Embedded Derivatives

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.

Upon issuance on

June 20, 2017,

the fair value of the embedded derivative was valued at

$7.0

million. As of

December 31, 2018,

the estimated fair value of the embedded derivatives was

$0.4

million. The Company recorded a

$2.6

million gain to reflect the change in fair value of the embedded derivative in the consolidated statements of operations for the year-ended

December 31, 2018.

The Company recorded the estimated fair value of the embedded derivative as a component of current liabilities in the consolidated balance sheet.

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

	December 31,			December 31,,
	2018			2017
Stock price	$	1.96		$	11.80
Conversion Rate		67.95			1,358.90
Conversion Price	$	14.72		$	14.72
Maturity date		March 15, 2020			March 15, 2020
Risk-free interest rate		2.57	%		1.89	%
Estimated stock volatility		150	%		75	%
Estimated credit spread		31	%		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 contained 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, 2018,

the fair value of the

2022

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.