Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used anywhere in this Report, the words “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. These statements relate to future events or our future financial or operational performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements 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. These forward-looking statements include, among other things, statements about: risks and uncertainties related to our ability to sell our products, our ability to expand or continue production of ethanol and isobutanol at our production facility in Luverne, Minnesota (the “Luverne Facility”), our ability to meet our production, financial and operational guidance, our strategy to pursue low-carbon ethanol for sale into California, our ability to replace our fossil-based energy sources with renewable energy sources at the Luverne Facility, our ability and plans to construct a commercial hydrocarbon facility to produce alcohol-to-jet fuel (“ATJ”), our ability to raise additional funds to continue operations and/or expand the Luverne Facility, our ability to produce ethanol and isobutanol on a commercial level and at a profit, achievement of advances in our technology platform, the success of our retrofit production model, the availability of suitable and cost-competitive feedstocks, our ability to gain market acceptance for our products, the expected cost-competitiveness and relative performance attributes of our ethanol and isobutanol and the products derived from isobutanol, additional competition and changes in economic conditions and the future price and volatility of petroleum and products derived from petroleum. Important factors could cause actual results to differ materially from those indicated or implied by forward-looking statements such as those contained in documents, we have filed with the U.S. Securities and Exchange Commission (the “SEC”), included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2018 (our “Annual Report”), and subsequent reports on Form 10-Q in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations". All forward-looking statements in this Report are qualified entirely by the cautionary statements included in this Report and such other filings. These risks and uncertainties could cause actual results to differ materially from results expressed or implied by forward-looking statements contained in this Report. These forward-looking statements speak only as of the date of this Report. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, and readers should not rely on the forward-looking statements as representing the Company’s views as of any date subsequent to the date of the filing of this Report.
Unless the context requires otherwise, in this Report the terms “we,” “us,” “our” and the “Company” refer to Gevo, Inc. and its subsidiaries.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the related notes and other financial information appearing elsewhere in this Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including, without limitation, the disclosures in our Annual Report.
Company Overview
We are commercializing the next generation of gasoline, jet fuel and diesel fuel with the potential to achieve zero carbon emissions, addressing the market need of reducing greenhouse gas emissions with sustainable alternatives. We use low-carbon renewable resource based carbohydrates as raw materials, and are developing renewable electricity and renewable natural gas for the energy of production processes resulting in low-carbon fuels with reduced carbon intensity (the level of greenhouse gas emissions compared to standard petroleum) fossil-based fuels across their lifecycle. Our products deliver the technical performance expected of traditional fossil-based fuels in infrastructure and engines, but significantly reduce greenhouse gas emissions. In addition to addressing the problems of fuels, our technology also enables certain plastics, such as polyester, to be made with more sustainable ingredients. Our ability to penetrate the growing low-carbon fuels market depends on the price of oil and the value of abating carbon emissions, that would otherwise increase greenhouse gas emissions. We believe that because of our ability to use a variety of low-carbon, sustainably produced feedstocks and our proven technology resulting in the economical production of the main components of gasoline, jet fuel, and diesel fuel using a very low carbon footprint, we have the potential to generate returns that justify the build-out of a multi-billion dollar business.
We believe that the fossil-based carbon emissions caused by using fossil-based liquid fuels will continue to come under increased regulation intent on reducing emissions. California's Low Carbon Fuel Standard Program (the "LCFS), the European Union's Renewable Energy Directive and other similar policies are causing the value of reducing fossil-based greenhouse gas emissions to become clearer and to be more attractive of a component of value to financiers.
To achieve the goal of becoming a multi-billion dollar business, we need to establish the low-carbon infrastructure for the Luverne Facility, secure additional take-or-pay offtake agreements that enable lower cost project financing, then build out large capacity for jet fuel, isooctane and diesel fuel and other productions sites around the world.
Financial Condition
For the nine months ended September 30, 2019 and 2018, we incurred a consolidated net loss of $21.8 million and $20.9 million, respectively, and had an accumulated deficit of $451.2 million at September 30, 2019. Our cash and cash equivalents at September 30, 2019 totaled $20.9 million which is primarily being used for the following: (i) operating activities of our Luverne Facility; (ii) operating activities at our corporate headquarters in Colorado, including research, engineering and development work; (iii) engineering, development and capital expenditures primarily associated with the Luverne Facility, including engineering, development and capital expenditures to “de-carbonize” the Luverne Facility; (iv) exploration of strategic alternatives and new financings; and (v) debt service and repayment obligations. We are actively working on refinancing our 2020 Notes (as defined below) that mature on March 15, 2020.
