 1:12-cv-01725-SLR. On January 28, 2013, this case was closed following a voluntary stipulation of
dismissal filed by both parties.
On August 14, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-01036-SLR, alleging
that the Company is infringing the ’878 Patent. Butamax is seeking a declaratory judgment, injunctive relief, damages and costs, including attorney’s fees and
expenses.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
On September 25, 2012, the Company filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-01202-SLR,
alleging that Butamax and DuPont are infringing U.S. Patent No. 8,273,565 (the “’565 Patent”), entitled “Methods of Increasing Dihydroxy Acid Dehydratase
Activity to Improve Production of Fuels, Chemicals, and Amino Acids.” The Company is seeking a declaratory judgment, injunctive relief, damages and costs,
including attorney’s fees and expenses. On September 25, 2012, Butamax and DuPont filed a lawsuit in the United States District Court for the District of
Delaware for declaratory judgment against the Company, as Case No. 1:12-cv-01201, seeking a judicial determination that the ’565 Patent is invalid and that
Butamax and DuPont do not infringe it.
On September 25, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-01200-SLR,
alleging that the Company is infringing U.S. Patent No. 8,273,558, entitled “Fermentive Production of Four Carbon Alcohols.” Butamax is seeking a declaratory
judgment, injunctive relief, damages and costs, including attorney’s fees and expenses.
On October 8, 2012, Butamax filed a complaint in the United States District Court for the District of Delaware, as Case No. 1:12-cv-01300-SLR, alleging
that the Company is infringing U.S. Patent No. 8,283,144, entitled “Fermentive Production of Four Carbon Alcohols.” Butamax is seeking a declaratory
judgment, injunctive relief, damages and costs, including attorney’s fees and expenses.
On October 8, 2012, Butamax filed a lawsuit in the United States District Court for the District of Delaware for declaratory judgment against us, as Case
No. 1:12-cv-01301-SLR, seeking a judicial determination that Butamax is not infringing Gevo’s recently issued U.S. Patent No. 8,283,505, entitled “Recovery of
Higher Alcohols from Dilute Aqueous Solutions.”
On February 13, 2013, coordinated discovery was ordered for Case Nos. 1:12-cv-1036-SLR, 1:12-cv-1200-SLR, 1:12-cv-1201-SLR, 1:12-cv-1202-SLR,
1:12-cv-1300-SLR, 1:12-cv-1301-SLR, and 1:12-cv-1724-SLR.
On March 19, 2013, the U.S. District Court of Delaware issued an order regarding claim construction and summary judgment in the patent suit involving
Butamax patents 7,851,188 and 7,993,889. Both parties had asked the Court to resolve certain issues regarding Butamax’s ‘188 and ‘889 patents without a trial by
seeking summary judgment from the court. The summary judgment procedure permits, but does not require, a court to dispose of some or all issues prior to
trial. Butamax had requested summary judgment that the Company infringed its patents, but the court denied Butamax’s request in its entirety. The Company
moved for summary judgment of noninfringement, both as a matter of literal infringement and infringement under the doctrine of equivalents, and the court
granted the Company’s motion regarding doctrine of equivalents infringement. The Company also requested summary judgment of invalidity of various claims in
Butamax’s patents. The court granted this motion in part, ruling that Butamax’s claims related to the inactivation of competing pathways for carbon flow were
invalid.
The court also provided certain claim construction rulings, including a ruling that Butamax’s patent claims were limited to an “acetohydroxy acid
isomeroreductase” enzyme that is “NADPH-dependent.” The remaining issues were to be resolved by a jury trial, scheduled to commence on April 1, 2013.
On March 20, 2013, the U.S. District Court for the District of Delaware held the final pre-trial hearing leading up to the trial on Butamax’s patents,
7,851,188 and 7,993,889 scheduled to commence April 1, 2013. During the hearing, Butamax’s attorney acknowledged that Gevo does not infringe Butamax’s
patents under the court’s construction of a key claim term in Butamax’s patents, “acetohydroxy acid isomeroreductase.” Butamax offered to stipulate to no literal
infringement under the Court’s construction. In view of the Court’s prior ruling of no infringement under Butamax’s alternative infringement theory, the doctrine
of equivalents, judgment of no
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
infringement is expected to be entered in favor of Gevo. Butamax has announced that it will appeal the court’s claim construction and summary judgment rulings.
Due to the nature and status of this litigation, the Company has determined that the possible loss or range of loss related to this litigation cannot be
reasonably estimated at this time. The trial on Gevo’s patents on PDC deletions and overexpression of AFT proteins is set for August 2013, and additional trials
are currently scheduled for July 2014 and August 2015. The Company expects to continue to incur significant costs through the foregoing trial dates.
Leases. During the year ended December 31, 2012, the Company entered into a 6 year software license agreement. The Company concluded that the
software license agreement qualifies as a capital lease. Accordingly, at December 31, 2012, the Company has capital lease liabilities of $0.1 million and $0.5
million included in accounts payable and accrued liabilities and other long-term liabilities, respectively.
The Company has operating leases for its office, research, and production facility in Englewood, Colorado (the “Colorado Facility”) with terms expiring in
July 2013 and 2016. The Company also maintains a corporate apartment in Colorado, which has a lease term expiring during the next 12 months.
Rent expense for the years ended December 31, 2012, 2011 and 2010, and from Inception to December 31, 2012, was $0.6 million, $0.6 million, $0.6
million and $3.2 million, respectively. The Company recognizes rent expense on its operating leases on a straight-line basis.
The table below shows the future minimum payments under non-cancelable operating leases and capital leases at December 31, 2012 (in thousands).
2013
2014
2015
2016
2017
Total
Operating Leases
1,567
$
1,567
1,582
1,326
2,661
8,703
$
Capital Lease
148
$
153
157
162
167
787
$
Total Lease Payments
1,715
$
1,720
1,739
1,488
2,828
9,490
$
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 December 31, 2012 or 2011, the Company did not have any liabilities associated with indemnities.
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
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
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 December 31, 2012.
19. Fair Value Measurements and Fair Value of Financial Instruments
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 inactive 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.
Cash and Cash Equivalents. For cash and cash equivalents, the fair value, based upon Level 1 inputs, approximates carrying value due to the short-term
nature of these instruments.
Inventories. The Company records its inventory, primarily 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 based upon Level 1 inputs using quoted market prices. During the years ended
December 31, 2012, the Company recognized a $0.3 million write-down of its corn inventory to market prices. The Company did not incur any write-down of
corn to market prices during the years ended December 31, 2011 or 2010.
Derivative Assets and Liabilities. The fair value of exchange-traded derivative instruments is based on Level 1 inputs using quoted market prices. The fair
value of exchange-traded derivative instruments was $0.3 million and $(0.2) million at December 31, 2012 and 2011, respectively.
The fair value of the Company’s forward contract derivative instruments are derived based upon a market approach using Level 2 inputs, including, the
price at the delivery location adjusted for basis differentials, counterparty credit quality, the effect of the Company’s own credit worthiness, the time value of
money and/or the liquidity of the market. The fair value of the Company’s forward contract derivative instruments were not material at December 31, 2012 and
2011.
See Note 2 for the Company’s policy on accounting for its derivative instruments.
Property, Plant and Equipment. The Company records its property, plant and equipment, primarily its Agri-Energy retrofit assets, at fair value only when
events or changes in circumstances indicate that their carrying amount may not be recoverable undiscounted cash and the carry value it’s carrying value exceeds
the undiscounted cash flows. The Company’s estimated cash flows for its Agri-Energy retrofit asset are based upon Level 3 cash flow inputs, primarily estimates
associated with the following: (1) sales price of isobutanol and dried distiller grains; (2) cost of corn; (3) costs of nutrients and other production inputs. During the
years ended
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
December 31, 2012, 2011 and 2010, the Company did not record any property, plant and equipment at fair value. See Note 1 for further discussion of the
Company’s policies associated with impairment of its property, plant and equipment.
Secured Debt. The Company has estimated the fair value of its secured debt obligations based upon discounted cash flows with Level 3 inputs, such as the
terms that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company
and other market factors. At December 31, 2011, the carrying values of the Company’s debt obligations approximated their estimated fair value. The following
table sets forth the principal balance of the Company’s secured debt obligation and the associated estimated fair value at December 31, 2012 (in thousands).
Issuance
TriplePoint—Matures September 2014
TriplePoint—Matures October 2015
TriplePoint—Matures January 2016
Principal Balance
11,643
$
9,266
4,689
Estimated Fair Value
10,604
$
7,864
3,929
Convertible Notes and Embedded Derivatives. In July 2012, the Company issued $42.3 million in Convertible Notes, net of $2.7 million in debt discounts.
The Company has estimated the fair value of the Convertible Notes, including the embedded derivatives, to be $26.0 million at December 31, 2012 based upon
Level 2 inputs, including the market price of the Convertible Notes derived from actual trades of the Convertible Notes. The Company has estimated the fair
value of the embedded derivatives on a stand-alone basis to be $11.0 million at December 31, 2012 based upon Level 2 inputs. See Note 7 for the fair value inputs
to estimating the fair value of the Convertible Notes with and without the embedded derivatives and the fair value of the embedded derivatives.
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.
20. Segments
The Company’s chief operating decision maker is provided with and reviews the financial results of each of the Company’s consolidated legal entities,
Gevo, Inc., Gevo Development, LLC, and Agri-Energy, LLC. The Company organizes its business segments based on the nature of the products and services
offered through each of its consolidated legal entities. All revenue is earned, and all assets are held, in the U.S. Prior to the acquisition of Agri-Energy, the
financials of Gevo Development were aggregated with Gevo, Inc. due to its size compared to Gevo, Inc. and were not reported separately.
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GEVO, INC.
Notes to Consolidated Financial Statements (Continued)
Revenues:
Gevo
Gevo Development / Agri-Energy
Consolidated
Operating income (loss):
Gevo
Gevo Development / Agri-Energy
Consolidated
Interest expense:
Gevo
Gevo Development / Agri-Energy
Consolidated
Depreciation expense:
Gevo
Gevo Development / Agri-Energy
Consolidated
Acquisitions of plant, property and equipment:
Gevo
Gevo Development / Agri-Energy
Consolidated
Total assets:
Gevo
Gevo Development / Agri-Energy
Intercompany eliminations
Consolidated
139
2012
Year Ended December 31,
2011
2010
$ 3,505
20,880
$ 24,385
$ (58,837)
(12,600)
$ (71,437)
$ 3,051
3,287
$ 6,338
$ 1,200
2,113
$ 3,313
$ 2,204
50,228
$ 52,432
$
807
63,742
$ 64,549
$ (46,155)
1,462
$ (44,693)
$ 1,381
2,196
$ 3,577
$ 2,539
2,061
$ 4,600
$ 1,397
6,618
$ 8,015
$ 1,631
14,765
$ 16,396
$ (33,809)
(1,704)
$ (35,513)
$ 1,751
623
$ 2,374
$ 2,639
549
$ 3,188
$
806
—
806
$
December 31,
2012
2011
$130,900
83,872
(58,661)
$ 156,111
$104,843
66,304
(38,117)
$133,030
Table of Contents
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that are designed to
provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our
management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required financial
disclosures.
As of the end of the period covered by this Report, we conducted an evaluation, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures
pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based on this evaluation, our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective as of December 31, 2012.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-
15(f) of the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are made only in accordance with authorizations of
our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—
Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2012.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the fourth quarter of 2012 that have or are reasonably likely to materially
affect our internal control over financial reporting identified in connection with the previously mentioned evaluation.
Item 9B.
Other Information
None.
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PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item will be included in the definitive proxy statement for our 2013 annual meeting of stockholders or an amendment to
this Report to be filed with the SEC within 120 days after our fiscal year ended December 31, 2012, and is incorporated into this Report by reference.
Item 11.
Executive Compensation
The information required by this item will be included in the definitive proxy statement for our 2013 annual meeting of stockholders or an amendment to
this Report to be filed with the SEC within 120 days after our fiscal year ended December 31, 2012, and is incorporated into this Report by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be included in the definitive proxy statement for our 2013 annual meeting of stockholders or an amendment to
this Report to be filed with the SEC within 120 days after our fiscal year ended December 31, 2012, and is incorporated into this Report by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included in the definitive proxy statement for our 2013 annual meeting of stockholders or an amendment to
this Report to be filed with the SEC within 120 days after our fiscal year ended December 31, 2012, and is incorporated into this Report by reference.
Item 14.
Principal Accountant Fees and Services
The information required by this item will be included in the definitive proxy statement for our 2013 annual meeting of stockholders or an amendment to
this Report to be filed with the SEC within 120 days after our fiscal year ended December 31, 2012, and is incorporated into this Report by reference.
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The following consolidated financial statements are included:
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets—As of December 31, 2012 and 2011
Consolidated Statements of Operations—For the years ended December 31, 2012, 2011 and 2010, and for the period from June 9, 2005 (date of
inception) to December 31, 2012
Consolidated Statements of Stockholders’ Equity—For the years ended December 31, 2012, 2011 and 2010, and for the period from June 9, 2005 (date
of inception) to December 31, 2012
Consolidated Statements of Cash Flows—For the years ended December 31, 2012, 2011 and 2010, and for the period from June 9, 2005 (date of
inception) to December 31, 2012
Notes to Consolidated Financial Statements
141
Page
98
99
100
101
105
107
Exhibit
Number
2.1†*
2.2*
3.1
3.2
4.1
4.2
Table of Contents
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable or are not required, or because the information required to be set forth
therein is included in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
Description
Form
File No.
Filing Date
Exhibit
Filed
Herewith
Previously Filed
Acquisition Agreement by and among Gevo Development, LLC, Agri-
Energy, LLC, Agri-Energy Limited Partnership, CORN-er Stone Ethanol
Management, Inc. and CORN-er Stone Farmers’ Cooperative, dated
August 5, 2010.
Equity Purchase Agreement, by and among Gevo, Inc., CDP Gevo, LLC,
Gevo Development, LLC, Michael A. Slaney and David N. Black, dated
August 5, 2010.
S-1
333-168792
November 4, 2010
2.1
S-1
333-168792
October 1, 2010
2.2
Amended and Restated Certificate of Incorporation of Gevo, Inc.
10-K 001-35073
March 29, 2011
Amended and Restated Bylaws of Gevo, Inc.
10-K 001-35073
March 29, 2011
Form of the Gevo, Inc. Common Stock Certificate.
S-1
333-168792
January 19, 2011
Fifth Amended and Restated Investors’ Rights Agreement, dated March 26,
2010.
S-1
333-168792
August 12, 2010
4.3†
Stock Issuance and Stockholder’s Rights Agreement, by and between Gevo,
Inc. and California Institute of Technology, dated July 12, 2005.
S-1
333-168792
August 12, 2010
4.4
4.5
4.6
4.7
Amended and Restated Warrant to purchase shares of Common Stock issued
to CDP Gevo, LLC, dated September 22, 2010.
S-1
333-168792
October 1, 2010
Warrant to purchase shares of Preferred Stock, issued to Virgin Green Fund I,
L.P., dated January 18, 2008.
S-1
333-168792
August 12, 2010
Plain English Warrant Agreement No. 0647-W-01, by and between Gevo, Inc.
and TriplePoint Capital LLC, dated August 5, 2010.
S-1
333-168792
October 1, 2010
Plain English Warrant Agreement No. 0647-W-02, by and between Gevo, Inc.
and TriplePoint Capital LLC, dated August 5, 2010.
S-1
333-168792
October 1, 2010
142
3.1
3.2
4.1
4.2
4.3
4.4
4.10
4.11
4.12
Table of Contents
Exhibit
Number
Description
Form
File No.
Filing Date
Exhibit
Filed
Herewith
Previously Filed
4.8
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Plain English Warrant Agreement No. 0647-W-03, by and between Gevo,
Inc. and TriplePoint Capital LLC, dated October 20, 2011
8-K
001-35073
October 26, 2011
Loan and Security Agreement, by and between Gevo, Inc. and Lighthouse
Capital Partners V, L.P., dated December 18, 2006, as amended.
S-1
333-168792
August 12, 2010
10.7
10.1
Plain English Growth Capital Loan and Security Agreement, by and
between Gevo, Inc. and TriplePoint Capital LLC, dated August 5, 2010.
First Amendment to Plain English Growth Capital Loan and Security
Agreement, by and between Gevo, Inc. and TriplePoint Capital LLC, dated
October 20, 2011.
Plain English Growth Capital Loan and Security Agreement, by and
between Gevo Development, LLC and TriplePoint Capital, LLC, dated
August 5, 2010.
Joinder Agreement and First Amendment, by and among Gevo
Development, LLC, Agri-Energy, LLC and TriplePoint Capital, LLC, dated
September 22, 2010, to the Plain English Growth Capital Loan and Security
Agreement, by and between Gevo Development, LLC and TriplePoint
Capital, LLC, dated August 5, 2010.
Amended and Restated Plain English Growth Capital Loan and Security
Agreement, by and between Agri-Energy, LLC and TriplePoint Capital
LLC, dated October 20, 2011.
Plain English Limited Recourse Continuing Guaranty, by Gevo
Development, LLC in favor of TriplePoint Capital LLC dated as of
October 20, 2011.
Amended and Restated Limited Recourse Membership Interest Pledge
Agreement, by Gevo Development, LLC in favor of TriplePoint Capital
LLC, dated as of October 20, 2011.
First Amendment to Plain English Security Agreement, by and between
Gevo, Inc. and TriplePoint Capital LLC, dated October 20, 2011.
143
S-1
333-168792
October 21, 2010
10.23
8-K
001-35073
October 26, 2011
10.2
S-1
333-168792
October 21, 2010
10.24
S-1
333-168792
October 21, 2010
10.25
10-K
001-05073
February 28, 2012
10-6
8-K
001-35073
October 26, 2011
10.3
8-K
001-35073
October 26, 2011
10.4
8-K
001-35073
October 26, 2011
10.5
Table of Contents
Exhibit
Number
10.10
10.11†
10.12†
10.13
10.14†
10.15
10.16†
10.17†
10.18†
10.19
10.20†
10.21†
Description
Form
File No.
Filing Date
Exhibit
Filed
Herewith
Previously Filed
First Amendment to Plain English Security Agreement, by and between
Agri-Energy, LLC and TriplePoint Capital LLC, dated October 20, 2011.
8-K
001-35073
October 26, 2011
Commercialization Agreement, by and between Gevo, Inc. and ICM, Inc.,
dated October 16, 2008.
S-1
333-168792
August 12, 2010
10.6
10.2
Development Agreement, by and between Gevo, Inc. and ICM, Inc., dated
October 16, 2008.
Amendment No. 1, effective July 1, 2010, to the Development
Agreement, by and between Gevo, Inc. and ICM, Inc., dated October 16,
2008.
Ethanol Purchasing and Marketing Agreement, by and between C&N
Ethanol Marketing Corporation and Agri-Energy Limited Partnership,
dated April 1, 2009.
Exclusive Supply Agreement, by and among Gevo, Inc., LANXESS Inc.
and LANXESS Corporation, dated January 14, 2011.
S-1
333-168792
November 4, 2010
10.3
S-1
333-168792
October 1, 2010
10.25
S-1
333-168792
November 4, 2010
10.26
S-1
333-168792
January 19, 2011
10.32
License Agreement, by and between Gevo, Inc. and Cargill Incorporated,
effective February 19, 2009.
S-1
333-168792
August 12, 2010
S-1
333-168792
August 12, 2010
10.4
10.5
Exclusive License Agreement, by and between Gevo, Inc. and The
Regents of the University of California, dated September 6, 2007, as
amended.
License Agreement, by and between Gevo, Inc. and the California
Institute of Technology, dated July 12, 2005, as amended.
Amendment No. 4, dated October 1, 2010, to the License Agreement, by
and between Gevo, Inc. and the California Institute of Technology, dated
July 12, 2005.
Sublease, by and between Gevo, Inc. and Luzenac America, Inc., dated
November 28, 2007.
First Amended and Restated Limited Liability Company Agreement of
Gevo Development, LLC, dated August 5, 2010.
144
S-1
333-168792
November 4, 2010
10.6
S-1
333-168792
October 21, 2010
10.10
S-1
333-168792
November 4, 2010
10.7
S-1
333-168792
November 4, 2010
10.8
Table of Contents
Description
Form
File No.
Filing Date
Exhibit
Filed
Herewith
Previously Filed
Exhibit
Number
10.22†
10.23†
10.24
10.34#
10.35#
10.36#
10.37#
Isobutanol Joint Venture Agreement, by and between Gevo
Development, LLC and Redfield Energy, LLC, dated June 15, 2011.
Second Amended and Restated Operating Agreement of Redfield
Energy, LLC, dated June 13, 2011.
10-Q
001-35073
August 3, 2011
10-Q
001-35073
August 3, 2011
International Off-Take and Distribution Agreement, by and between
Gevo, Inc. and Sasol Chemical Industries Limited, dated July 29, 2011.
10-Q
001-35073
November 2, 2011
10.25#
2006 Omnibus Securities and Incentive Plan.
S-1
333-168792
August 12, 2010
10.26#
10.27#
Form of Restricted Stock Award Agreement under the 2006 Omnibus
Securities and Incentive Plan.
Form of Stock Option Agreement under the 2006 Omnibus Securities
and Incentive Plan.
S-1
333-168792
August 12, 2010
S-1
333-168792
August 12, 2010
10.13
10.28#
2010 Stock Incentive Plan.
10-K 001-35073
March 29, 2011
10.19
10.29#
10.30#
10.31#
Form of Restricted Stock Unit Agreement under the 2010 Stock
Incentive Plan.
Form of Restricted Stock Award Agreement under the 2010 Stock
Incentive Plan.
S-1
333-168792
January 19, 2011
10-K
001-35073
March 29, 2011
Form of Stock Option Award Agreement under the 2010 Stock Incentive
Plan.
10-K
001-35073
March 29, 2011
10.32# Employee Stock Purchase Plan.
S-8
333-172771
March 11, 2011
10.33# Gevo, Inc. Executive Health Management Plan.
10-Q 001-35073
November 2, 2011
Form of Indemnification Agreement between Gevo, Inc. and its
directors and officers.
S-1
333-168792
January 19, 2011
10.1
10.2
10.2
10.11
10.12
10.15
10.21
10.22
4.7
10.1
10.33
Employment Agreement, by and between Gevo, Inc. and Patrick Gruber,
dated June 4, 2010.
Amendment Agreement, by and between Gevo, Inc. and Patrick Gruber,
dated December 21, 2011.
Employment Agreement, by and between Gevo, Inc. and Mark Smith,
dated June 4, 2010.
S-1
333-168792
November 4, 2010
10.14
8-K
001-35073
December 27, 2011
10.1
S-1
333-168792
November 4, 2010
10.15
145
Table of Contents
Exhibit
Number
10.38#
10.39#
10.40#
10.41#
10.42#
10.43
10.44
10.45
10.46
10.47
Description
Form
File No.
Filing Date
Exhibit
Filed
Herewith
Previously Filed
Employment Agreement, by and between Gevo, Inc. and Christopher
Ryan, dated June 4, 2010.
Employment Agreement, by and between Gevo, Inc. and David Glassner,
dated June 4, 2010.
Employment Agreement, by and between Gevo, Inc. and Brett Lund,
dated June 4, 2010.
Employment Agreement, by and between Gevo, Inc. and David N. Black,
dated September 22, 2010.
Employment Agreement, by and between Gevo, Inc. and Michael A.
Slaney, dated September 22, 2010.
