TerraVia™
SOLAZYME INC (Form: 10-Q, Received: 05/08/2013 17:27:35)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from              to             

Commission File Number: 001-35189

 

 

Solazyme, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   33-1077078

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

Solazyme, Inc.

225 Gateway Boulevard

South San Francisco, CA 94080

(650) 780-4777

(Address and telephone number principal executive offices)

 

 

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   x     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 pursuance to Rule 405 of Regulation S-T (§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   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-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   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

   Outstanding at April 30, 2013

Common Stock, $0.001 par value per share

   61,827,104 shares

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART 1: FINANCIAL INFORMATION

  

Item 1.    Condensed Consolidated Financial Statements (Unaudited)      3   
   Condensed Consolidated Balance Sheets      3   
   Condensed Consolidated Statements of Operations      4   
   Condensed Consolidated Statements of Comprehensive Loss      5   
   Condensed Consolidated Statements of Cash Flows      6   
   Notes to the Condensed Consolidated Financial Statements      7   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      36   
Item 4.    Controls and Procedures      37   

PART II: OTHER INFORMATION

  
Item 1.    Legal Proceedings      38   
Item 1A.    Risk Factors      38   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      59   
Item 3.    Defaults Upon Senior Securities      59   
Item 4.    Mine Safety Disclosures      59   
Item 5.    Other Information      59   
Item 6.    Exhibits      60   
Signatures      61   

 

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PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements.

SOLAZYME, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share amounts

Unaudited

 

     March 31,
2013
    December 31,
2012
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 55,440      $ 30,818   

Marketable securities

     183,671        118,187   

Accounts receivable

     7,320        3,280   

Unbilled revenues

     2,276        3,150   

Inventories

     6,668        6,890   

Prepaid expenses and other current assets

     5,121        2,954   
  

 

 

   

 

 

 

Total current assets

     260,496        165,279   

Property, plant and equipment, net

     32,390        32,225   

Investments in unconsolidated joint ventures

     23,588        19,047   

Other assets

     889        473   
  

 

 

   

 

 

 

Total assets

   $ 317,363      $ 217,024   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 5,526      $ 7,552   

Accrued liabilities

     11,883        9,320   

Current portion of long-term debt

     60        7,331   

Deferred revenue

     1,966        292   

Other current liabilities

     —          443   
  

 

 

   

 

 

 

Total current liabilities

     19,435        24,938   

Deferred revenue

     1,467        —     

Warrant liability

     781        835   

Long-term debt

     10,424        7,637   

Convertible debt, inclusive of derivative liability of $3,861 and net of unamortized debt discount of $8,132 as of March 31, 2013

     120,729        —     

Other liabilities

     238        303   
  

 

 

   

 

 

 

Total liabilities

     153,074        33,713   
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Stockholders’ equity:

    

Common stock, par value $0.001 - 150,000,000 shares authorized at March 31, 2013 and December 31, 2012; 61,786,103 and 61,000,724 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively

     62        61   

Additional paid-in capital

     381,135        373,577   

Accumulated other comprehensive loss

     (455     (399

Accumulated deficit

     (216,453     (189,928
  

 

 

   

 

 

 

Total stockholders’ equity

     164,289        183,311   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 317,363      $ 217,024   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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SOLAZYME, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

In thousands, except share and per share amounts

Unaudited

 

     Three Months Ended March 31,  
     2013     2012  

Revenues:

    

Research and development programs

   $ 2,680      $ 9,560   

Product revenues

     4,000        3,996   
  

 

 

   

 

 

 

Total revenues

     6,680        13,556   
  

 

 

   

 

 

 

Costs and operating expenses:

    

Cost of product revenue

     1,454        1,246   

Research and development

     13,720        15,361   

Sales, general and administrative

     14,866        14,056   
  

 

 

   

 

 

 

Total costs and operating expenses

     30,040        30,663   
  

 

 

   

 

 

 

Loss from operations

     (23,360     (17,107

Other income (expense):

    

Interest and other income, net

     348        546   

Interest expense

     (1,871     (219

Loss from equity method investment

     (959     —     

Gain from change in fair value of warrant liability

     54        —     

Loss from change in fair value of derivative liability

     (737     —     
  

 

 

   

 

 

 

Total other income (expense)

     (3,165     327   
  

 

 

   

 

 

 

Net loss

   $ (26,525   $ (16,780
  

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.43   $ (0.28
  

 

 

   

 

 

 

Weighted average number of common shares used in loss per share computation, basic and diluted

     61,542,509        60,101,176   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

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SOLAZYME, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

In thousands

Unaudited

 

     Three Months Ended March 31,  
     2013     2012  

Net loss

   $ (26,525   $ (16,780

Other comprehensive income (loss), net:

    

Change in unrealized gain/loss on available-for-sale securities

     (69     561   

Foreign currency translation adjustment

     13        (54
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (56     507   
  

 

 

   

 

 

 

Total comprehensive loss

   $ (26,581   $ (16,273
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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SOLAZYME, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In thousands

Unaudited

 

     Three Months Ended March 31,  
     2013     2012  

Operating activities:

    

Net loss

   $ (26,525   $ (16,780

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     1,126        606   

Net amortization of premiums on marketable securities

     418        766   

Amortization of debt discount

     262        38   

Amortization of loan fees

     73        5   

Stock-based compensation expense

     4,005        3,990   

Loss from equity method investment

     959        —     

Revaluation of warrant liability

     (54     —     

Revaluation of derivative liability

     737        —     

Changes in operating assets and liabilities:

    

Accounts receivable

     (4,040     (2,675

Unbilled revenue

     874        906   

Inventories

     222        (952

Prepaid expenses and other current assets

     485        905   

Accounts payable

     (2,129     (2,364

Accrued liabilities

     2,724        (2,921

Deferred revenue

     3,142        (164

Other current and long-term liabilities

     (499     8   
  

 

 

   

 

 

 

Net cash used in operating activities

     (18,220     (18,632
  

 

 

   

 

 

 

Investing activities:

    

Purchases of property, plant and equipment

     (1,189     (4,752

Purchases of marketable securities

     (83,581     (38,979

Maturities of marketable securities

     17,618        46,565   

Proceeds from sales of marketable securities

     —          5,409   

Capital contribution in unconsolidated joint venture

     (5,500     —     
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (72,652     8,243   
  

 

 

   

 

 

 

Financing activities:

    

Repayments under loan agreements

     (14,872     (2,743

Proceeds from the issuance of senior subordinated convertible notes, net of debt discount

     119,750        —     

Proceeds from the issuance of common stock, net of repurchases

     260        1,444   

Proceeds from issuance of common stock, pursuant to ESPP

     516        —     

Early exercise of stock options subject to repurchase

     (8     (17

Proceeds from borrowings under loan agreements

     10,369        —     

Payment for loan costs and fees

     (500     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     115,515        (1,316
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (21     (86
  

 

 

   

 

 

 

Net increase (decrease) of cash and cash equivalents

     24,622        (11,791

Cash and cash equivalents — beginning of period

     30,818        28,780   
  

 

 

   

 

 

 

Cash and cash equivalents — end of period

   $ 55,440      $ 16,989   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Interest paid in cash

   $ 183      $ 187   
  

 

 

   

 

 

 

Income taxes paid in cash

   $ —        $ —     
  

 

 

   

 

 

 

Supplemental disclosure of noncash investing and financing activities:

    

Capital assets in accounts payable and accrued liabilities

   $ 502      $ 1,500   
  

 

 

   

 

 

 

Debt issue costs in accounts payable and accrued liabilities

   $ 118      $ —     
  

 

 

   

 

 

 

Change in unrealized (loss) gain on marketable securities

   $ (69   $ 561   
  

 

 

   

 

 

 

Common stock issued in lieu of cash bonus

   $ 121      $ —     
  

 

 

   

 

 

 

Common stock issued in connection with use and operation of third party manufacturing facility

   $ 2,655      $ —     
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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SOLAZYME, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

Solazyme, Inc. (the “Company”) was incorporated in the State of Delaware on March 31, 2003. The Company’s proprietary technology transforms a range of low-cost plant-based sugars into high-value oils. The Company’s renewable products can replace or enhance oils derived from the world’s three existing sources-petroleum, plants, and animal fats. The Company tailors the composition of its oils to address specific customer requirements, offering superior performance characteristics and value. The Company has pioneered an industrial biotechnology platform that harnesses the prolific oil-producing capability of microalgae. The Company uses standard industrial fermentation equipment to efficiently scale and accelerate microalgae’s natural oil production time to a few days. By feeding the Company’s proprietary oil-producing microalgae plant sugars in dark fermentation tanks, the Company is in effect utilizing “indirect photosynthesis” in contrast to the traditional open-pond approaches. The Company’s platform is feedstock flexible and can utilize a wide variety of renewable plant-based sugars, such as sugarcane-based sucrose, corn-based dextrose, and sugar from other sustainable biomass sources including cellulosics, which the Company believes will represent an important alternative feedstock in the longer term. Furthermore, the Company’s platform allows it to produce and sell specialty bioproducts from the protein, fiber and other compounds produced by microalgae.

On June 2, 2011, the Company completed its initial public offering, issuing 12,021,250 shares of common stock at an offering price of $18.00 per share, resulting in net proceeds to the Company of $201.2 million, after deducting underwriting discounts and commissions of $15.1 million. Additionally, the Company incurred offering costs of $4.3 million related to the initial public offering. Upon the closing of the initial public offering, the Company’s outstanding shares of redeemable convertible preferred stock were automatically converted on a one for one basis into 34,534,125 shares of common stock, and the outstanding Series B redeemable convertible preferred stock warrants were automatically converted into 303,855 shares of common stock.

The Company expects ongoing losses as it continues its scale-up activities, expands its research and development activities and supports commercialization activities for its products. The Company plans to meet its capital requirements primarily through equity financing, collaborative agreements and the issuance of debt securities.

The industry in which the Company is involved is highly competitive and is characterized by the risks of changing technologies, market conditions, and regulatory requirements. Penetration into markets requires investment of considerable resources and continuous development efforts. The Company’s future success depends upon several factors, including the technological quality, price, and performance of its products and services relative to those of its competitors, scaling up of production for commercial sale, ability to secure adequate project financing at appropriate terms, and the nature of regulation in its target markets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the periods presented. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Solazyme Brazil Renewable Oils and Bioproducts Limitada (“Solazyme Brazil”), which had operations beginning in the first quarter of 2011, and Solazyme Manufacturing 1, L.L.C, which was formed to own the Peoria Facility assets (Note 7) and related promissory note in the second quarter of 2011. All intercompany accounts and transactions have been eliminated in consolidation.

On December 16, 2010, the Company entered into a joint venture agreement with Roquette Frères, S.A. (“Roquette”). The Solazyme Roquette JV is a variable interest entity (“VIE”) and is 50% owned by the Company and 50% by Roquette. The Company has determined that it is not required to consolidate the 50% ownership in the joint venture and is therefore accounting for the joint venture under the equity method of accounting (see Note 8).

On April 2, 2012, the Company entered into a joint venture agreement with Bunge Global Innovation, LLC (together with its affiliates, “Bunge”). The Company’s joint venture with Bunge (“Solazyme Bunge JV”) is a VIE and is 50.1% owned by the Company and 49.9% owned by Bunge. The Company determined that it is not required to consolidate the 50.1% ownership in the joint venture and is therefore accounting for the joint venture under the equity method of accounting (see Note 8).

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited condensed consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company’s interim financial information. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013, or for other interim periods or future years.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the United States Securities and Exchange Commission (“SEC”) on March 13, 2013. The December 31, 2012 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes required by GAAP for complete financial statements.

 

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Significant Accounting Policies – Except as described below, there have been no changes to the Company’s significant accounting policies since December 31, 2012.

Deferred Financing Costs – To the extent that the Company is required to pay issuance fees or direct costs relating to its credit facilities, such fees are deferred and amortized to interest expense over the contractual or expected term of the related debt using the effective interest method. The Company classifies deferred financing costs in other long-term assets, consistent with the long-term classification of the related debt outstanding at the end of the reporting period.

Debt Discounts – Debt discounts incurred with the issuance of the Company’s debt are recorded in the condensed consolidated balance sheets as a reduction to associated debt balances. The Company amortizes debt discount to interest expense over the contractual or expected term of the debt using the effective interest method.

Derivative Financial Instruments Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging , establishes accounting and reporting standards for derivative instruments. The accounting standards require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The fair value of the derivative is remeasured to fair value at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value of the derivative. The Company has determined that it must bifurcate and account for the early conversion feature in its 6.00% convertible senior subordinated notes due 2018 (“the Notes”) as an embedded derivative in accordance with ASC 815 (see Note 5 and Note 11). The Company recorded this embedded derivative liability as a non-current liability on its condensed consolidated balance sheets with a corresponding debt discount that is netted against the principal amount of the Notes. The Company estimates the fair value of these liabilities using a Monte Carlo simulation model.

3. BASIC AND DILUTED NET LOSS PER SHARE

Basic net loss per share is computed by dividing the Company’s net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by giving effect to all potentially dilutive securities. Basic and diluted net loss per share was the same for all periods presented as the inclusion of all potentially dilutive securities outstanding was anti-dilutive.

The following table summarizes the Company’s calculation of basic and diluted net loss per share (in thousands, except share and per share amounts):

 

     Three Months Ended March 31,  
     2013     2012  

Numerator

    

Net loss

   $ (26,525   $ (16,780
  

 

 

   

 

 

 

Denominator

    

Weighted-average number of common shares used in net loss per share calculation

     61,572,119        60,188,428   

Less: Weighted-average shares subject to repurchase

     (29,610     (87,252
  

 

 

   

 

 

 

Denominator: basic and diluted

     61,542,509        60,101,176   
  

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.43   $ (0.28
  

 

 

   

 

 

 

 

 

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The following outstanding shares of potentially dilutive securities were excluded from the calculation of diluted net loss per share for the periods presented as the effect was anti-dilutive:

 

     Three Months Ended March 31,  
     2013      2012  

Options to purchase common stock

     10,637,489         9,418,532   

Common stock subject to repurchase

     24,151         75,136   

Restricted stock units

     955,310         162,668   

Warrants to purchase common stock

     1,500,000         1,000,000   

Shares of common stock to be issued upon conversion of the Notes

     15,140,500         —     
  

 

 

    

 

 

 

Total

     28,257,450         10,656,336   
  

 

 

    

 

 

 

4. MARKETABLE SECURITIES

Marketable securities classified as available-for-sale consisted of the following (in thousands):

 

     March 31, 2013  
     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Fair Value  

Corporate bonds

   $ 67,256       $ 172       $ (25   $ 67,403   

Asset-backed securities

     33,578         42         (4     33,616   

Commercial paper

     32,957         11         -        32,968   

Government and agency securities

     27,972         37         (28     27,981   

Mortgage-backed securities

     14,481         56         (14     14,523   

Municipal bonds

     6,421         10         (1     6,430   

Certificates of deposit

     750         —           —          750   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 183,415       $ 328       $ (72   $ 183,671   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Fair Value  

Corporate bonds

   $ 49,545       $ 203       $ (4   $ 49,744   

Government and agency securities

     23,431         43         (27     23,447   

Asset-backed securities

     23,079         70         —          23,149   

Mortgage-backed securities

     12,064         40         (15     12,089   

Commercial paper

     1,200         —           —          1,200   

Municipal bonds

     6,273         13         —          6,286   

Certificates of deposit

     1,003         1         —          1,004   

Floating rate notes

     1,266         2         —          1,268   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 117,861       $ 372       $ (46   $ 118,187   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

 

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The following table summarizes the amortized cost and fair value of the Company’s marketable securities, classified by stated maturity as of March 31, 2013 and December 31, 2012 (in thousands):

 

     March 31, 2013      December 31, 2012  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Marketable securities

           

Due in 1 year or less

   $ 100,261       $ 100,379       $ 53,761       $ 53,852   

Due in 1-2 years

     47,695         47,795         36,510         36,694   

Due in 2-3 years

     13,397         13,387         11,847         11,856   

Due in 3-4 years

     4,546         4,544         744         746   

Due in 4-9 years

     5,653         5,680         5,158         5,179   

Due in 9-20 years

     2,262         2,269         1,032         1,040   

Due in 20-33 years

     9,601         9,617         8,809         8,820   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 183,415       $ 183,671       $ 117,861       $ 118,187   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable securities classified as available-for-sale are carried at fair value as of March 31, 2013 and December 31, 2012. Realized gains and losses from sales and maturities of marketable securities were not significant in the periods presented.

The aggregate fair value of available-for-sale securities with unrealized losses as of March 31, 2013 was $52.1 million. Gross unrealized losses on available-for-sale securities as of March 31, 2013 were insignificant and the Company believes the gross unrealized losses are temporary. In determining that the decline in fair value of these securities was temporary, the Company considered the length of time each security was in an unrealized loss position and the extent to which the fair value was less than cost. The aggregate fair value and unrealized loss of available-for-sale securities which had been in a continuous loss position for more than 12 months was $1.3 million and $26,000 as of March 31, 2013, respectively. In addition, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

Assets and liabilities recorded at fair value in the consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels that are directly related to the amount of subjectivity associated with the inputs to the valuation of these assets or liabilities are as follows:

 

   

Level 1—Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

 

   

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

 

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The following tables present the Company’s financial instruments that were measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012 by level within the fair value hierarchy (in thousands):

 

     March 31, 2013  
     Level 1      Level 2      Level 3      Total  

Financial Assets

           

Cash equivalents

   $ 4,753       $ 26,310       $ —         $ 31,063   

Marketable securities

     1,998         181,673         —           183,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,751       $ 207,983       $ —         $ 214,734   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           

Derivative liability

   $ —         $ —         $ 3,861       $ 3,861   

Warrant liability

     —           —           781         781   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 4,642       $ 4,642   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2012  
     Level 1      Level 2      Level 3      Total  

Financial Assets

           

Cash equivalents

   $ 25,781       $ 2,829       $ —         $ 28,610   

Marketable securities

     1,997         116,190         —           118,187   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,778       $ 119,019       $ —         $ 146,797   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liability

           

Warrant liability

   $ —         $ —         $ 835       $ 835   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company had no transactions measured at fair value on a nonrecurring basis as of March 31, 2013 and December 31, 2012.

Cash Equivalents and Marketable Securities – Cash equivalents and marketable securities classified within Level 2 of the fair value hierarchy are valued based on other observable inputs, including broker or dealer quotations or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes, which are based on proprietary valuation models of independent pricing services. These models generally use inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers and internal assumptions of the independent pricing services. The Company corroborates the reasonableness of non-binding quotes received from the independent pricing services by comparing them to quotes of identical or similar instruments from other pricing sources. During the three month ended March 31, 2013 and 2012, the Company did not record impairment charges related to its cash equivalents and marketable securities, and the Company did not have any transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy.

Derivative Liability - In January 2013, the Company issued the Notes which contain an early conversion feature, whereby the Note holders have the option of converting their Notes to common shares of the Company’s stock prior to November 1, 2016 (other than conversions in connection with certain fundamental changes). In addition to the shares deliverable upon conversion, holders are entitled to receive an early conversion payment equal to $83.33 per $1,000 principal amount of Notes surrendered for conversion that may be settled, at the Company’s election, in cash or, subject to satisfaction of certain conditions, in shares of the Company’s common stock. This early conversion feature has been identified as an embedded derivative, as described in ASC 815. In accordance with ASC 815, embedded derivatives are separated from the host contract, the 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 related to the early conversion feature of the Notes meet these criteria and, as such, must be valued separate and apart from the Notes and recorded at fair value at each reporting period. At each reporting period, the Company records this embedded derivative at fair value, which is included as a component of Convertible Debt on its condensed consolidated balance sheets.

The Company used a Monte Carlo simulation model to estimate the fair value of the embedded derivative related to the early conversion feature of the Notes. Within the model, the assumption was made that the Notes will be converted early if the conversion value is greater than the holding value. The model requires the following inputs: (i) price of the Company’s common stock; (ii)

 

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conversion rate of 121.1240 shares of common stock per $1,000 in principal amount of Notes, subject to adjustment; (iii) conversion price of $8.26 per share of common stock, subject to adjustment; (iv) maturity date; (v) risk-free interest rate; and (vi) estimated stock volatility.

The following table sets forth the Level 3 inputs to the Monte Carlo simulation model that were used to determine the fair value of the embedded derivative:

 

     Issuance Date     March 31, 2013  

Stock price

   $ 6.88      $ 7.80   

Conversion rate

     121.1240        121.1240   

Conversion price

   $ 8.26      $ 8.26   

Maturity date

     November 1, 2016        November 1, 2016   

Risk-free interest rate

     0.79     0.74

Estimated stock volatility

     50     50

Changes in certain inputs into the model can have a significant impact on changes in the estimated fair value of the embedded derivative. The following table sets forth the estimated fair value of the embedded derivative as of the issuance date and March 31, 2013 (in thousands):

 

     Issuance
Date
     March 31,
2013
 

Estimated fair value of the embedded derivative

   $ 3,124       $ 3,861   

The $0.7 million increase in the estimated fair value of the embedded derivative between the issue date and March 31, 2013 represents an unrealized loss that has been recorded as loss from change in fair value of embedded derivative in the condensed consolidated statements of operations.

Warrant Liability- The valuation of the warrant liability above is discussed in Note 8.

The following tables presents the change in fair values of the Company’s Level 3 financial instruments that were measured on a recurring basis using significant unobservable inputs as of March 31, 2013 (in thousands):

 

Fair value at December 31, 2012

   $ 835   

Fair value of derivative liability recorded on measurement date

     3,124   

Change in fair value recorded as a loss from change in fair value of derivative liability

     737   

Change in fair value recorded as a gain from change in fair value of warrant liability

     (54
  

 

 

 

Fair value at March 31, 2013

   $ 4,642   
  

 

 

 

The Company has estimated the fair value of its secured and unsecured 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 factors. As of March 31, 2013 and December 31, 2012 the carrying values of the Company’s secured and unsecured debt obligations, excluding the Notes, approximated their fair values. The Company has estimated the fair value of the Notes to be $128.8 million at March 31, 2013 based upon Level 2 inputs, including the market price of the Notes derived from actual trades of the Notes.

 

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6. INVENTORIES

Inventories consisted of the following (in thousands):

 

     March 31,
2013
     December 31,
2012
 

Raw materials

   $ 890       $ 1,044   

Work in process

     4,848         4,963   

Finished goods

     930         883   
  

 

 

    

 

 

 

Total inventories

   $ 6,668       $ 6,890   
  

 

 

    

 

 

 

7. PROPERTY, PLANT AND EQUIPMENT—NET

Property, plant and equipment—net consisted of the following (in thousands):

 

     March 31,
2013
    December 31,
2012
 

Plant equipment

   $ 18,670      $ 18,670   

Building and improvements

     5,478        5,478   

Lab equipment

     6,019        5,808   

Leasehold improvements

     2,672        2,665   

Computer equipment and software

     2,684        2,681   

Furniture and fixtures

     589        589   

Land

     430        430   

Automobiles

     49        49   

Construction in progress

     3,202        2,129   
  

 

 

   

 

 

 

Total

     39,793        38,499   

Less: accumulated depreciation and amortization

     (7,403     (6,274
  

 

 

   

 

 

 

Property, plant and equipment-net

   $ 32,390      $ 32,225   
  

 

 

   

 

 

 

Construction in progress as of March 31, 2013 and December 31, 2012 related primarily to the Peoria manufacturing facility and plant equipment not yet placed in service as of those dates.

Depreciation and amortization expense was $1.1 million and $0.6 million for the three months ended March 31, 2013 and 2012, respectively.

In March 2011, the Company entered into an agreement to purchase a development and commercial production facility with multiple 128,000-liter fermenters, and an annual oil production capacity of over 2,000,000 liters (1,820 metric tons) located in Peoria, Illinois for $11.5 million. Concurrent with the purchase transaction, the Company sold back certain equipment to the seller for $0.3 million. This transaction closed in May 2011, and the Company paid for the aggregate purchase price with available cash and borrowed $5.5 million under a promissory note, mortgage and security agreement from the seller. See promissory note terms in Note 11. In March 2013, the Company paid in full the outstanding principal on this promissory note. The Company began initial fermentation operations in the facility in the fourth quarter of 2011 and commissioned its first integrated biorefinery in June 2012 under its DOE program. The fair value of the assets on the purchase date was $10.9 million, which was allocated to plant equipment, building and improvements and land based on their relative fair values. These assets are classified in the table above under plant equipment, building and improvements and land as of March 31, 2013 and December 31, 2012.