The continued operation of our business is dependent upon raising additional capital through future public and private equity offerings, debt financings or through other alternative financing arrangements. In addition, successful completion of our research and development programs and the attainment of profitable operations are dependent upon future events, including our ability to raise sufficient capital to expand our commercial production facility, 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.
We expect to incur future net losses as we continue to fund the development and commercialization of our products and product candidates. We have primarily relied on raising capital to fund our operations and debt service obligations by issuing common stock and warrants in underwritten public offerings. Those issuances have caused significant dilution to our existing stockholders. While we have sought, and will continue to seek, other, less dilutive forms of financing to fund our operations and debt service obligations, there is no assurance that we will be successful in doing so.
Our transition to profitability is dependent upon, among other things, the successful development and commercialization of our products and product candidates, the achievement of a level of revenues adequate to support our cost structure and securing sufficient financing for the build-out and Retrofit of the Luverne Facility or a facility at another suitable location. We may never achieve profitability or generate positive cash flows, and unless and until we do, we will continue to need to raise additional cash. We intend to fund future operations through additional private and/or public offerings of debt or equity securities. In addition, we may seek additional capital through arrangements with strategic partners or from other sources, may seek to restructure our debt and we will continue to address our cost structure. Notwithstanding, there can be no assurance that we will be able to raise additional funds or achieve or sustain profitability or positive cash flows from operations.
Results of Operations
Comparison of the Three Months Ended September 30, 2019 and 2018
|
|
Three Months Ended September 30,
|
|
|
|
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Revenue and cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol sales and related products, net
|
|
$
|
5,554
|
|
|
$
|
8,071
|
|
|
$
|
(2,517
|
)
|
Hydrocarbon revenue
|
|
|
550
|
|
|
|
504
|
|
|
|
46
|
|
Grant and other revenue
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
Total revenues
|
|
|
6,110
|
|
|
|
8,575
|
|
|
|
(2,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
9,893
|
|
|
|
10,628
|
|
|
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(3,783
|
)
|
|
|
(2,053
|
)
|
|
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
1,789
|
|
|
|
1,865
|
|
|
|
(76
|
)
|
Selling, general and administrative expense
|
|
|
2,431
|
|
|
|
2,190
|
|
|
|
241
|
|
Total operating expenses
|
|
|
4,220
|
|
|
|
4,055
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,003
|
)
|
|
|
(6,108
|
)
|
|
|
(1,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(605
|
)
|
|
|
(767
|
)
|
|
|
162
|
|
Gain (loss) from change in fair value of derivative warrant liability
|
|
|
(2
|
)
|
|
|
5
|
|
|
|
(7
|
)
|
Gain (loss) from change in fair value of 2020 Notes embedded derivative
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
7
|
|
Other income (expense)
|
|
|
(9
|
)
|
|
|
(3
|
)
|
|
|
(6
|
)
|
Total other expense, net
|
|
|
(616
|
)
|
|
|
(772
|
)
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,619
|
)
|
|
$
|
(6,880
|
)
|
|
$
|
(1,739
|
)
|
Revenue. Revenue from the sale of ethanol, isobutanol and related products for the three months ended September 30, 2019 was $5.6 million, a decrease of $2.5 million from the three months ended September 30, 2018. As a result of an unfavorable commodity environment during the three months ended September 30, 2019 compared with the same period ended September 30, 2018, we reduced our production of ethanol and distiller grains which resulted in lower sales for the period. During the three months ended September 30, 2019, we sold 3.4 million gallons of ethanol compared to 5.1 million gallons of ethanol sold in the three months ended September 30, 2018.
Hydrocarbon revenues are comprised of ATJ, isooctane and isooctene sales. Hydrocarbon sales increased because of higher production volumes at the South Hampton Facility. During the three months ended September 30, 2018, we reduced production at the South Hampton Facility to upgrade the facility and double the production capacity.
Cost of goods sold. Cost of goods sold was $9.9 million during the three months ended September 30, 2019 compared with $10.6 million during the three months ended September 30, 2018. The decrease of approximately $0.7 million was primarily the result of decreased production at the Luverne Facility for the three months ended September 30, 2019 compared to September 30, 2018. Production was decreased due to an unfavorable commodity environment, largely the result of greater corn costs as compared to national markets than the region has historically experienced. Cost of goods sold included approximately $8.3 million associated with the production of ethanol and related products and approximately $1.6 million in depreciation expense during the three months ended September 30, 2019.