S-1
333-168792
November 4, 2010
10.16
S-1
333-168792
November 4, 2010
10.17
S-1
333-168792
November 4, 2010
10.18
S-1
333-168792
January 19, 2011
10.23
S-1
333-168792
January 19, 2011
10.24
Indenture, dated as of July 5, 2012, between Gevo, Inc. and Wells Fargo
Bank, National Association, as trustee.
8-K
001-35073
July 5, 2012
First Supplemental Indenture, dated as of July 5, 2012, to the Indenture
dated as of July 5, 2012, by and among Gevo, Inc. and Wells Fargo Bank,
National Association, as trustee.
Second Amendment to the Plain English Security Agreement, made and
entered into as of June 29, 2012, by and among Gevo, Inc. and TriplePoint
Capital LLC.
Second Amendment to Plain English Growth Capital Loan and Security
Agreement, made and entered into as of June 29, 2012, by and between
Gevo, Inc. and TriplePoint Capital LLC.
First Amendment to Amended and Restated Plain English Growth Capital
Loan and Security Agreement, mad and entered into as of June 29, 2012,
by and between Agri-Energy, LLC and TriplePoint Capital LLC.
8-K
001-35073
July 5, 2012
8-K
001-35073
July 5, 2012
8-K
001-35073
July 5, 2012
8-K
001-35073
July 5, 2012
4.1
4.2
10.1
10.2
10.3
10.48†
Lease of Space between Hines REIT 345 Inverness Drive, LLC and Gevo,
Inc
21.1
23.1
24.1
List of Subsidiaries.
Consent of Deloitte & Touche, LLP.
Power of Attorney (see the signature page to this Report).
146
S-1
333-168792
October 1, 2010
10.10
X
X
X
Table of Contents
Exhibit
Number
31.1
31.2
32.1
101**
Description
Form
File No.
Filing Date
Exhibit
Previously Filed
Section 302 Certification of the Principal Executive Officer.
Section 302 Certification of the Principal Financial Officer.
Section 906 Certification of the Principal Executive Officer and Principal Financial
Officer.
The following financial statements, formatted in XBRL: (i) Consolidated Balance Sheets
at December 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations
for each of the three years in the period ended December 31, 2012, (iii) Consolidated
Statements of Stockholders’ Equity for each of the three years in the period ended
December 31, 2012, (iv) Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2012; and (iv) Notes to the Consolidated
Financial Statements, tagged as blocks of text. The information in Exhibit 101 is
“furnished” and not “filed,” as provided in Rule 402 of Regulation S-T.
Filed
Herewith
X
X
X
*
†
#
**
Certain schedules and exhibits referenced in this document have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted
schedule and/or exhibit will be furnished supplement ally to the SEC upon request.
Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the SEC.
Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Report.
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of
Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Exchange Act, and otherwise is not subject to liability
under these sections.
(b) Exhibits
See Item 15(a)(3) above.
(c) Financial Statement Schedules
See Item 15(a)(2) above.
147
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GEVO, INC.
By:
Date: March 26, 2013
/s/ MARK SMITH
Mark Smith
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Patrick R. Gruber and Mark
Smith, jointly and severally, as his or her attorney-in-fact, each with full power of substitution, for him or her, in any and all capacities, to sign each amendment to
this report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
Signatures
Title
Date
/s/ PATRICK R. GRUBER
Patrick R. Gruber, Ph.D.
Chief Executive Officer (Principal Executive
March 26, 2013
Officer) and Director
/s/ MARK L. SMITH
Mark Smith
/s/ SHAI WEISS
Shai Weiss
/s/ CARLOS A. CABRERA
Carlos A. Cabrera
/s/ RUTH I. DREESSEN
Ruth Dreessen
Samir Kaul
/s/ GANESH M. KISHORE
Ganesh M. Kishore, Ph.D.
/s/ STACY J. SMITH
Stacy J. Smith
/s/ GARY W. MIZE
Gary W. Mize
/s/ BRUCE A. SMITH
Bruce A. Smith
Chief Financial Officer (Principal Financial and
March 26, 2013
Accounting Officer)
Chairman of the Board of Directors
March 26, 2013
Director
Director
Director
Director
Director
Director
Director
148
March 26, 2013
March 26, 2013
March 26, 2013
March 26, 2013
March 26, 2013
March 26, 2013
March 26, 2013
Table of Contents
Signatures
Title
/s/ BRUCE A. SMITH
Bruce A. Smith
Director
149
Date
March 26, 2013
LEASE OF SPACE
SINGLE-STORY OFFICE
SUMMARY OF BASIC LEASE TERMS
1.
2.
Tenant: GEVO, INC., a Delaware corporation.
Project/Building:
(a)
(b)
(c)
(d)
Project Name: 345 Inverness Drive South
Building Number: Building C, 345 Inverness Drive South, Englewood, Colorado 80112
Total Building Floor Area: 56,546 square feet
Total Project Floor Area: 175,287 square feet
3.
Demised Premises:
(a)
Total Floor Area: 29,865 square feet
(b) Address: 345 Inverness Drive South, Building C, Suite 310, Englewood, Colorado 80112
4.
Initial Lease Term:
(a)
(b)
Period: Thirty-six (36) months
Commencement Date: August 1, 2013
5.
Basic Rent:
Term
August 1, 2013 - July 31, 2014
August 1, 2014 - July 31, 2015
August 1, 2015 - July 31, 2016
6.
Additional Rent:
Exhibit 10.48
*** Text Omitted and Filed Separately
Confidential Treatment Requested
Under 17 C.F.R. §§ 200.80(b)(4) and 17 C.F.R. 24b-2
Sq. Ft.
29,865
29,865
29,865
$ Sq.
Ft./NNN
[…***…]
[…***…]
[…***…]
Basic
Rent/Mo.
[…***…]
[…***…]
[…***…]
Yearly Basic
Rent
[…***…]
[…***…]
[…***…]
(a)
(b)
(c)
Initial Monthly Deposit for Taxes, Landlord’s Insurance and Common Facilities Charges: […***…]
Tenant’s Pro Rata Share of the Building (for Additional Rent): 52.82%
Tenant’s Pro Rata Share of the Project (for Additional Rent): 17.04%
7.
Initial Monthly Payment Due (for Basic Rent and Additional Rent): […***…] per month
* Confidential Treatment Requested
8.
9.
Security Deposit Amount: […***…]
Address for Payments and Notices to Landlord:
(a) Address for Payments to Landlord:
Hines REIT 345 Inverness Drive, LLC
[…***…]
(b) Address for Notices to Landlord:
[…***…]
with a copy to:
[…***…]
and to:
[…***…]
10. Address for Notices to Tenant:
345 Inverness Drive South
Building C, Suite 310
Englewood, Colorado 80112
11. Address for Billings to Tenant:
345 Inverness Drive South
Building C, Suite 310
Englewood, Colorado 80112
* Confidential Treatment Requested
12.
Permitted Use(s) by Tenant: Office, Research & Development, Biology and Chemistry lab use.
13. Brokers:
(a)
(b)
Landlord is represented by Newmark Knight Frank Frederick Ross, which is acting as Landlord’s Broker.
Tenant is represented by Jones Lang LaSalle, which is acting as Tenant’s Broker.
14.
Parking: 149 unassigned parking spaces in close proximity to the Building (based upon 5.0 unassigned parking spaces per 1,000 square feet of Floor Area)
which shall be free for the entire Lease Term. Such number of parking spaces to be increased in the same proportion if the Demised Premises are increased
at any time during the Lease Term and any extensions thereof.
15. Guarantor: NONE.
[The remainder of this page intentionally left blank]
3
LEASE OF SPACE
(Single-Story Office)
This Lease is made this 13 day of September, 2012 (the “Effective Date”), between HINES REIT 345 INVERNESS DRIVE, LLC, a Delaware limited
th
liability company (“Landlord”) and GEVO, INC., a Delaware corporation (“Tenant”).
I.
GENERAL.
1.1 Consideration. Landlord enters into this Lease in consideration of the payment by Tenant of the rents herein reserved and the keeping, observance and
performance by Tenant of the covenants and agreements of Tenant herein contained.
1.2 Exhibits and Addenda to Lease. The Summary of Basic Lease Terms (“Summary”). Attachments, Exhibits and Addenda listed below shall be
attached to this Lease and be deemed incorporated in this Lease by this reference. In the event of any inconsistency between such Summary, Attachments,
Exhibits and Addenda and the terms and provisions of this Lease, the terms and provisions of the Summary, Attachments, Exhibits and Addenda shall control.
The Summary, Attachments, Exhibits and Addenda to this Lease are:
Summary of Basic Lease Terms
Exhibit A – Legal Descriptions of Land and Project
Exhibit B – Depiction of the Demised Premises
Exhibit C – Rules & Regulations
Exhibit D – Signage Specifications
Exhibit E – Work Letter
Rider 1 – Additional Provisions
II.
DEFINITIONS; DEMISE OF PREMISES.
2.1 Demise. Subject to the provisions, covenants and agreements herein contained, Landlord hereby leases and demises to Tenant, and Tenant hereby leases
from Landlord, the Demised Premises as hereinafter defined, for the Lease Term as hereinafter defined, subject to existing covenants, conditions, restrictions,
easements and encumbrances affecting the same.
2.2 Demised Premises. The “Demised Premises” shall mean the space to be occupied by Tenant as depicted in Exhibit B attached hereto and cross-
hatched thereon. The depiction of the Demised Premises on Exhibit B contains approximately the number of square feet of gross floor area (“Floor Area”) set
forth in the Summary, which depiction is herein referred to as the “Space Plan”. The Demised Premises are within the Building which is located on the Land, as
the terms Building and Land are hereinafter defined. Landlord and Tenant agree that, for all purposes of this Lease, the Floor Area of the Demised Premises, the
Floor Area of the Building and the Floor Area of the Project as set forth in the Summary are controlling and are not subject to revision after the Effective Date
except as otherwise provided herein.
2.3 Area and Address. The Demised Premises contains approximately the Floor Area set forth in the Summary. The address of the Demised Premises is
the address set forth in the Summary.
1
2.4 Land. “Land” shall mean the parcel of real property more particularly described as the Land in Exhibit A attached hereto.
2.5 Building. “Building” shall mean the building commonly known as Building A and containing the Demised Premises, which is constructed on the Land
and contains approximately the Floor Area set forth on the Summary.
2.6 Improvements. “Improvements” shall mean the Building, the Parking Area as hereinafter defined, and all other fixtures and improvements owned by
Landlord on the Land, including landscaping thereon.
2.7 Project. “Project” shall mean the buildings and other improvements constructed or hereafter constructed on the Land described as the Project on
Exhibit A attached hereto.
2.8 Property. “Property” shall mean the Land, the Building and the Improvements and any fixtures and personal property used in operation and
maintenance of the Land, the Building and Improvements other than fixtures and personal property of Tenant and other users of space in the Building.
2.9 Common Facilities. “Common Facilities” shall mean all of the Property except (a) the Demised Premises and (b) the other premises in the Project
leased or held for lease to other tenants. Common Facilities shall include the Parking Area and any walks and driveways. The Common Facilities may be
augmented from time to time by Landlord as it deems reasonable under the circumstances so long as any change does not materially impact Tenant’s access or use
of the Premises.
2.10 Parking Area. “Parking Area” shall mean that portion of the Common Facilities which is or is to be paved and otherwise improved for the parking
of motor vehicles, as designated by Landlord from time to time in close proximity to the Building.
2.11 Use of Common Facilities and Parking Area. Tenant is hereby granted the non-exclusive right and license to use, in common with others entitled to
such use, the Common Facilities, as it from time to time exists, subject to the rights of Landlord reserved herein. Tenant shall not unreasonably interfere, at any
time, with the rights of Landlord and others entitled to use any part of the Common Facilities, and shall not store, either permanently or temporarily, any
materials, supplies or equipment in or on the Common Facilities. Landlord shall have the right, at any time, to change, reduce or otherwise alter the Common
Facilities which may impact the Demised Premises, in its sole and subjective discretion and without compensation to Tenant, provided, however, such change
(a) does not impact Tenant’s ability to conduct its business at the Demised Premises, (b) does not materially change the view, or the perceived image of the
Demised Premises, (c) does not materially impact Tenant’s or visitors access to the Demised Premises, (d) does not increase any operating costs or Common
Facility Charges (e) does not reduce services or accessibility of services, (f) does not reduce the number of Tenant’s parking spaces available to Tenant as
provided in the Summary, and (g) permits reasonable access to loading areas and to the Demised Premises, subject to the provisions of Section 2.12. Landlord
may use any of the Common Facilities, including one or more street entrances to the Project, as are necessary in Landlord’s reasonable judgment, for the purpose
of completing or making
2
repairs or alterations in any portion of the Project. Landlord reserves the right to the roof, the demising floors, walls and ceilings, and the exterior walls of the
Building, and all telecommunications and utilities chases, ducts or other passageways located within the Demised Premises, the Building or the Project (the
“Reserved Area”). The installation of any telecommunications or utilities wires, cables or other equipment or facilities in the Reserved Area by Tenant or any
other service provider of Tenant shall be subject to the prior written approval of Landlord which shall not be unreasonably withheld, conditioned or delayed.
Landlord shall be entitled to allocate the available space in the Reserved Area as Landlord determines from time to time on a proportionate share based on the
percent occupied by Tenant of the Building. If Landlord determines that Tenant’s use of the Reserved Area shall require additional improvements or other costs to
Landlord, Landlord shall be entitled to charge such unreasonable costs to Tenant as a condition precedent to its consent.
2.12 Covenant of Quiet Enjoyment. Landlord covenants and agrees that, provided a Default by Tenant (as hereinafter defined) has not occurred, and
provided that Tenant keeps, observes and performs its covenants and agreements contained in this Lease, Tenant shall have quiet possession of the Demised
Premises and such possession shall not be disturbed or interfered with by Landlord or any party claiming through Landlord. Landlord shall under no
circumstances be held responsible for restriction or disruption of access to the Project from public streets caused by construction work or other actions taken by
governmental authorities or any other cause not entirely reasonably within Landlord’s control, and such circumstances shall not constitute a constructive eviction
of Tenant nor give rise to any right of Tenant against Landlord.
2.13 Condition of Demised Premises. Tenant covenants and agrees that, upon taking possession of the Demised Premises, Tenant shall be deemed to have
accepted the Demised Premises “as is” and Tenant shall be deemed to have waived any warranty of condition or habitability, suitability for occupancy, use or
habitation, fitness for a particular purpose or merchantability, express or implied, relating to the Demised Premises. Tenant’s acceptance of the Demised Premises
shall constitute its acknowledgment that the Demised Premises was in good condition, order and repair at the time of such acceptance including, without
limitation, all doors, any loading dock doors, dock levelers, related dock systems and areas, and all other mechanical and electrical systems.
2.14 Relocation. [Intentionally deleted].
III. TERM OF LEASE.
3.1 Initial Lease Term; Lease Term. “Initial Lease Term” shall mean the period of time specified in the Summary commencing at noon on the
Commencement Date specified in the Summary and expiring at noon on July 31, 2016 (the Initial Lease Term together with any extensions thereof is herein
referred to as the “Lease Term”).
IV. RENT AND OTHER AMOUNTS PAYABLE.
4.1 Basic Rent. Tenant covenants and agrees to pay to Landlord, without offset, reduction, deduction, counterclaim or abatement (except as otherwise
expressly set forth in this
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Lease), basic rent for the Lease Term in the amount specified as basic rent in the Summary (“Basic Rent”). The term “year” and subsequent years as described in
the Summary shall mean: (a) as to the first year of the Lease Term, the period of time beginning on the Commencement Date of the Initial Lease Term and ending
upon the last day of the calendar month falling on or after the first anniversary of the Initial Lease Term; and (b) for subsequent years, the corresponding period of
time commencing upon the expiration of the previous year and ending one (1) year thereafter.
4.2 Monthly Payments. Basic Rent shall be payable monthly in advance, without notice, in equal installments in the amount of monthly rent specified in
the Summary. The first such monthly installment shall be due and payable upon the Effective Date and a like monthly installment shall be due and payable on or
before the first day of each calendar month succeeding the Commencement Date recited in the Summary during the Lease Term, except that the rental payment
for any fractional calendar month at the commencement or end of the Lease Term shall be prorated based on a thirty (30) day month. Acceptance of Basic Rent or
any other sums payable by Tenant to Landlord from anyone other than Tenant shall not be construed as a waiver by Landlord, nor as a release of Tenant, but the
same shall be taken to be a payment on account of Tenant.
4.3 Place of Payments. Basic Rent and all other sums payable by Tenant to Landlord under this Lease shall be paid to Landlord at the place for payments
specified in the Summary, or such other place as Landlord may, from time to time but with not less than thirty (30) days prior notice to Tenant, designate in
writing.
4.4 Lease a Net Lease and Rent Absolute. It is the intent of the parties that the Basic Rent provided in this Lease shall be a net payment to Landlord; that
this Lease shall continue for the full Lease Term notwithstanding any occurrence preventing or restricting use and occupancy of the Demised Premises, including
any damage or destruction affecting the Demised Premises, and any action by governmental authority relating to or affecting the Demised Premises, except as
otherwise specifically provided in this Lease; that the Basic Rent and Additional Rent shall be absolutely payable without offset, reduction, deduction,
counterclaim, or abatement for any cause except as otherwise specifically provided in this Lease; that Landlord shall not bear any costs or expenses relating to the
Demised Premises or provide any services or do any act in connection with the Demised Premises except as otherwise specifically provided in this Lease; and
that Tenant shall pay, in addition to Basic Rent, Additional Rent to cover costs and expenses relating to the Demised Premises, the Common Facilities, and the
Property, all as hereinafter provided.
4.5 Additional Rent. Tenant covenants and agrees to pay, as additional rent under this Lease (“Additional Rent”), without offset, reduction, deduction,
counterclaim or abatement (except as otherwise expressly set forth in this Lease), all costs and expenses relating to the use, operation, maintenance and repair of
the Demised Premises by Tenant; Tenant’s Pro Rata Share (as defined in Section 4.6) of the Common Facilities Charges (as defined in Section 7.2): Tenant’s Pro
Rata Share of all Taxes (as defined in Section 5.1) and Landlord’s Insurance (as defined in Section 4.7); and all other costs and expenses which Tenant is
obligated to pay to Landlord or any other person or entity under this Lease, whether or not stated or characterized as Additional Rent.
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4.6 Tenant’s Pro Rata Share. “Tenant’s Pro Rata Share” shall mean the percentage set forth in the Summary as Tenant’s Pro Rata Share which is the
percentage derived by dividing the Floor Area of the Demised Premises, as initially set forth in the Summary by the Floor Area of the Building or the Project, as
the case may be, as initially set forth in the Summary. Landlord and Tenant agree that such approximations of Floor Area of the Demised Premises, the Building
and the Project are reasonable, and that the calculations of Basic Rent and Tenant’s Pro Rata Share based on such approximations are not subject to revision under
any circumstances, except as expressly provided in this Section 4.6. If the Floor Area of the Demised Premises, the Building, or the Project are ever remeasured,
the result may only be used to adjust the identification thereof, and neither Landlord nor Tenant shall be entitled to claim an increase or decrease in the amount of
the monthly Basic Rent specified in the Summary or the amount of Tenant’s Pro Rata Share specified in the Summary based upon such remeasurement. The
Demised Premises shall be approximately as depicted in the Space Plan, provided, however, in no event shall Landlord be liable to Tenant or Tenant have any
claims or rights against Landlord if the actual Floor Area of the Demised Premises is different than the estimated Floor Area of the Demised Premises herein
provided. Notwithstanding anything to the contrary, if Landlord from time to time increases or reduces the Floor Area of the Building or constructs additional
building(s) upon the Land or the Project, as the case may be, then Landlord shall recalculate Tenant’s Pro Rata Share using the formulas hereinabove set forth
based upon the added or reduced Floor Area. Landlord shall be entitled to provide services for the Common Facilities for either the Building or the Project, as
Landlord reasonably determines from time to time or may be necessary consistent with comparable services for Class A so-called “office flex” buildings (built
after 1998). Landlord shall be entitled to charge from time to time all or any item of the Common Facilities Charges, Taxes, Landlord’s Insurance, or any other
Additional Rent on the basis of either the Building or the Project subject to the terms of this Lease. For all items to be charged for the Building, the Tenant’s Pro
Rata Share of the Building shall be used and, for all items relating to the Project, Tenant’s Pro Rata Share of the Project shall be used for the purposes of
calculating such items, as determined by Landlord.
4.7 Monthly Deposits. Tenant shall pay, as Additional Rent, to Landlord, as a monthly deposit (“Monthly Deposit”), in advance, without notice, on the
day that payment of Basic Rent is due, an amount equal to 1/12 of Landlord’s estimate of Tenant’s Pro Rata Share of Taxes, Property Insurance (defined in
Section 6.1) and Liability Insurance (defined in Section 6.2) (such Property Insurance and Liability Insurance are collectively referred to herein as “Landlord’s
Insurance”), and Common Facilities Charges.
4.8 Security Deposit. On or before the Commencement Date, Tenant shall deposit with Landlord, and will keep on deposit at all times during the Lease
Term, the amount set forth in Section 8 of the Summary, as security for the payment by Tenant of all rent and other amounts agreed to be paid and for the
performance of all the terms and conditions of this Lease to be performed by Tenant (the “Security Deposit”). If Tenant shall be in default in the performance of
any provision of this Lease, Landlord shall have the right to use the Security Deposit, or so much as is necessary, in payment of any rent or other amounts in
default, reimbursement of expenses incurred by Landlord, and payment of damages incurred by Landlord by reason of Tenant’s default. In such event, Tenant
shall, on written demand of Landlord, promptly remit to Landlord a sufficient amount in cash to restore the Security Deposit to its original amount. If the Security
Deposit is not utilized, it (or as much thereof as has not been utilized for such purposes)
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shall be refunded to Tenant, or to whoever is then the holder of Tenant’s interest in this Lease, without interest, upon full performance of this Lease by Tenant.
Landlord shall have the right to commingle the Security Deposit with other funds of Landlord and need not keep it in a trust account. Landlord may deliver the
Security Deposit to the purchaser of Landlord’s interest in the Premises in the event such interest is sold, and Landlord shall then be discharged from further
liability with respect to it. If claims of Landlord exceed the deposit, Tenant shall remain liable for the balance of such claims.
4.9 General Provisions as to Monthly Deposits and Security Deposit. Landlord may commingle the Security Deposit or Monthly Deposits with
Landlord’s own funds and use such funds as Landlord determines. In no event shall Landlord be required to hold such funds in escrow or trust for Tenant.
Landlord shall not be obligated to pay interest to Tenant on account of the Monthly Deposits and Security Deposit. In the event of a transfer by Landlord of
Landlord’s interest in the Demised Premises, Landlord or the property manager of Landlord may deliver the remaining balance of any Monthly Deposits and
Security Deposit to the transferee of Landlord’s interest, advise Tenant of the name and address of such transferee and Landlord and such property manager shall
thereupon be discharged from any further liability to Tenant with respect to such Monthly Deposits and Security Deposit provided such transferee has agreed to
assume the Landlord’s obligations under this Lease. In the event of a Transfer (as defined in Section 8.16) by Tenant of Tenant’s interest in this Lease, Landlord
shall be entitled to return the Monthly Deposits and Security Deposit to Tenant’s successor in interest and Landlord shall thereupon be discharged from any
further liability with respect to the Monthly Deposits and Security Deposit.