8. INVESTMENTS IN JOINT VENTURES AND RELATED PARTY TRANSACTIONS

Solazyme Bunge Joint Venture

In April 2012, the Company and Bunge entered into a Joint Venture Agreement forming a joint venture (“Solazyme Bunge JV”) to build, own and operate a commercial-scale renewable tailored oils production facility (the “Plant”) adjacent to Bunge’s Moema sugarcane mill in Brazil. The Company expects this production facility to have annual production capacity of 100,000 metric tons of

 

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oil. Construction of the Plant commenced in the second quarter of 2012, with a targeted start-up in the fourth quarter of 2013. The Plant, which will leverage the Company’s technology and Bunge’s sugarcane milling and natural oil processing capabilities, will produce tailored triglyceride oils primarily for chemical applications. The capital contributions for this venture are being provided jointly by Solazyme and Bunge, and the agreement includes a value sharing mechanism that provides additional compensation to the Company for its technology contributions. The Company committed to make an initial capital contribution of up to $36.3 million in fiscal 2012 and, additional capital contributions of up to an additional $36.3 million beginning after December 31, 2012, primarily to fund the construction of the Plant. In the third quarter of 2012 and first quarter of 2013, the Company contributed capital in the amount of $10.0 million and $5.5 million, respectively, to the Solazyme Bunge JV. These capital contributions were recorded as an increase to investment in unconsolidated joint ventures and a corresponding decrease to cash and cash equivalents.

The Company has determined that the Solazyme Bunge JV is a VIE based on the insufficiency of each party’s equity investment at risk to absorb losses and the Company’s share of the respective expected losses of the Solazyme Bunge JV. However, the Company determined that it is not the primary beneficiary of the Solazyme Bunge JV and therefore will not consolidate the financial results of the Solazyme Bunge JV. The Company accounts for its interests in the Solazyme Bunge JV under the equity method of accounting. This consolidation status could change in the future due to changes in events and circumstances impacting the power to direct the activities that most significantly affect the Solazyme Bunge JV’s economic performance. The Company will continue to reassess its potential designation as the primary beneficiary of the Solazyme Bunge JV. During the three months ended March 31, 2013, the Company recognized $1.0 million of losses related to its equity method investment in the Solazyme Bunge JV.

In anticipation of the Solazyme Bunge JV’s formation, in May 2011, the Company granted Bunge Limited a warrant (“the Bunge Warrant”) to purchase 1,000,000 shares of its common stock at an exercise price of $13.50 per share. The Bunge Warrant vests (i) 25% on the date that Solazyme and Bunge enter into a joint venture agreement to construct and operate a commercial-scale renewable oil production facility; (ii) 50% upon the commencement of construction of the Plant; and (iii) 25% on the date upon which the aggregate output of triglyceride oil at the Plant reaches 1,000 metric tons. The number of warrant shares issuable is subject to adjustment for failure to achieve the performance milestones on a timely basis as well as certain changes to the capital structure of Solazyme Bunge JV and corporate transactions. The Bunge Warrant expires in May 2021.

The Company accounts for the Bunge Warrant pursuant to ASC 505-50, Equity-Based Payments to Non-Employees , which establishes that share-based payment transactions with nonemployees shall be measured at the   fair value of the consideration received or the fair value of the equity instruments issued (whichever is more reliably measurable), and the measurement date of such instruments shall be the earlier of the date at which a commitment for performance by the counterparty is reached or the date at which the counterparty’s performance is complete. A performance commitment is a commitment under which performance by the counterparty to earn the equity instruments is probable because of sufficiently large disincentives for nonperformance. The measurement date of the Bunge Warrant was April 2, 2012, the formation date of Solazyme Bunge JV, as it was determined that the future performance to earn the Bunge Warrant shares was probable.

On April 2, 2012, the Company recorded an investment in the Solazyme Bunge JV of $10.4 million, equal to the fair value of the Bunge Warrant, and recorded a corresponding $2.7 million of additional paid-in-capital for the vested Bunge Warrant shares and $7.7 million of warrant liability for the unvested Bunge Warrant shares as of that date. The fair value of the Bunge Warrant was determined using the Black-Scholes option pricing model. The warrant liability is remeasured to fair value at each balance sheet date and/or upon vesting, and the warrant liability is reclassified to additional-paid in capital upon vesting. On June 20, 2012, the second tranche of the Bunge Warrant shares vested, resulting in a reclassification of $4.6 million, which represented the fair value as of that date, to additional paid-in capital. The Company had a $0.8 million warrant liability associated with the unvested Bunge Warrant shares as of March 31, 2013. The fair value of the warrant liability was determined using the Black-Scholes option pricing model based upon the following assumptions: volatility of 50%, risk-free interest rate of 1.56%, exercise price of $13.50 and an expected life of 8.1 years. During the three months ended March 31, 2013, the Company recorded an unrealized gain of $54,000 related to the change in the fair value of the warrant liability. As of March 31, 2013, 750,000 of the Bunge Warrant shares had vested.

In addition to forming the Solazyme Bunge JV in April 2012, the Company entered into a Development Agreement with the Solazyme Bunge JV to continue to conduct research and development activities that are intended to benefit the Solazyme Bunge JV, including activities in the areas of strain development, molecular biology and process development. The Development Agreement provides that the Solazyme Bunge JV will pay the Company a technology maintenance fee in recognition of the Company’s ongoing research investment in technology that would benefit the Solazyme Bunge JV. The Company also entered into a Technology Service Agreement with the Solazyme Bunge JV under which the Solazyme Bunge JV will pay the Company for technical services related to the operations of the production facility.

In November 2012, the Company entered into a joint venture expansion framework agreement with the Solazyme Bunge JV. This framework agreement sets forth the intent of the partners to expand joint venture-owned oil production capacity from the current 100,000 metric tons under construction in Brazil to 300,000 metric tons by 2016 at select Bunge owned and operated processing facilities worldwide. The Company and Bunge also intend to expand the portfolio of oils to be produced out of the Solazyme Bunge JV facility in Brazil. The expanded field and portfolio of oils would include certain tailored food oils for sale in Brazil, where Bunge is the largest supplier of edible oils through several of its retail brands. The Company and Bunge intend to work together through joint market development to bring new, healthy and nutritious edible oils to the Brazilian market.

 

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In February 2013, the Solazyme Bunge JV entered into a loan agreement with the Brazilian Development Bank (“BNDES”) under which it may borrow up to R$245.7 million (approximately USD $121.0 million based on the exchange rate as of March 31, 2013). As a condition of the Solazyme Bunge JV drawing funds under the loan, the Company will be required to guarantee a portion of the loan (in an amount not to exceed the Company’s ownership percentage in the Solazyme Bunge JV). The BNDES funding will support the Solazyme Bunge JV’s first commercial-scale production facility in Brazil, which will reduce the capital requirements funded directly by the Company and Bunge. The term of the loan is eight years and will have an average interest rate of approximately 4.0% per annum. As of March 31, 2013, the loan guarantees were not in place and, therefore, the Solazyme Bunge JV had not drawn down on the loan. See also Note 12.

Solazyme Roquette Joint Venture

In November 2010, the Company entered into a joint venture agreement with Roquette, one of the largest global starch and starch-derivatives companies. The purpose of the joint venture, Solazyme Roquette Nutritionals, LLC (“Solazyme Roquette Nutritionals” or the “Solazyme Roquette JV”) is to engage in manufacturing, distribution, sales, marketing and support of products and services related to the use of microalgae to which the Company has not applied its targeted recombinant technology, in a fermentation production process to produce materials for use in the following fields: (i) human foods and beverages, (ii) animal feed and (iii) nutraceuticals. The Solazyme Roquette JV is 50% owned by the Company and 50% by Roquette and is governed by a four member board of directors, two from each investor. Solazyme Roquette Nutritionals will determine the approach to research, development, marketing, sales, distribution and manufacture of products in such fields. While Solazyme Roquette Nutritionals will establish a manufacturing platform for the products, Roquette has committed to provide expertise and resources with respect to manufacturing, including such volumes of corn-based dextrose feedstock as the Solazyme Roquette JV may request subject to the terms of a manufacturing agreement.

The Solazyme Roquette JV agreement contemplates three development stages. In Phase 1, Roquette built and owns a pilot plant with a capacity of approximately 300 metric tons per year for the dedicated use of Solazyme Roquette Nutritionals. In Phase 2, Roquette will build and own a commercial plant with a capacity of approximately 5,000 metric tons per year for the dedicated use of Solazyme Roquette Nutritionals. Solazyme Roquette Nutritionals will have the right, but not the obligation, to purchase and acquire the commercial plant built during Phase 2. Subject to the approval of the board of directors of Solazyme Roquette Nutritionals to enter into Phase 3, Roquette will provide debt and equity financing to build a commercial plant, expected to be sited at a Roquette wet mill with a capacity of approximately 50,000 metric tons per year to be owned by Solazyme Roquette Nutritionals.

The Company has determined that the Solazyme Roquette JV is a VIE based on the insufficiency of each party’s equity investment at risk to absorb losses and the Company’s share of the respective expected losses of the Solazyme Roquette JV. However, the Company determined that it is not the primary beneficiary of the Solazyme Roquette JV and therefore will not consolidate the financial results of the Solazyme Roquette JV. The Company accounts for its interests in the Solazyme Roquette JV under the equity method of accounting. This consolidation status could change in the future due to changes in events and circumstances impacting the power to direct the activities that most significantly affect the Solazyme Roquette JV’s economic performance. The Company will continue to reassess its potential designation as the primary beneficiary of the Solazyme Roquette JV. The Company has not recorded any income (loss) in the Solazyme Roquette JV through March 31, 2013, and does not expect to record any income (loss) at this time.

The Company’s initial contribution is the licensing of certain intellectual property (the “IP”) to the Solazyme Roquette JV. In September 2012, the Company contributed approximately $0.5 million to the Solazyme Roquette JV and correspondingly, reduced the Company’s receivable due from the Solazyme Roquette JV by approximately $0.5 million. Roquette is required to provide funds to Solazyme Roquette Nutritionals for working capital, lend additional funds to the Solazyme Roquette JV to provide working capital during Phase 1 and Phase 2 and lend additional funds to the Solazyme Roquette JV to provide working capital during Phase 3. Roquette has also agreed to provide funds to Solazyme Roquette Nutritionals to be used as equity in construction of the Phase 3 facility and to provide debt financing to Solazyme Roquette Nutritionals for construction of the Phase 3 facility, subject to the approval to proceed with construction. In September 2012, the Solazyme Roquette JV entered into a loan facility with Roquette that provided for a $10.0 million loan facility. This facility will be used for working capital purposes and expires on September 15, 2017, unless terminated earlier with three months notice. In October 2012, the Solazyme Roquette JV borrowed $5.0 million under this facility. As of March 31, 2013, $5.0 million remained outstanding under this facility. This $10.0 million loan facility is not guaranteed by the Company.

In November 2011, the Company and Roquette amended the joint venture agreement to provide that Roquette would make available to the Solazyme Roquette JV during Phase 1 and Phase 2, additional working capital in the form of debt financing (“Roquette Loan”). The Company agreed to guarantee repayment of a portion, up to a maximum amount, of 50% of the aggregate draw-downs from the Roquette Loan, if and when drawn, plus a portion of the associated fees, interest and expenses. The Solazyme Roquette JV did not draw down on the Roquette Loan as of March 31, 2013.

 

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Related Party Transactions

During the three months ended March 31, 2013 and March 31, 2012, the Company recognized revenues of $0.8 million and $0 million, respectively, related to its research and development arrangements with its joint venture companies. At March 31, 2013 and December 31, 2012, the Company had receivables of $2.7 million and $2.2 million, respectively, due from the joint venture companies. At March 31, 2013 and December 31, 2012, the Company had unbilled revenues of $0.8 million related to the joint venture companies.

9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

 

     March 31,
2013
     December 31,
2012
 

Accrued compensation and related liabilities

   $ 8,481       $ 7,503   

Accrued interest

     1,401         —     

Accrued professional fess

     497         474   

Other accrued liabilities

     1,504         1,343   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 11,883       $ 9,320   
  

 

 

    

 

 

 

10. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS, GOVERNMENT PROGRAMS AND LICENSES

Chevron —The Company entered into multiple research and development agreements with Chevron over the research funding period of January 2009 through June 2012 to conduct research, develop, manufacture and sell licensed products related to algal technology in the fields of diesel fuel, lubes and additives and coproducts.

These agreements with Chevron contain multiple element arrangements and the Company evaluated and concluded that there were two deliverables, research and development activities and licenses, which are considered one unit of accounting. Revenues related to these services are recognized as research services are performed over the related performance period. The payments received are not refundable and are based on a contractual reimbursement of costs incurred.

Unilever —Effective November 2009, the Company entered into a collaborative research and development agreement with Conopco, Inc. (doing business as Unilever) to develop oil for use in soap and other products. The Company completed the research and development under this agreement in the year ended December 31, 2010. In the first quarter of 2011, the Company and Unilever agreed to extend their research and development agreement through June 30, 2011.

In October 2011, the Company entered into a joint development agreement with Unilever (the Company’s fourth agreement with Unilever), which expands its current research and development efforts.

Department of Defense —In September 2010, the Company entered into an agreement with the U.S. Department of Defense (“DoD”) for research and development services to provide marine diesel fuel. This is a firm fixed price contract divided into two phases, with Phase 1 and Phase 2 fees of $5.6 million and $4.6 million, respectively. Phase 1 of the contract was completed in September 2011 when 75,000 gallons (283,906 liters) of fuel were delivered. In August 2011, the DoD exercised its option to pursue Phase 2 of the agreement, which calls for the additional delivery of 75,000 gallons (283,906 liters) of marine diesel fuel.

The Company evaluated the multiple elements of both DoD agreements (Phase 1 and Phase 2) and concluded that the two deliverables (research and development activities and fuel) were one unit of accounting. Revenues related to these services are recognized as research services that are performed over the related performance period for each phase of the contract. The payments received as installments are not refundable and are based on a contractual reimbursement of costs incurred.

With respect to Phase 1 of the September 2010 DoD contract, the Company completed this contract in the third quarter of 2011, and no revenues were recognized subsequent to this period.

 

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With respect to Phase 2 of the September 2010 DoD contract, the Company recognized $0 and $14,000 of revenues in the three months ended March 31, 2013 and March 31, 2012, respectively. The Company had no unbilled revenue and deferred revenue balances related to Phase 2 of the agreement as of March 31, 2013 and December 31, 2012.

Department of Energy —In December 2009, the U.S. Department of Energy (“DOE”) awarded the Company approximately $21.8 million to partially fund the construction, operation, and optimization of an integrated biorefinery. The project term is January 2010 through March 2014. The payments received are not refundable and are based on a contractual reimbursement of costs incurred. During the three months ended March 31, 2013 and March 31, 2012, the Company recognized revenues of $7,000 and $2.0 million, respectively. The Company had no deferred revenue balance related to this award as of March 31, 2013 and December 31, 2012. Unbilled revenues related to this award were $1.4 million and $2.1 million as of March 31, 2013 and December 31, 2012, respectively.

Dynamic Fuels —In November 2011, Dynamic Fuels, LLC (“Dynamic”) was awarded a contract to supply the US Navy with 450,000 gallons (1,703,000 liters) of renewable fuels. The contract involves supplying the US Navy with 100,000 gallons (379,000 liters) of jet fuel (Hydro-treated Renewable JP-5 and HRJ-5) and 350,000 gallons (1,325,000 liters) of marine distillate fuel (Hydro-treated Renewable F-76 and HRD-76). The Company was named a subcontractor and entered into a subcontractor agreement effective as of January 2012 to supply Dynamic with algal oil to fulfill Dynamic’s contract with the US Navy to deliver fuel by May 2012. The Company delivered its commitment of algal oil pursuant to this subcontract in February 2012. The fuel was used by the US Navy in July 2012, as part of its efforts to demonstrate a Green Strike Group composed of vessels and ships powered by biofuels.

Algenist ® Distribution Partners —The Company entered into an exclusive distribution contract with Sephora S.A. (Sephora EMEA) in December 2010 to distribute the Algenist ® product line in Sephora stores in certain countries in Europe and select countries in the Middle East and Asia. In January 2011, the Company also entered into a distribution arrangement with Sephora USA, Inc. (Sephora Americas) to sell the Algenist ® product line in the United States. Under both arrangements, the Company pays the majority of the costs associated with marketing the products, although both Sephora EMEA and Sephora Americas contribute in the areas of public relations, training and marketing to support the brand. Sephora EMEA creates the marketing material, but the Company has an approval right over the materials and ultimately the Company has control over the marketing budget. With Sephora Americas, the Company is responsible for creating certain marketing and training materials. The Company is obligated to fund minimum marketing expenditures under the agreement with Sephora EMEA. The Company has also granted a license to Sephora Americas and Sephora EMEA to use the Algenist ® trademarks and logos to advertise and promote the product line. In March 2011, the Company entered into an agreement with QVC, Inc. (“QVC”) and launched the sale of its Algenist ® product line through QVC’s multimedia platform.

Dow —In February 2011, the Company entered into a joint development agreement with The Dow Chemical Company (“Dow”) to jointly develop microalgae-based oils for use in dielectric insulating fluids. This initial research program was completed in September 30, 2011. In March 2012, the Company and Dow entered into a Phase 2 Joint Development Agreement (Phase 2 JDA), an extension of the original exclusive joint development agreement related to dielectric insulating fluids. The Phase 2 JDA includes accelerated commercialization timelines and enables Dow to conduct additional application development work.

Bunge —In May 2011, the Company entered into a joint development agreement (“JDA”) with Bunge, a global agribusiness and food company, that extends through May 2013. Pursuant to the joint development agreement, the Company and Bunge will jointly develop microbe-derived oils, and explore the production of such oils from Brazilian sugarcane feedstock. The joint development agreement also provides that Bunge will provide research funding to the Company through May 2013, payable quarterly in advance throughout the research term. The Company accounts for the JDA as an obligation to perform research and development services for others in accordance with ASC 730-20, Research and Development Arrangements , and records the payments for the performance of these services as revenue in its consolidated statement of operations. The Company recognizes revenue on the JDA based on proportionate performance of actual efforts to date relative to the amount of expected effort to be incurred. The cumulative amount of revenue recognized under the JDA is limited by the amounts the Company is contractually obligated to receive as cash reimbursements.

In April 2012, the Company and Bunge entered into a Joint Venture Agreement forming a joint venture to build, own and operate a commercial-scale renewable tailored oils production facility adjacent to Bunge’s Moema sugarcane mill in Brazil (see Note 8).

ADM —In November 2012, the Company and Archer-Daniels-Midland Company (“ADM”) entered into a Strategic Collaboration Agreement (the “Collaboration Agreement”), establishing a collaboration for the production of tailored triglyceride oil products at the ADM fermentation facility in Clinton, Iowa (the “Clinton Facility”). The Clinton Facility will produce tailored triglyceride oil products using the Company’s proprietary microbe-based catalysis technology. Feedstock for the facility will be provided from ADM’s adjacent wet mill. Under the terms of the Collaboration Agreement, the Company will pay ADM annual fees for use and operation of the Clinton Facility, a portion of which may be paid in Company common stock. The Company currently anticipates that commercial production at the Clinton Facility will begin by early 2014. The initial target nameplate capacity of the Clinton facility is expected to be 20,000 metric tons per year of tailored triglyceride oil products. Solazyme has an option to expand the capacity to 40,000 metric tons per year with the goal to further expand production to 100,000 metric tons per year. The parties are also working together to develop markets for the products produced at the Clinton Facility.

 

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In January 2013, the Company granted to ADM a warrant (“ADM Warrant”) to purchase 500,000 shares of the Company’s common stock, which will vest in equal monthly installments over five years, commencing from the start of commercial production. As of March 31, 2013, the Company had not commenced commercial production at the Clinton Facility, and therefore, a measurement date had not been established. In addition, in March 2013 the Company issued a series of warrants to ADM for payment in stock, in lieu of cash, at its election, of future annual fees for use and operation of the Clinton facility.

Mitsui – In February 2013, the Company entered into a $20.0 million multi-year agreement with Mitsui & Co., Ltd. (“Mitsui”) to jointly develop a suite of triglyceride oils for use primarily in the oleochemical industry. Product development is expected to span a multi-year period, with periodic product introductions throughout the term of the joint development alliance. End use application may include renewable, high-performance polymer additives for plastic applications, aviation lubricants and toiletry and household products.

11. DEBT

A summary of the Company’s debt as of March 31, 2013 and December 31, 2012 is as follows (in thousands):

 

     March 31,
2013
    December 31,
2012
    Maturity
Date

Secured and unsecured debt

      

Equipment note

   $ 115      $ 129      January 2015

Silicon Valley Bank term loan

     —          11,233      March 2013

Peoria facility note

     —          3,606      February 2013

HSBC facility

     10,369        —        March 2015
  

 

 

   

 

 

   

Total secured and unsecured debt

     10,484        14,968     

Convertible senior subordinated notes

     125,000        —        February 2018
  

 

 

   

 

 

   

Total debt

     135,484        14,968     

Add:

      

Initial fair value of embedded derivative

     3,124        —       

Change in fair value of embedded derivative

     737        —       

Less:

      

Unamortized debt discount

     (8,132     —       

Current portion of debt

     (60     (7,331  
  

 

 

   

 

 

   

Long-term portion of debt

   $ 131,153      $ 7,637     
  

 

 

   

 

 

   

Total interest costs related to the Company’s total debt was $1.6 million and $0.2 million for the three months ended March 31, 2013 and 2012, respectively. The Company was in compliance with all debt covenants as of March 31, 2013 and December 31, 2012.

Equipment Note – In June 2010, the Company entered into a secured promissory note agreement with the lessor of its headquarters under which $265,000 was borrowed to purchase equipment owned by the lessor. The loan is payable in monthly installments of principal and interest with final payment due in January 2015. Interest accrues at 9.0% and the promissory note is collateralized by the purchased equipment.

Silicon Valley Bank Term Loan – On May 11, 2011, the Company entered into a loan and security agreement with Silicon Valley Bank (“SVB”) that provided for a $20.0 million credit facility (the “SVB facility”) consisting of (i) a $15.0 million term loan (the “SVB term loan”) that was eligible to be borrowed in one or more increments prior to November 30, 2011 and (ii) a $5.0 million revolving facility (the “SVB revolving facility”). On May 11, 2011, the Company borrowed $15.0 million under the SVB facility. As of December 31, 2012, $11.2 million was outstanding under the SVB facility. On March 26, 2013, the SVB facility was terminated when the Company paid in full the outstanding principal and interest on this term loan using proceeds from the revolving facility with HSBC, USA, National Association, described in “ HSBC Facility ” below.

Peoria Facility Note – In March 2011, the Company entered into an agreement to purchase a development and commercial production facility with multiple 128,000-liter fermenters, and an annual oil production capacity of over 2,000,000 liters (1,820 metric tons) located in Peoria, Illinois for $11.5 million. This transaction closed in May 2011, and the Company paid for the aggregate purchase price with available cash and borrowed $5.5 million under a promissory note, mortgage and security agreement from the seller. The Company began initial fermentation operations in the facility in the fourth quarter of 2011 and commissioned its first integrated biorefinery in June 2012 under its DOE program. The principal is payable in two lump sum payments, the first of which was paid in March 2012 and the second payment was made in February 2013. The note is interest-free and secured by the real and

 

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personal property acquired from the seller. The assets acquired and the related note payable were recorded based upon the present value of the future payments assuming an imputed interest rate of 3.25%, resulting in a discount of $0.3 million. The $0.3 million loan discount was being recognized as interest expense over the loan term utilizing the effective interest method.

Convertible Senior Subordinated Notes – On January 24, 2013 the Company issued $125.0 million aggregate principal amount of Notes, which amount includes the exercise in full of the over-allotment option granted to the initial purchaser of the Notes, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Notes bear interest at a fixed rate of 6.00% per year, payable semiannually in arrears on August 1 and February 1 of each year, beginning on August 1, 2013. The Notes are convertible into the Company’s common stock and may be settled as described below. The Notes will mature on February 1, 2018, unless earlier repurchased or converted. The Company may not redeem the Notes prior to maturity.

The net proceeds from the Note offering were approximately $119.3 million, after deducting discounts to the initial purchaser of $5.3 million and debt issue costs of $0.4 million. Debt discounts incurred with the issuance of the Notes are recorded on the condensed consolidated balance sheets as a reduction to the associated Note balance. The Company amortizes the debt discounts to interest expense over the contractual or expected term of the Note using the effective interest method. Debt issuance costs were recorded in other long-term assets and are being amortized to interest expense over the contractual or expected term of the Notes using the effective interest method. The Company intends to use the net proceeds of the offering to fund project related costs and capital expenditures and for general corporate purposes.