Research and development expense. Research and development expense decreased by $0.1 million during the three months ended September 30, 2019 compared with the three months ended September 30, 2018, due primarily to a decrease in costs associated with the South Hampton Facility offset by an increase in personnel and consulting expenses.
Selling, general and administrative expense. Selling, general and administrative expense increased by approximately $0.2 million during the three months ended September 30, 2019 compared with the three months ended September 30, 2018, due primarily to an increase in personnel, consulting and investor relations costs, partially offset by a decrease in professional fees.
Interest expense. Interest expense during the three months ended September 30, 2019 was $0.6 million, a decrease of $0.2 million compared to the three months ended September 30, 2018, due to a decrease in the outstanding principal amount of the 12% convertible senior secured notes due 2020 (the “2020 Notes”) as of September 30, 2019 from the exchange of approximately $3.2 million of our 2020 Notes for our common stock during 2018.
Gain (loss) from change in fair value of derivative warrant liability. During the three months ended September 30, 2019, the fair value of the derivative warrant liability decreased $0.01 million compared to the three months ended September 30, 2018, primarily due to the decrease in the number of warrants outstanding and a decrease in the amount of time until the expiration of the outstanding warrants.
Comparison of the Nine Months Ended September 30, 2019 and 2018
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Revenue and cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Ethanol sales and related products, net
|
|
$
|
16,184
|
|
|
$
|
25,102
|
|
|
$
|
(8,918
|
)
|
Hydrocarbon revenue
|
|
|
1,381
|
|
|
|
1,111
|
|
|
|
270
|
|
Grant and other revenue
|
|
|
34
|
|
|
|
25
|
|
|
|
9
|
|
Total revenues
|
|
|
17,599
|
|
|
|
26,238
|
|
|
|
(8,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
27,306
|
|
|
|
31,904
|
|
|
|
(4,598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
(9,707
|
)
|
|
|
(5,666
|
)
|
|
|
(4,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
|
3,712
|
|
|
|
4,123
|
|
|
|
(411
|
)
|
Selling, general and administrative expense
|
|
|
6,705
|
|
|
|
5,697
|
|
|
|
1,008
|
|
Total operating expenses
|
|
|
10,417
|
|
|
|
9,820
|
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(20,124
|
)
|
|
|
(15,486
|
)
|
|
|
(4,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,127
|
)
|
|
|
(2,496
|
)
|
|
|
369
|
|
(Loss) on exchange or conversion of debt
|
|
|
—
|
|
|
|
(2,202
|
)
|
|
|
2,202
|
|
Gain (loss) from change in fair value of derivative warrant liability
|
|
|
1
|
|
|
|
(3,035
|
)
|
|
|
3,036
|
|
Gain from change in fair value of 2020 Notes embedded derivative
|
|
|
394
|
|
|
|
2,340
|
|
|
|
(1,946
|
)
|
Other income
|
|
|
11
|
|
|
|
5
|
|
|
|
6
|
|
Total other expense, net
|
|
|
(1,721
|
)
|
|
|
(5,388
|
)
|
|
|
3,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(21,845
|
)
|
|
$
|
(20,874
|
)
|
|
$
|
(971
|
)
|
Revenue. Revenue from the sale of ethanol, isobutanol and related products for the nine months ended September 30, 2019 was $16.2 million, a decrease of $8.9 million from the nine months ended September 30, 2018. As a result of an unfavorable commodity environment during the nine months ended September 30, 2019 compared with the same period ended September 30, 2018, we reduced our production of ethanol and distiller grains which resulted in decreased sales. During the nine months ended September 30, 2019, we sold 10.2 million gallons of ethanol compared to 14.9 million gallons of ethanol sold in the nine months ended September 30, 2018.
Hydrocarbon revenues are comprised of ATJ, isooctane and isooctene sales. Hydrocarbon sales increased by $0.3 million during the nine months ended September 30, 2019 as a result of greater shipments of finished products from our South Hampton Facility.
Cost of goods sold. Cost of goods sold was $27.3 million during the nine months ended September 30, 2019 compared with $31.9 million during the nine months ended September 30, 2018. The decrease of approximately $4.6 million was primarily the result of decreased production for the nine months ended September 30, 2019 compared to September 30, 2018. Production was decreased due to an unfavorable commodity environment, largely the result of greater corn costs as compared to national markets than the region has historically experienced. Cost of goods sold included approximately $22.6 million associated with the production of ethanol and related products and approximately $4.7 million in depreciation expense during the nine months ended September 30, 2019.