4.10 Annual Adjustment. On or before May 1 following the end of each calendar year of the Lease Term (or as soon thereafter as is reasonably practical),
Landlord shall submit to Tenant a statement setting forth the exact amount of Tenant’s Pro Rata Share of Taxes, Landlord’s Insurance, and Common Facilities
Charges for the previous calendar year (the “Statement”). The Statement shall also set forth the estimated the Monthly Deposits for the current calendar year. If
Landlord determines that the actual amount of Tenant’s Pro Rata Share of Taxes, Landlord’s Insurance, and Common Facilities Charges for the previous calendar
year exceeds the Monthly Deposits for such previous calendar year, Tenant shall pay to Landlord, within thirty (30) days after receipt of the Statement, such
deficiency in the amount reflected in the Statement. If Landlord determines that the Monthly Deposits exceeded the actual amount of Tenant’s Pro Rata Share of
Taxes, Landlord’s Insurance and Common Facilities Charges for the previous calendar year, the excess amount shall, at Landlord’s option, and except as may be
otherwise provided by law, either be paid to Tenant or credited against future Monthly Deposits or against Basic Rent, Additional Rent or other amounts next
payable by Tenant under this Lease. If Tenant disputes any Statement submitted by Landlord, including the estimated Monthly Deposits, Tenant shall give
Landlord notice of such dispute within sixty (60) days after Landlord provides the Statement to Tenant. If Tenant does not give Landlord timely notice, Tenant
waives its right to dispute that particular Statement and Tenant shall be deemed to have accepted the calculation of the Taxes, Landlord’s Insurance and Common
Facilities Charges and Tenant’s Pro Rata Share thereof for such calendar year, and neither Landlord nor Tenant shall thereafter be entitled to dispute or object to
that particular Statement or the calculation thereof. If Tenant timely objects and provided that Tenant has paid the entire amount of Tenant’s Pro Rata Share of
Taxes, Landlord’s Insurance and Common Facilities Charges and is not in default
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of its obligations under this Lease, then Tenant for a period of sixty (60) days after Tenant’s notice may, on a non-contingency fee basis, engage its own certified
public accountant (“Tenant’s Accountant”) to verify the accuracy of the Statement objected to by Tenant. During such 60-day period, Tenant’s Accountant shall
be entitled to examine the books and records of Landlord pertaining to that particular Statement, which examination shall be conducted only during the regular
business hours of Landlord at the office where Landlord maintains such books and records. Tenant’s Accountant shall enter into a commercially reasonable
confidentiality agreement with Landlord. Tenant shall deliver to Landlord copies of all audits, reports or other results from its examination within fifteen (15)
days after receipt thereof by Tenant. All costs incurred by Tenant for Tenant’s Accountant shall be paid by Tenant. Notwithstanding any pending dispute, Tenant
shall continue to pay Landlord the amount of the estimated Monthly Deposits until such amount has been determined to be incorrect. The amounts of Taxes,
Landlord’s Insurance and Common Facilities Charges payable by Tenant for the calendar years in which the Lease Term commences and expires shall be subject
to the provisions hereinafter contained in this Lease for proration of such amounts in such years. Prior to the dates on which payment is due for Taxes, Landlord’s
Insurance and Common Facilities Charges, Landlord shall make payment of Taxes, Landlord’s Insurance and Common Facilities Charges, to the extent of funds
from Monthly Deposits are available therefor and, upon request by Tenant, shall furnish Tenant with a copy of any receipt for such payments. Except for
Landlord’s obligation to make payments out of funds available from Monthly Deposits, the making of Monthly Deposits by Tenant shall not limit or alter Tenant’s
obligation to pay Taxes and to maintain insurance as elsewhere provided in this Lease. The obligations of the parties under this Section shall survive the
termination or expiration of this Lease or the early termination of Tenant’s right to occupy the Demised Premises. All costs incurred by Tenant for Tenant’s
Accountants shall be paid by Tenant, unless as a result of Tenant’s audit it is determined that the amount charged Tenant as Tenant’s Pro Rata Share of Taxes,
Landlord’s Insurance and Common Facilities Charges exceeded the actual amount thereof by five percent (5%) or more, in which event Landlord shall reimburse
Tenant for the reasonable cost of Tenant’s audit within thirty (30) days after receipt thereof (which costs (i) must be determined on a reasonable hourly basis, and
not a percentage or contingent fee basis and (ii) shall not exceed […***…]).
4.11 Partial Occupancy. For purposes of determining Tenant’s Pro Rata Share of the Common Facilities Charges that vary based on occupancy and any
other costs that vary by occupancy (collectively, “Variable Expenses”), if the Building or the Project is not fully occupied during all or a portion of any calendar
year, Landlord may make appropriate adjustments to Variable Expenses for such calendar year to determine the amount of Variable Expenses that would have
been paid or incurred by Landlord had the Building or the Project been 95% occupied, and the amount so determined shall be deemed to have been the amount of
Variable Operating Expenses for such calendar year.
V.
TAXES.
5.1 Covenant to Pay Taxes. Tenant covenants and agrees to pay, as Additional Rent, Tenant’s Pro Rata Share of Taxes, as hereinafter defined, which
accrue during or are attributable to the Lease Term, as it may be extended from time to time. “Taxes” shall mean all taxes, assessments or other impositions,
general or special, ordinary or extraordinary, of every kind or nature, which may be levied, assessed or imposed upon or with respect to the Property or
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the Project (as the case may be), or any part thereof, or upon any building, improvements or personal property at any time situated thereon. Any expenses incurred
by Landlord in obtaining or attempting to obtain or negotiating a reduction of any Taxes (including any interest due on such Taxes or on monies used to pay such
Taxes) shall be added to and included in the amount of any such Taxes; provided, however, that any reduction in Taxes or refund received by Landlord for any
year in which Tenant was required to, and did, pay Tenant’s Pro Rata Share of Taxes shall reduce Taxes for such year.
5.2 Proration at Commencement and Expiration of Term. Taxes shall be prorated between Landlord and Tenant for the year in which the Lease Term
commences and for the year in which the Lease Term expires as of, respectively, the commencement date of the Lease Term and the date of expiration of the
Lease Term, except as hereinafter provided. Additionally, for the year in which the Lease Term expires, Tenant shall be liable without proration for the full
amount of Taxes relating to any improvements, fixtures, equipment or personal property which Tenant is required to remove or in fact removes as of the
expiration of the Lease Term. Proration of Taxes shall be made on the basis of actual Taxes. Tenant’s Pro Rata Share of Taxes for the years in which the Lease
Term commences and expires shall be paid and deposited with the Landlord through Monthly Deposits as hereinabove provided.
5.3 Special Assessments. If any Taxes are payable in installments over a period of years, Tenant shall be responsible only for installments for periods
during the Lease Term with proration, as above provided, of any installment payable prior to the commencement date or after the expiration date of the Lease
Term.
5.4 New or Additional Taxes. Tenant’s obligation to pay Tenant’s Pro Rata Share of Taxes shall include any Taxes of a nature not presently in effect but
which may hereafter be levied, assessed or imposed upon Landlord or upon the Property or the Project (as the case may be), if such tax shall be based upon or
arise out of the ownership, use or operation of or the rents received therefrom, other than income taxes, transfer taxes or estate taxes of Landlord. For the purposes
of computing Tenant’s liability for such new type of tax or assessment, the Property shall be deemed the only property of Landlord.
5.5 Landlord’s Sole Right to Contest Taxes. Landlord shall have the sole right to contest any Taxes. Landlord shall credit Tenant with Tenant’s Pro Rata
Share of any abatement, reduction or recovery of any Taxes attributable to the Lease Term less Tenant’s Pro Rata Share of all reasonable costs and expenses
incurred by Landlord, including attorney’s fees, in connection with such abatement, reduction or recovery.
VI.
INSURANCE.
6.1 Property Insurance. Landlord covenants and agrees to maintain property insurance (“Property Insurance”) for the Building, the shell and core of the
Building and the Demised Premises in such amounts, from such company, with such deductible and on such terms and conditions as Landlord deems appropriate,
in its sole and subjective discretion, from time to time including, without limitation, extended coverage and insurance for loss of rent, boilers, exterior plate glass
and other exterior glass. Property Insurance obtained by Landlord need not name Tenant as an additional insured party and may, at Landlord’s option, name any
Mortgagee
8
(as hereinafter defined) as an additional insured party as its interests may appear. Tenant covenants and agrees to pay, as Additional Rent, its Pro Rata Share of the
cost of the Property Insurance obtained by Landlord for the Property or the Project (as the case may be) and the cost of any deductible under such Property
Insurance.
6.2 Tenant’s Insurance. Tenant covenants and agrees to maintain throughout the Lease Term insurance coverage at least as broad as ISO Causes of Loss—
Special Form Coverage against risk of direct physical loss or damage (commonly known as “all risk”) for the full replacement cost of Tenant’s equipment,
fixtures, improvements, Changes (as hereinafter defined) and personal property in the Demised Premises (collectively “Physical Damage Insurance”). Tenant
covenants and agrees to maintain throughout the Lease Term a commercial general liability policy, including protection against death, personal injury and
property damage, issued by an insurance company qualified to do business in the state in which the Demised Premises are located and with a single limit of not
less than […***…] per occurrence. Such policy shall name Landlord, its property manager and the Mortgagee as additional insureds, be primary to any other
similar insurance as such additional insureds, and provide that it may not be cancelled or modified without at least thirty (30) days prior notice to Landlord and
Mortgagee. The minimum limits of such insurance do not limit the liability of Tenant hereunder. Prior to occupancy of the Demised Premises and prior to
expiration or the then-current policy, Tenant shall deliver to Landlord certificates evidencing that insurance required under this Lease is in effect. Tenant
covenants and agrees to obtain all other insurance, coverages, and endorsements customarily maintained by companies in the general business and use or
reasonably requested by Landlord from time to time, including, without limitation, business interruption insurance and workers compensation insurance. The
commercial general liability policy obtained by Tenant shall not contain any retention or self-insurance provision, except for Tenant’s customary deductible (not
to exceed […***…]).
6.3 Liability Insurance. Landlord covenants and agrees to maintain a commercial general liability policy (“Liability Insurance”) covering the Common
Facilities of the Property or the Project (as the case may be) in such amounts, from such company, with such deductible and on such terms and conditions as
Landlord deems appropriate, in its reasonable discretion consistent with market standards, for the entire Lease Term and extensions thereof. Liability Insurance
obtained by Landlord need not name Tenant as an additional insured party and may, at Landlord’s option, name the Mortgagee as an additional insured party.
Tenant covenants and agrees to pay, as Additional Rent, its Pro Rata Share of the cost of the Liability Insurance obtained by Landlord and the cost of any
deductible under the Liability Insurance.
6.4 Waiver of Recovery. Landlord and Tenant each waive all right of recovery against the other and its respective officers, partners, members, agents,
representatives and employees for loss or damage to its real and personal property kept in or about the Building or the Project which is capable of being insured
against under ISO Causes of Loss—Special Form Coverage, or for loss of business revenue or extra expense arising out of or related to the use and occupancy of
the Demised Premises, to the extent there is insurance carried by such party or required to be carried by such party under this Lease. Each party shall, upon
obtaining the property damage insurance required by this Lease, notify the insurance carrier that the foregoing waiver is contained in this Lease and use all
reasonable efforts to obtain an appropriate waiver of subrogation in the policies.
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6.5 Cooperation. Landlord and Tenant shall cooperate with each other in the collection of any insurance proceeds which may be payable in the event of
any loss, including execution and delivery of any proof of loss or other action required to such recovery.
VII. OPERATING MAINTENANCE AND REPAIR EXPENSES.
7.1 Utility Charges. Tenant covenants and agrees to contract in Tenant’s own name and to pay, as Additional Rent, all charges for gas, electricity, light,
heat, power, telephone, telecommunication, internet, or other data transmission or utility services used, rendered or supplied to or for the Demised Premises. If
any such utility charges are not separately metered or billed to the Demised Premises, then Tenant shall pay, as Additional Rent, Tenant’s Pro Rata Share thereof
to Landlord, which amount shall be included in the Common Facilities Charges.
7.2 Common Facilities Charges. Tenant covenants and agrees to pay, as Additional Rent, Tenant’s Pro Rata Share of Common Facilities Charges (as
herein defined). The term “Common Facilities Charges” shall mean: all costs and expenses of operating, repairing, maintaining, upkeep and replacing of the
Common Facilities, the Building, the Improvements, the Property and the Project including, without limitation, upkeep and replanting of grass, trees, shrubs and
landscaping; removal of dirt, debris, obstructions and litter from the Parking Area, landscaped areas, sidewalks and driveways; trash and garbage disposal for the
Common Facilities and the tenants of the Property or Project; exterior window washing; repairs, resurfacing, resealing, re-striping, sweeping and snow and ice
removal from the Parking Area, sidewalks, and driveways; removal of graffiti and repair of vandalism; heating, ventilation and air conditioning units, systems,
equipment and facilities (“HVAC”) serving the Demised Premises, the other premises leased to other tenants of the Property or the Project, the Building and the
Common Facilities including, without limitation, replacement of filters, periodic inspections and any maintenance contracts (provided that Landlord shall not be
obligated to carry any maintenance contracts); building signs; stairways; elevators; skylights; gas, electricity, light, heat, power and other utilities for the Common
Facilities; extermination services; fire protection systems, monitoring and sprinkler systems; exterior painting; interior painting of the Common Facilities;
replacement of interior light bulbs, light fixtures and ballasts in the Common Facilities; maintenance and repairs to roofs; repair, maintenance and replacement of
damaged or broken exterior glass or windows; water and sewage disposal systems and charges; storm drainage systems and charges (including, without
limitation, any detention, drainage or pond areas located within the Project); irrigation and landscaping sprinkler systems; association assessments, dues and fees;
supplies and the cost of any rental of equipment in implementing such services; wages, salaries, compensation, taxes, medical and other insurance, pension and
retirement plans, and all other benefits and costs of personnel engaged in the operation, management, maintenance, service or security of the Property or Project
including, without limitation, property managers and all other personnel for the daily supervision and performance thereof; charges for professional property
management fees for the Project (collectively, “Management Fees”), not to exceed […***…]; all deductibles for Landlord’s Insurance; all alterations, additions,
improvements and other capital expenditures for the Property or Project (a) in order to conform to changes subsequent to the date of this Lease in any laws,
ordinances, rules, regulations or orders of any applicable governmental authority, or (b) which are intended as a cost or labor saving device or to effect other
economies in the operation of the Property or Project, but only to the extent of such cost
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savings, subject to amortization of such costs at a market rate of interest over the useful life thereof, as determined by generally accepted accounting practices;
and personal property taxes, licenses and permits. The Common Facilities Charges shall not be subject to amortization except as otherwise expressly herein
required. Landlord may cause any or all of such services to be provided by independent contractor(s) and sub-contractor(s). The cost of personnel shall be
prorated if such personnel provides services for other properties in addition to the Property or Project. Notwithstanding the foregoing, Tenant shall have no
responsibility for any Common Facilities Charges payable with respect to the following: (1) repairs, restoration or other work occasioned by fire, wind, the
elements or other casualty to the extent covered by property casualty insurance on the Property; (2) income and franchise taxes of Landlord; (3) except in the
event of a Default by Tenant hereunder, expenses incurred in leasing to or procuring of tenants, leasing commissions, advertising expenses and expenses for
renovating of space for new tenants; (4) interest or principal payments on any mortgage or other indebtedness of Landlord; (5) any depreciation allowance or
expense; (6) operating/maintenance expenses which are the exclusive responsibility of a tenant other than Tenant; (7) any increase in insurance premiums for
insurance required to be carried by Landlord hereunder if caused by the particular use of a tenant other than Tenant; (8) costs and expenses associated with the
operation of the business of the person or entity which constitutes Landlord as the same are distinguished from the costs of operation of the Property and Demised
Premises, including accounting and legal matters, costs of defending any lawsuits with any mortgagee, costs of selling, financing, mortgaging or otherwise
transferring any of Landlord’s interest in the Demised Premises and outside fees paid in connection with disputes with prior or future tenants; (9) costs and
expenses directly resulting from the gross negligence or willful misconduct of Landlord or its agents, employees or contractors; (10) costs for which the Landlord
has been reimbursed by any insurance of the Landlord or any prior or future tenant of all or any part of the Demised Premises; (11) any bad debt loss, rent or
reserves for. bad debts; (12) any fines, penalties or interest incurred by the Landlord not relating to any amounts Tenant has failed to pay under this Lease;
(13) any costs related to any heating, ventilation and air conditioning units, systems, equipment and facilities including service contracts (“HVAC”) for which
Landlord has been directly reimbursed by Tenant; (14) any costs of any services sold or provided to Tenant for which Landlord or its managing agent is directly
reimbursed by Tenant (including, without limitation, the costs of any maintenance contracts for HVAC entered into by Landlord); (15) the capital cost of
construction of or additions or replacement to the Property or the Project or any part thereof, except as provided in (a) or (b) above (16) ground lease payments
and other finance charges; (17) leasing commissions, attorney’s fees, cost and disbursements and other expenses incurred in connection with negotiations or
disputes with tenants or other occupants of the building, or with prospective tenants or costs incurred in marketing the building; (18) renovating or otherwise
improving or decorating, painting or redecorating any tenant space; (19) Landlord’s costs of electricity, water or other utilities which are provided without cost to
certain tenants of the building and not supplied to all tenants of the building or which are sold separately to tenants of the building for which Landlord is entitled
to be reimbursed; (20) any expense in connection with services or other benefits of a type or quality which Tenant is not entitled to receive under this Lease but
which are provided without reimbursement by direct payment to another tenant or occupant of the building; (21) costs due to violation by Landlord or its agent of
the terms and conditions of any lease or of any law, statute, ordinance, or of any insurance rating bureau or other quasi- public authority, or of any debt agreement
or ground lease; (22) except for Management Fees,
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overhead and profit paid to subsidiaries or affiliates of Landlord for services in excess of […***…] on or to the Buildings or Project to the extent that the services
exceed competitive costs of such services; (23) advertising and promotional expenses; (24) rental and other related expenses incurred in leasing air conditioning
systems, elevators or other equipment ordinarily considered to be of a capital nature, except equipment which is used in providing janitorial services and which is
not affixed to the Building; (25) except for Management Fees, any cost in excess of […***…] paid to any person or entity related to Landlord which is in excess
of the amount which would be paid absent such relationship; (26) any cost or expense for which Landlord is paid or reimbursed by any other person; (27) the cost
of installing, operating and maintaining any specialty service such as broadcast facilities, an athletic or recreation club, and parking facilities; (28) costs of any
cleaning of and rubbish removal from the Building relating to the initial and subsequent construction and renovation of any tenant space; (29) costs of sculptures,
paintings and any other objects of art; (30) attorney’s fees, cost and disbursements and other expenses incurred in connection with negotiations or disputes with
tenants or other occupants of the building or with prospective tenants or costs incurred in marketing the Building or the Project; (31) legal and other professional
fees and expenses incurred in preparing, negotiating and executing leases, amendments, terminations and extensions or in resolving any disputes with tenants and
other occupants or enforcing lease obligations, including, without limitation, court costs; and (32) expenses incurred by Landlord in connection with the transfer
or disposition of the Land, Buildings or Project or any ground, underlying or overriding lease, including, without limitation, transfer, deed and gains taxes.
7.3 Tenant’s Maintenance Obligation. Tenant, at its sole cost and expense, shall maintain, repair, replace and keep the Demised Premises and all
improvements, fixtures and personal property thereon in good, safe and sanitary condition, order and repair and in accordance with all applicable laws,
ordinances, orders, rules and regulations of governmental authorities having jurisdiction. Tenant shall perform or contract for and promptly pay, as Additional
Rent, for trash and garbage disposal (to the extent that Tenant’s trash and garbage disposal requirements exceed the usual requirements of tenants in the applicable
Building, as reasonably determined by Landlord), janitorial and cleaning services; security services, interior window washing services, interior painting, repair
and replacement of all damage to doors (including, without limitation, any loading dock doors, dock levelers and related dock systems and areas), repair,
maintenance and replacement of damaged or broken interior glass, plate glass and other breakable materials, and replacement of interior light bulbs, light fixtures
and ballasts in or serving the Demised Premises. Tenant shall operate, maintain, repair and replace the pipes and other equipment and facilities for water, sewage
and other utility services serving the Demised Premises from the point exclusively serving the Demised Premises, even if outside of the Demised Premises. All
costs of maintenance and repairs by Tenant shall be considered Additional Rent hereunder. All maintenance and repairs to be performed by Tenant shall be done
promptly, in a good and workmanlike fashion, and without diminishing the original quality of the Demised Premises or the Property.
7.4 Landlord’s Maintenance Obligation. Landlord shall maintain and replace the exterior walls and structural elements of the Buildings and systems and
the Improvements, which shall be at Landlord’s sole cost except as expressly included in Common Facilities Charges. Landlord, at its sole cost and expense, shall
be responsible for the replacement of the roofs of the Building and parking lots servicing the complex. Landlord’s maintenance obligation under this
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Section shall be determined in Landlord’s reasonable discretion consistent with comparable building in the area. For the purposes of this Section, all work and
costs for the roofs of the Building and parking lots servicing the complex shall be considered to be maintenance and repairs included in the Common Facilities
Charges, except for the replacement of the entire roofing system of the Building by Landlord hereunder.
7.5 Building Services.
(a) Landlord shall cause to be made available at general points of usage in the Demised Premises facilities for the supply of domestic hot (or
tempered) and cold running water, and facilities for electric power for normal lighting and small office equipment. Tenant shall maintain the heating and air
conditioning for the Demised Premises at such temperatures as are customary for similar quality office buildings in the area, as reasonably approved by Landlord,
during not less than Normal Business Hours (as herein defined). Normal Business Hours shall mean the hours of 8:00 a.m. to 5:30 p.m., Monday through Friday,
and 8:00 a.m. to 1:00 p.m. on Saturdays, except during any governmental or bank holiday. Notwithstanding the foregoing and subject to the provisions of
Section 7.5(b) below, it is acknowledged by Landlord and Tenant that Tenant may operate its computer rooms within the Premises on a 24 hour, 7 day a week
basis.
(b) Tenant shall be entitled to connect high wattage electrical equipment (including, without limitation, computer equipment and large copy
machines) and install heat generating equipment or machinery in the Demised Premises provided that Tenant, at its sole cost, shall be responsible for all
alterations or improvements to the HVAC, electric or other utility systems serving the Demised Premises and subject to Landlord’s prior written consent which
shall not be unreasonably withheld, conditioned or delayed. Tenant shall not make any alterations or improvements to the Demised Premises or install any
equipment or machinery which would affect other HVAC systems in the Building. Tenant shall pay, as Additional Rent, the cost of any modifications to the
electrical system or heating and air conditioning system of the Building necessitated by such usage and the cost of any additional electrical service provided to
Tenant, unless billed directly to Tenant by the utility company.