The Notes are convertible at the option of the holders at any time prior to the close of business on the scheduled trading day immediately preceding February 1, 2018 into shares of the Company’s common stock at the then-applicable conversion rate. The conversion rate is initially 121.1240 shares of common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $8.26 per share of common stock). With respect to any conversion prior to November 1, 2016 (other than conversions in connection with certain fundamental changes where the Company may be required to increase the conversion rate as described below), in addition to the shares deliverable upon conversion, holders are entitled to receive an early conversion payment equal to $83.33 per $1,000 principal amount of Notes surrendered for conversion that may be settled, at the Company’s election, in cash or, subject to satisfaction of certain conditions, in shares of the Company’s common stock.

The Company issued the Notes pursuant to an indenture dated as of January 24, 2013 (the “indenture”) by and between the Company and Wells Fargo Bank, National Association, as trustee. The indenture provides for customary events of default, including cross acceleration to certain other indebtedness of the Company and its significant subsidiaries.

If the Company undergoes a fundamental change, holders may require the Company to repurchase for cash all or part of their Notes at a purchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if certain fundamental changes occur, the Company may be required in certain circumstances to increase the conversion rate for any Notes converted in connection with such fundamental changes by a specified number of shares of its common stock.

The Company evaluated the embedded derivative resulting from the early conversion payment feature within the indenture for bifurcation from the Notes. The early conversion feature was not deemed clearly and closely related to the Notes and was bifurcated as an embedded derivative. The Company recorded this embedded derivative (derivative liability) at fair value, which is included as a component of Convertible Debt on its condensed consolidated balance sheets with a corresponding debt discount that is netted against the principal amount of the Notes. The derivative liability is remeasured to fair value at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value of the derivative liability being recorded in other income and loss. The Company determined the fair value of the embedded derivative using a Monte Carlo simulation model. See Note 5.

The Notes are the general unsecured obligations of the Company and will be subordinated in right of payment to its Senior Debt. The convertible notes will effectively rank junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness and be structurally junior to all indebtedness and other liabilities of the Company’s subsidiaries, including trade payables.

HSBC Facility – In March 2013, the Company entered into a loan and security agreement with HSBC Bank, USA, National Association (“HSBC”) that provides for a $30.0 million revolving facility (the “HSBC facility”) for working capital and letters of credit denominated in U.S. dollars or a foreign currency and other general corporate purposes. On March 26, 2013, the Company drew down approximately $10.4 million under the HSBC facility to repay all outstanding loans plus accrued interest under the SVB facility (as defined above). The Company incurred debt issuance costs of approximately $0.2 million related to this draw down, that was recorded in other long-term assets and is being amortized to interest expense using the effective interest method over the contractual term of the loan. As of March 31, 2013, $10.4 million was outstanding under the HSBC facility.

 

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The HSBC facility is unsecured unless (i) the Company takes action that could cause or permit obligations under the HSBC facility not to constitute Senior Debt (as defined in the indenture), (ii) the Company breaches financial covenants that require the Company and its subsidiaries to maintain cash and unrestricted cash equivalents at all times of not less than $30.0 million plus one hundred ten percent of the aggregate dollar equivalent amount of outstanding advances and letters of credit under the HSBC facility, or (iii) there is a payment default under the facility or bankruptcy or insolvency events relating to the Company.

Advances under the HSBC facility will bear interest at a variable interest rate based on, at the Company’s option at the time an advance is requested, either (i) the Base Rate (as defined in the Facility) plus the applicable Base Rate Margin (as defined in the HSBC facility), or (ii) the Eurodollar Rate (as defined in the HSBC facility) plus the applicable Eurodollar Rate Margin (as defined in the HSBC facility). The Company will pay HSBC an annual fee of two and one-half percent (2.50%) per annum with respect to letters of credit issued. Upon an event of default, outstanding obligations under the HSBC facility will bear interest at a rate of two percent (2.00%) per annum above the rates described in (i) and (ii) above. The interest rate for total debt outstanding under the HSBC facility was 2.8% as of March 31, 2013. The maturity date of the facility is March 26, 2015. If on the maturity date (or earlier termination date of the HSBC facility), there are any outstanding letters of credit, the Company will be required to provide HSBC with cash collateral in the amount of (i) for letters of credit denominated in U.S. dollars, up to one hundred five percent (105%), and (ii) for letters of credit denominated in a foreign currency, up to one hundred ten percent (110%), of the dollar equivalent of the face amount of all such letters of credit plus all interest, fees and costs.

In addition to the financial covenants and covenants related to the indenture referenced above, the Company is subject to customary affirmative and negative covenants and events of default under the facility including certain restrictions on borrowing. If an event of default occurs and continues, HSBC may declare all outstanding obligations under the facility immediately due and payable, with all obligations being immediately due and payable without any action by HSBC upon the occurrence of certain events of default or if the Company becomes insolvent.

12. COMMITMENTS AND CONTINGENCIES

Operating Lease Agreements

The Company records rent expense under its lease agreements on a straight-line basis. Differences between actual lease payments and rent expense recognized under these subleases results in a net deferred rent asset or a net deferred rent liability at each reporting period. In January 2013, the Company made the first payment to ADM by issuing 347,483 shares of its common stock, which was recorded to deferred rent and equity. The Company had a net deferred rent asset of $1.6 million as of March 31, 2013 and a net deferred rent liability of $0.7 million as of December 31, 2012.

The Company currently leases 96,000 square feet of office and laboratory space located in two buildings on adjacent properties in South San Francisco (“SSF”), California. The term of the lease will end in February 2015.

The Company also leases office and laboratory space in Brazil. The term of the lease is five years, and commenced on April 1, 2011 and expires on April 1, 2016. The rent is 29,500 Brazilian Real per month and is subject to an annual inflation adjustment. The Company pays its proportionate share of operating expenses. The Company may cancel this lease agreement at any time, but would be subject to paying the lessor the maximum of a three month rent penalty. Effective April 2012, the rent increased from 29,500 Brazilian Real per month to 30,500 Brazilian Real (approximately $15,000 based on the exchange rate at March 31, 2013) per month as a result of the annual inflation adjustment.

The Company entered into an auto lease agreement in February 2012. This lease agreement contains an early cancellation penalty equal to 50% of the remaining lease value. The remaining lease value as of March 31, 2013 was 320,000 Brazilian Real (approximately $158,000 based on the exchange rate at March 31, 2013).

The Company entered into a Strategic Collaborative Agreement with ADM in November 2012 (See Note 10). The Company will pay ADM annual fees for the use and operation of the Clinton Facility, a portion which may be paid in the Company’s common stock. In January 2013, the Company made the first payment to ADM in cash and by issuing 347,483 shares of its common stock, which was recorded to deferred rent and equity. The common stock and cash payments under the Strategic Collaboration Agreement are accounted for as an operating lease. In January 2013, the Company granted to ADM a warrant (“ADM Warrant”) to purchase 500,000 shares of the Company’s common stock, which will vest in equal monthly installments over five years, commencing from the start of commercial production. The exercise price is $7.17 per share and the warrant expires in January 2019. As of March 31, 2013, the Company had not commenced commercial production at the Clinton Facility, and therefore, a measurement date had not been established.

Rent expense was $0.7 million for the three months ended March 31, 2013 and 2012.

Contractual Obligations —As of March 31, 2013 the Company had no non-cancelable purchase obligations.

 

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The Company has various manufacturing, research, and other contracts with vendors in the conduct of the normal course of its business. All contracts are terminable with varying provisions regarding termination. If a contract with a specific vendor were to be terminated, the Company would only be obligated for the products or services that the Company had received at the time the termination became effective.

Guarantees and Indemnifications —The Company makes certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to certain transactions. 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 all or a portion of any future amounts paid. The Company believes the fair value of these indemnification agreements is minimal. The Company has not recorded any liability for these indemnities in the accompanying consolidated balance sheets. However, 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.

In November 2011, the Company agreed to guarantee repayment of a portion, up to a maximum amount, of 50% of the aggregate draw-downs from the Roquette Loan, if and when drawn down, including a portion of the associated fees, interest and expenses (Note 8). The Solazyme Roquette JV did not draw down on the Roquette Loan as of March 31, 2013, and therefore the Company has not recorded any liability for this guarantee in the accompanying condensed consolidated balance sheets.

In February 2013, the Solazyme Bunge JV entered a loan agreement with BNDES under which it may borrow up to R$245.7 million (approximately USD $121.0 million based on the exchange rate as of March 31, 2013) which will support the production facility in Brazil, including a portion of the construction costs of the facility. As a condition of the Solazyme Bunge JV drawing funds under the loan, the Company is required to guarantee a portion of the loan (in an amount not to exceed its ownership percentage in the Solazyme Bunge JV). No loan guarantees had been issued as of March 31, 2013 and the Solazyme Bunge JV did not draw down on the BNDES Loan as of March 31, 2013, and, therefore, the Company has not recorded any liability for this loan guarantee in the accompanying consolidated balance sheets. See also Note 8.

Other Matters —The Company may be involved, from time to time, in legal proceedings and claims arising in the ordinary course of its business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. The Company accrues amounts, to the extent they can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss that is reasonably estimable. As of March 31, 2013, the Company was not involved in any material legal proceedings. While there can be no assurances as to the ultimate outcome of any legal proceeding or other loss contingencies involving the Company, management does not believe any pending matters will be resolved in a manner that would have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

13. STOCK-BASED COMPENSATION PLANS

The Company’s stock-based compensation plans include the Second Amended and Restated Equity Incentive Plan (the “2004 EIP”), the 2011 Equity Incentive Plan (the “2011 EIP”) and the Employee Stock Purchase Plan (the “2011 ESPP”). On May 25, 2011, in conjunction with the Company’s initial public offering, the 2004 EIP terminated so that no further awards may be granted under the 2004 EIP. Although the 2004 EIP terminated, all outstanding awards will continue to be governed by their existing terms. The plans are administered by the Board of Directors, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award. The Board of Directors has delegated certain authority to the Compensation Committee with respect to administration of the plans. See Note 14 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, for additional information related to these stock-based compensation plans.

 

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The following table summarizes the components and classification of share-based compensation expense related to stock options, restricted stock units and awards (“RSUs” and “RSAs”), performance-based restricted stock units (“PSUs”) and the 2011 ESPP for the three months ended March 31, 2013 and 2012 (in thousands):

 

     Three Months Ended
March 31,
 
     2013      2012  

Stock options

   $ 3,255       $ 3,111   

RSUs/RSAs

     690         422   

PSUs

     35         338   

ESPP

     25         119   
  

 

 

    

 

 

 

Stock-based compensation expense

   $ 4,005       $ 3,990   
  

 

 

    

 

 

 

Reseach and development

   $ 1,089       $ 925   

Sales, general and administrative

     2,916         3,065   
  

 

 

    

 

 

 

Stock-based compensation expense

   $ 4,005       $ 3,990   
  

 

 

    

 

 

 

Common Stock Subject to Repurchase —The Company allows employees and non-employees to exercise options prior to vesting. The Company has the right, but not the obligation, to repurchase any unvested (but issued) common shares upon termination of employment or service at the original purchase price per share. The consideration received for an exercise of an option is considered to be a deposit of the exercise price and the related dollar amount is recorded as a liability. The unvested shares and liability are reclassified to equity on a ratable basis as the award vests. There were 24,151 and 34,832 shares of common stock subject to repurchase as of March 31, 2013 and December 31, 2012, respectively. The Company’s liability related to common stock subject to repurchase was $30,000 and $39,000 as of March 31, 2013 and December 31, 2012, respectively, and was recorded in other liabilities.

Common Stock Warrants

In May 2011, the Company granted Bunge Limited a warrant to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $13.50 per share. As of March 31, 2013, 750,000 of the warrant shares had vested. Refer to Note 8 and Note 10 for a description of the vesting terms and a discussion of the accounting for the warrant.

In January 2013, the Company granted ADM a warrant to purchase 500,000 shares of the Company’s common stock at an exercise price of $7.17 per share. The warrant will vest in equal monthly installments over five years, commencing from the start of commercial production. The warrant expires in January 2019. In addition, in March 2013 we issued a series of warrants to ADM for payment in stock, in lieu of cash, at our election, of future annual fees for use and operation of the Clinton facility. See Note 10 and Note 12.

14. EMPLOYEE BENEFIT PLAN

In January 2007, the Company adopted a 401(k) plan for its employees whereby eligible employees may contribute up to 90% of their compensation, on a pretax basis, subject to the maximum amount permitted by the Internal Revenue Code. The Company has not contributed to, nor is it required to contribute to, the 401(k) plan since its inception.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The following discussion and analysis should be read together with our condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. For example, statements regarding our expectations as to future financial and operating performance, future selling prices and margins for our products, expense levels and liquidity sources are forward-looking statements. Our actual results and the timing of events may differ materially from those discussed in our forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled “Risk Factors” included in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (SEC).

Overview

We make oils. Our proprietary technology transforms a range of low-cost, plant-based sugars into high-value oils. Our renewable products can replace or enhance oils derived from the world’s three existing sources—petroleum, plants and animal fats. We tailor the composition of our oils to address specific customer requirements, offering superior performance characteristics and value. Our oils can address the major markets served by conventional oils, which represented an opportunity of over $3 trillion in 2011. Initially, we are commercializing our products into three target markets: (1) chemicals and fuels, (2) nutrition and (3) skin and personal care.

We create oils that mirror or enhance the chemical composition of conventional oils used today. Until now, the physical and chemical characteristics of conventional oils have been dictated by oils found in nature or blends derived from them. We have created a new paradigm that enables us to design and produce novel tailored oils that cannot be achieved through blending of existing oils alone. These tailored oils offer enhanced value as compared to conventional oils. For example, our tailored, renewable oils can enable our customers to enhance product performance, reduce processing costs and/or enhance their products’ sustainability profile. Our oils are drop-in replacements such that they are compatible with existing production, refining, finishing and distribution infrastructure in all of our target markets.

We have pioneered an industrial biotechnology platform that harnesses the prolific oil-producing capability of microalgae. Our technology allows us to optimize oil profiles with different carbon chain lengths, saturation levels and functional groups to modify important characteristics. We use standard industrial fermentation equipment to efficiently scale and accelerate microalgae’s natural oil production time to a few days. By feeding our proprietary oil-producing microalgae plant sugars in dark fermentation tanks, we are in effect utilizing “indirect photosynthesis,” in contrast to traditional open-pond approaches. Our platform is feedstock flexible and can utilize a wide variety of renewable plant-based sugars, such as sugarcane-based sucrose, corn-based dextrose, and sugar from other sustainable biomass sources including cellulosics, which we believe will represent an important alternative feedstock in the longer term. Furthermore, our platform allows us to produce and sell specialty bioproducts from the protein, fiber and other compounds produced by microalgae.

We expect our products to generate attractive margins in our target markets. We anticipate that the average selling prices of our products will capture the enhanced value of our tailored oils. Based on the technology milestones we have demonstrated, we believe the conversion cost profile we have achieved to date will, when implemented at scale, enable us to profitably engage in our target markets. For example, our lead microalgae strains producing oil for the chemicals and fuels markets have achieved key performance metrics that we believe would allow us to generate attractive margins on the manufacture of oils today assuming the use of a larger-scale, built-for-purpose commercial plant (inclusive of the anticipated cost of financing and facility depreciation).

We have scaled up our technology platform and have successfully operated at lab (3-15 liter), pilot (600-1,000 liter), demonstration (20,000 liter) and commercial (approximately 500,000 liter) fermenter scale. Our achievement of the following milestones demonstrates the ongoing development of our platform:

 

   

The establishment of our pilot plant in South San Francisco, with recovery operations capable of handling material from both 600 and 1,000 liter fermenters, has enabled us to produce samples of our tailored oils for testing and optimization by our partners, as well as to test new process conditions at an intermediate scale.

 

   

Since 2007, the operation of our fermentation process in commercial-sized standard industrial fermentation equipment (75,000 liter) accessed through manufacturing partners.

 

   

Since 2009, the operation of downstream processing equipment at facilities in Iowa and Kentucky where we use commercially-sized, standard plant oil recovery equipment to recover the oil at low cost and high volume.

 

   

In 2012, the successful commissioning of our first fully integrated bio-refinery (IBR) in Peoria, Illinois (Peoria Facility), to produce algal oils. The IBR was partially funded with a federal grant that we received from the U.S. Department of

 

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Energy (DOE) to demonstrate integrated commercial-scale production of renewable algal-based fuels. The plant has a nameplate capacity of two million liters of oil annually and will provide an important platform for continued work on feedstock flexibility and scaling of new tailored oils into the marketplace. In 2012, we began commercial fermentation of our Alguronic Acid production at the Peoria Facility and we transferred a significant amount of our fermentation production of Alguronic Acid from contract manufacturers to the Peoria Facility.

 

   

In April 2012, our entrance into a Joint Venture Agreement with Bunge Global Innovation, LLC and certain of its affiliates (collectively, Bunge), one of the largest sugarcane processing companies in Brazil, establishing a joint venture (Solazyme Bunge JV) to construct and operate an oil production facility adjacent to Bunge’s sugarcane mill in Moema, Brazil, with an annual expected name plate capacity of 100,000 metric tons. The construction of the Solazyme Bunge JV’s production facility began in June 2012.

 

   

In November 2012, our execution of a strategic collaboration agreement with Archer-Daniels-Midland Company (ADM) to produce tailored triglyceride oil products at ADM’s facility in Clinton, Iowa (the Clinton Facility). The initial target nameplate capacity of the facility is expected to be 20,000 metric tons per year of tailored triglyceride oil products. We have an option to expand the capacity to 40,000 metric tons per year with the goal to further expand production to 100,000 metric tons per year. We and ADM will also work together to develop markets for products produced at the Clinton Facility.

 

   

In 2012, our completion of multiple initial fermentations at ADM’s Clinton Facility under an Evaluation Agreement. In these fermentation runs, we achieved commercial scale production metrics, exhibited linear scalability of our process from laboratory scale, and demonstrated the ability to run at this scale without contamination. The fermentation runs were conducted in approximately 500,000-liter vessels, which are about four times the scale of the vessels at our Peoria Facility.

To date, our revenues have been generated from research and development programs and commercial sale of our skin and personal care products. Our research and development programs have been conducted primarily from key agreements with government agencies and commercial partners. We have developed a portfolio of innovative skin care products based on our proprietary active ingredient, Alguronic Acid ® . These products have been available internationally in the luxury market since March 2011 and are currently sold to consumers via distribution arrangements with Sephora, QVC Inc., Space NK and others. These arrangements provide marketing support and access to more than 1,350 retail stores worldwide. We expect to continue expanding distribution throughout 2013.

Our total revenues have increased in each of the last three fiscal years, growing from $38.0 million in 2010, to $39.0 million in 2011 to $44.1 million in 2012. In the first quarter of 2013, our revenues were $6.7 million compared to $13.6 million in the first quarter of 2012. Our revenues from development agreements with strategic partners decreased due to timing of agreements that ended and new agreements entered into with strategic partners since late 2011. In general, we expect that our R&D program revenues will continue as work with our strategic partners in our existing and new R&D agreements enables important market development activities. In the near term, we expect government program revenues to decrease substantially compared to prior periods. We expect a larger percentage of our total revenues to be generated from product sales as we scale up our manufacturing capacity.

We incurred net losses of $16.4 million, $54.0 million and $83.1 million in 2010, 2011 and 2012, respectively. Our net loss was $26.5 million for the quarter ended March 31, 2013. In the near term, we anticipate that we will continue to incur net losses as we continue our research and development activities to further build on our library of oils that address the chemicals and fuels, nutrition and skin and personal care markets, continue work on feedstock flexibility and scaling of new tailored oils into the marketplace and support commercialization activities for our products. In addition, as we continue to scale our capacity by entering into manufacturing capacity and joint venture agreements with other feedstock producers, we may incur additional net losses associated with the build-out and initial operations of those production facilities.

Through a combination of partnerships and internal development, we plan to scale rapidly. In 2013, we or our joint ventures expect to utilize the manufacturing capacity of our joint venture entities Solazyme Roquette Nutritionals, LLC (Solazyme Roquette JV) and the Solazyme Bunge JV, along with our existing capacity at the Peoria Facility. By early 2014, we plan to launch additional capacity in North America at ADM’s Clinton Facility. In addition, we are currently negotiating supply agreements with multiple potential feedstock partners in Europe, Latin America and the United States.

 

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Significant Partner Agreements

We currently have joint venture, joint development, supply and distribution arrangements with various strategic partners. We expect to enter into additional partnerships in each of our three target markets to advance commercialization of our products and to expand our upstream and downstream capabilities. Upstream, we expect partners to provide research and development funding, capital for commercial manufacturing capacity and/or secure access to feedstock. Downstream, we expect partners to provide expanded distribution channels, product application testing, marketing expertise and/or long-term purchase commitments. Our current principal partnerships and strategic arrangements include:

Bunge . In May 2011, we entered into a Joint Development Agreement (the JDA) with Bunge that extends through May 2013. Pursuant to the JDA, we and Bunge are jointly developing microbe-derived oils, and exploring the production of such oils from Brazilian sugarcane feedstock. The JDA also provides that Bunge will provide research funding to us through May 2013, payable quarterly in advance throughout the research term.

In April 2012, we and Bunge formed a joint venture (the Solazyme Bunge JV) to build, own and operate a commercial-scale renewable tailored oils production facility (the Solazyme Bunge JV Plant) adjacent to Bunge’s Moema sugarcane mill in Brazil. The Solazyme Bunge JV Plant, which will leverage our technology and Bunge’s sugarcane milling and natural oil processing capabilities, will produce our tailored triglyceride oils primarily for chemical applications. In addition, the Solazyme Bunge JV Plant has been designed to be expanded for further production in line with market demand. We expect this production facility to have annual production capacity of 100,000 metric tons of oil. Construction of the Solazyme Bunge JV Plant commenced in the second quarter of 2012 and is targeted for start-up in the fourth quarter of 2013. The Solazyme Bunge JV is jointly financed by us and Bunge. In February 2013, the Solazyme Bunge JV entered into a loan agreement with the Brazilian Development Bank (BNDES), funding under which will support the production facility in Brazil, including a portion of the construction costs of the Solazyme Bunge JV Plant. As a condition of the Solazyme Bunge JV drawing funds under the loan, we will be required to guarantee a portion of the loan (in an amount not to exceed our ownership percentage in the Solazyme Bunge JV).

In addition to forming the Solazyme Bunge JV in April 2012, we entered into a Development Agreement with Solazyme Bunge JV to continue research and development activities that are intended to benefit Solazyme Bunge JV, including activities in the areas of strain development, molecular biology and process development. The Development Agreement provides that Solazyme Bunge JV will pay us a technology maintenance fee in recognition of our ongoing research investment in technology that would benefit Solazyme Bunge JV. We also entered into a Technology Service Agreement with the Solazyme Bunge JV under which Solazyme Bunge JV will pay us for technical services related to the operations of the Plant, including, but not limited to, engineering support for Plant operations, operation procedure consultation, product analysis and microbe performance monitoring and assessment.

In anticipation of Solazyme Bunge JV’s formation, in May 2011, we granted Bunge Limited a warrant (the Warrant) to purchase 1,000,000 shares of our common stock at an exercise price of $13.50 per share. The Warrant vests as follows: (i) 25% of the warrant shares vest on such date that we and Bunge Limited (or one of its affiliates) enter into a joint venture agreement to construct and operate a commercial-scale renewable oil production facility sited at a sugar mill of Bunge Limited or its affiliate; (ii) 50% of the warrant shares vest on the earlier of the following: (a) execution of the engineering, procurement and construction contract covering the construction of the Joint Venture Plant and (b) execution of a contract for the purchase of a production fermentation vessel for the Joint Venture Plant; provided, however, that such date occurs on or prior to ten weeks after certain technical milestones set forth in the JDA are achieved; and (iii) 25% of the warrant shares vest on the date upon which aggregate output of triglyceride oil at the Joint Venture Plant reaches 1,000 metric tons. The number of warrant shares issuable upon exercise is subject to downward adjustment for failure to achieve the performance milestones on a timely basis as well as adjustments for certain changes to capital structure and corporate transactions. The first tranche of the Warrant shares (25%) vested in April 2012. The second tranche of the Warrant shares (50%) vested in June 2012. The Warrant expires in May 2021.

In November 2012, we entered into a joint venture expansion framework agreement with Bunge. This framework agreement sets forth the intent of the partners to expand joint venture-owned oil production capacity from the current 100,000 metric tons under construction in Brazil to 300,000 metric tons by 2016 at select Bunge owned and operated processing facilities worldwide. We and Bunge also intend to expand the portfolio of oils to be produced out of the Solazyme Bunge JV facility in Brazil. The expanded field and portfolio of oils would include certain tailored food oils for sale in Brazil, where Bunge is the largest supplier of edible oils through several of its retail brands. We and Bunge intend to work together through joint market development to bring new, healthy, edible oils to the Brazilian market.

Refer to Note 8 and Note 10 in the accompanying notes to our condensed consolidated financial statements for further discussion of the Bunge JDA, Joint Venture Agreement and Warrant.

