Embedded Derivatives and Derivative Warrant Liabilities

2020

Notes Embedded Derivative

June 2017,

the Company issued its

12%

convertible senior secured notes due

2020

(the

“2020

Notes”) in exchange for its

12.0%

convertible senior secured notes due

2017

(the

“2017

Notes”). The

2020

Notes contain the following embedded derivatives: (i) a Make-Whole Payment (as defined in the indenture governing the

2020

Notes (the

“2020

Notes Indenture”)) upon either conversion or redemption; (ii) right to redeem the outstanding principal upon a Fundamental Change (as defined in the

2020

Notes Indenture); (iii) issuer rights to convert into a limited number of shares in any given

three

month period commencing

nine

-months from the issuance date and dependent on the stock price exceeding

150%

of the then in-effect conversion price over a

ten

-business day period; and (iv) holder rights to convert into either shares of the Company’s common stock or pre-funded warrants upon the election of the holders of the

2020

Notes.

Embedded derivatives are separated from the host contract and the

2020

Notes, and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are

not

clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. The Company has concluded that certain embedded derivatives within the

2020

Notes meet these criteria and, as such, must be valued separate and apart from the

2020

Notes as

one

embedded derivative and recorded at fair value each reporting period.

The Company used a binomial lattice model in order to estimate the fair value of the embedded derivative in the

2020

Notes. A binomial lattice model generates

two

probable outcomes, whether up or down, arising at each point in time, starting from the date of valuation until the maturity date. A lattice was initially used to determine if the

2020

Notes would be converted by the holder, called by the issuer, or held at each decision point. Within the lattice model, the following assumptions are made: (i) the

2020

Notes will be converted by the holder if the conversion value plus the holder’s Make-Whole Payment is greater than the holding value; or (ii) the

2020

Notes will be called by the issuer if (a) the stock price exceeds

150%

of the then in-effect conversion price over a

ten

-business day period and (b) if the holding value is greater than the conversion value plus the Make-Whole Payment at the time. Using this lattice model, the Company valued the embedded derivative using a “with-and-without method”, where the value of the

2020

Notes including the embedded derivative is defined as the “with”, and the value of the

2020

Notes excluding the embedded derivative is defined as the “without”. This method estimates the value of the embedded derivative by comparing the difference in the values between the

2020

Notes with the embedded derivative and the value of the

2020

Notes without the embedded derivative. The lattice model requires the following inputs: (i) price of Gevo common stock; (ii) Conversion Rate (as defined in the

2020

Notes Indenture); (iii) Conversion Price (as defined in the

2020

Notes Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated stock volatility; and (vii) estimated credit spread for the Company.

As of

March 31, 2018,

the estimated fair value of the embedded derivatives was

$2.4

million. Any change in the estimated fair value of the embedded derivatives represents an unrealized gain which has been recorded as

$2.9

million from the change in fair value of embedded derivatives in the consolidated statements of operations for the

three

months ended

March 31, 2018,

respectively. The Company recorded the estimated fair value of the embedded derivative with the

2020

Notes, net in the consolidated balance sheets.

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

	March 31,			December 31,
	2018			2017
Stock price	$	0.46			0.59
Conversion Rate per $1,000		1,358.90			1,358.90
Conversion Price	$	0.74		$	0.74
Maturity date	March 15, 2020			March 15, 2020
Risk-free interest rate		2.24	%		1.89	%
Estimated stock volatility		75	%		75	%
Estimated credit spread		28	%		28	%

Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the embedded featured within the

2020

Notes. For example, the estimated fair value will generally decrease with: (

) a decline in the stock price; (

) decreases in the estimated stock volatility; and (

) a decrease in the estimated credit spread.

2022

Notes Embedded Derivative

July 2012,

the Company issued

7.5%

convertible senior notes due

July 2022 (

the

“2022

Notes”) which contain the following embedded derivatives: (i) rights to convert into shares of the Company’s common stock, including upon a Fundamental Change (as defined in the indenture governing the

2022

Notes (the

“2022

Notes Indenture”)); and (ii) a Coupon Make-Whole Payment (as defined in the

2022

Notes Indenture) in the event of a conversion by the holders of the

2022

Notes prior to

July 1, 2017.

The Company had concluded that the embedded derivatives within the

2020

Notes required separation from the host instrument and was re-valued each reporting period, with changes in the fair value of the embedded derivative recognized as a component of the Company’s consolidated Statements of Operations. As of

December 31, 2017,

the fair value of the

2020

Notes embedded derivative was zero. In

January 2018,

the Company entered into a private exchange agreement with a holder of the

2022

Notes to exchange the remaining

$0.5

million of outstanding principal amount of the

2022

Notes for

780,303

shares of common stock. Upon completion of this exchange, the

2022

Notes were satisfied in their entirety and there are

remaining obligations under the

2022

Notes, including any remaining obligations under the

2022

Notes embedded derivative.

Derivative Warrant Liability

The following warrants were sold by the Company:

•

December 2013,

the Company sold warrants to purchase

71,013

shares of the Company’s common stock (the

“2013

Warrants”).

•

August 2014,

the Company sold warrants to purchase

50,000

shares of the Company’s common stock (the

“2014

Warrants”).

•

February 2015,

the Company sold Series A warrants to purchase

110,833

shares of the Company’s common stock (the “Series A Warrants”) and Series B warrants to purchase

110,883

shares of the Company’s common stock (the “Series B Warrants”).