(c) Except in the event of Landlord’s gross negligence or misconduct, Landlord shall not be liable for any damage, loss or expense incurred by
Tenant by reason of any interruption, reduction (permanent or temporary) or failure of any utilities or services for the Demised Premises or the Building. Landlord
may, with prior written notice to Tenant (except that no notice shall be required in the event of an emergency), cut off and discontinue any utilities and services
when such discontinuance is necessary in order to make repairs or alterations or if otherwise required in connection with the fulfillment of Landlord’s obligations
under this Lease; provided, however, Landlord shall use good faith efforts to minimize any interference with Tenant’s business operations. In no event shall
Tenant be entitled to any abatement of rent as a result of the Demised Premises being rendered unusable for their intended purpose due to any such failure,
interruption or reduction. No failure, interruption or reduction of utilities or services shall be construed as an eviction or disturbance of possession by Landlord
and Tenant shall have no right to terminate this Lease as a result thereof. Notwithstanding anything in this Section 7 to the contrary, if (i) the Demised Premises,
or a material portion of the Demised Premises, is made untenantable for a period in excess of five (5) consecutive business
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days as a result of an interruption of essential services, such as fire protection or water, that is a result of Landlord’s negligence or willful misconduct or is
otherwise within Landlord’s reasonable control and (ii) Tenant is unable to, and does not, conduct its normal business operations in all or any material portion of
the Demised Premises as a result thereof, then Tenant shall be entitled to receive an abatement of Basic Rent and Additional Rent payable hereunder during the
period beginning on the sixth (6 ) consecutive Business Day of the service failure and ending on the day the service has been restored; provided, however, that
(1) the foregoing conditional abatement of Basic Rent and Additional Rent shall not apply to the extent that the interruption is a result of Tenant’s negligence,
willful misconduct or breach of this Lease and (ii) such abatement shall be in proportion to the portion of the Demised Premises which Tenant is unable to use. In
no event, however, shall Landlord be liable to Tenant for any loss or damage, direct or indirect, special or consequential, including loss of business, arising out of
or in connection with the failure of any such utility services. The foregoing provisions regarding interruption of utility services shall not apply in case of damage
to or destruction of the Premises, which shall be governed by Section 9 of this Lease.
th
(d) Tenant shall promptly notify Landlord of any accidents or defects in the Building or the Project of which Tenant becomes aware, including
defects in pipes, electric wiring and HVAC equipment, and of any condition which may cause injury or damage to the Building or the Project or any person or
property therein.
7.6 Additional Services. If Tenant requests and Landlord agrees to provide any additional services which may be required by Tenant, including
locksmithing, non-Project standard lamp replacement, additional janitorial services and maintenance, Tenant shall pay to Landlord, upon billing, all of Landlord’s
costs for such additional services, plus an administrative fee equal to […***…] of such additional service. Charges for any service for which Tenant is required to
pay hereunder shall be deemed to be Additional Rent and shall be billed monthly.
VIII. OTHER COVENANTS OF TENANT.
8.1 Limitation of Use by Tenant. Tenant covenants and agrees to use the Demised Premises only for the use or uses set forth as Permitted Uses by Tenant
in the Summary and for no other purposes, except with the prior written consent of Landlord, in its sole and subjective discretion.
8.2 Compliance with Laws. Tenant covenants and agrees that nothing shall be done or kept on the Demised Premises in violation of any law, ordinance,
order, rule or regulation of any governmental authority having jurisdiction (collectively, “Laws”) and that the Demised Premises shall be used, kept and
maintained in compliance with any such Laws and with the certificate of occupancy issued for the Building and the Demised Premises.
8.3 Compliance with Insurance Requirements. Tenant covenants and agrees that nothing shall be done or kept on the Demised Premises which might
impair or increase the cost of insurance maintained with respect to the Demised Premises or the Property, which might increase the insured risks or which might
result in cancellation of any such insurance.
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8.4 No Waste. Tenant covenants and agrees that nothing shall be done or kept on the Demised Premises or the Property which would constitute waste.
8.5 No Structural or Electrical Overloading. Tenant covenants and agrees that nothing shall be done or kept on the Demised Premises or the Building
and that no improvements, changes, alterations, additions, maintenance or repairs shall be made to the Demised Premises which might impair the structural
soundness of the Building, which might result in an overload of electrical lines serving the Building or which might interfere with electric or electronic equipment
in the Building or on any adjacent or nearby property. In the event of violations hereof, Tenant covenants and agrees to immediately remedy the violation at
Tenant’s expense and in compliance with all requirements of governmental authorities and insurance underwriters.
8.6 No Nuisance, Noxious or Offensive Activity. Tenant covenants and agrees that no materially noxious or offensive activity shall be carried on upon the
Demised Premises or the Property nor shall anything be done or kept on the Demised Premises or the Property which may be or become a public or private
nuisance or which may cause a material disturbance, or annoyance to others in the Building or on adjacent or nearby property.
8.7 No Annoying Lights, Sounds or Odors. Tenant covenants and agrees that no light shall be emitted from the Demised Premises which is unreasonably
bright or causes unreasonable glare, no sound shall be emitted from the Demised Premises which is unreasonably loud or annoying; and no odor shall be emitted
from the Demised Premises which is or might be unreasonably noxious or offensive to others in the Building or on adjacent or nearby property.
8.8 No Unsightliness. Tenant covenants and agrees that no unsightliness shall be permitted on the Demised Premises which is visible from any adjacent or
nearby property. Without limiting the generality of the foregoing, all unsightly conditions, equipment, objects and conditions shall be kept enclosed within the
Demised Premises; no refuse, scrap, debris, garbage, trash, bulk materials or waste shall be kept, stored or allowed to accumulate on the Demised Premises except
as may be enclosed within the Demised Premises; all pipes, wires, poles, antennas and other facilities for utilities or the transmission or reception of audio or
visual signals or electricity shall be kept and maintained underground or enclosed within the Demised Premises or appropriately screened from view; and no
temporary structure shall be placed or permitted on the Demised Premises without the prior written consent of Landlord, in its sole and subjective discretion.
8.9 No Animals. Tenant covenants and agrees that no animals shall be permitted or kept on the Demised Premises or the Property, except as may be
required for any person with a disability.
8.10 Restriction on Signs and Exterior Lighting. Tenant covenants and agrees that, except as expressly set forth in Rider 1 attached hereto, no signs or
advertising devices of any nature shall be erected or maintained by Tenant on the Demised Premises or the Property and no exterior lighting shall be permitted on
the Demised Premises or the Property, except for signs complying with the signage specifications attached hereto as Exhibit D and approved by Landlord in
writing, in its sole and subjective discretion.
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8.11 No Violation of Covenants. Tenant covenants and agrees not to commit, suffer or permit any violation of any covenant, condition or restriction
affecting the Demised Premises or the Property.
8.12 Restriction on Changes and Alterations. Tenant covenants and agrees not to structurally improve, change, alter, add to, remove or demolish any
improvements on the Demised Premises (“Changes”), without the prior written consent of Landlord which consent shall not be unreasonably withheld,
conditioned or delayed and unless Tenant complies with all conditions which may be imposed by Landlord, in its reasonable discretion, in connection with such
consent; and unless Tenant pays, as Additional Rent, to Landlord the reasonable costs and expenses of Landlord for architectural, engineering or other consultants
which may be reasonably incurred by Landlord in determining whether to approve any such Changes. Notwithstanding the foregoing, Landlord hereby consents
to the Changes to be made as part of Tenant’s Work; provided, however, that such Changes are performed in accordance with the terms and conditions of the
Work Letter attached hereto. Landlord’s consent to any Changes and the conditions imposed in connection therewith shall be subject to all reasonable
requirements and restrictions of any Mortgagee. If such consent is given, no such Changes shall be permitted unless (a) Tenant shall have procured and paid for
all necessary permits and authorizations from any governmental authorities having jurisdiction; (b) such Changes are located wholly within the Demised
Premises, shall not adversely affect the structural integrity of the Building or the operation of the HVAC, plumbing, electrical, water, or sewer systems servicing
the Building or the Property; (c) such Changes shall not affect or impair existing insurance on the Property; and (d) Tenant, at Tenant’s sole cost and expense,
shall maintain or cause to be maintained workmen’s compensation insurance covering all persons employed in connection with the work and obtains liability
insurance covering any loss or damage to persons or property arising in connection with any such Changes and such other insurance or bonds as Landlord may
reasonably require. Tenant covenants and agrees that any Changes approved by Landlord shall be completed with due diligence and in a good and workmanlike
fashion and in compliance with all reasonable conditions imposed by Landlord and all applicable permits, authorizations, laws, ordinances, orders, rules and
regulations of governmental authorities having jurisdiction and that the costs and expenses with respect to such Change shall be paid promptly when due and that
the Change shall be accomplished free of mechanics’ and materialmen’s liens. Tenant covenants and agrees that all Changes shall become the property of the
Landlord at the expiration or earlier termination of the Lease Term or the early termination of Tenant’s right to occupy the Demised Premises or, if Landlord so
requests at the time Landlord consents to a particular Change, Tenant shall, at or prior to expiration of the Lease Term and at its sole cost and expense, remove
such Change and repair any damage to the Demised Premises resulting from such removal. As used in this Lease, “Changes” include real property improvements
(including fixtures) made to the Project as part of Tenant’s Work.
8.13 No Mechanic’s Liens. Tenant covenants and agrees not to permit or suffer, and to cause to be removed and released, any mechanic’s, materialmen’s
or other lien on account of supplies, machinery, tools, equipment, labor or material furnished or used in connection with the construction, alteration, improvement,
addition to or repair of the Demised Premises by, through or under Tenant. At least twenty (20) days prior to any Changes, Tenant shall provide written notice to
Landlord of the date of commencement of any Changes. Landlord shall have the right, at any time and from time to time, to post and maintain on the Demised
Premises and Building
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such notices as Landlord deems necessary to protect the Demised Premises against such liens. Tenant shall have the right to contest, in good faith and with
reasonable diligence, the validity of any such lien or claimed lien, provided that Tenant shall give to Landlord such security as may be reasonably requested by
Landlord but in no event more than […***…] of the lien amount, to insure the payment of any amounts claimed, including interest and costs, and to prevent any
sale, foreclosure or forfeiture of any interest in the Property on account of any such lien, including, without limitation, bonding, escrow or endorsement of the title
insurance policy of Landlord and any Mortgagee. If Tenant so contests, then on final determination of the lien or claim for lien, Tenant shall immediately pay any
judgment rendered, with interest and costs, and shall cause the lien to be released and any judgment satisfied.
8.14 No Other Encumbrances. Tenant covenants and agrees not to obtain any financing secured by Tenant’s interest in the Demised Premises and not to
encumber the Demised Premises or Landlord’s or Tenant’s interest therein, without the prior written consent of Landlord, in its sole and subjective discretion, and
to keep the Demised Premises free from all liens and encumbrances except liens and encumbrances existing upon the date of commencement of the Lease Term
or liens and encumbrances created by Landlord.
8.15 Subordination to Landlord Mortgages.
(a) Tenant covenants and agrees that this Lease and Tenant’s interest in the Demised Premises shall be junior and subordinate to any mortgage or
deed of trust (“Mortgage”) now or hereafter encumbering the Property. In the event of a foreclosure of any Mortgage, Tenant shall attorn to the party acquiring
title to the Property as the result of such foreclosure. No act or further agreement by Tenant shall be necessary to establish the subordination of this Lease to any
such Mortgage, which subordination is self-executing, but Tenant covenants and agrees, upon request of Landlord, to execute such documents as may be
necessary or appropriate to confirm and establish this Lease as subordinate to any Mortgage in accordance with the foregoing provisions. Alternatively, Tenant
covenants and agrees that, at the option of any mortgagee or holder of a Mortgage encumbering the Property (“Mortgagee”). Tenant shall execute commercially
reasonable documents as may be necessary to establish this Lease and Tenant’s interest in the Demised Premises as superior to any such Mortgage within
thirty (30) days after Tenant’s receipt thereof. If Tenant fails to execute any commercially reasonable documents required to be executed by Tenant under the
provisions hereof, Tenant shall be deemed to have agreed to and be bound by the covenants, terms and conditions provided in such documents. If any Mortgagee
or purchaser at foreclosure thereof, succeeds to the interest of Landlord in the Land or the Building, such person shall not be (i) liable for any act or omission of
Landlord under this Lease; (ii) liable for the performance of Landlord’s covenants hereunder which arise prior to such person succeeding to the interest of
Landlord hereunder (provided, however, such successor Landlord shall not be relieved of Landlord’s obligations that arise from and after such successor assumes
this Lease); (iii) bound by the payment of any rent which Tenant may have paid more than one month in advance; (iv) liable for any security deposit which was
not delivered to such person; or (v) bound by any modifications to this Lease to which such Mortgagee has not consented in writing,
(b) Within a reasonable time after Tenant’s written request, Landlord shall, subject to the terms and conditions of this Section 8.15(b) use reasonable
efforts to obtain for
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Tenant from the existing Mortgagee a subordination, non-disturbance and attornment agreement on such Mortgagee’s standard form (each, a “SNDA”).
Notwithstanding the foregoing, the Lease and Tenant’s obligations thereunder shall not be affected or impaired in any respect should any Mortgagee decline to
enter into a SNDA. If such Mortgagee executes and delivers to Landlord a SNDA and Landlord delivers the same to Tenant, and Tenant either fails or refuses to
execute and deliver the SNDA within 20 days following Landlord’s delivery of such SNDA to Tenant, then Landlord shall have no further obligation to obtain a
SNDA for Tenant from such Mortgagee. In no event shall Landlord be required to (i) expend any material sums in its effort to obtain the SNDA, (ii) commence
any litigation in order to obtain the SNDA or (iii) take any step which may, in Landlord’s judgment, have an adverse effect on its relationship with any
Mortgagee. If any Mortgagee shall impose any fee as a condition of entering into the SNDA, Landlord may withdraw its request therefor unless, within 10 days
after Landlord’s notice to Tenant as to such fee and the amount thereof, Tenant shall agree, in writing, to pay such fee.
8.16 No Assignment or Subletting.
(a) Tenant covenants and agrees not to make or permit a Transfer by Tenant, as hereinafter defined, without Landlord’s prior written consent, which
consent shall not be unreasonably withheld, conditioned or delayed. A “Transfer” by Tenant shall include an assignment of this Lease, a sublease of all or any
part of the Demised Premises or any assignment, sublease, transfer, mortgage, pledge or encumbrance of all or any part of the Demised Premises or of Tenant’s
interest under this Lease or in the Demised Premises, by operation of law or otherwise, or the use or occupancy of all or any part of the Demised Premises by
anyone other than Tenant. Any such Transfer by Tenant without Landlord’s written consent shall be void and shall constitute a Default by Tenant under this
Lease. If Landlord consents to any Transfer by Tenant, Tenant shall not be relieved of its obligations under this Lease and Tenant shall remain liable, jointly and
severally, and as a principal, not as a guarantor or surety, under this Lease, to the same extent as though no Transfer by Tenant had been made, unless specifically
provided to the contrary in Landlord’s prior written consent. The acceptance of rent by Landlord from any person other than Tenant shall not be deemed to be a
waiver by Landlord of the provisions of this Section or of any other provision of this Lease and any consent by Landlord to a Transfer by Tenant shall not be
deemed a consent to any subsequent Transfer by Tenant.
(b) If Tenant requests Landlord’s consent to a Transfer, Tenant shall submit to Landlord in writing the name of the proposed transferee, the effective
date of the Transfer, the terms of the proposed Transfer, a copy of the proposed form of sublease or assignment, and such information as to the business,
reputation, responsibility, and financial capacity of the transferee as Landlord shall reasonably require to evaluate the request. It shall be reasonable for the
Landlord to withhold its consent to any Transfer where: (i) in the case of a sublease, the subtenant has not acknowledged that the provisions of this Lease control
over any inconsistent provision in the sublease; or (ii) in Landlord’s reasonable opinion, the proposed transferee does not have the ability to perform its
obligations under the assignment or sublease; or (iii) the intended use by the transferee would damage the goodwill or reputation of the Building; or (iv) the
intended use is not compatible with other uses of the Building, conflicts with another tenant’s right to exclusive use, or is not permitted by applicable law or
covenant. The foregoing criteria are not exhaustive, and Landlord may withhold consent to a Transfer on any other reasonable
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grounds. Tenant shall reimburse Landlord for all of Landlord’s costs incurred in connection with any request for consent to a Transfer, including, without
limitation, a reasonable sum for attorneys’ fees not to exceed […***…].
(c) If Tenant consummates a Transfer other than a Permitted Transfer (as defined in Rider 1 attached hereto), Tenant shall pay over to Landlord, as
Additional Rent, […***…] of all sums received by Tenant in excess of the rent payable by Tenant hereunder which is attributable on an equally allocable Floor
Area basis, to any subletting of all or any portion of the Demised Premises so subleased, and […***…] of all consideration received on account of or attributable
to any assignment of this Lease, in each case net of all expenses and costs incurred by Tenant in connection with such Transfer, including, without limitation,
commissions, allowances, improvement costs and other concessions provided to the sublessee or assignee.
(d) If Landlord consents to a Transfer by Tenant, then any option to renew this Lease, right to extend the Lease Term, or option or right of refusal to
expand the Demised Premises shall automatically terminate.
(e) Tenant covenants and agrees to pay, as Additional Rent to Landlord, the amount of […***…] as the total fee to compensate Landlord for
processing such request whether or not the consent of Landlord is given to the Transfer requested by Tenant. Tenant shall pay such […***…] administrative
charge, which shall be due and payable to Landlord at the time that Tenant submits such request for consent to the Transfer to Landlord. The payment of such
administrative charge and other costs and expenses by Tenant shall be a condition precedent to the effectiveness of any consent by Landlord to such Transfer.
(f) Notwithstanding anything to the contrary, so long as Landlord has any comparable vacancy in the Project (or any pending vacancy in the Project),
Tenant shall not be entitled to make a Transfer to an existing tenant of the Project, or any person or entity with whom Landlord or its Related Parties (as herein
defined) negotiated any written proposal regarding a lease of space in the Project within the six (6) month period preceding Tenant’s request for such Transfer.
(g) For the purposes of this Lease, the term “Transfer” shall also include: the transfer or change, whether voluntary, involuntary or by operation of
law, of forty-nine percent (49%) or more of the control or ownership, whether legal or beneficial, in Tenant within a twelve (12) month period; the dissolution,
merger, consolidation or other reorganization of Tenant; or the withdrawal, resignation or termination of the majority of any general partners, managers or board
of directors of Tenant. Notwithstanding the foregoing, Landlord acknowledges that Tenant is a publicly traded company and that this Section 8.16(g) shall not
apply to Tenant so long as Tenant’s stock is traded on a public exchange or over the counter market.
(h) As a condition to Landlord’s consent to a Transfer by Tenant (including a Permitted Transfer), any assignee shall expressly assume all the
obligations of Tenant under this Lease in a written instrument reasonably satisfactory to Landlord and furnished to Landlord not later than fifteen (15) days prior
to the effective date of such assignment, and any subtenant shall covenant to Landlord to comply with all obligations of Tenant under this Lease as applied to the
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portion of the Demised Premises so sublet and to attorn to Landlord, at Landlord’s written election, in the event of any termination of this Lease prior to the
expiration date of the Lease Term, all of which shall be in a written instrument satisfactory to Landlord and furnished to Landlord not later than fifteen (15) days
prior to the effective date of such sublease.
(i) Notwithstanding anything to the contrary contained herein, in no event shall Tenant assign this Lease or enter into any Transfer for the possession,
use, occupancy or utilization (collectively, “use”) of any part of the Demised Premises which (i) provides for a rental or other payment for such use based in
whole or in part on the income or profits derived by any person from the Demised Premises (other than an amount based on a fixed percentage or percentages of
gross receipts or sales), and Tenant agrees that all assignments and subleases of any part of the Demised Premises shall provide that the person having an interest
in the use of the Demised Premises shall not enter into any lease or sublease which provides for a rental or other payment for such use based in whole or in part
on the income or profits derived by any person from the Demised Premises (other than an amount based on a fixed percentage or percentages of gross receipts of
sales), or (ii) would cause any portion of the amounts payable to Landlord hereunder to not constitute “rents from real property” within the meaning of
Section 856(d) of the Internal Revenue Code, and any such purported Transfer shall be absolutely void and ineffective as a conveyance of any right or interest in
the possession, use, occupancy or utilization of any part of the Demised Premises.
8.17 Annual Financial Statements. Tenant covenants and agrees to furnish to Landlord, within thirty (30) days after written request thereof from
Landlord, copies of publicly available financial statements of Tenant and agrees that Landlord may deliver any such financial statements to any existing or
prospective Mortgagee or purchaser of the Property. The financial statements shall include a balance sheet as of the end of, and a statement of profit and loss for,
the preceding fiscal year of Tenant and, if regularly prepared by Tenant, a statement of sources and use of funds for the preceding fiscal year of Tenant. Landlord
and any existing or prospective Mortgagee or purchaser of the Property must agree to take commercially reasonable steps to keep such financial statements
confidential.
8.18 Payment of Income and Other Taxes. Tenant covenants and agrees to pay, as Additional Rent, promptly when due, all personal property taxes on
personal property of Tenant on the Demised Premises and all federal, state and local income taxes, sales taxes, use taxes, Social Security taxes, unemployment
taxes and taxes withheld from wages or salaries paid to Tenant’s employees, the nonpayment of which might give rise to a lien on the Demised Premises or
Tenant’s interest therein, and to furnish, if requested by Landlord, evidence of such payments.
8.19 Estoppel Certificates. Tenant covenants and agrees to execute, acknowledge and deliver to Landlord, within ten (10) business days after Landlord’s
written request, a written statement certifying that this Lease is unmodified (or, if modified, stating the modifications) and in full force and effect; stating the dates
to which Basic Rent has been paid; stating the amount of the Security Deposit held by Landlord; stating the amount of the Monthly Deposits held by Landlord for
the then tax and insurance year; stating that there have been no defaults by Landlord or Tenant and no event which with the giving of notice or the passage of
time, or both, would constitute such a default (or, if there have been defaults, setting forth the nature thereof); and stating such other matters concerning this Lease
as Landlord may reasonably request.
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Tenant agrees that such statement may be delivered to and relied upon by any existing or prospective Mortgagee or purchaser of the Property. If Tenant fails to
deliver such a statement within such 10-business day period, Landlord may send a second request to Tenant (each, an “Estoppel Reminder Notice”). Tenant
agrees that a failure to deliver such a statement within three (3) business days after receipt of an Estoppel Reminder Notice shall be conclusive upon Tenant that
this Lease is in full force and effect without modification except as may be represented by Landlord; that there are no uncured defaults by Landlord or Tenant
under this Lease except as may be represented by Landlord; and that any representation by Landlord with respect to Basic Rent, the Security Deposit, the
Monthly Deposits and any other permitted matter are true.
8.20 Landlord Right to Inspect and Show Premises and to Install “For Sale” Signs. Tenant covenants and agrees that Landlord and the authorized
representatives of Landlord shall have the right upon reasonable prior written notice, to enter the Demised Premises at any reasonable time during ordinary
business hours (or at any time in the event of an emergency) for the purposes of inspecting, repairing or maintaining the same or performing any obligations of
Tenant which Tenant has failed to perform hereunder or for the purposes of showing the Demised Premises to any existing or prospective Mortgagee, purchaser or
tenant (so long as tenant is not a direct competitor of Tenant and Landlord provides at least 48 hours notice) of the Property or the Demised Premises. Tenant
covenants and agrees that Landlord may at any time in the last six (6) months of the Lease Term or any extension, and from time to time place on the Property or
the Demised Premises a sign advertising the Property or the Demised Premises for sale or for lease.
8.21 Landlord Title to Fixtures, Improvements and Equipment. Tenant covenants and agrees that all fixtures and improvements on the Demised
Premises, including all plumbing, heating, lighting, electrical and air conditioning fixtures and equipment other than Tenant’s trade fixtures, personal property,
and Tenant’s Equipment (defined below), whether or not attached to or affixed to the Demised Premises, and whether now or hereafter located upon the Demised
Premises, shall be and remain the property of the Landlord upon expiration of the Lease Term or upon the early termination of Tenant’s right to occupy the
Demised Premises.