ADM . In November 2012, we entered into a strategic collaboration agreement with ADM, establishing a collaboration for the production of tailored triglyceride oil products at ADM’s Clinton Facility. The Clinton Facility will produce tailored triglyceride oil products using our proprietary microbe-based catalysis technology. Feedstock for the facility will be provided from ADM’s adjacent wet mill. Under the terms of the strategic collaboration agreement, we will pay ADM annual fees for use and operation of the Clinton

 

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Facility, a portion of which may be paid in our common stock. In addition, we granted to ADM a warrant to purchase 500,000 shares of our common stock in January 2013, which will vest in equal monthly installments over five years, commencing from the start of commercial production. In addition, in March 2013 we issued a series of warrants to ADM for payment in stock, in lieu of cash, at our election, of future annual fees for use and operation of the Clinton facility. We currently anticipate that commercial production at the Clinton Facility will begin by early 2014. The initial target nameplate capacity of the facility is expected to be 20,000 metric tons per year of tailored triglyceride oil products. We have an option to expand the capacity to 40,000 metric tons per year with the goal to further expand production to 100,000 metric tons per year. We are also working together to develop markets for the products produced at the Clinton Facility.

Mitsui . In February 2013, we entered into a multi-year agreement with Mitsui & Co., Ltd. (Mitsui) to jointly develop triglyceride oils for use primarily in the oleochemical industry. The agreement includes further development of our myristic oil, a valuable raw material in the oleochemical industry, and additional oils that we are developing for the oleochemical and industrial sectors. End use applications may include renewable, high-performance polymer additives for plastic applications, aviation lubricants and toiletry and household products.

Chevron . We have entered into multiple research and development agreements with Chevron to conduct research related to algal technology in the fields of diesel fuel, lubes and additives and coproducts. Under the terms of the most recent agreement, we successfully completed all defined deliverables against the active Chevron research program which was funded through June 30, 2012.

US Navy . In September 2010, we entered into a firm fixed price research and development contract with the Department of Defense (DoD), through the Defense Logistics Agency, Fort Belvoir, VA (DLA), to provide marine diesel fuel. We agreed to produce up to 567,812 liters of HRF-76 marine diesel for the US Navy’s testing and certification program. This contract is the third contract that we have entered into with the DoD and the largest of the three. We completed two earlier contracts to research, develop and demonstrate commercial-scale production of microalgae-based advanced biofuels to establish appropriate status for future commercial procurements. We completed the first phase of our 567,812 liter contract in July 2011, with the delivery of 283,906 liters of HRF-76 marine diesel to the US Navy for their testing and certification program. In August 2011, the DoD exercised its option to pursue the second phase of the current DoD contract, which calls for the delivery of the remainder of the 283,906 liters of HRF-76 marine diesel for the US Navy’s testing and certification program. We completed the second phase of our contract in June 2012, with the delivery of 283,906 liters of HRF-76 marine diesel to the US Navy.

In November 2011, Dynamic Fuels, LLC (Dynamic) was awarded a contract to supply the US Navy with 450,000 gallons (1,703,000 liters) of renewable fuels. The contract involves supplying the US Navy with 100,000 gallons (379,000 liters) of jet fuel (Hydro-treated Renewable JP-5 or HRJ-5) and 350,000 gallons (1,325,000 liters) of marine distillate fuel (Hydro-Treated Renewable F-76 or HRD-76). We were named a subcontractor and we entered into a subcontractor agreement with Dynamic effective January 2012 to supply Dynamic with algal oil to fulfill Dynamic’s contract with the US Navy to deliver fuel by May 2012. We delivered our commitment of algal oil pursuant to this subcontract in February 2012. The fuel was used as part of the US Navy’s Green Strike Group demonstration at the 2012 Rim of the Pacific Exercise, the world’s largest international maritime warfare exercise. The Great Green Fleet was powered by a 50/50 blend of biofuel and conventional petroleum-based fuel.

Dow. In May 2012, we and Dow entered into a Phase 2 Joint Development Agreement (Phase 2 JDA), an extension of the original exclusive joint development agreement related to dielectric insulating fluids. The Phase 2 JDA includes accelerated commercialization timelines and enables Dow to conduct additional application development work.

Roquette . In November 2010, we entered into a joint venture agreement with Roquette. The purpose of the Solazyme Roquette JV is to engage in manufacturing, distribution, sales, marketing and support of products and services related to the use of microalgae to which we have not applied our targeted recombinant technology in a fermentation production process to produce materials for use in the following fields: (1) human foods and beverages; (2) animal feed; and (3) nutraceuticals. Solazyme Roquette Nutritionals is 50% owned by us and 50% by Roquette. While the Solazyme Roquette JV will establish a manufacturing platform for the products, Roquette has committed to provide expertise and resources with respect to manufacturing, including such volumes of corn-based dextrose feedstock as the Solazyme Roquette JV may request subject to the terms of a manufacturing agreement. Roquette has also agreed to provide (1) a full capital commitment for two Solazyme Roquette JV-dedicated, Roquette-owned facilities that are expected to have aggregate capacity of approximately 5,000 metric tons per year, (2) subject to the approval of the board of directors of the Solazyme Roquette JV, debt and equity financing for a larger Solazyme Roquette JV-owned facility that is expected to have capacity of approximately 50,000 metric tons per year, and (3) working capital financing during various scale-up phases. The commercialization of our nutrition products through the Solazyme Roquette JV will take place in three phases. As part of Phase I, Roquette financed and built a 300 metric ton per year facility in Lestrem, France, and production began on its microalgae-derived food ingredients in the first quarter of 2012. The plant is owned by Roquette, but is for the dedicated use of the Solazyme Roquette JV. In 2012, Roquette began construction of the Phase 2 facility with a capacity of approximately 5,000 metric tons per year, at the same location. The Phase 2 facility will also be financed and owned by Roquette but will be used for the Solazyme Roquette JV. In addition, subject to approval of the board of directors of the Solazyme Roquette JV to enter into Phase 3, Roquette has also agreed to provide debt and equity financing and build a commercial plant to be owned by the Solazyme Roquette JV that is expected to be sited at a

 

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Roquette wet mill with a capacity of approximately 50,000 metric tons per year. In November 2011, we and Roquette amended the joint venture agreement to provide that Roquette would make available to the Solazyme Roquette JV during Phase 1 and Phase 2 additional working capital in the form of debt financing (Roquette Loan). We agreed to guarantee payment of a portion, up to a maximum amount, of 50% of the aggregate draw-downs from the additional Roquette Loan, if and when drawn, plus a portion of the associated fees, interest and expenses.

Algenist ® Distribution Partners. In December 2010, we entered into an exclusive distribution contract with Sephora EMEA to distribute our Algenist ® product line in Sephora EMEA stores in certain countries in Europe and select countries in the Middle East and Asia. In January 2011, we also made arrangements with Sephora Americas to sell our Algenist ® product line in Sephora Americas stores (which currently includes locations in the United States and Canada). In October 2011, we launched our Algenist ® product line at Sephora inside jcpenney stores in the United States. In March 2011, we entered into an agreement with QVC, Inc. (QVC) and launched the sale of our Algenist ® product line through QVC’s multimedia platform.

Unilever. In October 2011, we entered into a joint development agreement with Unilever (our fourth agreement together) which expands our current research and development efforts. Upon successful completion of the development agreement and related activities, we have agreed with Unilever to the terms of a multi-year supply agreement in which Unilever would purchase commercial quantities of our renewable oils.

Financial Operations Overview

Revenues

To date, we have focused on building our corporate infrastructure, developing our core technology and designing a manufacturing process to scale up our biotechnology platform to position us in our target markets. Prior to our agreement with Roquette, which generated license fees, our revenues were primarily from collaborative research and government grants. We expect to sell our products in the future into three target markets: chemicals and fuels; nutrition; and skin and personal care. The products that we sell and intend to sell into our target markets have significantly different selling prices, volumes and expected contribution margins. We expect our product revenues in the near term to be comprised almost entirely from the sale of products into the skin and personal care market. We expect that this market will provide us with the highest gross margin of our three target markets. In the longer term, we expect that a significant portion of our revenues will come from the chemicals and fuels markets, which have lower, but still attractive, margins and higher volumes.

To date our revenues have consisted of research and development program revenues and license fees, and beginning in the first quarter of 2011, included product revenues.

 

   

Research and Development Program Revenues

Revenues from research and development (R&D) programs are recognized in the period during which the related costs are incurred, provided that the conditions under which the government grants and agreements were provided have been met and only perfunctory obligations are outstanding. We currently have active R&D programs with governmental agencies and commercial partners. These R&D programs are entered into pursuant to grants and agreements that generally provide payment for certain types of expenditures in return for research and development activities over a contractually defined period. Revenues related to R&D programs include reimbursable expenses and payments received for full-time equivalent employee services recognized over the related performance periods for each of the contracts. We are required to perform research and development activities as specified in each respective agreement based on the terms and performance periods set forth in the agreements as outlined above. R&D program revenues represented 40% and 71% of our total revenues for the three months ended March 31, 2013 and 2012, respectively. Revenues from government grants and agreements represented 5% and 59% of total R&D revenues for the three months ended March 31, 2013 and 2012, respectively. Revenues from commercial and strategic partner development agreements represented 95% and 41% of total R&D revenues for the three months ended March 31, 2013 and 2012, respectively.

 

   

Product Revenues

Product revenues consist of revenues from products sold commercially into each of our target markets.

Starting in 2011, we recognized revenues from the sale of our first commercial product line, Algenist ® , which we distributed to the skin and personal care end market through arrangements with Sephora S.A. and its affiliates (Sephora), QVC and Space NK. We may also launch the Algenist ® product line in additional geographies and/or through additional distribution channels. Product revenues represented 60% and 29% of our total revenues for the three months ended March 31, 2013 and 2012, respectively.

 

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Costs and Operating Expenses

Costs and operating expenses consist of cost of product revenue, research and development expenses and sales, general and administrative expenses. Personnel-related expenses including non-cash stock-based compensation, third-party contract manufacturing, reimbursable equipment and costs associated with government contracts, consultants and facility costs comprise the significant components of these expenses. We expect to continue to hire additional employees, primarily in research and development, manufacturing and commercialization, as we scale our manufacturing capacity and commercialize our technology in target markets.

 

   

Cost of Product Revenue

Cost of product revenue consists primarily of third-party contractor costs associated with packaging, distribution and production of Algenist ® products, internal labor, shipping, supplies and other overhead costs associated with production of Alguronic Acid ® , a microalgae-based active ingredient used in our Algenist ® product line. We expect our third-party contractor costs related to the distribution and production of Algenist ® , as well as our other costs of product revenue, to increase as the demand for our Algenist ® product line grows.

 

   

Research and Development

Research and development expenses consist of costs incurred for internal projects as well as partner-funded collaborative research and development activities with commercial and strategic partners and governmental entities (partners). Research and development expenses consist primarily of personnel and related costs including non-cash stock-based compensation, third-party contract manufacturing, reimbursable equipment and costs associated with government contracts, consultants, facility costs and overhead, depreciation and amortization of property and equipment used in development, and laboratory supplies. We expense our research and development costs as they are incurred. Our research and development programs are undertaken to advance our overall industrial biotechnology platform that enables us to produce tailored, high-value oils. Although our partners fund certain development activities, they benefit from advances in our technology platform as a whole, including costs funded by other development programs. Therefore, costs for such activities have not been separated as these costs have all been determined to be part of our total research and development related activity. Our research and development efforts are devoted to both internal and external product and process development projects. Our external research and development projects include research and development activities as specified in our government grants and contracts and development agreements with commercial and strategic partners. Internal research activities and projects focus on (1) strain screening, improvement and optimization in order to provide a detailed inventory of individual strain outputs under precisely controlled conditions; (2) process development aimed at reducing the cost of oil production; and (3) scale-up of commercial scale production. Our Peoria Facility, which we acquired in May 2011, commenced fermentation operations in the fourth quarter of 2011, and we successfully commissioned our first integrated biorefinery in June 2012 under our DOE program. We intend to use our Peoria Facility for joint development activities as well as commercial production for certain high-value products. In November 2012 we also entered into an agreement with ADM to utilize ADM’s existing commercial-scale production facility. We expect that our research and development expenses will increase in the near term as we scale up to commercial production.

 

   

Sales, General and Administrative

Sales, general and administrative expenses consist primarily of personnel and related costs including non-cash stock-based compensation related to our executive management, corporate administration, sales and marketing functions, professional and legal services, administrative and facility overhead expenses. These expenses also include costs related to our business development and sales functions, including marketing programs. Professional services consist primarily of consulting, external legal, accounting and temporary help. We expect sales, general and administrative expenses to increase as we incur additional costs related to commercializing our business, including our growth and expansion in Brazil, and operating as a publicly-traded company, including increased legal fees, accounting fees, costs of compliance with securities, corporate governance and other regulations, investor relations expenses and higher insurance premiums. In addition, we expect to incur additional costs as we hire personnel and enhance our infrastructure to support the anticipated growth of our business.

Other Income (Expense), Net

Interest and Other Income

Interest and other income consist primarily of interest income earned on marketable securities and cash balances. Our interest income will vary for each reporting period depending on our average investment balances during the period and market interest rates.

Interest Expense

Interest expense consists primarily of interest related to our debt. As of March 31, 2013 and December 31, 2012, our outstanding debt, net of debt discounts, was approximately $131.2 million and $15.0 million, respectively. We expect interest expense to increase primarily as a result of issuing $125.0 million of 6.00% convertible senior subordinated notes due 2018 (the Notes) in January 2013, and to fluctuate with changes in our debt obligations.

 

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Gain from Change in Fair Value of Warrant Liability

Gain from change in fair value of warrant liability consists primarily of the change in the fair value of redeemable convertible preferred stock warrants and a common stock warrant issued to Bunge Limited. The warrant liability is remeasured to fair value at each balance sheet date and/or upon vesting, and the change in the then-current aggregate fair value of the warrants is recorded as a gain or loss from the change in the fair value in our condensed consolidated statement of operations. The warrant liability is reclassified to additional paid-in capital upon conversion of redeemable preferred stock, or vesting of common warrant shares. The redeemable convertible stock warrants were converted into common stock or common stock warrants upon the close of our initial public offering in June 2011, and the related preferred stock warrant liability of $6.6 million was reclassified to additional paid-in capital and was no longer adjusted to fair value. In April 2012, the first and second tranches of the common stock warrant issued to Bunge Limited had vested, and the related warrant liability of $4.6 million was reclassified to additional paid-in capital and was no longer adjusted to fair value. The third tranche of the common stock warrant issued to Bunge Limited was unvested as of March 31, 2013, and will be remeasured to fair value at each balance sheet date until the warrant shares have vested.

Loss from Change in Fair Value of Derivative Liability

Loss from change in fair value of derivative liability consists of the change in the fair value of the embedded derivative related to the early conversion feature of the Notes issued in January 2013.

Income (Loss) from Equity Method Investments, Net

Revenues generated from the sale of products by Solazyme Roquette Nutritionals will be recognized by the Solazyme Roquette JV, while income (loss) from the equity method investment in the Solazyme Roquette JV will be recorded in our income statement as “Income (Loss) from Equity Method Investments, Net.” We do not expect to record any Solazyme Roquette JV income (loss) in the near future.

Income (loss) from the equity method investment in Solazyme Bunge JV is recorded in our income statement as “Income (Loss) from Equity Method Investments, Net”.

Income Taxes

Since inception, we have incurred net losses and have not recorded any US federal, state or non-US income tax provisions. We have recorded a full valuation allowance against deferred tax assets as it is more likely than not that they will not be realized.

Critical Accounting Policies and Estimates

Critical accounting policies are those accounting policies that management believes are important to the portrayal of our financial condition and results and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our 2012 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to revenue recognition, inventories, convertible preferred stock warrants, stock-based compensation and income taxes. There have been no material changes to the Company’s critical accounting policies described in the Company’s 2012 Annual Report on Form 10-K, except as described below:

Convertible Debt and Embedded Derivative

In January 2013, we issued $125.0 million aggregate principal amount of Notes. Terms of the Notes include, among others, that if a conversion occurs prior to November 1, 2016 (other than conversions in connection with certain fundamental changes where we may be required to increase the conversion rate as described in Note 11 to the condensed consolidated financial statements, in addition to the shares deliverable upon conversion), holders are entitled to receive an early conversion payment equal to $83.33 per $1,000 principal amount of Notes surrendered for conversion that may be settled, at our election, in cash or, subject to satisfaction of certain conditions, in shares of our common stock.

We evaluated the embedded derivative resulting from the early conversion payment feature within the indenture for bifurcation from the notes. The early conversion feature was not deemed clearly and closely related to the Notes and was bifurcated as an embedded derivative. We estimated the fair value of this embedded derivative liability using a Monte Carlo simulation model and classified it as a non-current liability in our condensed consolidated balance sheets with a corresponding debt discount that is netted against the principal amount of the Notes. The fair value of the embedded derivative is remeasured to fair value at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value of the derivative liability.

 

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Results of Operations

Comparison of Three Months Ended March 31, 2013 and 2012

Revenues

 

     Three Months ended March 31,  
     2013      2012      $ Change  
            (In thousands)         

Revenues:

        

Research and development programs

   $ 2,680       $ 9,560       $ (6,880

Net product revenue

     4,000         3,996         4   
  

 

 

    

 

 

    

 

 

 

Total revenues

   $ 6,680       $ 13,556       $ (6,876
  

 

 

    

 

 

    

 

 

 

Our total revenues decreased by $6.9 million in the first quarter of 2013 compared to the same period in 2012, due primarily to a $6.9 million decrease in R&D program revenue. Net Algenist ® product sales in the first quarter of 2013 were comparable to the first quarter of 2012.

R&D program revenues decreased by $6.9 million, due to a $5.5 million decrease in government program revenues and a $1.4 million decrease in revenues from development agreements with strategic partners.

Our government program revenues decreased in the first quarter of 2013 compared to the same period in 2012, primarily due to the delivery of our commitment of algal oil under the Dynamic Fuels subcontract in the first quarter of 2012 and the completion of the integrated biorefinery build out at our Peoria facility in mid-2012 under the DOE grant. The grant awarded by the DOE is funding up to $21.8 million of the build-out, equipment costs and certain research and development costs associated with our integrated biorefinery program in our Peoria Facility. We successfully commissioned the integrated biorefinery at our Peoria Facility in the second quarter of 2012 and anticipate that the remaining objectives under the program will be completed as outlined in the program by the end of 2013. Remaining costs to complete the objectives of the DOE award are expected to be fully funded by us.

Our revenues from development agreements with strategic partners decreased due to timing of agreements that ended and new agreements entered into since late 2011. In general, we expect that our R&D program revenues will continue as work with our strategic partners in our existing and new R&D agreements enables important market development activities.

As we enter into new agreements with strategic partners or government programs, we expect that quarterly trends may fluctuate based on the timing of program activities. In the near term, we expect government program revenues to decrease substantially.

Cost of Product Revenues

 

     Three Months ended March 31,  
     2013      2012      $ Change  
            (In thousands)         

Cost of revenue:

        

Product

   $ 1,454       $ 1,246       $ 208   
  

 

 

    

 

 

    

 

 

 

Gross profit:

        

Product

   $ 2,546       $ 2,750       $ (204
  

 

 

    

 

 

    

 

 

 

Cost of product revenue increased slightly in the first quarter of 2013 compared to the same period in 2012, and sales of Algenist ® products were approximately the same for both the first quarter of 2013 and 2012. Gross margins decreased from 68.8% in the first quarter in 2012 to 63.7% in the first quarter of 2013 due primarily to changes in customer and product mix in the first quarter of 2013 compared to the same period in 2012.

 

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Operating Expenses

 

     Three Months ended March 31,  
     2013      2012      $ Change  
            (In thousands)         

Operating expenses:

        

Research and development

   $ 13,720       $ 15,361       $ (1,641

Sales, general and administrative

     14,866         14,056       $ 810   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 28,586       $ 29,417       $ (831
  

 

 

    

 

 

    

 

 

 

Research and Development Expenses

Our research and development expenses decreased by $1.6 million in the first quarter of 2013 compared to the same period in 2012, due primarily to decreased R&D program and third-party contractor costs of approximately $3.7 million, partially offset by increased personnel-related and facilities-related costs of $1.3 million and $0.9 million, respectively. R&D program and third-party contractor costs decreased primarily due to decreased costs related to the completion of construction of the integrated biorefinery program in 2012, partially offset by increased costs incurred to scale up our industrial fermentation process at ADM’s Clinton Facility. Personnel-related and facilities-related costs increased as a result of headcount growth to support Peoria manufacturing and collaborative research activities. Personnel-related costs include non-cash stock-based compensation expense of $1.1 million in the first quarter of 2013 compared to $0.9 million in the same period in 2012. We plan to continue to make significant investments in research and development for the foreseeable future as we continue to develop our algal strain screening and optimization process, continue to validate and scale up our industrial fermentation manufacturing processes at ADM’s Clinton Facility, pursue process development improvements and continue to maximize production efficiencies at our Peoria Facility.

Sales, General and Administrative Expenses

Our sales, general and administrative expenses increased by $0.8 million in the first quarter of 2013 compared to the same period in 2012, primarily due to increased personnel-related costs of $1.1 million associated with headcount growth and increased marketing and promotional costs of $0.2 million, partially offset by decreased consulting costs of $0.4 million. Personnel-related costs include non-cash stock-based compensation of $2.9 million in the first quarter of 2013 compared to $3.1 million in the same period in 2012. We expect our sales, general and administrative expenses to increase as we hire additional personnel to support the anticipated growth of our business domestically and in Brazil.

Other Income (Expense), Net

 

     Three Months ended March 31,  
     2013     2012     $ Change  
           (In thousands)        

Other income (expense):

      

Interest and other income, net

   $ 348      $ 546      $ (198

Interest expense

     (1,871     (219     1,652   

Loss from equity method investment

     (959     —          959   

Gain from change in fair value of warrant liabilities

     54        —          54   

Loss from change in fair value of derivative liability

     (737     —          737   
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ (3,165   $ 327      $ (3,492
  

 

 

   

 

 

   

 

 

 

Interest and Other Income, net

Interest and other income, net decreased by $0.2 million in the first quarter of 2013 compared to the same period in 2012, primarily due to decreased interest income earned on lower average investment balances. We expect our interest and other income, net to fluctuate with changes in the mix of our cash and investment balances.

Interest expense

Interest expense increased by $1.7 million in the first quarter of 2013 compared to the same period in 2012, primarily due to the increase in our debt as a result of the issuance of the Notes in January 2013. We expect interest expense and amortization of debt discounts and debt issue costs to increase due to the issuance of the Notes in the first quarter of 2013 (see Note 11 to our condensed consolidated financial statements).

 

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Loss on Equity Method Investment

Loss on equity method investment increased by $1.0 million, which represents our proportionate share of the net loss from the Solazyme Bunge JV in the first quarter of 2013. We expect the loss from our equity method investment to increase as the Solazyme Bunge JV continues to construct a commercial-scale production facility in Brazil.

Gain from Change in Fair Value of Warrant Liability

Gain from the change in fair value of warrant liability increased by $54,000 in the first quarter of 2013 compared to the same period in 2012, due to the change in the fair value of the unvested warrant issued to Bunge Limited. The warrant vests in three separate tranches, each contingent upon the achievement of specific performance-based milestones related to the formation and operations of Solazyme Bunge JV. The unvested warrant shares are classified as a liability on our condensed consolidated balance sheet beginning in the second quarter of 2012, and remeasured to fair value at each balance sheet date and reclassified to additional paid-in capital upon vesting. In the second quarter of 2012, 750,000 warrant shares vested and were reclassified to additional paid-in capital. We expect that the gain from the change in the fair value of the warrant liability will fluctuate with the change in our stock price and other factors.

Loss from Change in Fair Value of Derivative Liability

Loss from change in fair value of derivative liability of $0.7 million for the three months ended March 31, 2013 was due to the change in the fair value of the embedded derivative related to the early conversion feature of the Notes issued in January 2013. At each reporting period, we record this embedded derivative at fair value which is included as a component of the Notes on our condensed consolidated balance sheets. We used a Monte Carlo simulation model to estimate the fair value of the embedded derivative related to the early conversion feature of the Notes. Changes in certain inputs into the model may have a significant impact on changes in the estimated fair value of the embedded derivative. We expect that the loss from the change in the fair value of the derivative liability will fluctuate with the change in our stock price and other certain inputs to the Monte Carlo simulation model.

Liquidity and Capital Resources

 

     March 31,
2013
     December 31,
2012
 
     (In thousands)  

Cash and cash equivalents

   $ 55,440       $ 30,818   

Marketable securities

     183,671         118,187   

Cash, cash equivalents and marketable securities increased by $90.1 million in the three months ended March 31, 2013, primarily due to $119.3 million of net cash proceeds received from the issuance of the Notes (net of $5.3 million of debt discounts and $0.4 million of debt issue costs) and $10.4 million of proceeds received from borrowings under the HSBC revolving facility, partially offset by cash used in operating activities of $18.2 million, $1.2 million of property and equipment purchases, $5.5 million of capital contributed to the Solazyme Bunge JV and $14.9 million of repayments under loan agreements.