Research and development expense. Research and development expense decreased by approximately $0.4 million during the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018, due primarily to a decrease in costs associated with our South Hampton Facility, offset by an increase in personnel expenses.
Selling, general and administrative expense. Selling, general and administrative expense increased by approximately $1.0 million during the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018, due primarily to an increase of personnel, consulting, travel, legal and investor relations costs, partially offset by a decrease in professional fees.
Interest expense. Interest expense during the nine months ended September 30, 2019 was $2.1 million, a decrease of $0.4 million compared to the nine months ended September 30, 2018, due to a decrease in the outstanding principal amount of the 2020 Notes as of September 30, 2019 from the exchange of approximately $3.2 million of our 2020 Notes for our common stock during 2018.
Gain (loss) from change in fair value of derivative warrant liability. During the nine months ended September 30, 2019, the fair value of the derivative warrant liability decreased $3.0 million compared to the nine months ended September 30, 2018, primarily due to the decrease in the number of warrants outstanding and a decrease in the amount of time until the expiration of the outstanding warrants.
Gain from change in fair value of the 2020 Notes embedded derivative. During the nine months ended September 30, 2019, the estimated fair value of the 2020 Notes embedded derivative liability decreased to $0, resulting in a decrease in the non-cash gain of $1.9 million compared to the nine months ended September 30, 2018. The decrease in derivative liability was primarily due to the decrease in the price of our common stock since the June 20, 2017 issuance date and the decrease in estimated stock volatility for the remaining period the 2020 Notes are due.
Revenue, Cost of Goods Sold and Operating Expenses
Revenue
During the nine months ended September 30, 2019 and 2018, we generated revenue from: (i) the sale of ethanol, isobutanol and related products; (ii) hydrocarbon sales, consisting primarily of the sale of ATJ fuel, isooctane and isooctene derived from our isobutanol for purposes of certification and testing; and (iii) government grants and research and development programs.
Cost of Goods Sold and Gross Loss
Cost of goods sold during the nine months ended September 30, 2019 and 2018 primarily includes costs directly associated with isobutanol production and ethanol production at the Luverne Facility, such as costs for direct materials, direct labor, depreciation, other operating costs and certain plant overhead costs. Direct materials include corn feedstock, denaturant and process chemicals. Direct labor includes compensation of personnel directly involved in production operations at the Luverne Facility. Other operating costs include utilities and natural gas usage.
Our gross loss is defined as our total revenue 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 to produce isobutanol and the development of downstream applications thereof. Research and development expenses include 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 Luverne Facility that include administrative and oversight expenses, certain personnel-related expenses, insurance and other operating expenses.
Liquidity and Capital Resources
Since our inception in 2005, we have devoted most of our cash resources to manufacturing ethanol, isobutanol and related products, research and development and selling, general and administrative activities related to the commercialization of ethanol, isobutanol, as well as related products from renewable feedstocks. We have incurred losses since inception and expect to incur losses through at least 2020. We have financed our operations primarily with proceeds from multiple sales of equity and debt securities, borrowings under debt facilities and product sales.
The continued operation of our business, including any expansion of the Luverne Facility, is dependent upon raising additional capital through future public and private equity offerings, debt financings or through other alternative financing arrangements. In addition, successful completion of our research and development programs and the attainment of profitable operations are dependent upon future events, including access to sufficient capital, repayment of our current debt, 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. Such additional capital may not be available to us on acceptable terms or at all.
As of September 30, 2019, we had an accumulated deficit of $451.2 million with cash and cash equivalents totaling $20.9 million. The 2020 Notes mature on March 15, 2020. See discussion below in "2020 Notes".
The following table sets forth the major sources and uses of cash for each of the periods set forth below (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash used in operating activities
|
|
$
|
(14,798
|
)
|
|
$
|
(10,154
|
)
|
Net cash used in investing activities
|
|
$
|
(7,260
|
)
|
|
$
|
(933
|
)
|
Net cash provided by financing activities
|
|
$
|
9,268
|
|
|
$
|
37,850
|
|
Operating Activities
Our primary uses of cash from operating activities are personnel-related expenses, research and development expenses, which include costs incurred under development agreements; costs and expenses for the production of isobutanol, ethanol and related products, logistics costs, costs associated with further processing of isobutanol and costs associated with the operation of the South Hampton Facility and debt service payments.