8.22 Removal of Tenant’s Equipment. Tenant covenants and agrees to remove, at or prior to the expiration or earlier termination of the Lease Term or at
the early termination of Tenant’s right to occupy the Demised Premises, all of Tenant’s Equipment, as hereinafter defined. “Tenant’s Equipment” shall mean all
equipment, apparatus, machinery, signs, furniture, furnishings, trade fixtures and personal property used in the operation of the business of Tenant (as
distinguished from the use and operation of the Demised Premises) including any HVAC equipment used in or servicing the laboratory area of the Demised
Premises. If such removal shall injure or damage the Demised Premises Tenant covenants and agrees, at its sole cost and expense, at or prior to the expiration of
the Lease Term or at the early termination of Tenant’s right to occupy the Demised Premises, to repair such injury and damage in good and workmanlike fashion
and to place the Demised Premises in the same condition as the Demised Premises would have been in if such Tenant’s Equipment had not been installed. If
Tenant fails to remove any of Tenant’s Equipment by the expiration of the Lease Term or at the early termination of Tenant’s right to occupy the Demised
Premises, Landlord may, at its option, keep and retain any such Tenant’s Equipment or dispose of the same and retain any proceeds
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therefrom, and Landlord shall be entitled to recover from Tenant, any costs or expenses of Landlord in removing the same and in restoring the Demised Premises,
in excess of the actual proceeds, if any, received by Landlord from disposition thereof. Tenant releases and discharges Landlord from any and all claims and
liabilities of any kind arising out of Landlord’s disposition of Tenant’s Equipment.
8.23 Tenant Indemnification of Landlord. Except in the event of a violation by Landlord of its obligations in Section 8.24, Tenant covenants and agrees
to protect, indemnify, defend and save Landlord and Landlord’s managers, employees, agents, beneficiaries, successors, assigns and other related parties
(“Related Parties”) harmless from and against all liability, obligations, claims, damages, penalties, causes of action, costs and expenses, including attorneys’ fees
(collectively, “Claims”), imposed upon, incurred by or asserted against Landlord or its Related Parties, except to the extent caused by the negligence or
intentional misconduct of Landlord or such Related Parties, by reason of (a) any accident, injury to or death of any person or loss of or damage to any property
occurring on or about the Demised Premises; (b) any act or omission of Tenant or Tenant’s agents, officers or employees or any other person entering upon the
Demised Premises under express or implied invitation of Tenant (collectively, “Tenant’s Agents”): (c) any use which may be made of, or condition existing upon,
the Demised Premises; (d) any improvements, fixtures or equipment upon the Demised Premises; (e) any failure on the part of Tenant or Tenant’s Agents to
perform or comply with any of the provisions, covenants or agreements of Tenant contained in this Lease; (f) any violation of any law, ordinance, order, rule or
regulation of governmental authorities having jurisdiction over Tenant or Tenant’s Agents; or (g) any repairs, maintenance or Changes to the Demised Premises
by, through or under Tenant. Tenant further covenants and agrees that, in case any action, suit or proceeding is brought against Landlord or its Related Parties by
reason of any of the foregoing, Tenant shall, at Tenant’s sole cost and expense, defend Landlord in any such action, suit or proceeding with counsel reasonably
acceptable to Landlord.
8.24 Landlord Indemnification of Tenant. Landlord covenants and agrees to protect, indemnify, defend and save Tenant harmless from and against all
Claims imposed upon, incurred by, or asserted against Tenant by reason of (a) Landlord’s negligence or willful misconduct; or (b) Claims arising in the Common
Areas (except to the extent caused by the negligence or intentional misconduct of Tenant or Tenant’s Agents). Tenant waives and releases any claims Tenant may
have against Landlord or its Related Parties for loss, damage or injury to person or property sustained by Tenant or Tenant’s Agents resulting from any cause
whatsoever other than gross negligence or willful misconduct of Landlord. Notwithstanding anything to the contrary, the indemnification of Tenant by Landlord
provided in this Section 8.24 shall be subject to all waivers, limitations and restrictions otherwise provided in this Lease. Notwithstanding anything to the
contrary, Landlord and its Related Parties shall not be personally liable with respect to any of the terms, covenants and conditions of this Lease, and Tenant shall
look solely to the interest of Landlord in the Property and the proceeds therefrom in the event of any default or liability of Landlord under this Lease, such
exculpation of liability to be absolute and without any exception whatsoever.
8.25 Release upon Transfer by Landlord. In the event of a transfer by Landlord of the Property or of Landlord’s interest as Landlord under this Lease,
Landlord’s successor or assign shall take subject to and be bound by this Lease and in such event, Tenant covenants and
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agrees that Landlord and its Related Parties shall be released from all obligations of Landlord under this Lease, except obligations which arose prior to such
transfer by Landlord; that Tenant shall thereafter look solely to Landlord’s successor or assign for satisfaction of the obligations of Landlord under this Lease; and
that, upon demand by Landlord or Landlord’s successor or assign, Tenant shall attorn to such successor or assign.
8.26 Rules and Regulations. Tenant shall observe and comply with rules and regulations attached hereto as Exhibit C, which may be amended from time
to time by Landlord by providing written notice thereof to Tenant so long as such amendments do not materially increase or Tenant’s obligations or decrease
Tenant’s rights under the Lease. Landlord shall enforce the rules and regulations uniformly with respect to all tenants or occupants of the project. Landlord shall
not be responsible to Tenant for the failure of any other tenant of the Project to observe or comply with any of the rules or regulations. In the event of a conflict
between the rules and regulations and this Lease, the terms of this Lease shall govern and control.
8.27 Tenant’s Representations, Warranties and Covenants Concerning Use of Hazardous Substances.
(a) Tenant shall, without cost or expense to Landlord, keep and maintain the Demised Premises in good condition, ordinary wear and tear and
damage by fire or other casualty and condemnation excepted, and promptly respond to and clean up any release or threatened release of any Hazardous Substance
(as hereinafter defined) into the drainage systems, soil, surface water, groundwater, or atmosphere, in accordance with Applicable Environmental Law (as
hereinafter defined), and as authorized or approved by all federal, state, and/or local agencies having authority to regulate the permitting, handling, and cleanup of
Hazardous Substances; provided, however, Tenant’s obligations under this sentence shall not include any releases of Hazardous Substances that (i) existed on the
Property on the commencement of the Lease Term unless caused by any act or omission of Tenant or Tenant’s Agents, or (ii) were not caused by Tenant’s
operations at the Property.
(b) Tenant and Tenant’s Agents shall not use, store, generate, treat, transport, or dispose of any Hazardous Substance at the Property without first
obtaining Landlord’s written approval, which consent shall be in Landlord’s sole and subjective discretion, except for commercially reasonable amounts of
Hazardous Substances used in the ordinary course of Tenant’s operations at the Property which are used and stored in compliance with all Applicable
Environmental Laws.
(c) Every twelve (12) months, beginning first anniversary of the Commencement Date, Tenant shall provide Landlord with a written report listing the
following items, if such occurred during the preceding twelve (12) months): (i) all Hazardous Substances which were used at the Demised Premises by the Tenant
(not including customary and ordinary office products and cleansers or Hazardous Substances identified on Tenant’s prior written reports under this
Section 8.26(c)); (ii) all releases of Hazardous Substances that occurred or were discovered at the Property; and (iii) all instances of materials non-compliance
with Applicable Environmental Laws, including all contacts with government agencies or private parties of any kind concerning Hazardous Substances.
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(d) Tenant shall permit Landlord and its Related Parties to enter into and upon the Demised Premises, without notice, at all reasonable times (or at
any time in the event of an emergency) for the purpose of inspecting the Demised Premises and all activities thereon, including activities involving Hazardous
Substances, or for purposes of maintaining any Building. Such right of entry and inspection shall not constitute managerial or operational control by Landlord
over any activities or operations conducted on the Property by Tenant.
(e) Tenant hereby indemnifies, defends and holds harmless Landlord from and against any suits, actions, legal or administrative proceedings,
demands, claims, liabilities, fines, penalties, losses, injuries, damages, expenses or costs, including interest and attorneys’ fees, incurred by, claimed or assessed
against Landlord or its Related Parties, under any Applicable Environmental Laws, arising from, or in any way connected to, Tenant’s operations at the Property,
except to the extent caused by negligence or willful misconduct of Landlord or such Related Parties, This indemnity specifically includes the direct obligation of
Tenant to perform any remedial or other activities required, ordered, recommended or requested by any agency, government official or third party, or otherwise
necessary to avoid or minimize injury or liability to any person, or to prevent the spread of pollution, however it came to be located thereon (hereinafter, the
“Remedial Work”). Tenant shall perform all Remedial Work in its own name in accordance with Applicable Environmental Laws. Without waiving its rights
hereunder, if Tenant fails to conduct the Remedial Work in a timely and reasonable fashion, Landlord may, at its option, perform the Remedial Work and
thereafter seek reimbursement for the costs thereof Tenant shall permit Landlord access to the Property to perform any Remedial Work. Whenever Landlord has
incurred costs described in this Section, Tenant shall, within ten (10) days of receipt of notice thereof, reimburse Landlord for all such expenses together with
interest from the date of expenditure at the rate provided in Section 12.9 hereof.
(f) Without limiting its obligations under any other Section of this Lease, Tenant shall be responsible for responding to and complying with any
administrative notice, order, request or demand, or any third party claim or demand relating to potential or actual contamination on the Property resulting from the
acts of Tenant or Tenant’s Agents, except to the extent caused by the negligence or willful misconduct of Landlord or such Related Parties. The responsibility
conferred under this Section includes but is not limited to responding to such orders on behalf of Landlord and defending against any assertion of Landlord’s
financial responsibility or individual duty to perform under such orders. Tenant assumes all liabilities or responsibilities which are assessed against Landlord in
any action described under this Section.
(g) Landlord consents to Tenant’s use of ordinary office products and the materials and products used in Tenant’s research and development activities
and in customary quantities so used within the Demised Premises, in accordance with Applicable Environmental laws and the terms and conditions of this Lease.
(h) “Hazardous Substance(s)” shall mean any hazardous substance, pollutant, contaminant, waste, by-product or constituent regulated under any of
the Applicable Environmental Laws (as hereinafter defined); oil and petroleum products, natural gas, natural gas liquids, liquefied natural gas, and synthetic gas
usable for fuel; pesticides regulated under any of the Applicable Environmental Laws; asbestos and asbestos containing materials, PCBs and other substances
regulated under any of the Applicable Environmental Laws; raw materials; source
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material, special nuclear material, by-product material and any other radioactive materials or radioactive wastes, however produced, regulated under the Atomic
Energy Act or the Nuclear Waste Policy Act; chemicals subject to the OSHA Hazard Communications Standard, 29 C.F.R. § 19.10.1200 et seq.; industrial process
and pollution control wastes, whether or not defined as hazardous within the meaning of any Applicable Environmental Law; and any substance which at any
time shall be listed as “hazardous” or “toxic” or regulated under any of the Applicable Environmental Laws.
(i) “Applicable Environmental Law(s)’ shall include, but shall not be limited to, all federal, state, and local statutes, ordinances, regulations and
rules regulating the environmental quality, health, safety, contamination and cleanup including, without limitation, the Clean Air Act, as amended, 42 U.S.C.
§ 7401 et seq., the Federal Water Pollution Control Act, as amended, 33 U.S.C. § 1251 et seq.; the Water Quality Act of 1987, as amended; the Federal
Insecticide, Fungicide and Rodenticide Act, as amended, 7 U.S.C. § 136 et seq.; the Marine Protection, Research and Sanctuaries Act, as amended, 33 U.S.C.
§ 1401 et seq.; the National Environmental Policy Act, as amended, 42 U.S.C. § 4321 et seq.; the Noise Control Act, as amended, 42 U.S.C. § 4901 et seq.; the
Occupational Safety and Health Act, as amended, 29 U.S.C. § 651 et seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. § 609 et seq.; the
Safe Drinking Water Act, as amended, 42 U.S.C. § 300(f) et seq.; the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42
U.S.C. § 9601 et seq.; the Toxic Substances Control Act, as amended, 15 U.S.C. § 2601 et seq.; the Atomic Energy Act, as amended, 42 U.S.C. § 2011 et seq.; the
Nuclear Waste Policy Act of 1982, as amended, 42 U.S.C. § 10101 et seq.; and state superlien and environmental cleanup statutes, with implementing regulations
and guidelines. Applicable Environmental Laws shall also include all federal, state, regional, county, municipal, agency, judicial and other local laws, statutes,
ordinances, regulations, rules and rulings, whether currently in existence or hereinafter enacted or promulgated, that govern or relate to: (i) the existence, cleanup
and/or remedy of contamination of property; (ii) the protection of the environment from spilled, deposited or otherwise emplaced contamination; (iii) the control
of Hazardous Substances; or (iv) the use, generation, discharge, transportation, treatment, removal or recovery of Hazardous Substances.
IX. DAMAGE OR DESTRUCTION
9.1 Tenant’s Notice of Damage. If any portion of the Demised Premises shall be damaged or destroyed by fire or other casualty, Tenant shall give prompt
written notice thereof to Landlord (“Tenant’s Notice of Damage”).
9.2 Options to Terminate if Damage Substantial. Upon receipt of Tenant’s Notice of Damage, Landlord shall promptly proceed to determine the nature
and extent of the damage or destruction and to estimate the time necessary to repair or restore the Demised Premises. As soon as reasonably possible, Landlord
shall give written notice to Tenant stating Landlord’s estimate of the time necessary to repair or restore the Demised Premises (“Landlord’s Notice of Repair
Time”). If Landlord reasonably estimates that repair or restoration of the Demised Premises cannot be completed within […***…] from the time of Tenant’s
Notice of Damage, Landlord and Tenant shall each have the option to terminate this Lease. If, however, the damage or destruction was caused by the act or
omission of Tenant or Tenant’s Agents, Landlord shall have the option to terminate this Lease if Landlord reasonably estimates that the
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repair or restoration cannot reasonably be completed within […***…] from the time of Tenant’s Notice of Damage, but Tenant shall not have the option to
terminate this Lease. Any option granted hereunder shall be exercised by written notice to the other party given within thirty (30) days after Landlord’s Notice of
Repair Time. If either Landlord or Tenant exercises its option to terminate this Lease, the Lease Term shall expire fifteen (15) days after the notice by either
Landlord or Tenant exercising such party’s option to terminate this Lease. Following termination of this Lease under the provisions hereof, Landlord shall refund
to Tenant such amounts of Basic Rent and Additional Rent theretofore paid by Tenant as may be applicable to the period subsequent to the time of Tenant’s
Notice of Damage.
9.3 Option to Terminate if Damage to Building. If the Building shall be damaged or destroyed by fire or other casualty (though the Demised Premises
may not be affected or if affected, can be repaired within […***…] to the extent of […***…] of the replacement value of the Building, Landlord may elect not
to reconstruct or rebuild the Building. Upon written notice to Tenant given within twenty (20) days after Landlord’s Notice of Repair Time, this Lease shall
terminate and Landlord shall refund to Tenant such amounts of Basic Rent and Additional Rent paid by Tenant for the period after such damage.
9.4 Obligations to Repair and Restore. If repair and restoration of the Demised Premises can be completed within the period specified in Section 9.2. in
Landlord’s reasonable estimation, or if neither Landlord nor Tenant terminate this Lease as provided in Sections 9.2 or 9.3, then this Lease shall continue in full
force and effect and Landlord shall proceed forthwith to cause the Demised Premises (including any improvements constructed by Landlord but excluding any
alterations, improvements, Changes, fixtures and personal property constructed or owned by Tenant) to be repaired and restored with reasonable diligence to
substantially the condition that existed prior to such fire or casualty, and there shall be abatement of Basic Rent and Additional Rent proportionate to the extent of
the space and period of time that Tenant is unable to use and enjoy the Demised Premises. If all repairs are not completed within such […***…] (subject to
reasonable delays for insurance adjustments and Force Majeure, and also subject to zoning Laws and building codes then in effect), then Tenant may terminate the
Lease upon fifteen (15) days prior written notice to Landlord delivered at any time before the Demised Premises are restored.
9.5 Application of Insurance Proceeds. The proceeds of any Property Insurance maintained on the Demised Premises by Landlord, other than property
insurance maintained by Tenant on fixtures and personal property of Tenant, shall be paid to and become the property of Landlord, subject to any obligation of
Landlord to cause the Demised Premises to be repaired and restored and further subject to any rights under any Mortgage encumbering the Property to such
proceeds. Landlord’s obligation to repair and restore the Demised Premises provided in this Section 9 is limited to the repair and restoration that can be
accomplished with the proceeds of any Property Insurance maintained on the Demised Premises. The amount of any such insurance proceeds is subject to any
right of any Mortgagee to apply such proceeds to its secured debt under its Mortgage and any proceeds so applied shall not be considered available for repair and
restoration.
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X.
CONDEMNATION.
10.1 Taking – Substantial Taking – Insubstantial Taking. A “Taking” shall mean the taking of all or any portion of the Demised Premises or the
Building as a result of the exercise of the power of eminent domain or condemnation for public or quasi-public use or the sale of all or part of the Demised
Premises or the Building under the threat of condemnation. A “Substantial Taking” shall mean a Taking of […***…] or more of the Floor Area of either the
Demised Premises or the Building or a substantial amount of the Parking Area. An “Insubstantial Taking” shall mean a Taking which does not constitute a
Substantial Taking.
10.2 Termination on Substantial Taking. If there is a Substantial Taking with respect to the Demised Premises or the Building, the Lease Term shall
expire on the date of vesting of title pursuant to such Taking. In the event of termination of this Lease under the provisions hereof, Landlord shall refund to Tenant
such amounts of Basic Rent and Additional Rent theretofore paid by Tenant as may be applicable to the period subsequent to the time of termination of this
Lease.
10.3 Restoration on Insubstantial Taking. In the event of an Insubstantial Taking with respect to the Demised Premises or the Building, this Lease shall
continue in full force and effect, Landlord shall proceed forthwith to cause the Demised Premises (but excluding any alterations, improvements, Changes, fixtures
and personal property constructed or owned by Tenant), less such Taking, to be restored as near as may be to the original condition thereof and there shall be
abatement of Basic Rent and Additional Rent on a fair and equitable basis based on the extent of the space so taken.
10.4 Right to Award. The total award, compensation, damages or consideration received or receivable as a result of a Taking (“Award”) shall be paid to
and be the property of Landlord, including, without limitation, any part of the Award made as compensation for diminution of the value of this leasehold or the
fee of the Demised Premises. Tenant hereby assigns to Landlord, all of Tenant’s right, title and interest in and to any such Award. Tenant covenants and agrees to
execute, immediately upon demand by Landlord, such documents as may be necessary to facilitate collection by Landlord of any such Award. Notwithstanding
Landlord’s right to the entire Award, Tenant shall be entitled to a separate award, if any, for the loss of Tenant’s personal property, the loss of Tenant’s business
and profits, and Tenant’s moving expenses to the extent Landlord’s award is not diminished.
XI. DEFAULTS BY TENANT.
11.1 Defaults Generally. In the event that any of the following events shall occur, Tenant shall be deemed to be in default of Tenant’s obligations under
this Lease (each of the following shall be referred to as a “Default by Tenant”).
11.2 Failure to Pay Rent or Other Amounts. A Default by Tenant shall exist if Tenant fails to pay Basic Rent, Additional Rent, Monthly Deposits, or any
other amounts payable by Tenant within five (5) business days after notice to Tenant such rental or other amount is due under the terms of this Lease.
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11.3 Violation of Lease Terms. A Default by Tenant shall exist if Tenant breaches or fails to comply with any non-monetary agreement, term, covenant or
condition in this Lease applicable to Tenant, and Tenant does not cure such breach or failure within thirty (30) days after written notice thereof by Landlord to
Tenant, or, if such breach or failure to comply cannot be reasonably cured within such 30-day period, if Tenant shall not in good faith commence to cure such
breach or failure to comply within such 30-day period or shall not diligently proceed therewith to completion. Landlord shall not be required to give written
notice of the same or any similar non-monetary default more than two (2) times in any twelve month period during the Lease Term, and thereafter Tenant’s failure
to perform the same or any similar non-monetary agreement, term, covenant, or condition as and when required to be performed by Tenant under the terms of this
Lease shall be a Default by Tenant without notice or demand.
11.4 Intentionally Omitted.
11.5 Transfer of Interest Without Consent. A Default by Tenant shall exist if Tenant’s interest under this Lease or in the Demised Premises shall be
transferred to or pass to or devolve upon any other party except in accordance with the terms and conditions of this Lease.
11.6 Execution and Attachment against Tenant. A Default by Tenant shall exist if Tenant’s interest under this Lease or in the Demised Premises shall be
taken upon execution or by other process of law directed against Tenant, or shall be subject to any attachment at the instance of any creditor or claimant against
Tenant and said attachment shall not be discharged or disposed of within sixty (60) days after the levy thereof.
11.7 Bankruptcy or Related Proceedings. A Default by Tenant shall exist if Tenant shall file a petition in bankruptcy or insolvency or for reorganization
or arrangement under the bankruptcy laws of the United States or under any similar act of any state, or shall voluntarily take advantage of any such law or act by
answer or otherwise, or shall be dissolved or shall make an assignment for the benefit of creditors or if involuntary proceedings under any such bankruptcy or
insolvency law or for the dissolution of Tenant shall be instituted against Tenant or a receiver or trustee shall be appointed for the Demised Premises or for all or
substantially all of the property of Tenant, and such proceedings shall not be dismissed or such receivership or trusteeship vacated within sixty (60) days after
such institution or appointment.
XII. LANDLORD’S REMEDIES.
12.1 Remedies Generally. Upon the occurrence of any Default by Tenant and during the continuance thereof, Landlord shall have the right, at Landlord’s
election, then or any time thereafter, to exercise any one or more of the following remedies.
12.2 Cure by Landlord. In the event of a Default by Tenant, Landlord may, at Landlord’s option, but without obligation to do so, and without releasing
Tenant from any obligations under this Lease, make any payment or take any action as Landlord may deem necessary or desirable to cure any such Default by
Tenant in such manner and to such extent as Landlord may deem necessary or desirable. Landlord may do so without demand on, or written notice to, Tenant and
without giving Tenant an opportunity to cure such Default by Tenant. Tenant covenants and agrees to pay to Landlord, within ten (10) days after demand, all
advances,
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costs and expenses of Landlord in connection with the making of any such payment or the taking of any such action including, without limitation, (a) a charge in
the amount of […***…] of such advances, costs and expenses payable to Landlord to compensate for the administrative overhead attributable to such action,
(b) reasonable attorneys’ fees, and (c) interest as hereinafter provided from the date of payment of any such advances, costs and expenses by Landlord. Action
taken by Landlord may include commencing, appearing in, defending or otherwise participating in any action or proceeding and paying, purchasing, contesting or
compromising any claim, right, encumbrance, charge or lien, with respect to the Demised Premises which Landlord, in its discretion, may deem necessary or
desirable to protect its interest in the Demised Premises and under this Lease. In the event that the Lease Term has expired or Tenant is no longer occupying the
Demised Premises, Landlord shall be entitled to take such actions as provided under this Section 12.2 without Landlord being required to provide the notice to
Tenant under Section 11.3.