The following table shows a summary of our cash flows for the periods indicated:

 

     Three Months Ended March 31,  
   2013     2012  
     (In thousands)  

Net cash used in operating activities

   $ (18,220   $ (18,632

Net cash (used in) provided by investing activities

     (72,652     8,243   

Net cash provided by (used in) financing activities

     115,515        (1,316

Sources and Uses of Capital

Since our inception, we have incurred significant net losses, and, as of March 31, 2013, we had an accumulated deficit of $216.5 million. We anticipate that we will continue to incur net losses as we continue our scale-up activities, support commercialization activities for our products and expand our research and development activities. In addition, we may acquire additional manufacturing

 

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facilities, expand or build-out our current manufacturing facilities and/or build additional manufacturing facilities. We are unable to predict the extent of any future losses or when we will become profitable, if at all. We expect to continue making significant investments in research and development and manufacturing, and expect selling, general and administrative expenses to increase as a result of operating as a publicly-traded company. As a result, we will need to generate significant revenues from product sales, collaborative research and joint development activities, licensing fees and other revenue arrangements to achieve profitability.

In January 2010, we obtained a grant from the DOE to receive up to $21.8 million for reimbursement of expenses incurred towards building, operating, and optimizing a pilot-scale integrated biorefinery, which has allowed us to develop integrated US-based production capabilities for renewable fuels derived from microalgae at the Peoria Facility. Under the terms of the grant, we are responsible for funding an additional $8.4 million.

We purchased the Peoria Facility in May 2011. We began fermentation operations in the fourth quarter of 2011 and successfully commissioned our integrated biorefinery in June 2012, funded in part by the DOE grant described above. In connection with the closing of the Peoria Facility acquisition, we entered into a promissory note, mortgage and security agreement with the seller in the initial amount of $5.5 million. In March 2013, we paid in full the outstanding principal on this promissory note.

In April 2012, we entered into the Solazyme Bunge JV, which is jointly capitalized by us and Bunge, to construct and operate an oil production facility in Brazil that will utilize our proprietary technology to produce tailored oils from sugar feedstock provided by Bunge. Through April 2013, we contributed approximately $17.3 million in capital to the Solazyme Bunge JV, and we may need to contribute additional capital to this project. In February 2013, the Solazyme Bunge JV entered a loan agreement with the Brazilian Development Bank (BNDES) under which it may borrow up to R$245.7 million (approximately USD $121.0 million based on the exchange rate as of March 31, 2013). As a condition of the Solazyme Bunge JV drawing funds under the loan, we will be required to guarantee a portion of the loan (in an amount not to exceed our ownership percentage in the Solazyme Bunge JV). The BNDES funding will support the Solazyme Bunge JV’s first commercial-scale production facility in Brazil, which will reduce the capital requirements funded directly by us and Bunge. We expect to scale up additional manufacturing capacity in a capital-efficient manner by signing additional agreements whereby our partners will invest capital and operational resources in building manufacturing capacity, while also providing access to feedstock. We are currently negotiating with additional potential feedstock partners in Latin America and the United States to co-locate oil production at their mills. Depending on the specifics of each partner discussion, we may choose to deploy some portion of the equity capital required to construct additional production facilities, as such capital contribution may influence the scope and timing of our relationship. We expect to evaluate the optimal amount of capital expenditures that we agree to fund on a case-by-case basis. These events may require us to access additional capital through equity or debt offerings. If we are unable to access additional capital, our growth may be limited due to the inability to build out additional manufacturing capacity.

In November 2012, we entered into a strategic collaboration agreement with ADM, whereby we have agreed to pay ADM annual fees for use and operation of its commercial scale facility in Clinton, Iowa, a portion of which may be paid in our common stock. In January 2013, we made the first payment to ADM in common stock and cash. In addition, in March 2013 we issued a series of warrants to ADM for payment in stock, in lieu of cash, at our election, of future annual fees for use and operation of the Clinton facility.

On May 11, 2011, we entered into a loan and security agreement with Silicon Valley Bank (the bank) that provided for a $20.0 million credit facility (the SVB facility) consisting of (i) a $15.0 million term loan (the term loan) and (ii) a $5.0 million revolving facility (the SVB revolving facility). On May 11, 2011, we borrowed $15.0 million under the term loan portion of the SVB facility. In the first quarter of 2013, the SVB facility was terminated when we paid in full the outstanding principal and interest on this term loan using proceeds from the revolving facility with HSBC Bank, USA, National Association we entered into in March 2013 as described below.

In January 2013, we issued $125.0 million aggregate principal amount of Notes in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Notes bear interest at a fixed rate of 6.00% per year, payable semiannually in arrears on August 1 and February 1 of each year, beginning on August 1, 2013. The Notes are convertible into our common stock and will mature on February 1, 2018, unless earlier repurchased or converted. The Company may not redeem the Notes prior to maturity. The initial conversion price will be approximately $8.26 per share of common stock and, under certain circumstances, the Note holders will be entitled to additional payments upon conversion. The Notes are convertible at the option of the holders at any time prior to February 1, 2018 into shares of our common stock at the then-applicable conversion rate. The conversion rate is initially 121.1240 shares of common stock per $1,000 principal amount of Notes. In the event the Notes are converted prior to November 1, 2016, the holders are entitled to receive an early conversion payment of $83.33 per $1,000 principal amount of Notes surrendered for conversion that may be settled, at the Company’s election, in cash or, subject to satisfaction of certain conditions, in shares of our common stock. If we undergo a fundamental change (as defined in the indenture entered into with the trustee), Note holders may require that we repurchase for cash all or part of their Notes at a purchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if fundamental changes occur, we may be required in certain circumstances to increase the conversion rate for any Notes converted in connection with such fundamental changes by a specified number of shares of our common stock.

 

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On March 26, 2013, we entered into a loan and security agreement with HSBC Bank, USA, National Association (HSBC) that provides for a $30.0 million revolving facility (HSBC revolving facility) for working capital, letters of credit denominated in U.S. dollars or a foreign currency and other general corporate purposes. Also on March 26, 2013, we drew down approximately $10.4 million under the HSBC revolving facility to repay the outstanding term loan plus accrued interest under the SVB facility. The HSBC revolving facility is unsecured unless (i) we take action that could cause or permit obligations under the HSBC revolving facility not to constitute senior debt (as defined in the indenture dated as of January 24, 2013 (the indenture) by and between us and Wells Fargo Bank, National Association, as trustee), (ii) we breach financial covenants that require us and our subsidiaries to maintain cash and unrestricted cash equivalents at all times of not less than $30.0 million plus one hundred ten percent of the aggregate dollar equivalent amount of outstanding advances and letters of credit under the HSBC revolving facility, or (iii) there is a payment default under the HSBC revolving facility or bankruptcy or insolvency events relating to us. As of March 31, 2013, $10.4 million was outstanding under the HSBC revolving facility and we were in compliance with all the financial covenants under the loan.

We believe that our current cash, cash equivalents, marketable securities, revenue from product sales and net proceeds from the Notes issued in January 2013 will be sufficient to fund our current operations for at least the next 12 months. However, our liquidity assumptions may prove to be wrong, and we could utilize our available financial resources sooner than we currently expect. We may elect to raise additional funds within this period of time through public or private debt or equity financings and/or additional collaborations.

Our future capital requirements and the adequacy of available funds will depend on many factors, including those set forth under “Risk Factors” elsewhere in this Quarterly Report on Form 10-Q. We may not be able to secure additional financing to meet our funding requirements on acceptable terms, if at all. If we raise additional funds by issuing equity securities, dilution to our existing stockholders may result. If we are unable to obtain additional funds, we will have to reduce our operating costs and delay our manufacturing and research and development programs.

Cash Flows from Operating Activities

Cash used in operating activities of $18.2 million in the three months ended March 31, 2013 reflect a loss of $26.5 million, and a net change of $0.8 million in our net operating assets and liabilities, partially offset by aggregate non-cash charges of $7.5 million. Non-cash charges primarily included $4.0 million of stock-based compensation, $0.7 million related to the revaluation of our derivative liability, $0.4 million of net amortization of premiums on marketable securities, $1.1 million of depreciation and amortization and $1.0 million loss on an equity method investment. The net change in our operating assets and liabilities was primarily a result of increased accounts receivable and unbilled revenue of $3.2 million, increased deferred revenues of $3.1 million and net increased accounts payable and accrued liabilities of $0.6 million, decreased prepaid expenses and other current assets of $0.5 million and decreased other current and long-term liabilities of $0.5 million. Accounts receivable and unbilled revenue increased primarily due to billing related to research and development agreements entered into in mid-2012 and timing of payments received on accounts receivables from strategic partners. Deferred revenues increased due primarily to the timing of payments received under a research and development agreement with a strategic partner. The net increase to accounts payable and accrued liabilities was due to increased employee bonus accruals and interest payable under our Notes, partially offset by overall decreased research and development costs. Prepaid expenses and other current assets decreased primarily due to receipt of payment on a receivable balance from our investment in unconsolidated joint venture. Other current and long-term liabilities decreased due to prepayment of rent resulting in reclassification of deferred rent liability to prepaid rent.

Cash used in operating activities of $18.6 million in the quarter ended March 31, 2012 reflect a loss of $16.8 million, and a net change of $7.3 million in our net operating assets and liabilities, partially offset by aggregate non-cash charges of $5.4 million. Non-cash charges primarily included $4.0 million of stock-based compensation, $0.8 million of net amortization of premiums on marketable securities and $0.6 million of depreciation and amortization. The net change in our operating assets and liabilities was primarily a result of a decrease in accounts payable and accrued liabilities of $5.3 million, a net increase in accounts receivable and unbilled revenue of $1.8 million, and an increase in inventories of $1.0 million, partially offset by a decrease in prepaid expenses and other current assets of $0.9 million. Accounts payable and accrued liabilities decreased primarily due to payments made to third-party contract manufacturers, employee bonus payments and employee purchases of our common stock pursuant to our employee stock purchase plan. Accounts receivable and unbilled revenue increased primarily due to billing related to the completion of the Dynamic Fuels subcontract and increased Algenist ® product sales. Inventories increased primarily to meet increased customer demand for Algenist ® products and expansion of the Algenist ® product line. Prepaid expenses and other current assets decreased primarily due to settlement of receivables due from our Solazyme Roquette JV.

 

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Cash Flows from Investing Activities

In the three months ended March 31, 2013, cash used in investing activities was $72.7 million, primarily as a result of $66.0 million of net marketable securities purchases, $5.5 million of capital contributed to the Solazyme Bunge JV and $1.2 million of capital expenditures.

In the three months ended March 31, 2012, cash provided by investing activities was $8.2 million, primarily as a result of $13.0 million of net marketable securities maturities, partially offset by $4.8 million of capital expenditures related primarily to the construction of the Peoria Facility.

Cash Flows from Financing Activities

In the three months ended March 31, 2013, cash provided by financing activities was $115.5 million, primarily due to $119.3 million of proceeds received from the issuance of the Notes, net of debt discounts and debt issue costs, $10.4 million of loan proceeds received from HSBC and $0.8 million received from common stock issuances pursuant to our equity plans, partially offset by $14.9 million of principal debt payments.

In the three months ended March 31, 2012, cash used in financing activities was $1.3 million, primarily due to $2.7 million of repayments under loan agreements, partially offset by proceeds of $1.4 million received from common stock issuances pursuant to our equity plans.

Contractual Obligations and Commitments

The following is a summary of our contractual obligations and commitments as of March 31, 2013 (in thousands):

 

     Total      Remainder of
2013
     2014      2015      2016      2017
and  beyond
 

Principal payments on long-term debt

   $ 135,484       $ 45       $ 65       $ 10,374       $ —         $ 125,000   

Interest payments on long-term debt, fixed rate

     38,234         7,249         7,792         7,568         7,500         8,125   

Non-cancellable operating leases

     4,860         1,955         2,681         224         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 178,578       $ 9,249       $ 10,538       $ 18,166       $ 7,500       $ 133,125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

This table does not reflect (1) a lease agreement entered into in May 2011 for facility space in Brazil; the lease term is five years, commencing on April 1, 2011 and expiring on April 1, 2016; the rent is 30,500 Brazilian Real (approximately $15,000 based on the exchange rate at March 31, 2013) per month and is subject to an annual inflation adjustment; this lease is cancelable at any time, subject to a maximum three month rent penalty, (2) that portion of the expenses that we expect to incur, up to $1.0 million from April through December 2013, in connection with research activities under the DOE program for which we will not be reimbursed and (3) our agreement to guarantee repayment of a portion, up to a maximum amount, of 50% of the aggregate draw-downs from the Roquette Loan, if and when drawn down, plus a portion of the associated fees, interest and expenses.

We currently lease approximately 96,000 square feet of office and laboratory space in South San Francisco, California. Operating leases also include our annual fees paid to ADM in 2013 to use and operate the Clinton facility, a portion of which may be paid in our common stock.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our condensed consolidated balance sheets.

Recent Accounting Pronouncements

Refer to Note 2 in the accompanying notes to our unaudited condensed consolidated financial statements for a discussion of recent accounting pronouncements.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to financial market risks, primarily changes in interest rates, currency exchange rates and commodity prices. All of the potential changes noted below are based on sensitivity analyses performed on our financial positions as of March 31, 2013. Actual results may differ materially.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our outstanding debt obligations. We generally invest our cash in investments with short maturities or with frequent interest reset terms. Accordingly, our interest income fluctuates with short-term market conditions. As of March 31, 2013, our investment portfolio consisted primarily of corporate debt obligations, US government agency securities, asset-backed and mortgaged-backed securities, municipal bonds and money market funds, which are held for working capital purposes. We believe we do not have material exposure to changes in fair value as a result of changes in interest rates. Our marketable securities were comprised primarily of fixed-term securities as of March 31, 2013. Due to the short-term nature of these instruments, we do not believe that there would be a significant negative impact to our consolidated financial position or results of operations as a result of interest rate fluctuations in the financial markets. On March 26, 2013 we entered into the HSBC revolving facility, which bears a variable interest rate based on LIBOR during the two-year funding period. As of March 31, 2013, the HSBC loan had a balance of $10.4 million. A 1.0% increase or decrease in the underlying interest rate for this obligation will increase or decrease interest expense by approximately $0.1 million annually, assuming debt remains constant at March 31, 2013 levels. Our other outstanding debt as of March 31, 2013 consists of fixed-rate debt, and therefore, is not subject to fluctuations in market interest rates.

Foreign Currency Risk

Our operations include manufacturing and sales activities primarily in the United States, as well as research activities primarily in the United States. We are actively expanding outside the United States, in particular in Europe and Brazil through our Solazyme Roquette JV and Solazyme Bunge JV, respectively. We also launched the Algenist ® product line in Europe in March 2011 and conduct operations in Brazil. As we expand internationally, our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. For example, our operations in Brazil and / or potential expansion elsewhere in Latin America or increasing Euro denominated product sales to European distributors, will result in our use of currencies other than the US dollar. In addition, the local currency is the functional currency of our Brazil subsidiary, and therefore the assets and liabilities are translated from its functional currency to U.S. dollars at the exchange rate in effect at the balance sheet date, with resulting foreign currency translation adjustments recorded in accumulated other comprehensive income (loss) in the consolidated statements of comprehensive loss. As a result, our comprehensive income (loss), cash flows and expenses are subject to fluctuations due to changes in foreign currency exchange rates. In periods when the US dollar declines in value as compared to the foreign currencies in which we incur expenses, our foreign-currency based expenses increase when translated into US dollars. We have not hedged our foreign currency since the exposure has not been material to our historical operating results. Although substantially all of our sales are currently denominated in US dollars, future fluctuations in the value of the US dollar may affect the price competitiveness of our products outside the United States. We may consider hedging our foreign currency risk as we continue to expand internationally.

Commodity Price Risk

Our exposure to market risk for changes in commodity prices currently relates primarily to our purchases of plant sugar feedstock. We have not historically hedged the price volatility of plant sugar feedstock. In the future, we may manage our exposure to this risk by hedging the price volatility of feedstock, principally through futures contracts, and entering into joint venture agreements that would enable us to obtain secure access to feedstock.

 

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Item 4. Controls and Procedures.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure 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’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired objectives. In reaching a reasonable level of assurance, management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2013 at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II: OTHER INFORMATION

 

Item 1. Legal Proceedings.

From time to time, we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any material legal proceedings.

 

Item 1A. Risk Factors.

You should carefully consider the risks described below before investing in our publicly-traded securities. Additional risks not presently known to us or that our management currently deems immaterial also may impair our business operations. If any of the risks described below were to occur, our business, financial condition, operating results, and cash flows could be materially adversely affected. In such an event, the trading price of our common stock could decline and you could lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Report, including our consolidated financial statements and related notes. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward looking statements. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward Looking Statements.

Risks Related to Our Business and Industry

We have a limited operating history and have incurred significant losses to date, anticipate continuing to incur losses and may never achieve or sustain profitability.

We are an early stage company with a limited operating history. We only recently began commercializing our products. To date, a substantial portion of our revenues has consisted of funding from third party collaborative research agreements and government grants. We have only generated limited revenues from commercial sales, which have been principally derived from sales of our nutrition and skin and personal care products. Although we expect a significant portion of our future revenues to come from commercial sales in the tailored food oils, chemicals and fuels markets, only a small portion of our revenues to date has been generated from market development activities. We have not yet commercialized any of our oils in the tailored food oils or chemicals market.

We have incurred substantial net losses since our inception, including net loss of $26.5 million during the quarter ended March 31, 2013. We expect these losses may continue as we expand our manufacturing capacity and build out our product pipeline. As of March 31, 2013, we had an accumulated deficit of $216.5 million. For the foreseeable future, we expect to incur additional costs and expenses related to the continued development and expansion of our business, including research and development, the build-out and operation of our Peoria Facility, the construction and operation of the Solazyme Bunge JV production facility (described below), the retrofitting of the Clinton Facility (described below) and other commercial facilities. As a result, our annual operating losses may continue in the short term.

We, along with our development and commercialization partners, will need to develop products successfully, produce them in large quantities cost effectively, and market and sell them profitably. If our products do not achieve market acceptance, we will not become profitable on a quarterly or annual basis. If we fail to become profitable, or if we are unable to fund our continuing losses, we may be unable to continue our business operations. There can be no assurance that we will ever achieve or sustain profitability.

We have generated limited revenues from the sale of our products, and our business may fail if we are not able to successfully commercialize these products.

We have had only limited product sales to date. If we are not successful in further advancing our existing commercial arrangements with strategic partners, developing new arrangements, or otherwise increasing our manufacturing capacity and securing reliable access to sufficient volumes of low-cost feedstock, we will be unable to generate meaningful revenues from our products. We are subject to the substantial risk of failure facing businesses seeking to develop products based on a new technology. Certain factors that could, alone or in combination, prevent us from successfully commercializing our products include:

 

   

our ability to secure reliable access to sufficient volumes of low-cost feedstock;

 

   

our ability to achieve commercial-scale production of our products on a cost effective basis and in a timely manner;

 

   

technical challenges with our production processes or with development of new products that we are not able to overcome;

 

   

our ability to establish and maintain successful relationships with development, feedstock, manufacturing and commercialization partners;

 

   

our ability to gain market acceptance of our products with customers and maintain customer relationships;

 

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our ability to manage our growth;

 

   

our ability to secure and maintain necessary regulatory approvals for the production, distribution and sale of our products and to comply with applicable laws and regulations;

 

   

actions of direct and indirect competitors that may seek to enter the markets in which we expect to compete or that may seek to impose barriers to one or more markets that we intend to target; and

 

   

public concerns about the ethical, legal, environmental and social ramifications of the use of targeted recombinant technology, land use and the diversion of resources from food production.

The production of our microalgae-based oils and bioproducts requires fermentable feedstock. The inability to obtain feedstock in sufficient quantities or in a timely and cost-effective manner may limit our ability to produce our products.

A critical component of the production of our oils and bioproducts is access to feedstock in sufficient quantities and at an acceptable price to enable commercial production and sale. Other than as described below, we currently purchase feedstock, such as sugarcane-based sucrose and corn-based dextrose, for the production of our products at prevailing market prices. We are currently in discussions with additional potential feedstock partners.

Except for the supply of feedstock to Solazyme Roquette Nutritionals, LLC (Solazyme Roquette Nutritionals, or the Solazyme Roquette JV) for nutrition products by our partner, Roquette Frères, S.A. (Roquette), to Solazyme Bunge Produtos Renováveis Ltda. (Solazyme Bunge Renewable Oils or the Solazyme Bunge JV) for triglyceride oil products for sale and use in Brazil by our partner, Bunge Global Innovation, LLC and certain of its affiliates (Bunge), pursuant to joint venture arrangements, and to our strategic collaboration with Archer-Daniels-Midland Company (ADM) (Solazyme/ADM Collaboration) at the ADM fermentation facility in Clinton, Iowa (Clinton Facility), we do not have any long-term supply agreements or other guaranteed access to feedstock. As we scale our production, we anticipate that the production of our oils for the tailored food oils, chemicals and fuels markets will require large volumes of feedstock and we may not be able to contract with feedstock producers to secure sufficient quantities of feedstock at reasonable costs or at all. For example, corn-based dextrose feedstock for the Clinton Facility will be provided from ADM’s adjacent wet mill and sugarcane-based sucrose for the Solazyme Bunge JV facility in Moema, Brazil will be provided by Bunge. Corn and sugar are traded as commodities and are subject to price volatility. While we will seek to manage our exposure to fluctuations in the price of sugar and corn-based dextrose by entering into hedging transactions directly or through our joint venture or collaboration arrangements, we may not be successful in doing so. If we cannot access feedstock in the quantities we need at acceptable prices, we may not be able to successfully commercialize our tailored food oils, chemicals and fuels products, and our business will suffer. We are currently negotiating with additional potential feedstock partners in Latin America and the United States. We cannot be sure that we will successfully execute additional long-term feedstock contracts on terms favorable to us, or at all. If we do not succeed in entering into long-term supply contracts, successfully hedge against our exposure to fluctuations in the price of feedstock or otherwise procure feedstock as and when needed, our revenues and profit margins may fluctuate from period to period as we will remain subject to prevailing market prices.

Although our plan is to enter into partnerships, such as the Solazyme Bunge JV and the Solazyme/ADM Collaboration, with feedstock providers to supply the feedstock necessary to produce our products, we cannot predict the future availability or price of such feedstock or be sure that our feedstock partners will be able to supply such feedstock in sufficient quantities or in a timely manner. The prices of feedstock depend on numerous factors outside of our or our partners’ control, including weather conditions, government programs and regulations, changes in global demand resulting from population growth and changes in standards of living, rising or falling commodities and equities markets, and availability of credit to producers. Crop yields and sugar content depend on weather conditions such as rainfall and temperature. Variable weather conditions have historically caused volatility in feedstock crop prices due to crop failures or reduced harvests. For example, excessive rainfall can adversely affect the supply of feedstock available for the production of our products by reducing the sucrose content of feedstock and limiting growers’ ability to harvest. Crop disease and pestilence can also occur from time to time and can adversely affect feedstock crop growth, potentially rendering useless or unusable all or a substantial portion of affected harvests. The limited amount of time during which feedstock crops keep their sugar content after harvest poses a risk of spoilage. Also, the fact that many feedstock crops are not themselves traded commodities limits our ability to substitute supply in the event of such an occurrence. If our ability to obtain feedstock crops is adversely affected by these or other conditions, our ability to produce our products will be impaired, and our business will be adversely affected.

In the near term we believe Brazilian sugarcane-based sucrose will be an important feedstock for us. Along with the risks described above, Brazilian sugarcane prices may also increase due to, among other things, changes in the criteria set by the Conselho dos Produtores de Cana, Açúcar e Álcool (Council of Sugarcane, Sugar and Ethanol Producers), known as Consecana. Consecana is an industry association of producers of sugarcane, sugar and ethanol that sets market terms and prices for general supply, lease and partnership agreements and may change such prices and terms from time to time. Moreover, Brazil has a developed industry for producing ethanol from sugarcane, and if we have manufacturing operations in Brazil that do not have a partner providing the sugarcane feedstock, such as Bunge as part of the Solazyme Bunge JV, we will need to compete for sugarcane feedstock with ethanol producers. Such changes and competition could result in higher sugarcane prices and/or a significant decrease in the volume of sugarcane available for the production of our products, which could adversely affect our business and results of operations.

 

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We have entered into, and plan to enter into other, arrangements with feedstock producers to co-locate oil production at their existing mills, and if we are not able to complete and execute on these arrangements in a timely manner and on terms favorable to us, our business will be adversely affected.

