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 binomial lattice model, the following assumptions are made: (i) the

2020

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

2020

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

150%

of the then in-effect conversion price over a

ten

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

2020

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

2020

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

2020

Notes with the embedded derivative and the value of the

2020

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

2020

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

2020

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

As of

June 30, 2018

the estimated fair value of the embedded derivatives was

$0.7

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

$0.5

million loss and a

$2.3

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

three

and

six

months ended

June 30, 2018

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

2020

Notes, net in the consolidated balance sheets.

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

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

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

2020

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

) 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

39,016

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

3,551

shares of the Company’s common stock (the

“2013

Warrants”).

•

August 2014,

the Company sold warrants to purchase

2,500

shares of the Company’s common stock (the

“2014

Warrants”).

•

February 2015,

the Company sold Series A warrants to purchase

5,542

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

5,542

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

•

May 2015,

the Company sold Series C warrants to purchase

1,075

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

•

December 2015,

the Company sold Series D warrants to purchase

25,125

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

20,000

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

•

April 2016,

the Company sold Series F warrants to purchase

25,733

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

51,465

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

16,429

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

•

September 2016,

the Company sold Series I warrants to purchase

35,650

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

9,250

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

•

February 2017,

the Company sold Series K warrants to purchase

312,516

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

312,500

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

28,500

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

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

June 30, 2018

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

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

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

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

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

The agreements governing the above warrants include the following terms:

•

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

•

warrant holders

may

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

not

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

may

only exercise the warrants through a cash exercise;

•

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

•

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.

During the

three

months ended

June 30, 2018,

Series A Warrants to purchase

251

shares of common stock and Series K Warrants to purchase

300,510

shares of common stock were exercised to purchase an aggregate of

300,761

shares of common stock, providing cash proceeds of approximately

$1.3

million.

As of

June 30, 2018

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