12.3 Termination of Lease and Damages. In the event of a Default by Tenant, Landlord may terminate this Lease, effective at such time as may be
specified by written notice to Tenant, and demand (and, if such demand is refused, recover) possession of the Demised Premises from Tenant. Tenant shall remain
liable to Landlord for damages in an amount equal to the Basic Rent, Additional Rent and other sums which would have been owing by Tenant hereunder for the
balance of the Lease Term, had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Demised Premises by Landlord subsequent to
such termination, after deducting all Landlord’s expenses in connection with such recovery of possession or reletting. Landlord shall be entitled to collect and
receive such damages from Tenant on the days on which the Basic Rent, Additional Rent and other amounts would have been payable if this Lease had not been
terminated. Alternatively, at the option of Landlord, Landlord shall be entitled to recover forthwith from Tenant, as damages for loss of the bargain and not as a
penalty, an aggregate sum which, at the time of such termination of this Lease, represents the excess, if any, of (a) the aggregate of the Basic Rent, Additional
Rent and all other sums payable by Tenant hereunder that would have accrued for the balance of the Lease Term, over (b) the aggregate rental value of the
Demised Premises for the balance of the Lease Term, both discounted to present worth at the rate of 8% per annum.
12.4 Repossession and Reletting. In the event of a Default by Tenant, Landlord may reenter and take possession of the Demised Premises or any part
thereof, without demand or notice, and repossess the same and expel Tenant and any party claiming by, under or through Tenant, and remove the effects of both
using such force for such purposes as may be necessary, without being liable for prosecution on account thereof or being deemed guilty of any manner of trespass,
and without prejudice to any remedies for arrears of rent or right to bring any proceeding for breach of covenants or conditions. No such reentry or taking
possession of the Demised Premises by Landlord shall be construed as an election by Landlord to terminate this Lease unless a written notice of such intention is
given to Tenant. No notice from Landlord hereunder or under a forcible entry and detainer statute or similar law shall constitute an election by Landlord to
terminate this Lease unless such notice specifically so states. Landlord reserves the right, following any reentry or reletting, to exercise its right to terminate this
Lease by giving Tenant such written notice, in which event this Lease shall terminate as specified in said notice. Subject to applicable law, after recovering
possession of the Demised Premises, Landlord shall use reasonable efforts to re-let the Demised Premises, or any part thereof, for the account of
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Tenant, for such term or terms and on such conditions and upon such other terms as Landlord, in its reasonable discretion, may determine. Landlord may make
such repairs, alterations or improvements as Landlord may consider reasonably appropriate to accomplish such reletting, and Tenant shall reimburse Landlord
upon demand for all reasonable costs and expenses, including reasonable attorneys’ fees, which Landlord may incur in connection with such reletting. Landlord
may collect and receive the rents for such reletting but Landlord shall in no way be responsible for or liable for any failure to relet the Demised Premises, or any
part thereof, or for any failure to collect any rent due upon such reletting. Notwithstanding Landlord’s recovery of possession of the Demised Premises, Tenant
shall continue to pay on the dates herein specified, the Basic Rent, Additional Rent and other amounts which would be payable hereunder if such repossession
had not occurred. Landlord shall promptly refund to Tenant any amount, without interest, by which the amounts paid by Tenant, when added to the net amount, if
any, recovered by Landlord through any reletting of the Demised Premises, exceeds the amounts payable by Tenant under this Lease. If, in connection with any
reletting, the new lease term extends beyond the existing Lease Term, or the premises covered thereby include other premises not part of the Demised Premises, a
fair apportionment of the rent received from such reletting and the expenses incurred in connection therewith shall be made in determining the net amount
recovered from such reletting.
12.5 Landlord’s Lien and Enforcement. [Intentionally deleted].
12.6 Suits by Landlord. Actions or suits for the recovery of amounts and damages payable under this Lease may be brought by Landlord from time to
time, at Landlord’s election, and Landlord shall not be required to await the date upon which the Lease Term would have expired to bring any such action or suit.
12.7 Recovery of Landlord Enforcement Costs. All costs and expenses incurred by the prevailing party in connection with an action for collecting any
amounts and damages owing by Tenant pursuant to the provisions of this Lease or to enforce any provision of this Lease, including reasonable attorneys’ fees,
whether or not any action is commenced by either party, shall be paid by the non-prevailing party to the other upon demand.
12.8 Administrative Late Charge. Notwithstanding any other remedies for nonpayment of rent, if the monthly payment of Basic Rent and Additional
Rent are not received by Landlord on or before the fifth (5 ) day of the month for which such rental is due, or if any other payment due Landlord by Tenant is not
received by Landlord on or before the fifth (5 ) business day of the month next following the month in which Tenant was invoiced, an administrative late charge
of […***…] of such past due amount shall become due and payable, as Additional Rent, in addition to such amounts owed under this Lease to help defray the
additional cost to Landlord for processing such late payments.
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12.9 Interest on Past-Due Payments and Advances. Tenant covenants and agrees to pay Landlord, as Additional Rent, interest on demand at the rate of
[…***…] per annum, compounded on a monthly basis, on the amount of any Basic Rent, Additional Rent or other charges not paid when due, from the date due
and payable, and on the amount of any payment made by Landlord required to have been made by Tenant under this Lease and on the amount of any costs and
expenses, including reasonable attorneys’ fees, paid by Landlord in connection with the taking of any action to cure any Default by Tenant, from the date of
making any such payment or the advancement of such costs and expenses by Landlord.
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12.10 Additional Damages. In the event of a Default by Tenant, Landlord shall be entitled to recover as damages, in addition to all other damages and
remedies provided hereunder, an amount equal to the total of […***…].
12.11 Landlord’s Bankruptcy Remedies. Nothing contained in this Lease shall limit or prejudice the right of Landlord to prove and obtain as liquidated
damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding, an amount equal to the maximum allowable by any statute or rule
of law governing such proceeding in effect at the time when such damages are to be proved, whether or not such amount be greater, equal or less than the
amounts recoverable, either as damages or rent, under this Lease.
12.12 Remedies Cumulative. Exercise of any of the remedies of Landlord under this Lease shall not prevent the concurrent or subsequent exercise of any
other remedy provided for in this Lease or otherwise available to Landlord or Tenant at law or in equity.
XIII. SURRENDER AND HOLDING OVER.
13.1 Surrender upon Lease Expiration. Upon the expiration or earlier termination of this Lease, or on the date specified in any demand for possession by
Landlord after any Default by Tenant, Tenant covenants and agrees to surrender possession of the Demised Premises to Landlord broom clean, with all lighting,
doors (including, without limitation, all loading dock doors, dock levelers, and related dock systems and areas), electrical and mechanical systems in good
working order and condition, all walls in clean condition and holes or punctures in the walls repaired, and otherwise in the same condition as of the
Commencement Date other than with respect to Tenant’s Work which may remain in place and ordinary wear and tear, damages from casualty and condemnation
excepted. Tenant, at Landlord’s option, shall transfer the telephone services to Landlord instead of terminating such service account, provided that Landlord bears
any costs of such transfer.
13.2 Holding Over. If Tenant shall hold over after the expiration of the Lease Term, without written agreement providing otherwise, Tenant shall be
deemed to be a trespasser upon the Demised Premises. If Landlord consents in writing to such holdover, then Tenant shall be deemed to be a tenant from month to
month, at a monthly rental, payable in advance, equal to […***…], and Tenant shall be bound by all of the other terms, covenants and agreements of this Lease.
Nothing contained herein shall be construed to give Tenant the right to hold over at any time, and Landlord, if Tenant’s holdover period extends beyond
one (1) month, may exercise any and all remedies at law or in equity to recover possession of the Demised Premises, as well as any damages incurred by
Landlord, due to Tenant’s failure to vacate the Demised Premises and deliver possession to Landlord as herein provided.
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* Confidential Treatment Requested
XIV. MISCELLANEOUS.
14.1 No Implied Waiver. No failure by Landlord or Tenant to insist upon the strict performance of any term, covenant or agreement contained in this
Lease, no failure by Landlord or Tenant to exercise any right or remedy under this Lease, and no acceptance of full or partial payment during the continuance of
any Default by Tenant or a default by Landlord, shall constitute a waiver of any such term, covenant or agreement, or a waiver of any such right or remedy, or a
waiver of any such Default by Tenant or default by Landlord.
14.2 Survival of Provisions. The covenants, agreements and obligations of the parties hereto shall continue in force and effect and survive any expiration
of the Lease Term or termination of this Lease or the early termination of Tenant’s right to occupy the Demised Premises.
14.3 Covenants Independent. This Lease shall be construed as if the covenants herein between Landlord and Tenant are independent, and not dependent,
and Tenant shall not be entitled to any offset against Landlord if Landlord fails to perform its obligations under this Lease.
14.4 Covenants as Conditions. Each provision of this Lease performable by Tenant shall be deemed both a covenant and a condition.
14.5 Tenant’s Remedies. Tenant may bring a separate action against Landlord for any claim Tenant may have against Landlord under this Lease, provided
Tenant shall first give written notice thereof to Landlord and shall afford Landlord a reasonable opportunity under the circumstance to cure any such default,
except in the case of emergencies. In addition, Tenant shall send notice of such default by certified or registered mail, postage prepaid, to any Mortgagee of whose
address Tenant has been notified in writing, and shall afford such holder a reasonable opportunity to cure any default on Landlord’s behalf but in no event less
than thirty (30) days following such notice, except in the case of emergencies. In no event shall Landlord be responsible for any consequential damages incurred
by Tenant including, but not limited to, loss of profits or interruption of business as a result of any default by Landlord hereunder.
14.6 Binding Effect. This Lease shall extend to and be binding upon the heirs, executors, legal representatives, successors and assigns of the respective
parties hereto. The terms, covenants, agreements and conditions in this Lease shall be construed as covenants running with the Land.
14.7 No Recording. Neither this Lease nor any memorandum or other memorialization of this Lease shall be recorded in the records of any County Clerk
and Recorder of the State of Colorado or any other public records without Landlord’s prior consent.
14.8 Notices and Demands. All billings under this Lease shall be provided by Landlord to Tenant at the address for billings set forth in the Summary by
regular mail or personal delivery. All other notices and demands under this Lease shall be in writing, signed by the party giving the same and shall be deemed
properly given and received when personally delivered (via hand delivery or overnight carrier) or three (3) business days after mailing through the United States
mail, postage prepaid, certified or registered, return receipt requested, addressed to the party to receive the notice at the address set forth for such party in the
Summary or at such other address as either party may notify the other of in writing.
32
14.9 Time of the Essence. Time is of the essence under this Lease, and all provisions herein relating thereto shall be strictly construed.
14.10 Captions for Convenience. The headings and captions hereof are for convenience only and shall not be considered in interpreting the provisions
hereof.
14.11 Severability. If any provision of this Lease shall be held invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and there
shall be deemed substituted for the affected provision a valid and enforceable provision as similar as possible to the affected provision.
14.12 Governing Law. This Lease shall be interpreted and enforced according to the laws of the State of Colorado.
14.13 Entire Agreement. This Lease, the Summary, Attachments, Exhibits and Addenda referred to herein, constitute the final and complete expression of
the parties’ agreements with respect to the Demised Premises and Tenant’s occupancy thereof. Each party agrees that it has not relied upon or regarded as binding
any prior agreements, negotiations, representations, or understandings, whether oral or written, except as expressly set forth herein.
14.14 No Oral Amendment or Modifications. No amendment or modification of this Lease, and no approvals, consents or waivers by Landlord under this
Lease, shall be valid or binding unless in writing and executed by the party to be bound.
14.15 Format. This Lease has been prepared to reflect all additions and deletions negotiated between Landlord and Tenant from the initial form of this
Lease submitted by Landlord to Tenant. All provisions and terms that are stricken are deletions and shall not be a part of this Lease; provided, however, a deletion
from this Lease shall not be construed to create the opposite intent of the deleted provision. All provisions and terms which are underlined (other than headings,
titles and captions) are additions and shall be part of this Lease. Tenant acknowledges that it has had the opportunity to thoroughly review and negotiate this Lease
and that the rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this
Lease.
14.16 Real Estate Brokers. Tenant covenants to pay, hold harmless and indemnify the Landlord from and against any and all cost, expense or liability for
any compensation, commissions, charges or claims by any broker or other agent with respect to this Lease or the negotiation thereof, whether or not meritorious,
other than the broker(s) listed as the Broker(s) on the Summary. Tenant acknowledges Landlord is not liable for any representations by Tenant’s Broker (as set
forth in Section 13 of the Summary) or by Landlord’s Broker except as required in Section 14.17(c) regarding the Demised Premises, the Building, the Project, or
this Lease.
33
14.17 Agency Disclosure.
(a) Landlord is represented by Newmark Knight Frank Frederick Ross, which is acting as Landlord’s agent (“Landlord’s Broker”).
Landlord’s Broker is an agent for Landlord and not an agent for Tenant, unless Landlord’s Broker enters into a written agreement with Tenant to act as
its agent. Landlord’s Broker owes duties to Landlord which include utmost good faith, loyalty and fidelity. Landlord’s Broker will negotiate on behalf of
and act as an advocate for Landlord. Please do not tell Landlord’s Broker any information which you do not want to share with Landlord. Landlord is
not vicariously liable for the acts of Landlord’s Broker that are not approved, directed or ratified by Landlord. Although Landlord’s Broker does not
represent Tenant, Landlord’s Broker shall disclose to Tenant all adverse material facts about the Demised Premises actually known by Landlord’s
Broker. Landlord’s Broker shall assist Tenant without regard to race, creed, sex, religion, national origin, familial status, marital status, or handicap.
(b) DIFFERENT BROKERAGE RELATIONSHIPS ARE AVAILABLE WHICH INCLUDE SELLER (LANDLORD) AGENCY, BUYER
(TENANT) AGENCY, OR TRANSACTION-BROKER.
(c) The definitions of real estate brokerage relationships are provided as follows: A landlord’s agent: (i) is engaged as a limited agent and
works solely on behalf of the landlord; (ii) owes duties to the landlord which include the utmost good faith, loyalty and fidelity; (iii) will negotiate on
behalf of and act as an advocate for the landlord; and (iv) must disclose to potential tenants only adverse material facts about the property actually
known by the agent. A broker acting as a landlord’s agent may cooperate with other brokers but may not engage or create any subagents. A landlord is
not vicariously liable for the acts of landlord’s agent that are not approved, directed or ratified by landlord. A separate written listing agreement is
required which sets forth the duties and obligations of the parties, and notice of such agency relationship must be furnished to any prospective party to
the proposed transaction in a timely manner. A tenant’s agent: (i) is engaged as a limited agent and works solely on behalf of the tenant; (ii) owes duties
to the tenant which include the utmost good faith, loyalty and fidelity; (iii) will negotiate on behalf of and act as an advocate for the tenant; and (iv) must
disclose to potential landlords only adverse material facts concerning the tenant’s financial ability to perform the terms of the transaction actually
known by the agent. A tenant is not vicariously liable for the acts of tenant’s agent that are not approved, directed or ratified by tenant. A broker acting
as a tenant’s agent owes no duty to conduct an independent inspection of the property for the benefit of the tenant, and owes no duty to independently
verify the accuracy or completeness of statements made by the landlord or independent inspectors; provided, however, this does not limit the agent’s
duties, as set forth above. A broker acting as a tenant’s agent may cooperate with other brokers but may not engage or create any subagents. A separate
written tenant agency agreement is required which sets forth the duties and obligations of the parties, and notice of such agency relationship must be
furnished to any prospective party to the proposed transaction in a timely manner. A broker shall not establish dual agency with any landlord or tenant.
A transaction-broker: (i) will assist a landlord or a tenant or both throughout a real estate transaction with communication, advice, negotiation,
contracting and closing without being an agent or advocate for any of the parties; (ii) does owe the parties a number of statutory obligations and
responsibilities, including using reasonable skill and care in the performance of any
34
oral or written agreement; and (iii) must also make the same disclosures as agents about adverse material facts concerning a property or a tenant’s
financial ability to perform the terms of a transaction, but only to the extent actually known by the agent. A transaction broker may cooperate with
other brokers but shall not engage or create any subagents. A landlord and tenant shall not be vicariously liable for a transaction-broker’s acts. A
broker shall be considered a transaction-broker unless a single agency relationship is established through a written agreement between the broker and
the party(ies) to be represented by such broker.
14.18 Parking. Provided no Default by Tenant or sublease exists, Tenant shall be entitled to the non-exclusive use of the Parking Area up to the maximum
number of spaces set forth in the Summary, on a first come-first serve basis. Landlord shall be entitled to establish reasonable rules and regulations governing the
use of the Parking Area including, without limitation, the right to issue parking permits and decals to be affixed to motor vehicles (with the reasonable costs
thereof being a part of the Common Facilities Charges). Landlord may designate a specific area for Tenant’s parking spaces within the Parking Area subject to
Tenant’s approval. Landlord shall not be liable for and Tenant hereby releases and covenants not to bring any action against Landlord for any loss, damage or
theft to or from any motor vehicle or other property of Tenant or Tenant’s Agents which occurs in or about the Parking Area except as caused by landlord or
Landlord’s Agents. If any visitor parking is provided by Landlord in the Parking Area, the use thereof shall be limited to visitors of Tenant and other tenants of
the Project, except as otherwise permitted by Landlord. Notwithstanding the foregoing, Tenant’s right to use such parking spaces shall be a license only and
Landlord’s inability to make such spaces available at any time for reasons beyond Landlord’s control shall not constitute a default by Landlord under this Lease.
14.19 Relationship of Landlord and Tenant. Nothing contained herein shall be deemed or construed as creating the relationship of principal and agent or
of partnership, or of joint venture by the parties hereto, it being understood and agreed that no provision contained in this Lease nor any acts of the parties hereto
shall be deemed to create any relationship other than the relationship of Landlord and Tenant.
14.20 Authority of Tenant. Each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to deliver
this Lease on behalf of Tenant and that this Lease is binding upon Tenant in accordance with its terms.
14.21 Removal of Cabling. Tenant shall be solely responsible for the cost of installation and maintenance of any high speed cable or fiber optic that Tenant
requires in the Demised Premises. Landlord shall provide reasonable access to the Building’s electrical lines, feeders, risers, wiring and other machinery to enable
Tenant to install high speed cable or fiber optic to serve its intended purpose, if any. All such cabling installed shall be tagged by Tenant at their point of entry into
the Building, at the terminal end of the cable and in the riser closet indicating the type of cable, the Tenant’s name and the service provided. Tenant shall be
responsible for the removal of such cabling and fiber optic at the termination or expiration of the Lease Term or the early termination of the Tenant’s right to
occupy the Demised Premises. Failure to remove any abandoned or unused cabling at the expiration or termination of the Lease Term or the early termination of
Tenant’s right to occupy the Demised Premises will be deemed
35
to be a holdover under Section 13.2 of the Lease. In the event Tenant fails to remove such cabling as set forth herein, Landlord may, but shall not be obligated to,
remove such cabling, all at Tenant’s sole cost and expense. Notwithstanding anything in this Section 14.21 to the contrary, and provided that Tenant has vacated
and surrendered exclusive possession of the Demised Premises on or before the expiration of this Lease, then (a) Tenant may remain in the Demised Premises for
up to five (5) days after the expiration (but not the early termination) of this Lease for the sole purpose of removing the cabling and other items that Tenant is
required to remove pursuant to this Section 14.21. and (b) Tenant’s possession of the Demised Premises for such purpose shall be subject to all of the terms and
conditions of this Lease, except that Tenant shall have no obligation to pay Basic Rent or Tenant’s Pro Rata Share of the Common Facilities Charges, Taxes, or
Landlord’s Insurance during such 5-day period.
14.22 Force Majeure. Whenever a period of time is herein prescribed for the taking of any action by Landlord or Tenant, Landlord or Tenant shall not be
liable or responsible for, and there shall be excluded from the computation of such period of time, any delays due to strikes, riots, acts of God, shortages of labor
or materials, war, governmental laws, regulations or restrictions, or any other cause whatsoever beyond the control of Landlord.
XV. EFFECTIVENESS CONDITION.
15.1 The Existing Building C Lease. Tenant acknowledges and agrees that, as of the Effective Date, (a) the Demised Premises are currently leased by an
unaffiliated third party (the “Existing Tenant”) pursuant to a written lease with Landlord (the “Existing Lease”), and (b) Tenant is in possession of the Demised
Premises pursuant to a sublease with Existing Tenant.
15.2 Effectiveness Conditions. Notwithstanding anything in this Lease to the contrary, the effectiveness of this Lease is expressly conditioned on the
satisfaction of each of the following conditions (collectively, the “Effectiveness Conditions”):
(a) Landlord and Existing Tenant will have unconditionally and irrevocably agreed to terminate the Existing Lease effective on or before July 31,
2013, as evidenced by (i) Landlord and the Existing Tenant duly signing and delivering to Landlord a written termination of lease (the “Termination”), which
Termination shall be on the terms and conditions that are acceptable to Landlord, in Landlord’s sole and absolute discretion, and (ii) the Existing Tenant waiving,
or being deemed to have waived, all conditions set forth in the Termination (if any).
(b) Tenant shall duly execute and deliver this Lease to Landlord;
(c) Tenant shall have delivered the Security Deposit in accordance with Section 4.8 of this Lease; and
(d) The existing Mortgagee shall have approved and consented to this Lease, in writing.
15.3 Failure of Effectiveness Conditions. If the Effectiveness Conditions have not been satisfied on or before the date that is thirty (30) days after the
Effective Date (the “Contingency Deadline”), then either party may, at any time prior to the satisfaction of the Effectiveness Conditions, terminate this Lease
upon written notice to the other party, in which event this Lease shall be null and void, ab initio, and of no force or effect.
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15.4 Landlord Representation and Warranty. Landlord represents and warrants to Tenant that, except for Mortgagee’s security interest in the Demised
Premises, no parties have rights to the Demised Premises beyond the Existing Tenant’s current lease term which, subject to Tenant’s execution of the Termination,
will expire as of July 31, 2013, and there are no other leases, options or rights of first refusal with respect to the use or possession of the Demised Premises.
[signature page follows]
37
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the Effective Date.
LANDLORD:
HINES REIT 345 INVERNESS DRIVE, LLC,
a Delaware limited liability company
By:
/s/ […***…]
Name:
[…***…]
Title:
Authorized Agent
TENANT:
GEVO, INC.,
a Delaware corporation
By:
/s/ […***…]
Name:
[…***…]
Title:
[…***…]
SIGNATURE PAGE
LEASE
BUILDING C, SUITE 310
345 INVERNESS DRIVE SOUTH
ENGLEWOOD, CO 80112
(GEVO, INC.)
* Confidential Treatment Requested
EXHIBIT “A”
Legal Description of Land
LOT 1B-2A,
INVERNESS SUBDIVISION FILING NO. SEVEN-10 AMENDMENT,
COUNTY OF DOUGLAS,
STATE OF COLORADO.
TH
[The remainder of this page intentionally left blank]
A-1
EXHIBIT “B”
Depiction of the Demised Premises
[NOTE—Any furnishings depicted on this plan are for illustration purposes only and are not included as part of the Demised Premises]
B-1
EXHIBIT “C”
Rules & Regulations
1.
2.
3.
4.
5.
6.
7.
8.
9.
The sidewalks, entrances shall not be obstructed or used for any purpose other than ingress and egress.
No awning or other projection shall be displayed or attached to the outside walls of the Building without the prior written consent of Landlord. The
standard blinds provided by Landlord shall not be removed from the windows and no other curtains, shades or screens, shall be installed without the prior
consent of Landlord.
SIGNAGE: See Exhibit & Standards. Tenant may place at Tenant’s expense one sign above the entry per Exhibit subject to Landlord’s prior written
approval (which shall not be unreasonably withheld) and shall be subject to any applicable governmental laws, ordinances and regulations and in
compliance with Landlord’s signage program. Tenant shall remove all such signs and graphics prior to the termination of this Lease. Such installations and
removals shall be made in such manner as to avoid injury or defacement of the Demised Premises; and Tenant shall repair any injury or defacement,
including without limitation, discoloration caused by such installation or removal.