In April 2012, we entered into a Joint Venture Agreement with Bunge, forming the Solazyme Bunge JV which is doing business as Solazyme Bunge Renewable Oils. The Solazyme Bunge JV will produce triglyceride oils in Brazil for sale into the Brazilian market using our proprietary technology and sugarcane feedstock provided by Bunge. The Solazyme Bunge JV’s production facility is located adjacent to a sugarcane processing mill in Brazil that is owned by Bunge. The acquisition of the facility site by the Solazyme Bunge JV is in process, is complex, is subject to multiple approvals from governmental authorities and will take time to complete. The construction of the Solazyme Bunge JV’s production facility began in June 2012 and we are targeting start-up of the facility in the fourth quarter of 2013. In addition, in May 2011, we entered a joint development agreement with Bunge that advances our work on Brazilian sugarcane feedstocks and extends through May 2013. In May 2011, we entered into a Warrant Agreement, amended in August 2011, with Bunge Limited that vests upon the successful completion of milestones that ultimately target the completion of construction of the Solazyme Bunge JV facility in 2013 with a nameplate capacity of 100,000 metric tons of output oil in 2013. We intend to continue to expand our manufacturing capacity by entering into additional agreements with feedstock producers that require them to invest some or all of the capital needed to build new production facilities to produce our oils. In return, we expect to share in profits anticipated to be realized from the sale of these products. We are currently negotiating with additional potential feedstock partners in Latin America and the United States.

In November 2012, we and ADM entered into a Strategic Collaboration Agreement (Collaboration Agreement), establishing the Solazyme/ADM Collaboration for the production of tailored triglyceride oil products at the Clinton Facility. The Clinton Facility will produce tailored triglyceride oil products using our proprietary microbe-based catalysis technology. Feedstock for the facility will be provided from ADM’s adjacent wet mill. Under the terms of the Collaboration Agreement, we agreed to pay ADM annual fees for use and operation of the Clinton Facility, a portion of which may be paid in our common stock. In addition, we have granted to ADM a warrant covering 500,000 shares of our common stock, which vests in equal monthly installments over five years, commencing from the start of commercial production. We currently anticipate that commercial production at the Clinton Facility will begin by early 2014. The initial target nameplate capacity of the facility is expected to be 20,000 metric tons per year of tailored triglyceride oil products. We have an option to expand the capacity to 40,000 metric tons per year, with the goal to further expand production to 100,000 metric tons per year. There can be no assurance that commercial production at the Clinton Facility will commence on the anticipated timeline or that we will expand the capacity of the facility. We and ADM are also working together to develop markets for the products produced at the Clinton Facility.

There can be no assurance that a sufficient number of other sugar or other feedstock mill owners will accept the opportunity to partner with us for the production of our oils. Reluctance on the part of mill owners may be caused, for example, by their failure to understand our technology or product opportunities or their belief that greater economic benefits can be achieved from partnering with others. Mill owners may also be reluctant or unable to obtain needed capital; alternatively, if mill owners are able to obtain debt financing, we may be required to provide a guarantee. Limitations in the credit markets, such as those experienced in the recent economic downturn or historically in developing nations as a result of government monetary policies designed in response to very high rates of inflation, would impede or prevent this kind of financing and could adversely affect our ability to develop the production capacity needed to allow us to grow our business. Mill owners may also be limited by existing contractual obligations with other third parties, liability, health and safety concerns and additional maintenance, training, operating and other ongoing expenses.

Even if additional feedstock partners are willing to co-locate our oil production at their mills, they may do so only on economic terms that place more of the cost, or confer less of the economic return, on us than we currently anticipate. If we are not successful in negotiations with mill owners, our cost of securing additional manufacturing capacity may be higher than anticipated in terms of up-front costs, capital expenditure or lost future returns, and we may not gain the manufacturing capacity that we need to grow our business.

Our pursuit of new product opportunities may not be technologically feasible or cost effective, which would limit our ability to expand our product line and sources of revenues.

We intend to commit substantial resources, alone or with collaboration partners, to the development and analysis of new tailored oils by applying recombinant technology to our microalgae strains. There is no guarantee that we will be successful in creating new tailored oil profiles that we, our partners or their customers desire. There are significant technological hurdles in successfully applying recombinant technology to microalgae, and if we are unsuccessful at engineering microalgae strains that produce desirable tailored oils, the number and size of the markets we will be able to address will be limited, our expected profit margins could be reduced and the potential profitability of our business could be compromised.

 

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The successful development of our business depends on our ability to efficiently and cost-effectively produce microalgae-based oils at large commercial scale.

Two of the significant drivers of our production costs are the level of productivity and conversion yield of our microalgae strains. Productivity is principally a function of the amount of oil that can be obtained from a given volume over a particular time period. Conversion yield refers to the amount of the desired oil that can be produced from a fixed amount of feedstock. We may not be able to meet our currently expected production cost profile as we bring large commercial manufacturing capacity online. If we cannot do so, our business would be materially and adversely affected.

Production of both current and future oils will require that our technology and processes be scalable from laboratory, pilot and demonstration projects to large commercial-scale production. We do not have experience constructing or managing large, commercial-scale manufacturing facilities. We may not have identified all of the factors that could affect our manufacturing processes. Our technology may not perform as expected when applied at large commercial scale, or we may encounter operational challenges for which we are unable to identify a workable solution. For example, contamination in the production process, problems with plant utilities, human error, issues arising from process modifications to reduce costs and adjust product specifications, and other similar challenges could decrease process efficiency, create delays and increase our costs. To date we have employed our technology using fermenters with a capacity of up to 128,000 liters, and have achieved scaled yields at fermenters with a capacity of approximately 500,000 liters. However, we still need to reproduce our commercial productivity at fermenters with a capacity of 500,000 liters, and our commercial productivity and yields using fermenters with a capacity of approximately 625,000 liters. We may not be able to scale up our production in a timely manner, on commercially reasonable terms, or at all. If we are unable to manufacture products at a large commercial scale, our ability to commercialize our technology will be adversely affected, and, with respect to any products that we do bring to market, we may not be able to achieve and maintain an acceptable production cost profile, which would adversely affect our ability to reach, maintain and increase the profitability of our business.

We rely in part on third parties for the production and processing of our products. If these parties do not produce and process our products at a satisfactory quality, in a timely manner, in sufficient quantities and at an acceptable cost, our development and commercialization efforts could be delayed or otherwise negatively impacted.

Other than our Peoria Facility, we do not own facilities that can produce and process our products other than at small scale. As such, we rely, and we expect to continue to rely, at least partially, on third parties (including partners and contract manufacturers) for the production and processing of our products. To date, we have entered into three manufacturing arrangements for industrial fermentation: the manufacture of nutrition products for Solazyme Roquette Nutritionals by our partner Roquette, the future manufacture of certain triglyceride oil products by the Solazyme Bunge JV, in each case pursuant to joint venture arrangements, and the future manufacture of tailored triglyceride oil products at the Clinton Facility. We also have manufacturing agreements relating to other aspects of our production process. Our current and anticipated future dependence upon our partners and contract manufacturers for the production and processing of our products may adversely affect our ability to develop products on a timely and competitive basis. The failure of any of our counterparties to provide acceptable products could delay the development and commercialization of our products. We or our partners will need to enter into additional agreements for the commercial development, manufacturing and sale of our products. There can be no assurance that we or our partners can do so on favorable terms, if at all. Even if we reach agreements with manufacturing partners to produce and process our products, initially the partners will be unfamiliar with our technology and production processes. We cannot be sure that the partners will have or develop the operational expertise needed to run the additional equipment and processes required to manufacture our products. Further, we may have limited control over the amount or timing of resources that any partner is able or willing to devote to production and processing of our products.

To date, our products have been produced and processed in quantities sufficient for our development work. For example, we delivered more than 400,000 liters (373 metric tons) of microalgae-derived military marine diesel and jet fuel to the US Navy in 2011. Even if there is demand for our products at a commercial scale, we or our partners may not be able to successfully increase the production capacity for any of our products in a timely or economic manner or at all. In addition, to the extent we are relying on contract manufacturers to produce and process our products, we cannot be sure that such contract manufacturers will have capacity available when we need their services, that they will be willing to dedicate a portion of their production and/or processing capacity to our products or that we will be able to reach acceptable price and other terms with them for the provision of their production and/or processing services. If we, our partners or our contract manufacturers are unable to increase the production capacity for a product when and as needed, the commercial launch of that product may be delayed, or there may be a shortage of supply, which could limit sales, cause us to lose customers and sales opportunities and impair the growth of our business.

In addition, if a facility or the equipment in a facility that produces and/or processes our products is significantly damaged, destroyed or otherwise becomes unavailable, we or our partners may be unable to replace the manufacturing capacity quickly or cost effectively. The inability to obtain manufacturing agreements, the damage or destruction of a facility upon which we or our partners rely for manufacturing or any other delays in obtaining supply would delay or prevent us and/or our partners from further developing and commercializing our products.

 

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We may experience significant delays in financing, designing and constructing large commercial manufacturing facilities, which could result in harm to our business and prospects.

Our business plan contemplates bringing significant commercial manufacturing capacity online over the next several years. In order to meet our capital requirements for those facilities, we may have to raise additional funds and may be unable to do so in a timely manner, in sufficient amounts and on terms that are favorable to us, if at all. If we fail to raise sufficient funds, our ability to finance and construct additional manufacturing facilities could be significantly limited. If this happens, we may be forced to delay the commercialization of our products and we will not be able to successfully execute our business plan, which would harm our business.

The Solazyme Bunge JV is currently constructing an oil production facility adjacent to Bunge’s Moema sugarcane mill in Brazil. We are targeting start-up of the facility in the fourth quarter of 2013. The production facility is expected to have a name plate capacity of 100,000 metric tons per year of oil. In February 2013, the Solazyme Bunge JV entered a loan agreement with the Brazilian Development Bank (BNDES) for project financing. Funds borrowed under the loan agreement will support the production facility in Brazil, including a portion of the construction costs of the facility. As a condition of the Solazyme Bunge JV drawing funds under the loan, we will be required to guarantee a portion of the loan (in an amount not to exceed our ownership percentage in the Solazyme Bunge JV). Negotiating the terms of the guarantee documentation may take longer than anticipated and may contain terms that are not favorable to us. If we are unable to negotiate our guarantee documentation on acceptable terms, the Solazyme Bunge JV will be unable to draw down amounts under the loan, will have to seek additional financing and may not be able to raise sufficient additional funds on favorable terms, if at all. If the Solazyme Bunge JV is unable to secure additional financing, we will be required to fund our portion of the Solazyme Bunge JV’s capital requirements either from existing sources or seek additional financing. The acquisition of the facility site is in process, is complex, is subject to multiple approvals of governmental authorities and will take time to complete. If the Solazyme Bunge JV is unable to acquire the facility site on reasonable terms, or at all, it may not be able to operate the oil production facility and may lose all or part of its investment in such facility.

Furthermore, we will need to construct, or otherwise secure access to, and fund, additional capacity significantly greater than what we are in the process of building as we continue to commercialize our products. We aim to commence production of oils for the chemicals and fuels markets at the Solazyme Bunge JV facility in the fourth quarter of 2013, we anticipate commercial production at the Clinton Facility to begin by early 2014 and we expect to bring online additional facilities thereafter. Although we intend to enter into arrangements with third parties to meet our capacity targets, it is possible that we will need to construct our own facility or facilities to meet a portion or all of these targets. We have limited experience in the construction of commercial production facilities and, if we decide to construct our own facility, we will need to secure necessary funding, complete design and other plans needed for the construction of such facility and secure the requisite permits, licenses and other governmental approvals, and we may not be successful in doing so. The construction of any such facility would have to be completed on a timely basis and within an acceptable budget. In addition, there may be delays related to the acquisition of facility sites, which could delay the development and commercialization of our products. Any facility, whether owned by a third party or by us, must perform as designed once it is operational. If we encounter significant delays, cost overruns, engineering problems, equipment supply constraints or other serious challenges in bringing any of these facilities online, we may be unable to meet our production goals in the time frame we have planned. In addition, we have limited experience in the management of manufacturing operations at large scale. We may not be successful in producing the amount and quality of oil or bioproduct we anticipate in the facilities and our results of operations may suffer as a result. We have limited experience producing our products at commercial scale, and we will not succeed if we cannot maintain or decrease our production costs and effectively scale our technology and manufacturing processes.

If we fail to maintain and successfully manage our existing, or enter into new, strategic collaborations, we may not be able to develop and commercialize many of our products and achieve or sustain profitability.

Our ability to enter into, maintain and manage collaborations in our target markets is fundamental to the success of our business. We currently have joint venture agreements, collaboration agreements, research and development agreements, supply agreements and/or distribution agreements with various strategic partners. We currently rely on our partners, in part, for manufacturing and sales or marketing services and intend to continue to do so for the foreseeable future, and we intend to enter into other strategic collaborations to produce, market and sell other products we develop. However, we may not be successful in entering into collaborative arrangements with third parties for the production and sale and marketing of other products. Any failure to enter into collaborative arrangements on favorable terms could delay or hinder our ability to develop and commercialize our products and could increase our costs of development and commercialization.

In the chemicals and fuels markets, we have entered into a joint venture arrangement with Bunge that will focus on the production of triglyceride oils in Brazil for sale in the Brazilian market, and development agreements with Bunge, Unilever, Mitsui & Co., Ltd. and The Dow Chemical Company (Dow). We have entered into a joint venture with Roquette in connection with our nutrition business. In addition, we have entered into a strategic collaboration with ADM for the production of tailored triglyceride oil products to be sold primarily to the industrial and nutritionals markets in North America. In the skin and personal care market, we have entered into arrangements with Sephora S.A. and its affiliates (Sephora), QVC, Inc. and others. There can be no guarantee that we can successfully manage these strategic collaborations. Under our agreement with Sephora, we bear a significant portion of the

 

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costs and risk of marketing the products, but do not exercise sole control of marketing strategy. In some cases, we will need to meet certain milestones to continue our activities with these partners. Moreover, the exclusivity provisions of certain strategic arrangements limit our ability to otherwise commercialize our products.

Pursuant to the agreements listed above and similar arrangements that we may enter into in the future, we may have limited or no control over the amount or timing of resources that any partner is able or willing to devote to our products or collaborative efforts. Any of our partners may fail to perform their obligations as expected. These partners may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our partners may not develop products arising out of our arrangements or devote sufficient resources to the development, manufacture, marketing, or sale of our products. Dependence on collaborative arrangements will also subject us to other risks, including:

 

   

we may be required to relinquish important rights, including intellectual property, marketing and distribution rights;

 

   

we may disagree with our partners as to rights to intellectual property we develop, or their research programs or commercialization activities;

 

   

we may have lower revenues than if we were to market and distribute such products ourselves;

 

   

a partner could separately develop and market a competing product either independently or in collaboration with others, including our competitors;

 

   

our partners could become unable or less willing to expend their resources on research and development or commercialization efforts due to general market conditions, their financial condition or other circumstances beyond our control;

 

   

we may be unable to manage multiple simultaneous partnerships or collaborations; and

 

   

our partners may operate in countries where their operations could be adversely affected by changes in the local regulatory environment or by political unrest.

Moreover, disagreements with a partner could develop, and any conflict with a partner could reduce our ability to enter into future collaboration agreements and negatively impact our relationships with one or more existing partners. In addition, disagreements with a partner could result in disputes or litigation and could require substantial time and money to resolve. If any of these events occur, or if we fail to maintain our agreements with our partners, we may not be able to commercialize our existing and potential products, grow our business or generate sufficient revenues to support our operations.

Additionally, our business could be negatively impacted if any of our partners undergoes a change of control or were to otherwise assign the rights or obligations under any of our agreements to a competitor of ours or to a third party who is not willing to work with us on the same terms or commit the same resources as the current partner.

Our relationship with our strategic partner ADM may not prove successful.

We have entered into the Solazyme/ADM Collaboration, which will focus on the production of tailored triglyceride oil products at the Clinton Facility. The Clinton Facility will produce tailored triglyceride oil products using our proprietary microbe-based catalysis technology. Feedstock for the facility will be provided from ADM’s adjacent wet mill. Under the terms of the Collaboration Agreement, we will pay ADM annual fees for use and operation of the Clinton Facility, a portion of which may be paid in our common stock.

Our ability to generate value from the Solazyme/ADM Collaboration will depend, among other things, on our ability to work cooperatively with ADM for the production of tailored triglyceride oil products at the Clinton Facility. We may not be able to do so. For example, under the Solazyme/ADM Collaboration, ADM has agreed to provide feedstock and utility services to the Clinton Facility as well as operating services. ADM does not have previous experience working with our technology, and we cannot be sure that ADM will be successful in producing our tailored triglyceride oil products in amounts we may require, at a satisfactory quality and/or in a cost-effective manner. Subject to limited exceptions and adjustments, we will be responsible for annual fees regardless of ADM’s success in producing our tailored triglyceride oil products in acceptable quantities, at satisfactory quality and at acceptable costs. In addition, there may be delays related to the retrofitting and permitting of the Clinton Facility, which would delay the production and commercialization of our tailored triglyceride oil products and could increase our costs. Furthermore, the agreements governing our Solazyme/ADM Collaboration are complex and cover a range of future activities, and disputes may arise between us and ADM that could delay the production and commercialization of our tailored triglyceride oil products or cause the termination of the Solazyme/ADM Collaboration.

 

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Our relationship with our strategic partner Bunge may not prove successful.

We have entered into a joint venture with Bunge that will focus on the production of certain triglyceride oils in Brazil for sale into Brazilian markets. In connection with the establishment of the Solazyme Bunge JV, we entered into a development agreement and other agreements with Bunge and the Solazyme Bunge JV.

Our ability to generate value from the Solazyme Bunge JV will depend, among other things, on our ability to work cooperatively with Bunge and the Solazyme Bunge JV for the commercialization of the Solazyme Bunge JV’s products. We may not be able to do so. For example, under the joint venture, Bunge has agreed to provide feedstock as well as utility services to the production facility. We and Bunge have both agreed to provide various administrative services to the Solazyme Bunge JV, and Bunge will also provide working capital to the Solazyme Bunge JV through a revolving loan facility, with a portion of the repayment for start-up expenses to be guaranteed by us. Bunge does not have previous experience working with our technology, and we cannot be sure that the Solazyme Bunge JV will be successful in commercializing its products. In addition, there may be delays related to the acquisition of the facility site and construction of the Solazyme Bunge JV production facility. There may also be delays in our negotiation of the loan guarantee to be entered into as a condition of the Solazyme Bunge JV drawing down amounts under the loan agreement with BNDES. Any of these events would delay the development and commercialization of the Solazyme Bunge JV products. Furthermore, the agreements governing our partnership are complex and cover a range of future activities, and disputes may arise between us and Bunge that could delay completion of the Solazyme Bunge JV facility and/or the expansion of the Solazyme Bunge JV’s capacity and the development and commercialization of the Solazyme Bunge JV’s products or cause the dissolution of the Solazyme Bunge JV.

Our relationship with our strategic partner Roquette may not prove successful.

We have entered into a 50/50 joint venture with Roquette, one of the world’s largest starch and starch-derivatives companies. As part of this relationship, we and Roquette formed Solazyme Roquette Nutritionals, through which both we and Roquette will conduct a substantial portion of our business in connection with microalgae-based oils and bioproducts for the food, nutraceuticals and animal feed markets. In connection with the establishment of the Solazyme Roquette JV, we have entered into services, manufacturing and license agreements with Roquette and Solazyme Roquette Nutritionals.

Our ability to generate value from the Solazyme Roquette JV will depend on, among other things, our ability to work cooperatively with Roquette and Solazyme Roquette Nutritionals for the commercialization of the Solazyme Roquette JV’s products. We may not be able to do so. For example, under the joint venture, Roquette personnel and facilities will be used to produce nutrition products using our licensed technology. Roquette does not have previous experience working with our technology, and we cannot be sure that the Solazyme Roquette JV will be successful in manufacturing and/or commercializing the Solazyme Roquette JV’s products. To date, Roquette has provided, or financed, the working capital requirements of Solazyme Roquette Nutritionals. If Roquette does not provide additional working capital financing, Solazyme Roquette Nutritionals may not be able to fund its operations, which could lead to dissolution of the Solazyme Roquette JV. In addition, the agreements governing our partnership are complex and cover a range of future activities, and disputes may arise between us and Roquette that could delay the development and commercialization of the Solazyme Roquette JV’s products or cause the dissolution of the Solazyme Roquette JV. For example, the joint venture agreement contemplates that Roquette will construct and own two Solazyme Roquette JV-dedicated facilities that are expected to have aggregate capacity of approximately 5,000 metric tons per year. In addition, subject to approval of the board of directors of the Solazyme Roquette JV to enter into Phase 3, Roquette has committed to fund a Solazyme Roquette JV-owned facility in Phase 3 that is expected to have capacity of approximately 50,000 metric tons per year. However, because the four-person board of directors of the Solazyme Roquette JV includes two Roquette designees, the decision to proceed with Phase 3 will functionally require Roquette’s approval. If we are unable to obtain the approval of the board of directors of the Solazyme Roquette JV, our ability to commercialize the Solazyme Roquette JV’s nutrition products and the financial performance of the Solazyme Roquette JV will suffer.

We cannot be sure that our products will meet necessary standards or be approved or accepted by customers in our target markets.

If we are unable to convince our potential customers or end users of our products that we are a reliable supplier, that our products are comparable or superior to the products that they currently use, or that the use of our products is otherwise beneficial to them, we will not be successful in entering our target markets and our business will be adversely affected.

In the chemicals market, the potential customers for our or the Solazyme Bunge JV’s oils are generally companies that have well-developed manufacturing processes and arrangements with suppliers for the chemical components of their products and may resist 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, supplier operating history, regulatory 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.

 

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Although we produce products for the fuels market that comply with industry specifications, potential fuels customers may be reluctant to adopt new products due to a lack of familiarity with our oils. In addition, our fuels may need to satisfy product certification requirements of equipment manufacturers. For example, diesel engine manufacturers may need to certify that the use of diesel fuels produced from our oils in their equipment will not invalidate product warranties.

In the nutrition market, our Solazyme Roquette JV’s products will compete with oils and other food ingredients currently in use. Potential customers may not perceive a benefit to microalgae-based products as compared to existing ingredients or may be otherwise unwilling to adopt their use. If consumer packaged goods (CPG) companies do not accept the Solazyme Roquette JV’s products as ingredients for their widely distributed finished products, or if end customers are unwilling to purchase finished products made using the Solazyme Roquette JV’s oils or bioproducts, the Solazyme Roquette JV will not be successful in competing in the nutrition market and our business will be adversely affected.

In the skin and personal care market, our branded products are marketed directly to potential consumers, but we cannot be sure that consumers will continue to be attracted to our brand or purchase our products on an ongoing basis. As a result, our distribution partners may decide to discontinue marketing our products.

We have entered into contingent offtake agreements and non-binding letters of intent with third parties regarding purchase of our products, but these agreements do not unconditionally obligate the other party to purchase any quantities of any products at this time. There can be no assurance that our contingent offtake agreements and non-binding letters of intent will lead to unconditional definitive agreements to purchase our products.

We have limited experience in structuring arrangements with customers for the purchase of our microalgae-based products, and we may not be successful in this essential aspect of our business.

We expect that our customers will include large companies that sell skin and personal care products, food products and chemical products, as well as large users of oils for fuels. Because we have only recently begun to commercialize our skin and personal care products and, through Solazyme Roquette Nutritionals, nutrition products, and are still in the process of developing our products for the tailored food oils, chemicals and fuels markets, we have limited experience operating in our customers’ industries and interacting with the customers that we intend to target. Developing the necessary expertise may take longer than we expect and will require that we expand and improve our sales and marketing capability, which could be costly. These activities could delay our ability to capitalize on the opportunities that we believe our technology and products present, and may prevent us from successfully commercializing our products. Further, we ultimately aim to sell large amounts of our oils and bioproducts, and this will require that we effectively negotiate and manage contracts for these purchase and sale relationships. The companies with which we aim to have arrangements are generally much larger than we are and have substantially longer operating histories and more experience in their industries than we have. As a result, we may not succeed in establishing relationships with these companies and, if we do, we may not be effective in negotiating or managing the terms of such relationships, which could adversely affect our future results of operations.

We may be subject to product liability claims and other claims of our customers and partners.

The design, development, production and sale of our oils and bioproducts involve an inherent risk of product liability claims and the associated adverse publicity. Because some of our ultimate products in each of our target markets are used by consumers, and because use of those ultimate products may cause injury to those consumers and damage to property, we are subject to a risk of claims for such injuries and damages. In addition, we may be named directly in product liability suits relating to our oils, bioproducts or the ultimate products, even for defects resulting from errors of our partners, contract manufacturers or other third parties working with our products. These claims could be brought by various parties, including customers who are purchasing products directly from us or other users who purchase products from our customers or partners. We could also be named as co-parties in product liability suits that are brought against manufacturing partners that produce our products.