•

May 2015,

the Company sold Series C warrants to purchase

21,500

shares of the Company’s common stock (the “Series C Warrants”).

•

December 2015,

the Company sold Series D warrants to purchase

502,500

shares of the Company’s common stock (the “Series D Warrants”) and Series E warrants to purchase

400,000

shares of the Company’s common stock (the “Series E Warrants”).

•

April 2016,

the Company sold Series F warrants to purchase

514,644

shares of the Company’s common stock (the “Series F Warrants”) and Series H warrants to purchase

1,029,286

shares of the Company’s common stock (the “Series H Warrants”), and pre-funded Series G warrants (the “Series G Warrants”) to purchase

328,571

shares of the Company’s common stock, pursuant to an underwritten public offering.

•

September 2016,

the Company sold Series I warrants to purchase

712,503

shares of the Company’s common stock (the “Series I Warrant”) and pre-funded Series J warrants (“Series J Warrants”) to purchase

185,000

shares of the Company’s common stock, pursuant to an underwritten public offering.

•

February 2017,

the Company sold Series K warrants to purchase

6,250,000

shares of the Company’s common stock (the “Series K Warrants”) and Series M warrants to purchase

6,250,000

shares of the Company’s common stock (the “Series M Warrants”), and pre-funded Series L warrants (the “Series L Warrants”) to purchase

570,000

shares of the Company’s common stock, pursuant to an underwritten public offering.

The following table sets forth information pertaining to shares issued upon the exercise of such warrants as of

March 31, 2018:

	Issuance Date	Expiration Date	Exercise Price as of March 31, 2018			Shares Underlying Warrants on Issuance Date		Shares Issued upon Warrant Exercises as of March 31, 2018		Shares Underlying Warrants Outstanding as of March 31, 2018 (4)
2013 Warrants	12/16/2013	12/16/2018	$	8.99			71,013		15,239		55,774
2014 Warrants	08/05/2014	08/05/2019	$	6.83			50,000		30,538		19,462
Series A Warrants	02/03/2015	02/03/2020	$	0.68			110,833		99,416		11,417
Series B Warrants	02/03/2015	08/03/2015		-	(1)		110,833		110,833		-
Series C Warrants	05/19/2015	05/19/2020	$	5.50			21,500		-		21,500
Series D Warrants	12/11/2015	12/11/2020	$	2.00			502,500		501,570		930
Series E Warrants	12/11/2015	12/11/2020		-	(1)		400,000		400,000		-
Series F Warrants	04/01/2016	04/01/2021	$	2.00			514,644		233,857		280,787
Series G Warrants	04/01/2016	04/01/2017		-	(1)		328,571		328,571		-
Series H Warrants	04/01/2016	10/01/2016		-	(1)		1,029,286		1,029,286		-
Series I Warrants	09/13/2016	09/13/2021	$	11.00			712,503		-		712,503
Series J Warrants	09/13/2016	09/13/2017		-	(1)		185,000		185,000		-
Series K Warrants	02/17/2017	2/17/2022	$	0.60			6,250,000		160,000		6,090,000
Series L Warrants	02/17/2017	02/17/2018		-	(1)		570,000		570,000		-
Series M-A Warrants	02/17/2017	11/17/2017		-	(1), (2)		2,305,000		1,485,000		-
Series M-B Warrants	02/17/2017	11/17/2017		-	(1), (3)		3,945,000		3,945,000		-
							17,106,683		9,094,310		7,192,373

( 1 )	Warrants have either been fully exercised and/or expired as of March 31, 2018.

( 2 )	In October 2017, 1,485,000 Series M warrants were repriced between $0.60 and $0.65 per warrant. Of those warrants that were repriced, all were exercised in the fourth quarter of 2017, providing proceeds of $1.0 million.

( 3 )	In September 2017, 3,945,000 Series M warrants were repriced to $0.60. Of those warrants that were repriced, all were exercised in the second half of 2017, providing proceeds of $2.4 million.

( 4 )	This table does not include 1,393 equity-classified warrants issued between 2008 through 2012, with strike prices between $17.70 and $24.45 per share.

The agreements governing the above warrants include the following terms:

•

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

•

warrant holders

may

exercise the warrants through a cashless exercise if, and only if, the Company does

not

have an effective registration statement then available for the issuance of the shares of its common stock. If an effective registration statement is available for the issuance of its common stock a holder

may

only exercise the warrants through a cash exercise;

•

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

•

in the event of an “extraordinary transaction” or a “fundamental transaction” (as such terms are defined in the respective warrant agreements), generally including any merger with or into another entity, sale of all or substantially all of the Company’s assets, tender offer or exchange offer, or reclassification of its common stock, in which the successor entity (as defined in the respective warrant agreements) that assumes the successor entity is

not

a publicly traded company, the Company or any successor entity will pay the warrant holder, at such holder’s option, exercisable at any time concurrently with or within

days after the consummation of the extraordinary transaction or fundamental transaction, an amount of cash equal to the value of such holder’s warrants as determined in accordance with the Black Scholes option pricing model and the terms of the respective warrant agreement. In some circumstances, the Company or successor entity

may

be obligated to make such payments regardless of whether the successor entity that assumes the warrants is a publicly traded company.

There were

warrants exercised during the

three

months ended

March 31, 2018.

As of

March 31, 2018,

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