All Tenant’s work to be done by State and or County licensed subcontractors and shall be Permitted by Douglas County, copies of which shall be delivered
to Landlord. Tenant to provide Landlord with copies of its approved Construction Plans.
The toilets, wash bowls and other plumbing fixtures shall not be used for any purpose other than those for which they were constructed, and no sweepings,
rubbish rags or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by tenant who, or whose
servants, employees, agents, visitors or licensees shall have caused the same.
No vehicles or animals of any kind (other than animals serving people with disabilities) shall be brought into or kept in or about the Demised Premises, and
no cooking shall be done or permitted by any tenant on the Demised Premises, except the preparation of coffee, tea, hot chocolate and similar items and the
use of microwave ovens for tenants and their employees shall be permitted. No tenant shall cause or permit any unusual or objectionable odors to be
produced upon or permeate the Demised Premises.
The Demised Premises shall not be used for the manufacturing of merchandise except as such storage may be incidental to the use of the Demised Premises
for general purposes. No tenant shall occupy or permit any portion of his Premises to be occupied for the manufacture or sale of liquor, narcotics, or
tobacco in any form. The Demised Premises shall not be used for lodging or sleeping or for any immoral or illegal purposes.
No tenant shall use, keep or permit to be used or kept any foul or noxious gas or substances in the Demised Premises or the Building or permit or suffer the
Demised Premises to be occupied or used in a manner offensive or objectionable to Landlord or other tenants of the Building of neighboring buildings by
reason of noise odors and/or vibrations, including, without limitation, by the use of any musical instrument, radio, phonograph, sound-producing instrument
or device that can be heard outside the Demised Premises.
No tenants shall place any radio or television antenna on the roof or on any part of the inside or outside of the Building without written permission of
Landlord. No tenant shall operate any electrical device from which may emanate electrical waves, which may interfere with or impair radio or television
broadcasting or reception from or in the Building or any part of the Project.
C-1
10.
Landlord reserves the right to exclude or expel from the Building or any part of the Project any person who in the judgment of Landlord is intoxicated or
under the influence of liquor or drugs or who shall in any manner do any act in violation of these Rules and Regulations.
11. No tenant nor any of tenant’s servants, employees, agents, visitors or licensees, shall any time keep or permit to be kept upon the Demised Premises any
inflammable, combustible or explosive fluid, chemical or substance without the approval of Landlord other than normal quantities of office supplies,
Tenant’s materials and supplies used in its research and development operations.
12. No additional locks or bolts of any kind shall be placed upon any of the doors by any tenant, nor shall any changes be made in existing locks or the
mechanism thereof, except tenant shall at his option have the existing exterior locks re-keyed at their expense by Landlords locksmith.
13.
14.
Permitted use only as specified in the terms of the Lease.
Tenant shall maintain Liability insurance in the amounts specified in the Lease and name Landlord as Additional Insured and provide Landlord with a
Certificate of Insurance.
15.
Tenant and their employees and guests shall observe all signs and posted speed limits and park within painted or assigned parking stalls only.
16. Car repairs, waxing, washing or cleaning of vehicles within the Demised Premises is strictly prohibited.
17.
18.
Tenant shall maintain at their expense the leased warehouse area at a temperature complying with local codes and requirements to protect fire sprinkler
system from freezing during winter months; the code requirement is min. of 40 degrees.
The expense of repairing any damage resulting from a violation of any Rule or Regulation herein shall be borne by the tenant by whom, or by whose
contractors, employees or invitees, the damage shall have been caused.
C-2
EXHIBIT “D”
Signage Specifications
The signage requirements for owner buildings shall be one building mounted sign, logos cannot be more than 1.5 times the character size, no character can be
higher than 18 inches, the maximum allowable sign area for a fascia sign (whether rectangle or pin letter) shall be determined by multiplying the actual character
height (which can be no higher than 18”) by two- thirds the length of the fascia or building elevation upon which such sign in placed, and no sign can be
electrified (back lit or neon). The standard monument sign may be back lit. Landlord acknowledges that Tenant’s signage existing as of the Effective Date
complies with the terms of this Lease.
For multi-tenant office/warehouse projects, where each tenant has its own entrance, there shall be one sign per tenant, logos cannot be more than 1.5 times the
character size, no character can be higher than 18 inches, the maximum allowable sign area for the fascia sign (whether rectangle or pin letter) shall be determined
by multiplying the actual character height (which can be no higher than 18”) by two-thirds the length of the fascia or building elevation upon which such sign is
placed, and no sign can be electrified (back lit or neon).
D-1
EXHIBIT “E”
TENANT WORK LETTER
THIS TENANT WORK LETTER (this “Tenant Work Letter”) is attached to and a part of that certain Lease dated September 13, 2012 (the “Lease”), by
and between HINES REIT 345 INVERNESS DRIVE, LLC, a Delaware limited liability company (“Landlord”) and GEVO, INC., a Delaware corporation
(“Tenant”). All references in this Tenant Work Letter to Sections of the “Tenant Work Letter” shall mean the relevant portions of Sections 1 through 5 of this
Tenant Work Letter. Capitalized terms not otherwise defined in this Tenant Work Letter shall have the meanings given to such terms in the Lease.
SECTION 1
BASE BUILDING; LANDLORD WORK
1.1 Base Building. The “Base Building” means those portions of the Demised Premises and the Buildings which were in existence prior to the construction of
Tenant’s Work.
1.2 Landlord Work. Landlord shall have no obligation for construction work or improvements on the Demised Premises, and Landlord’s contribution to the
construction and improvements consists only of (a) delivery of possession of the Demised Premises to Tenant in the condition outlined in Section 2.13 of the
Lease and (b) the delivery to Tenant of the Tenant Improvement Allowance in accordance with the terms and conditions of the Lease and this Tenant Work Letter.
SECTION 2
TENANT IMPROVEMENTS
2.1 Tenant Improvement Allowance. Landlord shall, subject to the terms and conditions of the Lease and this Tenant Work Letter, provide the Tenant
Improvement Allowance to be applied to the cost of Tenant’s Work. Tenant shall be entitled to the Tenant Improvement Allowance to be used for Tenant
Improvement Allowance Items (as defined below). In no event shall Landlord be obligated to make disbursements pursuant to this Tenant Work Letter (a) in a
total amount which exceeds the sum of the Tenant Improvement Allowance, or (b) prior to August 1, 2013.
2.2 Disbursement of the Tenant Improvement Allowance.
(a) Tenant Improvement Allowance Items. The Tenant Improvement Allowance shall be disbursed by Landlord only for the following items and costs
(collectively the “Tenant Improvement Allowance Items”):
(i) Payment of the fees of the “Architect”, the “Engineers,” and the “Project Manager,” as those terms are defined in Section 3.1 of this Tenant Work
Letter, including, without limitation, all space planning fees and other design costs actually paid by Tenant (as documented by invoices);
(ii) The payment of plan check, permit and license fees relating to construction of Tenant’s Work;
(iii) The cost of construction of Tenant’s Work, including, without limitation, testing and inspection costs, hoisting and trash removal costs, and
contractors’ fees and general conditions;
EXHIBIT “E”-PAGE 1
(iv) The cost of any changes in the Base Building when such changes are required by the Construction Drawings (as defined below), such cost to
include all direct architectural and/or engineering fees and expenses incurred in connection therewith;
(v) The cost of any changes to the Construction Drawings or Tenant’s Work required by all applicable Laws, including, without limitation, all
applicable building codes;
(vi) The costs of Landlord’s engineer and any other consultants retained by Landlord in connection with Landlord’s review of the Design Documents
and Constructions Drawings;
(vii) Costs associated with electrical transformer and panels and HVAC equipment;
(viii) If, any only if, Landlord is retained as the Project Manager, a fee to Landlord for its coordination and review of Tenant’s Work in an amount
equal to […***…] of the total cost of Tenant’s Work; and
(ix) Sales and use taxes.
(b) Unused Funds. Any unused portion of the Tenant Improvement Allowance upon completion of Tenant’s Work (if any, the “Unused Funds”) will not be
refunded to Tenant or monies to which Tenant is entitled.
(c) Disbursement of the Tenant Improvement Allowance.
(i) Monthly Disbursements. During the construction of Tenant’s Work, Landlord shall make periodic disbursements of the Tenant Improvement
Allowance (less a […***…], herein the “Retainage” ) for payments due the Contractor for labor and materials included in the Tenant Improvement Allowance
Items for the benefit of Tenant and shall authorize the release of monies for the benefit of Tenant in accordance with the terms and conditions of this
Section 2.2(c): provided, however, in no event shall Landlord be required to make disbursements more than once monthly. No Retainage shall be withheld on any
other costs included in the Tenant Improvement Allowance Items, including, without limitation, design costs and permit fees. From time to time as Tenant
receives draw requests from the Contractor (as defined below) during the construction of Tenant’s Work, or as Tenant pays Tenant Improvement Allowance Items
to other of Tenant’s Construction Agents (as defined below), Tenant shall deliver to Landlord, as a condition to the disbursement of all or any portion of the
Tenant Improvement Allowance: (1) an executed request for payment of the Contractor, in a form reasonably acceptable to Landlord, detailing the portion of the
work completed; (2) invoices from all of Tenant’s Construction Agents for labor rendered and materials delivered to the Demised Premises; (3) executed
unconditional partial mechanic’s lien waivers and releases (conforming to the requirements of applicable Law) from all of Tenant’s Construction Agents; and
(4) all other information reasonably requested by Landlord. Tenant’s request for payment shall be deemed, as between Landlord and Tenant, Tenant’s acceptance
and approval of the work furnished and/or the materials supplied as set forth in Tenant’s payment request. Not more than thirty (30) days thereafter, Landlord
shall deliver a check payable to Tenant, the Contractor or such other of Tenant’s Construction Agents (as directed by Tenant in Tenant’s disbursement request) in
payment of the lesser of: (A) the amounts so requested by Tenant, as set forth in this Section 2.2(c)(i). or (B) the balance of any remaining available portion of the
Tenant Improvement Allowance (net of Retainage); provided, however, as a condition to the final
EXHIBIT “E”-PAGE 2
* Confidential Treatment Requested
disbursement of the remaining balance of the Tenant Improvement Allowance, including any Retainage (the “Final Disbursement”). Tenant shall deliver to
Landlord, in addition to all other items set forth in this Section 2.2(c)(i), (y) an executed unconditional final mechanic’s lien waiver and release (conforming to the
requirements of applicable Law) from all of Tenant’s Construction Agents and (z) a certificate from the Architect, in form and substance satisfactory to each
Mortgagee, certifying that, as of the date of the certificate, Tenant’s Work has been completed in accordance with the Approved Working Drawings (as defined
below). Landlord’s payment of such amounts shall not be deemed Landlord’s approval or acceptance of the work furnished or materials supplied as set forth in
Tenant’s payment request.
(ii) Limitations. Landlord’s disbursement of the Tenant Improvement Allowance is subject to the limitations set forth in Rider 1 of the Lease.
SECTION 3
CONSTRUCTION DRAWINGS
3.1 Selection of Architect/Construction Drawings. Tenant shall retain the architect/space planner designated by Tenant (the “Architect”) to prepare the
Construction Drawings; provided, however, the Architect shall be reasonably satisfactory to Landlord and shall be licensed by the State of Colorado. Tenant shall
retain the engineering consultants designated by Tenant (the “Engineers”) to prepare all plans and engineering working drawings relating to the structural,
mechanical, electrical, plumbing, HVAC, life safety, and sprinkler work in the Demised Premises, which work is not part of the Base Building; provided,
however, the Engineers shall be reasonably satisfactory to Landlord and shall be licensed by the State of Colorado; provided, further, however, that Landlord may
retain, as an Tenant Improvement Allowance Item, its own engineer to review the Construction Drawings and consult with the Engineers regarding the same.
Tenant may retain a project manager to oversee Tenant’s Work (the “Project Manager”). The plans and drawings to be prepared by Architect and the Engineers
hereunder shall be known collectively as the “Construction Drawings.” All Construction Drawings shall be subject to Landlord’s reasonable approval. Landlord
shall advise Tenant, in writing, within five (5) business days after Landlord’s receipt of the Construction Drawings if the same is unsatisfactory or incomplete in
any respect (and specify in such written notice the unsatisfactory items). If Landlord fails to respond within the time period specified in this Section 3.1, Tenant
may send a second notice (each, a “Reminder Notice”) to Landlord requesting Landlord’s approval. Landlord’s failure to respond within five (5) business days
after its receipt of a Reminder Notice shall be deemed as Landlord’s approval. Tenant and Architect shall verify, in the field, the dimensions and conditions as
shown on the relevant portions of the base building plans, and Tenant and Architect shall be solely responsible for the same, and Landlord shall have no
responsibility in connection therewith. Landlord’s review of the Construction Drawings shall be for its sole purpose and shall not imply Landlord’s review of the
same, or obligate Landlord to review the same for quality, design, compliance with Laws or other like matters. Accordingly, notwithstanding that any
Construction Drawings are reviewed by Landlord or its space planner, architect, engineers and consultants, and notwithstanding any advice or assistance which
may be rendered to Tenant by Landlord or Landlord’s space planner, architect, engineers, and consultants, Landlord shall have no liability whatsoever in
connection therewith and shall not be responsible for any omissions or errors contained in the Construction Drawings, and Tenant’s waiver and indemnity set
forth in the Lease shall specifically apply to the Construction Drawings.
EXHIBIT “E”-PAGE 3
3.2 Final Working Drawings. Tenant shall supply the Architects and Engineers with a complete listing of standard and non-standard equipment and
specifications, including, without limitation, HVAC requirements, electrical requirements and special electrical receptacle requirements for the Demised Premises,
to enable the Engineers and the Architect to complete the Final Working Drawings (as defined below) in the manner as set forth below. Tenant shall promptly
cause the Architect and the Engineers to complete the architectural and engineering drawings for Tenant’s Work and Architect shall compile a fully-coordinated
set of architectural, structural (if required), mechanical, electrical and plumbing working drawings in a form which is complete to allow subcontractors to bid on
the work and to obtain all applicable permits (collectively, the “Final Working Drawings”) and shall submit the same to Landlord for Landlord’s approval,
which approval shall not be unreasonably withheld, conditioned or delayed. Tenant shall supply Landlord with two (2) copies signed by Tenant of such Final
Working Drawings. Landlord shall advise Tenant, in writing, within five (5) business days after Landlord’s receipt of the Final Working Drawings for Tenant’s
Work if the same is unsatisfactory or incomplete in any respect (and specify in such written notice the unsatisfactory items). If Tenant is so advised, Tenant shall
immediately revise the Final Working Drawings in accordance with such review and any disapproval of Landlord in connection therewith. If Landlord fails to
respond within the time period specified in this Section 3.2. Tenant may send a Reminder Notice to Landlord requesting Landlord’s approval. Landlord’s failure
to respond within five (5) business days after its receipt of a Reminder Notice shall be deemed as Landlord’s approval.
3.3 Approved Working Drawings. The Final Working Drawings with the changes required by Landlord pursuant to Section 3.2 above, if any, shall be approved
by Landlord within five (5) business days after the date Tenant delivers the revised Final Working Drawings to Landlord prior to the commencement of
construction of Tenant’s Work (the “Approved Working Drawings”). If Landlord fails to respond within the time period specified in this Section 3.3, Tenant
may send a Reminder Notice to Landlord requesting Landlord’s approval. Landlord’s failure to respond within five (5) business days after its receipt of a
Reminder Notice shall be deemed as Landlord’s approval. Upon receipt by Tenant of the Approved Working Drawings, Tenant may submit the same to the
appropriate municipal authorities for all applicable building permits. Tenant hereby agrees that neither Landlord nor Landlord’s consultants shall be responsible
for obtaining any building permit or certificate of occupancy for the Demised Premises and that obtaining the same shall be Tenant’s sole responsibility; provided,
however. that Landlord shall cooperate, at no cost to Landlord, with Tenant in executing permit applications and performing other ministerial acts necessary to
enable Tenant to obtain any such permit or certificate of occupancy. No changes, modifications or alterations in the Approved Working Drawings may be made
without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed.
SECTION 4
CONSTRUCTION OF THE TENANT IMPROVEMENTS
4.1 Tenant’s Selection of Contractors.
(a) The Contractor. A general contractor shall be retained by Tenant to construct Tenant’s Work. Such general contractor (“Contractor”) shall be
(i) subject to Landlord’s prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed, (ii) licensed in the State of Colorado
and (iii) bonded and insured in accordance with the provisions of this Tenant Work Letter. Tenant agrees to use commercially reasonable efforts to obtain or cause
to be obtained a “no lien” contract from the Contractor.
EXHIBIT “E”-PAGE 4
(b) Tenant’s Construction Agents. Upon Landlord’s written request, Tenant will request the Contractor to give Landlord a list of all subcontractors, laborers,
materialmen, and suppliers used by Tenant (such subcontractors, laborers, materialmen, and suppliers, together with the Contractor, the Architect, the Engineers
and the Project Manager, collectively, “Tenant’s Construction Agents’’).
4.2 Construction of Tenant’s Work by Tenant’s Construction Agents.
(a) Conditions for Tenant’s Construction Agents and Tenant’s Work. Tenant and Tenant’s Construction Agents’ construction of Tenant’s Work shall comply
with the following: (i) Tenant’s Work shall be constructed in accordance with the Approved Working Drawings and all Laws; and (ii) Tenant and Tenant’s
Construction Agents shall abide by all reasonable rules made by Landlord’s property manager with respect to the use of freight, loading dock and service
elevators, storage of materials, coordination of work with the contractors of other lessees, and any other matter in connection with this Tenant Work Letter,
including, without limitation, the construction of Tenant’s Work.
(b) Indemnity. Tenant agrees to indemnify, protect, defend and hold Landlord and its Related Parties harmless against any and all Claims arising from or in
any way related to, except to the extent caused by the negligence or intentional misconduct of Landlord or its Related (i) Tenant’s Work, (ii) any negligence or
willful misconduct of Tenant or Tenant’s Construction Agents, or anyone directly or indirectly employed by any of them, (iii) Tenant’s non-payment of any
amount arising out of Tenant’s Work and/or (iv) Tenant’s disapproval of all or any portion of any request for payment from Tenant’s Construction Agents.
(c) Requirements of Tenant’s Construction Agents. Tenant shall endeavor to have each of Tenant’s Construction Agents guarantee to Tenant and for the
benefit of Landlord that the portion of Tenant’s Work for which it is responsible shall be free from any defects in workmanship and materials for a period of not
less than one (1) year from the date of completion thereof. Each of Tenant’s Construction Agents shall be responsible for the replacement or repair, without
additional charge, of all work done or furnished in accordance with its contract that shall become defective within one (1) year after the completion of the work
performed by such contractor or subcontractors. The correction of such work shall include, without additional charge, all additional expenses and damages
incurred in connection with such removal or replacement of all or any part of Tenant’s Work, and/or the Building and/or the Common Areas that may be damaged
or disturbed thereby. All such warranties or guarantees as to materials or workmanship of or with respect to Tenant’s Work shall be contained in the contract or
subcontract and shall be written such that such guarantees or warranties shall inure to the benefit of both Landlord and Tenant, as their respective interests may
appear, and can be directly enforced by either. Tenant covenants to give to Landlord any assignment or other assurances which may be necessary to effect such
right of direct enforcement.
(d) Insurance Requirements.
(i) General Coverages. Tenant shall require of Contractor that all of Tenant’s Construction Agents shall carry worker’s compensation insurance
covering all of their respective employees, and shall also carry public liability insurance, including property damage, all with limits, in form and with companies
as are required to be carried by Tenant as set forth in the Lease.
EXHIBIT “E”-PAGE 5
(ii) Special Coverages. Tenant shall carry “Builder’s All Risk” insurance in an amount approved by Landlord covering the construction of Tenant’s
Work, it being understood and agreed that Tenant’s Work shall be insured by Tenant pursuant to the Lease immediately upon completion thereof. Such insurance
shall be in amounts and shall include such extended coverage endorsements as may be reasonably required by Landlord including, but not limited to, the
requirement that all of Tenant’s Construction Agents shall carry excess liability and Products and Completed Operation Coverage insurance, each in amounts not
less than […***…], and in form and with companies as are required to be carried by Tenant as set forth in the Lease.
(iii) General Terms. Certificates for all insurance carried pursuant to this Section 4.2(d) shall be delivered to Landlord before the commencement of
construction of Tenant’s Work and before Contractor’s equipment is moved onto the site. All such policies of insurance must contain a provision that the company
writing said policy will give Landlord thirty (30) days prior written notice of any cancellation or lapse of the effective date or any reduction in the amounts of
such insurance. All policies carried under this Section 4.2(d) shall insure Landlord and Tenant, as their interests may appear, as well as Contractor and Tenant’s
Construction Agents. All insurance, except Workers’ Compensation, maintained by Tenant’s Construction Agents shall preclude subrogation claims by the insurer
against anyone insured thereunder. Such insurance shall provide that it is primary insurance as respects Landlord and that any other insurance maintained by
Landlord is excess and noncontributing with the insurance required hereunder.
(iv) Governmental Compliance. Tenant’s Work shall comply in all respects with the following: (A) the applicable building code and other state,
federal, city or quasi- govemmental laws, codes, ordinances and regulations, as each may apply according to the rulings of the controlling public official, agent or
other person; (B) applicable standards of the American Insurance Association (formerly, the National Board of Fire Underwriters) and the National Electrical
Code; and (C) building material manufacturer’s specifications.
SECTION 5
GENERAL PROVISIONS
5.1 Tenant Representative. Tenant has designated […***…] as its sole representative with respect to the matters set forth in this Tenant Work Letter, who shall
have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter, until further written notice to Landlord.
5.2 Landlord’s Representative. Landlord has designated Liz Taylor of Hines as Landlord’s sole representative with respect to the matters set forth in this Tenant
Work Letter, who, until further notice to Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Tenant Work Letter.
5.3 “As-Built” Drawings and Specifications. A CADD-DXF diskette file and a set of mylar reproducibles of all “as-built” drawings and specifications of the
Demised Premises (reflecting all field changes and including, without limitation, architectural, structural, mechanical and electrical drawings and specifications)
prepared by all of Tenant’s Construction Agents shall be delivered by Tenant to Landlord, at Tenant’s expense, within thirty (30) days after the completion of
Tenant’s Work.
EXHIBIT “E”-PAGE 6
* Confidential Treatment Requested
5.4 Force and Effect. The terms and conditions of this Tenant Work Letter supplement the Lease and shall be construed to be a part of the Lease and are
incorporated in the Lease. Without limiting the generality of the foregoing, any default by any party hereunder shall have the same force and effect as a default
under the Lease. Should any inconsistency arise between this Tenant Work Letter and the Lease as to the specific matters which are the subject of this Tenant
Work Letter, the terms and conditions of this Tenant Work Letter shall control.
[signature page follows]
EXHIBIT “E”-PAGE 7
IN WITNESS WHEREOF, Landlord and Tenant have executed this Tenant Work Letter as of the Effective Date of the Lease.
LANDLORD:
HINES REIT 345 INVERNESS DRIVE, LLC,
a Delaware limited liability company
By:
/s/ […***…]
Name:
[…***…]
Title:
Authorized Agent
TENANT:
GEVO, INC.,
a Delaware corporation
By:
/s/ […***…]
Name:
[…***…]
Title:
[…***…]
EXHIBIT “E”
SIGNATURE PAGE
TENANT WORK LETTER
BUILDING C, SUITE 310
345 INVERNESS DRIVE SOUTH
ENGLEWOOD, CO 80112
(GEVO, INC.)