In addition, our customers and partners may bring suits against us alleging damages for the failure of our products to meet specifications or other requirements. Any such suits, even if not successful, could be costly, disrupt the attention of our management and damage our negotiations with other partners and/or customers.

Although we often seek to limit our product liability in our contracts, such limits may not be enforceable or may be subject to exceptions. Our current product liability and umbrella insurance for our business may be inadequate to cover all potential liability claims. Insurance coverage is expensive and may be difficult to obtain. Also, insurance coverage may not be available in the future on acceptable terms and may not be sufficient to cover potential claims. We cannot be sure that our contract manufacturers or manufacturing partners who produce our ultimate products will have adequate insurance coverage to cover against potential claims. If we experience a large insured loss, it may exceed our coverage limits, or our insurance carrier may decline to further cover us or may raise our insurance rates to unacceptable levels, any of which could impair our financial position and potentially cause us to go out of business.

 

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We will face risks associated with our international business in developing countries and elsewhere.

For the foreseeable future, our business plan will likely subject us to risks associated with essential manufacturing, sales and operations in developing countries. We have limited experience to date manufacturing and selling internationally and such expansion would require us to make significant expenditures, including the hiring of local employees and establishing facilities, in advance of generating any revenue. The economies of many of the countries in which we will operate have been characterized by frequent and occasionally extensive government intervention and unstable economic cycles.

In addition, in Brazil, where the Solazyme Bunge JV is located, there are restrictions on the foreign ownership of land. As a result, the process for the acquisition by the Solazyme Bunge JV of the facility site may be long, complicated and is subject to government approvals.

International business operations are subject to local legal, political, regulatory and social requirements and economic conditions and our business, financial performance and prospects may be adversely affected by, among others, the following factors:

 

   

political, economic, diplomatic or social instability;

 

   

land reform movements;

 

   

tariffs, export or import restrictions, restrictions on remittances abroad or repatriation of profits, duties or taxes that limit our ability to move our products out of these countries or interfere with the import of essential materials into these countries;

 

   

inflation, changing interest rates and exchange controls;

 

   

tax burden and policies;

 

   

delays or failures in securing licenses, permits or other governmental approvals necessary to build and operate facilities and use our microalgae strains to produce products;

 

   

the imposition of limitations on products or processes and the production or sale of those products or processes;

 

   

uncertainties relating to foreign laws, including labor laws, regulations and restrictions, and legal proceedings;

 

   

foreign ownership rules and changes in regard thereto;

 

   

an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action;

 

   

successful compliance with US and foreign laws that regulate the conduct of business abroad, including the Foreign Corrupt Practices Act;

 

   

insufficient investment in developing countries in public infrastructure, including transportation infrastructure, and disruption of transportation and logistics services; and

 

   

difficulties and costs of staffing and managing foreign operations.

These and other factors could have a material adverse impact on our results of operations and financial condition.

Our international operations may expose us to the risk of fluctuation in currency exchange rates and rates of foreign inflation, which could adversely affect our results of operations.

We currently incur some costs and expenses in Euros and Brazilian Reais and expect in the future to incur additional expenses in these and other foreign currencies, and also derive a portion of our revenues in the local currencies of customers throughout the world. As a result, our revenues and results of operations are subject to foreign exchange fluctuations, which we may not be able to manage successfully. During the past few decades, the Brazilian currency in particular has faced frequent and substantial exchange rate fluctuations in relation to the US dollar and other foreign currencies. In 2011, the Real depreciated 11% against the US dollar, and in 2012, the Real depreciated 10% against the US dollar. The Euro depreciated 3% against the US dollar in 2011 and appreciated 2% against the US dollar in 2012. There can be no assurance that the Real or the Euro will not significantly appreciate or depreciate against the US dollar in the future. We bear the risk that the rate of inflation in the foreign countries where we incur costs and expenses or the decline in value of the US dollar compared to those foreign currencies will increase our costs as expressed in US dollars. Future measures by foreign governments to control inflation, including interest rate adjustments, intervention in the foreign exchange market and changes to the fixed value of their currencies, may trigger increases in inflation. We may not be able to adjust the prices of our products to offset the effects of inflation on our cost structure, which could increase our costs and reduce our net operating margins. If we do not successfully manage these risks through hedging or other mechanisms, our revenues and results of operations could be adversely affected.

 

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We may encounter difficulties managing our growth, and we will need to properly prioritize our efforts in three distinct target markets as our business grows. If we are unable to do so, our business, financial condition and results of operations may be adversely affected.

Our business has grown rapidly. Continued growth may place a strain on our human and capital resources. Furthermore, we intend to conduct our business internationally and anticipate business operations in the United States, Europe, Latin America and elsewhere. These diversified, global operations place increased demands on our limited resources and may require us to substantially expand the capabilities of our administrative and operational resources and will require us to attract, train, manage and retain qualified management, technicians, scientists and other personnel. As our operations expand domestically and internationally, we will need to continue to manage multiple locations and additional relationships with various customers, partners, suppliers and other third parties across several product categories and markets.

Our growth is taking place across three distinct target markets: chemicals and fuels, nutrition, and skin and personal care. We will be required to prioritize our limited financial and managerial resources as we pursue particular development and commercialization efforts in each target market. Any resources we expend on one or more of these efforts could be at the expense of other potentially profitable opportunities. If we focus our efforts and resources on one or more of these areas and they do not lead to commercially viable products, our revenues, financial condition and results of operations could be adversely affected. Furthermore, as our operations continue to grow, the simultaneous management of development, production and commercialization across all three target markets will become increasingly complex and may result in less than optimal allocation of management and other administrative resources, increase our operating expenses and harm our operating results.

Our ability to effectively manage our operations, growth and various projects across our target markets will require us to make additional investments in our infrastructure to continue to improve our operational, financial and management controls and our reporting systems and procedures and to attract and retain sufficient numbers of talented employees, which we may be unable to do effectively. We may be unable to successfully manage our expenses in the future, which may negatively impact our gross margins or operating margins in any particular quarter.

In addition, we may not be able to improve our management information and control systems, including our internal control over financial reporting, to a level necessary to manage our growth and we may discover deficiencies in existing systems and controls that we may not be able to remediate in an efficient or timely manner.

Our success depends in part on recruiting and retaining key personnel and, if we fail to do so, it may be more difficult for us to execute our business strategy. We are currently a small organization and will need to hire additional personnel to execute our business strategy successfully.

Our success depends on our continued ability to attract, retain and motivate highly qualified management, business development, manufacturing and scientific personnel and on our ability to develop and maintain important relationships with leading academic institutions and scientists. We are highly dependent upon a number of key members of our senior management, including manufacturing, business development and scientific personnel. If any of such persons left, our business could be harmed. All of our employees are “at-will” employees. The loss of the services of one or more of our key employees could delay or have an impact on the successful commercialization of our products. We do not maintain any key man insurance. Competition for qualified personnel in the biotechnology field is intense, particularly in the San Francisco Bay Area. We may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel. If we are unsuccessful in our recruitment efforts, we may be unable to execute our strategy.

We may not be able to obtain regulatory approval for the sale of our microalgae-based products and, even if approvals are obtained, complying on an ongoing basis with the numerous regulatory requirements applicable to our various product categories will be time-consuming and costly.

The sale and/or use of diesel and jet fuels produced from our oils are subject to regulation by various government agencies, including the Environmental Protection Agency (EPA) and the California Air Resources Board in the United States. To date, we have registered only our Soladiesel RD ® fuel in the United States. We or our refining or commercialization partners or customers may be required to register our fuel in the United States, with the European Commission and elsewhere before selling our products.

Our chemical products may be subject to government regulation in our target markets. In the United States, the EPA administers the Toxic Substances Control Act (TSCA), which regulates the commercial registration, distribution, and use of chemicals. TSCA will require us to obtain and comply with the Microbial Commercial Activity Notice (MCAN) process to manufacture and distribute products made from our recombinant microalgae strains. To date, we have filed an MCAN for one of our recombinant microalgae strains. Before we can manufacture or distribute significant volumes of a chemical, we need to determine whether that chemical is listed in the TSCA inventory. If the substance is listed, then manufacture or distribution can commence immediately. If not, then a pre-manufacture notice (PMN) must be filed with the EPA for a review period of up to 90 days excluding extensions. We filed a PMN for oil derived from one of our recombinant microalgae strains, the review of which was completed by the EPA in July 2012. We filed

 

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a PMN for oil derived from one of our non-recombinant microalgae strains, the review of which was completed by the EPA in December 2012. We also filed a PMN for algal biomass in December 2012. We filed additional PMNs for two oils from recombinant strains in March 2013. An MCAN is not required for non-recombinant microalgal strains. Some of the products we produce or plan to produce are already eligible to be placed on the TSCA inventory. Others are not yet listed. We may not be able to expediently receive approval from the EPA to list the chemicals we would like to make on the TSCA registry, resulting in delays or significant increases in testing requirements. A similar program exists in the European Union, called REACH (Registration, Evaluation, Authorization, and Restriction of Chemical Substances). We are required to register some of our products with the European Commission, and this process could cause delays or significant costs. We have determined that some of our algal oils are exempt from REACH registration requirements. To the extent that other geographies, such as Brazil, may rely on the TSCA or REACH for chemical registration in their geographies, delays with the US or European authorities may subsequently delay entry into these markets as well. Furthermore, other geographies may have their own chemical inventory requirements, which may delay entry into these markets, irrespective of US or European approval.

Our nutrition products are subject to regulation by various government agencies, including the US Food and Drug Administration (FDA), state and local agencies and similar agencies outside the United States. Food ingredients and ingredients used in animal feed are regulated either as food additives or as substances generally recognized as safe, or GRAS. A substance can be listed or affirmed as GRAS by the FDA or self-affirmed by its manufacturer upon determination that independent qualified experts would generally agree that the substance is GRAS for a particular use. We have submitted to the FDA our GRAS Notice of Determination for algal oil and received notification from the FDA in June 2012 that it had no further questions. Our GRAS Notice of Determination for algal flour has been submitted to the FDA. We do not expect any objections upon their review; however, there can be no assurance that we will not receive any objections from the FDA. If the FDA were to disagree with our determination, they could ask us to voluntarily withdraw the products from the market or could initiate legal action to halt their sale. Such actions by the FDA could have an adverse effect on our business, financial condition, and results of our operations. Food ingredients that are not GRAS are regulated as food additives and require FDA approval prior to commercialization. The food additive petition process is generally expensive and time consuming, with approval, if secured, taking years.

Our skin and personal care products are subject to regulation by various government agencies both within and outside the United States. Such regulations principally relate to the ingredients, labeling, packaging and marketing of our skin and personal care products.

Changes in regulatory requirements, laws and policies, or evolving interpretations of existing regulatory requirements, laws and policies, may result in increased compliance costs, delays, capital expenditures and other financial obligations that could adversely affect our business or financial results.

We expect to encounter regulations in most if not all of the countries in which we may seek to sell our products, and we cannot be sure that we will be able to obtain necessary approvals in a timely manner or at all. If our microalgae-based oils and bioproducts do not meet applicable regulatory requirements in a particular country or at all, then we may not be able to commercialize them and our business will be adversely affected. The various regulatory schemes applicable to our products will continue to apply following initial approval for sale. Monitoring regulatory changes and ensuring our ongoing compliance with applicable requirements will be time-consuming and may affect our results of operations. If we fail to comply with such requirements on an ongoing basis, we may be subject to fines or other penalties, or may be prevented from selling our oils and bioproducts, and our business may be harmed.

We may incur significant costs complying with environmental, health and safety laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.

We use hazardous chemicals and radioactive and biological materials in our business and are subject to a variety of federal, state, local and international laws and regulations governing, among other matters, the use, generation, manufacture, transportation, storage, handling, disposal of, and human exposure to, these materials both in the US and outside the US, including regulation by governmental regulatory agencies, such as the Occupational Safety and Health Administration and the EPA. We have incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of our business in complying with these laws and regulations.

Although we have implemented safety procedures for handling and disposing of these materials and waste products in an effort to comply with these laws and regulations, we cannot be sure that our safety measures will be compliant or capable of eliminating the risk of injury or contamination from the generation, manufacturing, use, storage, transportation, handling, disposal of, and human exposure to, hazardous materials. Failure to comply with environmental, health and safety laws could subject us to liability and resulting damages. There can be no assurance that violations of environmental, health and safety laws will not occur 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, regulatory oversight costs, 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, such as the

 

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Comprehensive Environmental Response Compensation and Liability Act in the United States, can impose liability for the full amount of damages, without regard to comparative fault for the investigation and cleanup of contamination and impacts to human health and for damages to natural resources. Contamination at properties we own and operate, and at properties to which we send hazardous materials, may result in liability for us under environmental laws and regulations.

Our business and operations will be affected by other new environmental, health and safety laws and regulations, which may affect our research and development and manufacturing programs, and environmental laws could become more stringent over time, requiring us to change our operations, or resulting in greater compliance costs and increasing risks and penalties associated with violations, which could impair our research, development or production efforts and harm our business. The costs of complying with environmental, health and safety laws and regulations, and any claims concerning noncompliance, or liability with respect to contamination in the future could have a material adverse effect on our financial condition or operating results.

Changes in government regulations, including subsidies and economic incentives, could have a material adverse effect on demand for our oils, business and results of operations.

The market for renewable fuels is heavily influenced by foreign, federal, state and local government regulations and policies. Changes to existing, or adoption of new, domestic or foreign federal, state or local legislative initiatives that impact the production, distribution, sale or import and export of renewable fuels may harm our business. For example, in 2007, the Energy Independence and Security Act of 2007 set targets for alternative sourced liquid transportation fuels (approximately 14 billion gallons in 2011, increasing to 36 billion gallons by 2022). Of the 2022 target amount, a minimum of 21 billion gallons must be advanced biofuels. In the US 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. The elimination of, or 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 renewable fuels. In addition, the US Congress has passed legislation that extends tax credits to blenders of certain renewable fuel products. However, there is no assurance that this or any other favorable legislation will remain in place. For example, the biodiesel tax credit expired in December 2009, and its extension was not approved until March 2010. Any reduction in, phasing out or elimination of existing tax credits, subsidies and other incentives in the US and foreign markets for renewable fuels, or any inability of our customers to access such credits, subsidies and incentives, may adversely affect demand for our products and increase the overall cost of commercialization of our renewable fuels, which would adversely affect our business. In addition, market uncertainty regarding future policies may also affect our ability to develop new renewable products or to license our technologies to third parties and to sell products to end customers. 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.

Conversely, government programs could increase investment and competition in the markets for our oils. For example, various governments have announced a number of spending programs focused on the development of clean technology, including alternatives to petroleum-based fuels and the reduction of greenhouse gas (GHG) emissions, which could lead to increased funding for us or our competitors, or the rapid increase in the number of competitors within our markets.

Concerns associated with renewable fuels, including land usage, national security interests and food crop usage, are receiving legislative, industry and public attention. This 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.

Future government policies may adversely affect the supply of sugarcane, corn or cellulosic sugars, restricting our ability to use these feedstocks to produce our oils, and negatively impact our revenues and results of operations.

We may face risks relating to the use of our targeted recombinant microalgae strains, and if we are not able to secure regulatory approval for the use of these strains or if we face material ethical, legal and social concerns about our use of targeted recombinant technology, our business could be adversely affected.

The use of microorganisms designed using targeted recombinant technology, such as some of our microalgae strains, is subject to laws and regulations in many states and countries, some of which are new and still evolving and interpreted by fact specific application. In the United States, the EPA regulates the commercial use of microorganisms designed using targeted recombinant technology as well as potential products derived from them.

We expect to encounter regulations of microorganisms designed using targeted recombinant technology in most if not all of the countries in which we may seek to establish manufacturing operations, and the scope and nature of these regulations will likely be different from country to country. For example, in the US, when used in an industrial process, our microalgae strains designed using targeted recombinant technology may be considered new chemicals under the TSCA, administered by the EPA. We will be required to comply with the EPA’s process and are preparing to file an MCAN for the strain of optimized microalgae that we use for our chemicals and fuels businesses. In Brazil, microorganisms designed using targeted recombinant technology are regulated by the

 

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National Biosafety Technical Commission, or CTNBio. In March 2013, we submitted an application for approval from CTNBio to use microalgae designed using targeted recombinant technology in a contained environment in order to use these microalgae for research and development and commercial production purposes in any facilities we establish in Brazil. If we cannot meet the applicable requirements in Brazil and other countries in which we intend to produce microalgae-based products, or if it takes longer than anticipated to obtain such approvals, our business could be adversely affected.

The subject of organisms designed using targeted recombinant technology has received negative publicity, which has aroused public debate. Public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and microorganisms designed using targeted recombinant technology could influence public acceptance of our technology and products. In addition, shifting public attitudes regarding, and potential changes to laws governing, ownership of genetic material could harm our intellectual property rights with respect to our genetic material and discourage collaborators from supporting, developing, or commercializing our products, processes and technologies. Governmental reaction to negative publicity concerning organisms designed using targeted recombinant technology could result in greater government regulation of or trade restrictions on imports of genetic research and derivative products. If we and/or our collaborators are not able to overcome the ethical, legal, and social concerns relating to the use of targeted recombinant technology, our products and processes may not be accepted or we could face increased expenses, delays or other impediments to their commercialization.

We expect to face competition for our oils in the chemicals and fuels markets from providers of products based on petroleum, plant oils and animal fats and from other companies seeking to provide alternatives to these products, many of whom have greater resources and experience than we do. If we cannot compete effectively against these companies or products, we may not be successful in bringing our products to market or further growing our business.

In the chemical markets, we will compete with the established providers of oils currently used in chemical products. Producers of these incumbent products include global oil companies, including those selling agricultural products such as palm oil, palm kernel oil, castor bean oil and sunflower oil, large international chemical companies and other companies specializing in specific products or essential oils. We may also compete in one or more of these markets with manufacturers of other products such as highly refined petrochemicals, synthetic polymers and other petroleum-based fluids and lubricants as well as new market entrants offering renewable products.

In the transportation fuels market, we expect to compete with independent and integrated oil refiners, large oil and gas companies and, in certain fuels markets, with other companies producing advanced biofuels. The refiners compete with us by selling conventional fuel products, and some are also pursuing hydrocarbon fuel production using non-renewable feedstocks, such as natural gas and coal, as well as production using renewable feedstocks, such as vegetable oil and biomass. We also expect to compete with companies that are developing the capacity to produce diesel and other transportation fuels from renewable resources in other ways. These include advanced biofuels companies using specific engineered enzymes that they have developed to convert cellulosic biomass, which is non-food plant material such as wood chips, corn stalks and sugarcane bagasse, into fermentable sugars and ultimately, renewable diesel and other fuels. Biodiesel companies convert vegetable oils and animal oils into diesel fuel and some are seeking to produce diesel and other transportation fuels using thermochemical methods to convert biomass into renewable fuels.

We believe the primary competitive factors in both the chemicals and fuels markets are product price, product performance, sustainability, availability of supply and compatibility of products with existing infrastructure.

The oil companies, large chemical companies and well-established agricultural products companies with whom we expect to compete are much larger than we are, have, in many cases, well-developed distribution systems and networks for their products, have valuable historical relationships with the potential customers we are seeking to serve and have much more extensive sales and marketing programs in place to promote their products. Some of our competitors may use their influence to impede the development and acceptance of our products. 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. In the nascent markets for renewable chemicals and fuels, it is difficult to predict which, if any, market entrants will be successful, and we may lose market share to competitors producing new or existing renewable products.

We expect to face competition for our nutrition and skin and personal care products from other companies in these fields, many of whom have greater resources and experience than we do. If we cannot compete effectively against these companies or their products, we may not be successful in selling our products or further growing our business.

We expect that our nutrition products will compete with providers in both the specialty and mass food ingredient markets. Many of these companies, such as Cargill, Incorporated, Monsanto Company and Syngenta AG, are larger than we are, have well-developed distribution systems and networks for their products and have valuable historical relationships with the potential customers and distributors we hope to serve. We may also compete with companies seeking to produce nutrition products based on renewable oils, including DSM Food Specialties and DuPont Nutrition & Health. We plan to develop nutrition products both within and independent of our joint venture with Roquette, but our success will depend on our ability to effectively compete with established companies and successfully commercialize our products.

 

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In the skin and personal care market, we expect to compete with established companies and brands with loyal customer followings. The market for skin and personal care products is characterized by strong established brands, loyal brand following and heavy brand marketing. We will compete with companies with well-known brands such as Kinerase ® , Perricone MD ® , and StriVectin ® . These companies have greater sales and marketing resources. We will also compete in the mass consumer market. Some of our competitors in this market have well-known brands such as Meaningful Beauty ® and Principal Secret ® and have substantially greater sales and marketing resources. We have limited experience in the skin and personal care market. We will need to continue to devote substantial resources to the marketing of our products and there can be no assurance that we will be successful.

A decline in the price of petroleum and petroleum-based products, plant oils or other commodities may reduce demand for our oils and may otherwise adversely affect our business.

We believe that some of the present and projected demand for renewable fuels results from relatively recent increases in the cost of petroleum and certain plant oils. We anticipate that most of our oils, and in particular those used to produce fuels, will be marketed as alternatives to corresponding products based on petroleum and plant oils. If the price of any of these oils falls, we may be unable to produce tailored oils that are cost-effective alternatives to their petroleum or plant oil-based counterparts. Declining oil prices, or the perception of a future decline in oil prices, may adversely affect the prices we can obtain from our potential customers or prevent potential customers from entering into agreements with us to buy our oils. During sustained periods of lower oil prices we may be unable to sell our oils, which could materially and adversely affect our operating results.

Petroleum prices have been extremely volatile, and this volatility is expected to persist. Lower petroleum prices over extended periods of time may change the perceptions in government and the private sector that cheaper, more readily available energy alternatives should be developed and produced. If petroleum prices were to decline from present levels and remain at lower levels for extended periods of time, the demand for renewable fuels could be reduced, and our business and revenue may be harmed.

Prices of plant oils have also experienced significant volatility. If prices for oils such as palm kernel were to materially decrease in the future, there may be less demand for oil alternatives, which could reduce demand for our products and harm our business. The prices of commodities that serve as food ingredients have also been volatile. To the extent that the prices of these commodities decline and remain at lower levels for extended periods of time, the demand for our nutrition products may be reduced, and our ability to successfully compete in this market may be harmed.

Our facilities in California are located near an earthquake fault, and an earthquake or other natural disaster or resource shortage could disrupt our operations.

Important documents and records, such as hard copies of our laboratory books and records for our products and some of our manufacturing operations, are located in our corporate headquarters in South San Francisco, California, near active earthquake zones. In the event of a natural disaster, such as an earthquake, drought or flood, or localized extended outages of critical utilities or transportation systems, we do not have a formal business continuity or disaster recovery plan, and could therefore experience a significant business interruption. In addition, California from time to time has experienced shortages of water, electric power and natural gas. Future shortages and conservation measures could disrupt our operations and could result in additional expense. Although we maintain business interruption insurance coverage, we do not maintain earthquake or flood coverage.

Risks Related to Our Intellectual Property

Our competitive position depends on our ability to effectively obtain and enforce patents related to our products, manufacturing components and manufacturing processes. If we or our licensors fail to adequately protect this intellectual property, our ability and/or our partners’ ability to commercialize products could suffer.

Our success depends in part on our ability to obtain and maintain patent protection sufficient to prevent others from utilizing our manufacturing components, manufacturing processes or marketing our products, as well as to successfully defend and enforce our patents against infringement by others. In order to protect our products, manufacturing components and manufacturing processes from unauthorized use by third parties, we must hold patent rights that cover our products, manufacturing components and manufacturing processes.

The patent position of biotechnology and bio-industrial companies can be highly uncertain because obtaining and determining the scope of patent rights involves complex legal and factual questions. The standards applied by the US Patent and Trademark Office and foreign patent offices in granting patents are not always applied uniformly or predictably. There is no uniform worldwide policy regarding patentable subject matter, the scope of claims allowable in biotechnology and bio-industrial patents, or the formal requirements to obtain such patents. Consequently, patents may not issue from our pending patent applications. Furthermore, in the process of seeking patent protection or even after a patent is granted, we could become subject to expensive and protracted proceedings, including patent interference, opposition and re-examination proceedings, which could invalidate or narrow the scope of our patent rights. As such, we do not know nor can we predict the scope and/or breadth of patent protection that we might obtain on our products and technology.

 

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Changes either in patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property rights. Depending on the decisions and actions taken by the US Congress, the federal courts, and the US Patent and Trademark Office, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future.