During the nine months ended September 30, 2019, we used $14.8 million in cash from operating activities primarily resulting from a net loss of $21.8 million, a $0.5 million increase in working capital items and approximately $6.5 million in non-cash operating activities.
Investing Activities
During the nine months ended September 30, 2019, we used $7.3 million in cash from investing activities related to an investment of $1.5 million in Juhl and $5.8 primarily for capital expenditures at our Luverne Facility.
We are installing equipment to fractionate corn and to dry distiller's grains at the Luverne Facility totaling approximately $3.0 million as of September 30, 2019. The fractionation machine is expected to be operational in the first quarter of 2020.
Financing Activities
During the nine months ended September 30, 2019, we raised approximately $9.3 million associated with financing activities, which consisted of $9.4 million of net proceeds from sales under our “at-the-market” offering program discussed below offset by $0.2 million net settlement of common stock under stock plans.
At-the-Market Offering Program. In February 2018, we commenced an at-the-market offering program, which allows us to sell and issue shares of our common stock from time-to-time. The at-the-market offering program was amended multiple times during 2018 to increase the available capacity under the at-the-market offering program by an aggregate of approximately $84.9 million. In August 2019, the at-the-market offering program was amended to increase the available capacity under the at-the-market offering program by $10.7 million. During the nine months ended September 30, 2019, we issued 3,244,941 shares of common stock under the at-the-market offering program for gross proceeds of $9.9 million. We paid commissions and incurred other offering related expenses totaling $0.4 million during the nine months ended September 30, 2019. There were no shares issued during the three months ended September 30, 2019. As of September 30, 2019, we had capacity to issue up to $10.7 million of common stock under the at-the-market offering program.
From October 1, 2019 to November 11, 2019, the Company issued 322,899 shares of common stock under the at-the-market offering program for gross proceeds of $0.9 million, net of $0.03 million of commissions and offering related expenses.
2020 Notes
On April 19, 2017, we entered into an Exchange and Purchase Agreement (the “Purchase Agreement”) with WB Gevo, LTD (such holder, the “Holder”), and Whitebox Advisors LLC, in its capacity as representative of the Holder (“Whitebox”), the holder of our 12.0% convertible senior secured notes due 2017, which were cancelled in connection with the issuance of the 2020 Notes. Pursuant to the terms of the Purchase Agreement, the Holder, subject to certain conditions, including approval of the transaction by our stockholders (which was received on June 15, 2017), agreed to exchange all of the outstanding principal amount of the 2017 Notes for an equal principal amount of our newly created 2020 Notes, plus an amount in cash equal to the accrued and unpaid interest (other than interest paid in kind) on the 2017 Notes (the “Exchange”). On June 20, 2017, we cancelled the 2017 Notes. As of September 30, 2019 and December 31, 2018, the outstanding principal on the 2020 Notes, including PIK Interest (as defined and described below), was $13.9 million and $13.8 million, respectively.
The 2020 Notes will mature on March 15, 2020. The 2020 Notes bear interest at 12% per annum (with 2% potentially payable as PIK Interest at our option), payable on March 31, June 30, September 30, and December 31 of each year. Under certain circumstances, we have the option to pay a portion of the interest due on the 2020 Notes by either (a) increasing the principal amount of the 2020 Notes by the amount of interest then due or (b) issuing additional 2020 Notes with a principal amount equal to the amount of interest then due (interest paid in the manner set forth in (a) or (b) being referred to as “PIK Interest”).
The 2020 Notes are convertible into shares of our common stock, subject to certain terms and conditions. The initial conversion price of the 2020 Notes is $14.72 per share of common stock, or 0.0679 shares of common stock per $1 principal amount of 2020 Notes.
See Note 9, Debt, to our consolidated financial statements included herein for further discussion of the 2020 Notes.
Critical Accounting Policies and Estimates
Except for the adoption of ASC 842 “Leases” (see Note 4) there have been no significant changes to our critical accounting policies since December 31, 2018. See Note 1, Nature of Business, Financial Condition and Basis of Presentation, to our consolidated financial statements included herein for a discussion of recently issued accounting pronouncements and their impact or future potential impact on our financial results, if determinable. For a description of critical accounting policies that affect our significant judgments and estimates used in the preparation of our consolidated financial statements, refer to our 2018 Annual Report.
Off-Balance Sheet Arrangements
As of September 30, 2019, we did not have any material off-balance sheet arrangements, except for operating lease obligations disclosed in Note 4, Leases, Right-to-Use Assets and Related Liabilities, and Note 12, Commitments and Contingencies.