* Confidential Treatment Requested
RIDER 1
ADDITIONAL PROVISIONS
THIS RIDER 1 TO LEASE (this “Rider 1”) is attached to and made a part of that certain Lease dated as of September 13, 2012 (the “Lease”), by and
between HINES REIT 345 INVERNESS DRIVE, LLC, a Delaware limited liability company (“Landlord”) and GEVO, INC., a Delaware corporation
(“Tenant”), for the Demised Premises described in the Lease.
1. RIDER 1. Capitalized terms not defined in this Rider 1 shall have the same meaning as set forth in the Lease. This Rider 1 forms a part of the Lease. Should
any inconsistency arise between this Rider 1 and any other provision of the Lease as to the specific matters which are the subject of this Rider 1, the terms and
conditions of this Rider 1 shall control. All of the rights, options and concessions set forth in this Rider 1 are personal to the Tenant first named above (together
with any assignee that assumes the Lease pursuant to a Permitted Transfer, “Original Tenant”), and may only be exercised and/or utilized by Original Tenant
(and not any assignee, sublessee or other transferee of Original Tenant’s interest in the Tenant). All references to “Tenant” in this Rider 1 shall mean Original
Tenant only. Time is of the essence of this Rider 1.
2.
TENANT IMPROVEMENT ALLOWANCE; TENANT’S WORK.
2.1 The Improvement Allowance. Landlord shall, subject to the terms and conditions of the Lease and the Tenant Work Letter (as defined below), provide
Tenant with an improvement allowance not to exceed […***…] (the “Tenant Improvement Allowance”), for the purpose of contributing towards the costs of
the design, engineering and construction of real property improvements or electrical and HVAC upgrades made to the Demised Premises; provided, however, in
no event shall Landlord be required to fund or disburse any portion of the Tenant Improvement Allowance before August 1, 2013. Subject to Tenant’s compliance
with the disbursement conditions set forth in Section 2.2(c) of the Work Letter, Landlord shall pay to Tenant the Tenant Improvement Allowance on or before the
Commencement Date.
2.2 Tenant’s Work. Tenant shall perform all work required to complete the Demised Premises to a finished condition ready to open for Tenant’s business
(collectively, “Tenant’s Work”). Tenant’s Work shall be performed in accordance with the Tenant Work Letter attached to the Lease as Exhibit E (the “Tenant
Work Letter”). Tenant shall cause Tenant’s Work to be designed, engineered and constructed in a good and workmanlike manner, free of any defects, liens or
other encumbrances, and in accordance with the terms and conditions of this Lease, the Tenant Work Letter and all applicable Laws.
2.3 Deadlines for Use. Notwithstanding anything in the Lease or this Rider 1 to the contrary, Tenant shall cause the Tenant Improvement Allowance to be
used on or before the first (1 ) anniversary of the Commencement Date (the “Deadline for Use”). If Tenant fails to cause the Tenant Improvement Allowance to
be utilized on or before the Deadline for Use, Landlord shall have no obligation to provide all or any portion of the remaining balance of the Tenant Improvement
Allowance to Tenant.
st
Rider 1-1
* Confidential Treatment Requested
2.4 Limitations. Notwithstanding anything in the Lease or this Rider 1 to the contrary, so long as a Default by Tenant is continuing under the Lease,
Landlord shall have no obligation to provide or disburse all or any portion of the Tenant Improvement Allowance.
3.
PERMITTED TRANSFER.
3.1 Permitted Transfer. Notwithstanding anything in Section 8.16 of the Lease to the contrary, and provided there is no uncured Default by Tenant under
the Lease, Tenant shall have the right, without the prior written consent of Landlord, to (a) assign the Lease to an Affiliate (as defined below), to an entity created
by merger, reorganization or recapitalization of or with Tenant, or to a purchaser of all or substantially all of Tenant’s assets or (b) sublease the Demised Premises
or any part thereof to an Affiliate (each, a “Permitted Transfer”): provided, however, that (i) such Permitted Transfer is for a valid business purpose and not to
avoid any obligations under the Lease, (ii) the assignee is a reputable entity and shall have, immediately after giving effect to such assignment, an aggregate net
worth (computed in accordance with GAAP) at least equal to the aggregate net worth (as so computed) of Tenant immediately prior to such assignment or on the
Effective Date, whichever is greater, (iii) no later than fifteen (15) days prior to the effective date of the Permitted Transfer, Tenant shall give notice to Landlord
which notice shall include the full name and address of the assignee or subtenant, and a copy of all agreements executed between Tenant and the assignee or
subtenant with respect to the Demised Premises or part thereof, as may be the case, (iv) no later than fifteen (15) days after the effective date of the Permitted
Transfer, the assignee or sublessee shall provide the documentation required pursuant to Section 8.16(h) of the Lease, and (v) within ten (10) days after
Landlord’s written request, provide such reasonable documents or information which Landlord reasonably requests for the purpose of substantiating whether or
not the Permitted Transfer is to an Affiliate or is otherwise in accordance with the terms and conditions of this Rider 1. Tenant shall not have the right to perform
a Permitted Transfer, if, as of the date of the effective date of the Permitted Transfer, a Default by Tenant is then continuing.
3.2 Definitions. In addition to the terms elsewhere defined in the Lease, the following terms shall have the following meanings with respect to the
provisions of the Lease:
(a) “Affiliate” shall mean any Person (as defined below) which is owned or controlled by, owns or controls, or is under common ownership or
control with Tenant.
(b) “control” means, with respect to a Person that is a corporation, the right to exercise, directly or indirectly, more than fifty percent (50%) of the
voting rights attributable to the shares of the controlled corporation and, with respect to a Person that is not a corporation, the possession, directly or indirectly, of
the power at all times to direct or cause the direction of the management and policies of the controlled Person.
(c) “Person” means an individual, partnership, trust, corporation, firm or other entity.
3.3 No Excess Rent Rights. Landlord acknowledges and agrees that the terms and conditions of Section 8.16(c) of the Lease shall not apply to any
Permitted Transfer.
Rider 1-2
4.
OPTION TO RENEW.
4.1 Grant of Option. Subject to the terms and conditions of this Rider 1, Tenant shall have one (1) option to renew the Lease Term for one (1) consecutive
additional period of sixty (60) months (the “Renewal Term”). There shall be no additional renewal terms beyond the Renewal Term set forth herein. Tenant must
exercise its option to extend the Lease Term by giving Landlord written notice (the “Option Exercise Notice”) of its election to do so no later than
nine (9) months, and no earlier than fifteen (15) months, prior to the expiration of the Lease Term. If Tenant fails to timely deliver the Option Exercise Notice in
strict accordance with this Rider 1 and the notice provisions of the Lease, then Tenant shall be deemed to have waived its extension rights, as aforesaid, and
Tenant shall have no further right to renew the Lease.
4.2 Terms and Conditions of Option. The Renewal Term shall be on all the terms and conditions of the Lease, except that Landlord shall have no
additional obligation for free rent, leasehold improvements or for any other tenant inducements for the Renewal Term, and Basic Rent shall be adjusted to Market
Rent (as defined below).
4.3 Market Rent. “Market Rent” means the annual amount per square foot (exclusive of Operating Expenses) that a willing tenant would pay and a
willing landlord would accept in arm’s length bona fide negotiations, for a renewal lease of premises of comparable Class A so-called “office flex” space (built
after 1998) being offered in the southeast suburban Denver submarket as of the end of the Lease Term as determined by Landlord and Tenant as set forth
hereafter. The determination of Market Rent shall take into account typical market concessions, free rent periods, tenant improvement allowances, tenant
inducements and costs and adjusted appropriately for any such concessions, allowances and costs not being provided or paid by Landlord in connection with the
renewal of the Lease Term for Tenant’s of comparable size.
4.4 “Baseball” Arbitration. Within thirty (30) days following Landlord’s receipt of Tenant’s Option Exercise Notice, Landlord shall initially deliver to
Tenant a designation of Market Rent (“Landlord’s Market Rent Designation”) and Landlord shall furnish data in support of such designation. Within thirty (30)
days after receipt of Landlord’s Market Rent Designation, Tenant shall elect, in writing, either (i) to accept Landlord’s Designation (an “Acceptance Notice”),
(ii) to withdraw the exercise of its option to renew (a “Withdrawal Notice”) or (iii) to submit the determination of market rent to “baseball” arbitration in
accordance with subsections (b) through (f) below (the “Arbitration Notice”). Tenant’s failure to timely deliver either an Acceptance Notice, a Withdrawal
Notice or an Arbitration Notice shall be deemed Tenant’s irrevocable revocation and rescission of its exercise of this option to extend, and, thereafter, Tenant shall
have no further right to renew the Lease Term. Upon the timely giving of an Acceptance Notice or an Arbitration Notice, the Lease Term shall be deemed
extended without the need for further act or deed of either party. Following Tenant’s delivery of an Arbitration Notice, Landlord and Tenant shall attempt to agree
upon such Market Rent using their good faith efforts. If Landlord and Tenant fail to reach agreement within fifteen (15) days following Landlord delivery of
Landlord’s Market Rent Designation (“Outside Agreement Date”), then each party shall place in a separate sealed envelope their final proposal as to Market
Rent and such determination shall be submitted to “baseball” arbitration in accordance with subsections (b) through (f) below.
Rider 1-3
(a) In the event that Landlord fails to timely generate the initial written notice of Landlord’s Market Rent Designation which triggers the negotiation
period of this Section, then Tenant may commence such negotiations by providing the initial Market Rent notice, in which event Landlord shall have fifteen (15)
days (“Landlord’s Review Period”) after receipt of Tenant’s notice of the proposed Market Rent within which to accept such proposal. In the event Landlord
fails to accept in writing such Market Rent proposed by Tenant, then such proposal shall be deemed rejected, and Landlord and Tenant shall attempt in good faith
to agree upon Market Rent using good faith efforts. If Landlord and Tenant fail to reach agreement within fifteen (15) days following Landlord’s Review Period
(which shall be, in such event, the “Outside Agreement Date” in lieu of the above definition of such date), then each party shall place in a separate sealed
envelope their final proposal as to the Market Rent along with information justifying their Market Rate determination and such determination shall be submitted
to arbitration in accordance with subsections (b) through (f) below.
(b) Landlord and Tenant shall meet with each other within five (5) business days after the Outside Agreement Date and exchange the sealed
envelopes and then open such envelopes in each other’s presence. If Landlord and Tenant do not mutually agree upon the Market Rent within one (1) business
day after the exchange and opening of envelopes, then, within ten (10) business days after the exchange and opening of envelopes, Landlord and Tenant shall
agree upon and jointly appoint a single arbitrator who shall by profession be a real estate broker who shall have been active over the 10-year period ending on the
date of such appointment in the leasing of so-called “flex” space being offered in the Southeast Denver office flex submarket Neither Landlord nor Tenant shall
consult with such arbitrator as to his or her opinion as to Market Rent prior to the appointment. The determination of the arbitrator shall be limited solely to the
issue of whether Landlord’s or Tenant’s submitted Market Rent is the closest to the actual Market Rent as determined by the arbitrator, taking into account the
requirements of this Section. Such arbitrator may hold such hearings and require such briefs as the arbitrator, in his or her sole discretion, determines is necessary.
In addition, Landlord or Tenant may submit to the arbitrator, with a copy to the other party, within five (5) business days after the appointment of the arbitrator
any market data and additional information that such party deems relevant to the determination of the Market Rent (“MR Data”) and the other party may submit
a reply in writing within five (5) business days after receipt of such MR Data.
(c) The arbitrator shall, within thirty (30) days after his or her appointment, reach a decision as to whether the parties shall use Landlord’s or Tenant’s
submitted Market Rent, and shall notify Landlord and Tenant of such determination.
(d) The decision of the arbitrator shall be binding upon Landlord and Tenant.
(e) If Landlord and Tenant fail to agree upon and appoint an arbitrator, then the appointment of the arbitrator shall be made by the Presiding Judge of
the Denver County District Court, or, if he or she refuses to act, by any judge having jurisdiction over the parties.
(f) The cost of arbitration shall be paid by Landlord and Tenant equally.
4.5 Limitations; Termination of Option to Renew. Tenant shall not have the right to renew the Lease for any amount of space less than the entire
Premises hereunder. In the event
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that Tenant assigns the Lease (other than a Permitted Transfer) or subleases, in aggregate, more than 2% of the Demised Premises (other than a Permitted
Transfer), the option to renew shall be extinguished. The renewal option granted herein shall terminate as to the entire Premises upon the failure by Tenant to
timely exercise its option to renew at the times and in the manner set forth in this Rider 1. Tenant shall not have the option to renew, as provided in this Rider 1, if,
as of the date of the Option Exercise Notice, or as of the scheduled commencement date of the Renewal Term, (a) Default by Tenant is continuing or (b) Landlord
has given more than two (2) notices of default in any 12-month period for nonpayment of monetary obligations.
4.6 Self-Operative; Amendment to Lease. Notwithstanding the fact that, upon Tenant’s delivery of an Acceptance Notice or an Arbitration Notice, the
renewal of the Lease Term shall be self executing, Landlord and Tenant shall, promptly following Tenant’s delivery of an Acceptance Notice or an Arbitration
Notice, execute one or more amendments to the Lease reflecting such additional term.
5.
RIGHT OF FIRST REFUSAL.
5.1 Grant of Right of First Refusal. Subject to the terms and conditions of this Rider 1, Landlord hereby grants to Tenant a right of first refusal to lease all
space in Building B and Building C of the Project (the “First Refusal Space”). Notwithstanding the foregoing, such right of first refusal shall (a) commence only
following the expiration or earlier termination of the initial lease (or leases, as the case may be) of the First Refusal Space, regardless of whether any such lease is
executed prior to or after the Effective Date (including the expiration of any renewal, extension or expansion rights set forth in any such lease, regardless of
whether such renewal, extension or expansion rights are executed strictly in accordance with their terms, or pursuant to a lease amendment or a new lease) and
(b) shall be subject and subordinate to the rights granted to HONEYWELL INTERNATIONAL INC., a Delaware corporation (together with its successors and
assigns, the “Superior ROFR Holder”) to lease such First Refusal Space. Tenant’s right of first refusal shall be on the terms and conditions set forth in this Rider
1.
5.2 Procedure for Offer. If Landlord receives a bona fide written offer from an unaffiliated third party for the lease of all or any portion of the First
Refusal Space (each, a “Bona Fide Offer”), and Landlord is willing to accept the Bona Fide Offer, Landlord shall give Tenant written notice (the “First Refusal
Notice”) of the Bona Fide Offer including the actual offer agreed to by both parties, but only if the Superior ROFR Holder does not wish to lease such space;
provided, however, that Landlord may redact any confidential information from the actual offer (including the name of the thirty party), or, if Landlord is
prohibited from delivering the actual offer, Landlord may only provide a summary of the actual offer. Pursuant to such First Refusal Notice, Landlord shall offer
to lease to Tenant the First Refusal Space on the same terms and conditions of the Bona Fide Offer (collectively, the “Bona Fide Offer Terms”). Landlord shall
provide all material terms and conditions of Bona Fide Offer as part of the First Refusal Notice.
5.3 Procedure for Acceptance. If Tenant wishes to exercise Tenant’s right of first refusal with respect to the space described in the First Refusal Notice,
then within five (5) business days after delivery of the First Refusal Notice to Tenant, Tenant shall deliver written
Rider 1-5
notice to Landlord of Tenant’s exercise of its right of first refusal with respect to the entire space described in the First Refusal Notice on the Bona Fide Offer
Terms. Tenant must elect to exercise its right of first refusal, if at all, with respect to all of the space offered by Landlord to Tenant in the First Refusal Notice.
Tenant may not elect to lease only a portion of the space offered in the First Refusal Notice, even if the space described in the First Refusal Notice comprises an
area larger than the First Refusal Space or an area that does not comprise the entire First Refusal Space. If Tenant does not so notify Landlord within the 5-
business day period, then Landlord shall be free to lease and/or re-lease all or any portion of the First Refusal Space from time to time to anyone to whom
Landlord desires on any terms Landlord desires.
5.4 Other Terms and Conditions. Except as otherwise expressly set forth in the First Refusal Notice, Tenant shall take the First Refusal Space in its “AS
IS” condition, and Landlord shall have no obligation for free rent, leasehold improvements or for any other tenant inducements for the First Refusal Space.
Except as otherwise expressly set forth in the First Refusal Notice, the term of the Lease for the applicable portion of the First Refusal Space, and Tenant’s
obligation to pay Rent for such First Refusal Space, shall commence upon the date of delivery of the First Refusal Space to Tenant and shall terminate on the date
set forth in the First Refusal Notice.
5.5 Limitations. Tenant shall not have the right to lease the First Refusal Space, if, as of the date of the attempted exercise of any right of first refusal by
Tenant, or as of the scheduled date of delivery of such First Refusal Space to Tenant, a Default by Tenant is continuing.
5.6 Termination of Right of First Refusal. Subject to Section 5.6 below, the right of first refusal granted herein shall terminate as to the entire First
Refusal Space upon the failure by Tenant to timely exercise its right of first refusal with respect to the entire portion of the First Refusal Space as offered by
Landlord in the First Refusal Notice.
5.7 Reinstated Right. Notwithstanding anything in this Rider 1 to the contrary, in the event the right of first refusal has terminated because of Tenant’s
non-exercise of its rights in accordance with this Rider 1, Tenant’s right of first refusal shall be reinstated with respect to the space contained in the First Refusal
Notice if Landlord intends to offer or accept overall economic terms that are less than […***…] of the economic terms offered to Tenant in the First Refusal
Notice. In such an event, Landlord shall notify (“Reduced Terms Notice”) Tenant and such Reduced Term Notice shall set forth Landlord’s proposed economic
terms and conditions upon which Landlord is willing to lease the First Refusal Space to Tenant (“Reduced Economic Terms”). If Tenant wishes to exercise its
reinstated right of first refusal, Tenant shall, within three (3) business days of Tenant’s receipt of the Reduced Terms Notice, deliver written notice to Landlord of
Tenant’s exercise of its right of first refusal with respect to the entire space described in the Reduced Terms Notice on the Reduced Economic Terms. The Right of
First Refusal herein shall continue and remain in effect so long as this Lease is in full force and effect, and shall apply to any future Bona Fide Offer. All
provisions of this Rider 1 shall apply, mutatis mutandis, to any reinstated right of first refusal Tenant may have
5.8 Amendment to Lease. If Tenant timely exercises Tenant’s right to lease the First Refusal Space as set forth herein, Landlord and Tenant shall, within
fifteen (15) days after Tenant’s exercise thereof, execute an amendment to the Lease for such First Refusal Space upon the terms and conditions as set forth in the
First Refusal Notice and this Rider 1.
Rider 1-6
* Confidential Treatment Requested
6.
LICENSE RIGHTS: SIGNAGE.
6.1 Grant of Signage License.
(a) The Monument Sign License. Provided that a Default by Tenant is not continuing under the Lease, and so long as Tenant is leasing and
occupying at least 29,865 rentable square feet in the Project, Landlord grants to Tenant a non-exclusive license (the “Monument Sign License”), for the Lease
Term and any extensions thereof, for the purpose of operating, maintaining and repairing one (1) sign panel bearing only Tenant’s company name (the
“Monument Signage”) on the Building’s existing signage monument facing Inverness Drive South (the “Monument”).
(b) The Signage License Area. The portions of the Project upon which the Monument Signage is or will be located is referred to herein collectively
as the “Signage License Area.” Landlord makes no representations or warranties with respect to the Signage License Area, and Landlord shall have no liability
of any kind or nature arising from or related to the Monument Signage. Tenant accepts the Signage License Area in its “AS IS” condition.
6.2 Design and Installation.
(a) Design. Tenant must obtain Landlord’s prior approval (which approval may be withheld or conditioned in Landlord’s reasonable discretion) as to
all aspects of the design and installation of the Monument Signage.
(b) Installation. Installation of the Monument Signage shall be performed by Landlord: (i) at the sole cost of Landlord, (i) by a contractor reasonably
approved by Landlord and Tenant, (iii) in a good and workmanlike manner, and (iv) in accordance with all Operational Requirements and the reasonable
construction rules of Landlord.
6.3 Personal Property Taxes. Tenant will pay all sales, use and personal property taxes assessed against or attributable to the Monument Signage.
6.4 Permits and Operational Requirements. “Operational Requirements” means the following, as the same may be amended from time to time: (i) all
Laws, (ii) requirements of Landlord’s insurance carriers, the electricity provider for the Project, and any property owners’ association or similar body (including,
without limitation, any requirements imposed by the Inverness Planning and Architectural Control Committee pursuant to the Declaration of Protective Covenants
for the Inverness Business Park), and (iii) the technical standards and rules and regulations of the Building.
6.5 Alterations. Tenant shall not make any alterations, improvements or additions to the Monument Signage or the Signage License Area without the prior
written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed.
Rider 1-7
6.6 Surrender and Removal. Upon the expiration or earlier termination of the Monument Sign License, Tenant shall, at Tenant’s sole cost and expense,
remove the Monument Signage from the Project and surrender the Signage License Area to Landlord in the same condition as on the commencement of the Lease
Term.
6.7 Indemnities; Insurance. The Signage License Area will be considered to be part of the Demised Premises solely for the purposes of any indemnity,
waiver, or obligation to defend contained in the Lease or of any insurance policy carried by Tenant. Tenant shall insure the Monument Signage in accordance with
the Lease.
[signature page follows]
Rider 1-8
IN WITNESS WHEREOF, Landlord and Tenant have executed this Rider 1 as of the Effective Date of the Lease.
LANDLORD:
HINES REIT 345 INVERNESS DRIVE, LLC,
a Delaware limited liability company
By:
/s/ […***…]
Name:
[…***…]
Title:
Authorized Agent
TENANT:
GEVO, INC.,
a Delaware corporation
By:
/s/ […***…]
Name:
[…***…]
Title:
[…***…]
SIGNATURE PAGE
RIDER 1
BUILDING C, SUITE 310
345 INVERNESS DRIVE SOUTH
ENGLEWOOD, CO 80112
(GEVO, INC.)
* Confidential Treatment Requested
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-172771 on Form S-8 and Registration Statement No. 333-180097 on Form S-3 of
our report dated March 25, 2013, relating to the consolidated financial statements of Gevo, Inc. and subsidiaries (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to Gevo Inc.’s status as a development stage enterprise), appearing in this Annual Report on Form 10-K of Gevo,
Inc. for the year ended December 31, 2012.
Exhibit 23.1
/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
March 25, 2013
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
(Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
Exhibit 31.1
I, Patrick R. Gruber, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Gevo, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 26, 2013
/S/ PATRICK R. GRUBER
Patrick R. Gruber
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
(Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)
Exhibit 31.2
I, Mark Smith, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Gevo, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 26, 2013
/S/ MARK SMITH
Mark Smith
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION
Exhibit 32.1
I, Patrick R. Gruber, Chief Executive Officer of Gevo, Inc. (the “Company”), and I, Mark Smith, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Annual Report on Form 10-K of the Company for the year ended December 31, 2012, (the “Report”) fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company
for the period covered by the Report.
/S/ PATRICK R. GRUBER
Patrick R. Gruber
Chief Executive Officer
Date: March 26, 2013
Date: March 26, 2013
/S/ MARK SMITH
Mark Smith
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.
This certification accompanies the Report to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of
the Company under the Securities Act of 1933, as amended, whether made before or after the date of the Report and irrespective of any general incorporation
language contained in such filing.