The America Invents Act, which was signed into law on September 16, 2011, brings a number of changes to the US patent system and affects the way patents are prosecuted, challenged and litigated. Among the changes that went into effect September 16, 2012, one of the most significant involves the implementation of a reformed post-grant review system. Other changes, which went into effect on March 16, 2013, include the transition from a “first-to-invent” to “first-to-file” system, which harmonizes the US with most of the world. Together, these changes may increase the costs of prosecution and enforcement of US patents. Lack of precedential interpretation of the new provisions of the America Invents Act in specific cases by the US Patent and Trademark Office and the courts increases the uncertainty surrounding the effect of these changes. While it is currently unclear what impact these changes will have on the operation of our business, they may favor companies able to dedicate more resources to patent filings and challenges.

Risks associated with enforcing our intellectual property rights in the United States.

If we were to initiate legal proceedings against a third party to enforce a patent claiming one of our technologies, the defendant could counterclaim that our patent is invalid and/or unenforceable or assert that the patent does not cover its manufacturing processes, manufacturing components or products. Proving patent infringement may be difficult, especially where it is possible to manufacture a product by multiple processes or a patented process is performed by multiple parties. Furthermore, in patent litigation in the United States, defendant counterclaims alleging both invalidity and unenforceability are commonplace. Although we believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith, the outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity of our patent rights, we cannot be certain, for example, that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would not be able to exclude others from practicing the inventions claimed therein. Such a loss of patent protection could have a material adverse effect on our business. Defendant counterclaims of antitrust or other anti-competitive conduct are also commonplace.

Even if our patent rights are found to be valid and enforceable, patent claims that survive litigation may not cover commercially viable products or prevent competitors from importing or marketing products similar to our own, or using manufacturing processes or manufacturing components similar to our own.

Although we believe we have obtained assignments of patent rights from all inventors, if an inventor did not adequately assign their patent rights to us, a third party could obtain a license to the patent from such inventor. This could preclude us from enforcing the patent against such third party.

We may not be able to enforce our intellectual property rights throughout the world.

The laws of some foreign countries where we intend to produce and use our proprietary strains in collaboration with sugar mills or other feedstock suppliers do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, including Brazil and developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology and/or bio-industrial technologies. This could make it difficult for us to stop the infringement of our patents or misappropriation of our intellectual property rights in these countries. Proceedings to enforce our patent rights in certain foreign jurisdictions are unpredictable and could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.

Third parties may misappropriate our proprietary strains, information, or trade secrets despite a contractual obligation not to do so.

Third parties (including joint venture, collaboration, development and feedstock partners, contract manufacturers, and other contractors and shipping agents) often have custody or control of our proprietary microbe strains. If our proprietary microbe strains were stolen, misappropriated or reverse engineered, they could be used by other parties who may be able to use our strains for their own commercial gain. It is difficult to prevent misappropriation and subsequent reverse engineering. In the event that our proprietary microbe strains are misappropriated, it could be difficult for us to challenge the misappropriation and prevent reverse engineering, especially in countries with limited legal and intellectual property protection.

 

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Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of proprietary information and trade secrets.

In addition to patents, we rely on confidentiality agreements to protect our technical know-how and other proprietary information. Confidentiality agreements are used, for example, when we talk to potential strategic partners. In addition, each of our employees signed a confidentiality agreement upon joining our company. Nevertheless, there can be no guarantee that an employee or an outside party will not make an unauthorized disclosure or use of our proprietary confidential information. This might happen intentionally or inadvertently. It is possible that a competitor will make use of such information, and that our competitive position will be compromised, in spite of any legal action we might take against persons making such unauthorized disclosures.

We also keep as trade secrets certain technical and proprietary information where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our trade secrets to competitors or otherwise use misappropriated trade secrets to compete with us. It can be expensive and time consuming to enforce a claim that a third party illegally obtained and is using our trade secrets. Furthermore, the outcome of such claims is unpredictable. In addition, courts outside the US may be less willing to or may not protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how without misappropriating or otherwise violating our trade secret rights. Where a third party independently develops equivalent knowledge, methods and know-how without misappropriating or otherwise violating our trade secret rights, they may be able to seek patent protection for such equivalent knowledge, methods and know-how. This could prohibit us from practicing our trade secrets.

Claims by patent holders that our products or manufacturing processes infringe their patent rights could result in costly litigation or could require substantial time and money to resolve, whether or not we are successful, and an unfavorable outcome in these proceedings could have a material adverse effect on our business.

Our ability to commercialize our technology depends on our ability to develop, manufacture, market and sell our products without infringing the proprietary rights of patent holders or their authorized agents. An issued patent does not guarantee us the right to practice or utilize the patented inventions or commercialize the patented product. Third parties may have blocking patents that may prevent us from commercializing our patented products and utilizing our patented manufacturing components and manufacturing processes. In the event that we are made aware of blocking third party patents, we cannot be sure that licenses to the blocking third-party patents would be available or obtainable on terms favorable to us or at all.

Numerous US and foreign issued patents and pending patent applications, which are owned by third parties, relate to (1) the production of bio-industrial products, including oils, chemicals and biofuels, and (2) the use of microalgae strains, such as microalgae strains containing genes to alter oil composition. As such, there could be existing valid patents that our manufacturing processes, manufacturing components, or products may inadvertently infringe. There could also be existing invalid or unenforceable patents that could nevertheless be asserted against us and would require expenditure of resources to defend. In addition, there are pending patent applications that are currently unpublished and therefore unknown to us that may later result in issued patents that are infringed by our products, manufacturing processes or other aspects of our business.

We may be exposed to future litigation based on claims that one of our products, manufacturing processes or manufacturing components infringes the intellectual property rights of others. There is inevitable uncertainty in any litigation, including patent litigation. Defending against claims of patent infringement is costly and time consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us with substantial unanticipated costs. Some of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the costs and uncertainty associated with patent litigation could have a material adverse effect on our ability to continue our internal research and development programs, in-license needed technology, or enter into strategic partnerships that would help us commercialize our technologies. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business.

If a party successfully asserts a patent or other intellectual property rights against us, we might be barred from using certain of our manufacturing processes or manufacturing components, or from developing and commercializing related products. Injunctions against using specified processes or components, or prohibitions against commercializing specified products, could be imposed by a court or by a settlement agreement between us and a third party. In addition, we may be required to pay substantial damage awards to the third party, including treble or enhanced damages if we are found to have willfully infringed the third party’s intellectual property rights. We may also be required to obtain a license from the third party in order to continue manufacturing and/or marketing the products that were found to infringe. It is possible that the necessary license will not be available to us on commercially acceptable terms, or at all. This could limit our ability to competitively commercialize some or all of our products.

 

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During the course of any patent litigation, there could be public announcements of the results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our products, technology or intellectual property could be diminished. Accordingly, the market price of our common stock may decline.

We have received government funding in connection with the development of certain of our proprietary technologies, which could negatively affect our intellectual property rights in such technologies.

Some of our proprietary technology was developed with US federal government funding. When new technologies are developed with US government funding, the government obtains certain rights in any resulting patents, including a nonexclusive license authorizing the government to use the invention for non-commercial purposes. These rights may permit the government to disclose our confidential information to third parties and to exercise “march-in” rights to use or allow third parties to use our patented technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the US government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to US industry. In addition, US government-funded inventions must be reported to the government and US government funding must be disclosed in any resulting patent applications. In addition, our rights in such inventions are subject to government license rights and foreign manufacturing restrictions. Any exercise by the government of such rights could harm our competitive position or impact our operating results.

In addition, some of our technology was funded by a grant from the state of California. Inventions funded by this grant may be subject to forfeiture if we do not seek to patent or practically apply them. Any such forfeiture could have a materially adverse effect on our business.

Risks Related to Our Finances and Capital Requirements

Our financial results could vary significantly from quarter to quarter and are difficult to predict.

Our revenues and results of operations could vary significantly from quarter to quarter because of a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful. Factors that could cause our quarterly results of operations to fluctuate include:

 

   

achievement, or failure to achieve, technology or product development milestones needed to allow us to enter target markets on a cost effective basis;

 

   

delays or greater than anticipated expenses associated with the completion of new production facilities, and the time to complete scale up of production following completion of a new manufacturing facility;

 

   

capital requirements of our joint ventures;

 

   

disruptions in the production process at any facility where we produce our products;

 

   

the timing, size and mix of sales to customers for our products;

 

   

increases in price or decreases in availability of feedstocks;

 

   

fluctuations in the price of and demand for products based on petroleum or other oils for which our oils are alternatives;

 

   

the unavailability of contract manufacturing capacity altogether or at anticipated cost;

 

   

fluctuations in foreign currency exchange rates;

 

   

seasonal production and sale of our products;

 

   

the effects of competitive pricing pressures, including decreases in average selling prices of our products;

 

   

unanticipated expenses associated with changes in governmental regulations and environmental, health and safety requirements;

 

   

reductions or changes to existing fuel and chemical regulations and policies;

 

   

departure of key employees;

 

   

business interruptions, such as earthquakes and other natural disasters;

 

   

our ability to integrate businesses that we may acquire;

 

   

risks associated with the international aspects of our business; and

 

   

changes in general economic, industry and market conditions, both domestically and in foreign markets in which we operate.

Due to these factors and others the results of any quarterly or annual period may not meet our expectations or the expectations of our investors and may not be meaningful indications of our future performance.

 

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We may require additional financing in the future and may not be able to obtain such financing on favorable terms, if at all, which could force us to delay, reduce or eliminate our research and development or commercialization activities.

To date, we have financed our operations primarily through our initial public offering, completed in June 2011, private placements of our equity securities, government grants and funding from strategic partners. In January 2013 we issued $125.0 million aggregate principal amount of convertible senior subordinated notes due 2018, which bear interest at a rate of 6.00% per year, payable in cash semi-annually commencing in August 2013. In March 2013, we entered into a loan and security agreement with HSBC Bank, USA, National Association (HSBC) that provides for a $30.0 million revolving facility for working capital and letters of credit. While we plan to enter into relationships with partners or collaborators for them to provide some portion or all of the capital needed to build production facilities, we may determine that it is more advantageous for us to provide some portion or all of the financing for new production facilities. Some of our previous funding has come from government grants; however, our future ability to obtain government grants is uncertain due to the competitive bid process and other factors.

We may have to raise additional funds through public or private debt or equity financings to meet our capital requirements, including our portion of joint venture funding requirements. For example, although the Solazyme Bunge JV recently entered a loan agreement with BNDES for project financing funding to support the joint venture’s production facility in Brazil, including a portion of the construction costs of the facility, if we are unable to finalize the guarantee documentation on acceptable terms, the Solazyme Bunge JV will be unable to draw down amounts under the loan and will have to seek additional financing. If the Solazyme Bunge JV is unable to secure additional financing, we will be required to fund our portion of the Solazyme Bunge JV’s capital requirements either from existing sources or seek additional financing. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and continue to incur losses, our ability to fund our operations, take advantage of strategic opportunities, develop and commercialize products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate research and development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to relinquish commercial rights, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.

Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay amounts due under our indebtedness, including our convertible notes.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including our convertible notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

Despite our current debt levels, we may still incur substantially more debt or take other actions that would intensify the risks discussed above.

Despite our current consolidated debt levels, we and our subsidiaries may be able to incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, some of which may be secured debt. We are not restricted under the terms of the indenture governing the convertible notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms governing the notes. Our existing credit facility with HSBC contains certain restrictions on our ability to incur additional indebtedness, but if the facility matures or is repaid, we may not be subject to such restrictions under the terms of any subsequent indebtedness.

We have received government grant funding and may pursue government funding in the future. Loss of our government grant funding could adversely impact our future plans.

We have been awarded an approximately $21.8 million “Integrated Bio-Refinery” grant from the US Department of Energy (DOE). The terms of this grant make the funds available to us to develop US-based production capabilities for renewable fuels derived from microalgae at the Peoria Facility. Government grant agreements generally have fixed terms and may be terminated, modified or recovered by the granting agency under certain conditions. We are in the process of obtaining reimbursement under the grant for funds spent by us in connection with the Integrated Bio-Refinery. If we were unable to obtain reimbursement under the grant, our financial results would be negatively impacted.

 

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Activities funded by a government grant are subject to audits by government agencies. As part of an audit, these agencies may review our performance, cost structures and compliance with applicable laws, regulations and standards. Grant funds must be applied by us toward the research and development programs specified by the granting agency, 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 are also subject to additional regulations based on our receipt of government grant funding and entry into government contracts. If we fail to comply with these requirements, we may face penalties and may not be awarded government funding or contracts in the future.

If we engage in any 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 may seek to acquire additional businesses, assets, technologies or products to enhance our business. In connection with any acquisitions, we could issue additional equity or equity-linked securities such as our convertible notes, which would dilute our 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 businesses, adverse effects on existing business relationships with current and/or prospective collaborators, customers and/or suppliers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees. Acquisitions may also require us to record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur write offs and restructuring and other related expenses, any of which could harm our operating results and financial condition. If we fail in our integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business and financial condition may be adversely affected.

Raising additional funds may cause dilution to our stockholders or require us to relinquish valuable rights.

If we elect to raise additional funds through equity offerings or offerings of equity-linked securities, our stockholders would likely experience dilution. Debt financing, if available, may subject us to restrictive covenants that could limit our flexibility in conducting future business activities. For example, the loan and security agreement we entered into with HSBC in March 2013 contains financial covenants that, if breached, would require us to secure our obligations thereunder. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary for us to share a portion of the margin from the sale of our products. We may also be required to relinquish or license on unfavorable terms our rights to technologies or products that we otherwise would seek to develop or commercialize ourselves.

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 requires us and our independent registered public accounting firm to evaluate and report on our internal control over financial reporting, and have our chief executive officer and chief 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 from 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.

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 material weaknesses or significant deficiencies in our internal controls will not be discovered in the future. 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. 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.

 

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Risks Relating to Securities Markets and Investment in Our Stock

The price of our common stock may be volatile.

The volatility of our common stock may affect the price of our common stock, and the sale of substantial amounts of our common stock could adversely affect the price of our common stock. Stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, the average daily trading volume of the securities of small companies, particularly small technology companies, can be very low. Limited trading volume of our stock may contribute to its future volatility. Price declines in our common stock could result from general market and economic conditions and a variety of other factors, including any of the risk factors described in this Quarterly Report on Form 10-Q.

These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. The market price of our common stock could also be affected by possible sales of the common stock by investors who view our convertible notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we expect to develop involving the common stock.

If our executive officers, directors and largest stockholders choose to act together, they may be able to control our management and operations, acting in their own best interests and not necessarily those of other stockholders.

As of March 15, 2013 our executive officers, directors and beneficial holders of 5% or more of our outstanding stock beneficially owned approximately 40.7% of our common stock, including shares subject to repurchase. As a result, these stockholders, acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders.

Our certificate of incorporation, our bylaws and Delaware law contain provisions that could discourage another company from acquiring us and may prevent attempts by our stockholders to replace or remove our current management.

Provisions of Delaware law (where we are incorporated), our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace or remove our board of directors. These provisions include:

 

   

authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;

 

   

requiring supermajority stockholder voting to effect certain amendments to our certificate of incorporation and bylaws;

 

   

eliminating the ability of stockholders to call special meetings of stockholders;

 

   

prohibiting stockholder action by written consent;

 

   

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings; and

 

   

dividing our board of directors into three classes so that only one third of our directors will be up for election in any given year.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which, under certain circumstances, may make it more difficult for a person who would be an “interested stockholder,” as defined in Section 203, to effect various business combinations with us for a three-year period. Our certificate of incorporation and bylaws do not exclude us from the restrictions imposed under Section 203. These provisions could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market price of our common stock.

 

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Being a public company increases our expenses and administrative burden.

As a public company, we incur significant legal, accounting and other expenses. For example, as a public company, we have adopted internal and disclosure controls and procedures and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under applicable securities laws.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations implemented by the SEC and the NASDAQ Global Select Market, create uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. We are currently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and attract and retain qualified executive officers. If these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

If securities or industry analysts do not continue to publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If securities or industry analysts do not continue coverage of our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.

We do not anticipate paying cash dividends in the foreseeable future. As a result, only appreciation of the price of our common stock, which may never occur, would provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

Item 5. Other Information.

None.

 

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Item 6. Exhibits.

 

Exhibit

Number

  

Description

   Incorporated by Reference     

 

 
      Form      File No.      Filing Date      Exhibit      Filed
Herewith
 
  4.1    Indenture dated as of January 24, 2013 between Wells Fargo Bank, National Association, as Trustee, and Solazyme, Inc.      8-K         001-35189         January 24, 2013         4.1      
10.1    Warrant for the Purchase of Shares of Common Stock of Solazyme, Inc., dated as of January 18, 2013, between Archer-Daniels-Midland Company and Solazyme, Inc.                  X   
10.2    Form of Warrant for the Purchase of Shares of Common Stock of Solazyme, Inc. between Archer-Daniels-Midland Company and Solazyme, Inc.                  X   
10.3    Loan and Security Agreement dated as of March 26, 2013 between HSBC National Bank, USA, National Association and Solazyme, Inc.                  X   
31.1    Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002                  X   
31.2    Certification of the Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002                  X   
32.1§    Certification of the Chief Executive Officer and Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002                  X   
101†    The following materials from Solazyme, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Comprehensive Loss and (v) Notes to the Condensed Consolidated Financial Statements                  X   

 

§ This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act of 1934, as amended.
Pursuant to Rule 406T of Regulation S-T, the interactive files on Exhibit 101 hereto are deemed not “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Solazyme, Inc.

 

By:  

/s/    T YLER W. P AINTER

  Tyler W. Painter
  Chief Financial Officer
  (Principal Financial and Accounting Officer)
Date: May 8, 2013

 

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Exhibit 10.1

SOLAZYME, INC.

WARRANT FOR THE PURCHASE OF SHARES OF

COMMON STOCK OF SOLAZYME, INC.

 

No. CS-2   

Warrant to Purchase

500,000 Shares

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE THEREWITH.

FOR VALUE RECEIVED, SOLAZYME, INC. , a Delaware corporation (the “ Company ”), hereby certifies that Archer-Daniels-Midland Company, its successor or permitted assigns (the “ Holder ”), is entitled, subject to the provisions of this Warrant, to purchase from the Company, at the times specified herein, 500,000 fully paid and non-assessable shares of Common Stock of the Company, par value $0.001 per share (the “ Common Stock ”), at a purchase price per share equal to the Exercise Price (as hereinafter defined). The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for a share of Common Stock are subject to adjustment from time to time as hereinafter set forth.

1. Definitions. (a) The following terms, as used herein, have the following meanings:

Affiliate ” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For the purpose of this definition, the term “ control ” (including, with correlative meanings, the terms “ controlling ”, “ controlled by ” and “ under common control with ”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

Board of Directors ” means the board of directors of the Company.

Business Day ” means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized by law to close.

Current Market Price Per Common Share ” means, on any determination date, the average of the Daily Prices per share of Common Stock for the 20 consecutive trading days immediately prior to such date. If, on any determination date, the shares of Common Stock are not traded on a national securities exchange or quoted by any regulated quotation service, the Current


Market Price Per Common Share shall be the fair market value per share as determined in good faith by the Board of Directors.

Daily Price ” means, on any determination date, (i) if the shares of Common Stock are then listed and traded on a national securities exchange, the closing price on such date as reported by the principal national securities exchange on which such shares are listed and traded and (ii) if such shares are not then listed and traded on a national securities exchange, the closing price on such date as quoted by any regulated quotation service.

Exercise Price ” means $7.17 per Warrant Share, as the same may be adjusted from time to time as provided in this Warrant.

Expiration Time ” means 5:00 p.m. New York City time on the sixth (6 th ) anniversary of the date of this Warrant or, if such day is not a Business Day, then until 5:00 p.m. New York City time on the next succeeding day that is a Business Day.

Strategic Collaboration Agreement ” means the strategic collaboration agreement by and between the original Holder and the Company effective November 13, 2012, in which such parties have agreed to build-out and operate a triglyceride oil production facility sited at the original Holder’s Clinton, IA corn wet mill (the “ Triglyceride Oil Facility ”).

Manufacturing Commencement Date ” means the date of completion of the first commercial fermentation run that produces a dried biomass intermediate after construction and commissioning of the Triglyceride Oil Facility.

Person ” means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

Principal Holder ” means the original Holder of this Warrant on the date of issue, or if such original Holder so elects, any permitted transferee of all or any portion of this Warrant whom such original Holder shall have designated by written notice to the Company as the successor Principal Holder. Any successor Principal Holder designated pursuant to the immediately preceding sentence shall also have the right upon any subsequent permitted transfer to designate a successor Principal Holder in the manner and circumstances described in the preceding sentence.

Warrant Shares ” means the shares of Common Stock issuable upon exercise of this Warrant, as the same may be adjusted from time to time as provided in this Warrant.


(b) Capitalized terms used but not defined in this Warrant shall have the meanings assigned to such terms in the Strategic Collaboration Agreement.

2. Vesting of the Warrant. This Warrant shall vest and become exercisable in 60 equal monthly installments (in arrears) from the Manufacturing Commencement Date (the Warrant Shares, to the extent such shares have vested, the “ Vested Shares ”); provided, however , that such vesting shall stop as of the date of termination of the Strategic Collaboration Agreement.

3. Exercise of the Warrant.

(a) The Holder, or designated agent of the Holder, is entitled to exercise this Warrant in whole or in part at any time, or from time to time, as to Vested Shares until the Expiration Time. To exercise this Warrant, the Holder, or its agent, shall deliver to the Company (i) an executed Warrant Exercise Notice substantially in the form annexed to this Warrant, and (ii) this Warrant. Payment of the aggregate Exercise Price shall be made in accordance with paragraph 3(e). Upon such delivery, the Holder shall be deemed to be the holder of record of the Warrant Shares deliverable in connection with such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that electronic evidence of such Warrant Shares shall not have been actually delivered to the Holder or its agent.

(b) The Company shall pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of the Warrant Shares; provided, however, that the Company shall not be required to pay any taxes that may be payable in respect of any transfer involved in the issuance and delivery of the Warrant Shares in a name other than that of the Holder.

(c) If the Holder exercises this Warrant in part, this Warrant shall be surrendered by the Holder to the Company and a new Warrant of the same tenor and subject to the same terms and conditions set forth herein for the unexercised number of Warrant Shares shall be executed by the Company. The Company shall register the new Warrant in the name of the Holder or in such name or names of its transferee pursuant to paragraph 7 as may be directed in writing by the Holder and deliver the new Warrant to the Person or Persons entitled to receive the same.

(d) Upon surrender of this Warrant in conformity with the foregoing provisions, the Company shall transfer to the Holder of this Warrant appropriate evidence of ownership of the shares of Common Stock or other securities or property (including any money) to which the Holder is entitled, registered or otherwise placed in, or payable to the order of, the name or names of the Holder or its transferee pursuant to paragraph 7 as


may be directed in writing by the Holder, and shall deliver such evidence of ownership and any other securities or property (including any money) to the Person or Persons entitled to receive the same, together with an amount in cash in lieu of any fraction of a share as provided in paragraph 6.

(e) The Exercise Price with respect to any exercise hereunder will be paid by converting (and the Company withholding) a sufficient number of Warrant Shares to satisfy the applicable aggregate Exercise Price for the exercise. In such event the Company will issue to the Holder (i) a new Warrant pursuant to paragraph 3(c) for the number of unexercised Warrant Shares that remain following such exercise and (ii) the number of shares of Common Stock equal to the amount resulting from the following equation:

X = (A - B) x C where:

                      A

 

X    =    the number of shares of Common Stock issuable upon exercise pursuant to this paragraph 3(e);
A    =    the Current Market Price Per Common Share on the date on which the Holder delivers a Warrant Exercise Notice to the Company pursuant to paragraph 3(a);
B    =    the Exercise Price with respect to the Warrant Shares subject to such exercise; and
C    =    the number of shares of Common Stock as to which this Warrant is being exercised pursuant to paragraph 3(a).

If the foregoing calculation results in zero or a negative number, then no shares of Common Stock shall be issued upon exercise pursuant to this paragraph 3(e).

4. Excess Return . If, as of each anniversary date of the Manufacturing Commencement Date, the value of Warrant Shares vesting in the preceding year (calculated as the product of (a) the Daily Price of the Common Stock on the applicable anniversary date minus the Exercise Price and (b) 100,000) exceeds $2 million, the Company shall receive a credit of fifty percent (50%) of the excess of such value above $2 million against future payments of the fees set forth in the Strategic Collaboration Agreement, or in the case of the fifth anniversary of the Manufacturing Commencement Date, against the fee payable for the fifth (5 th ) year of the Strategic Collaboration Agreement. Notwithstanding the foregoing, the credit to the Company as set forth in the above calculations will be provided only upon Holder’s exercise of this Warrant and sale of the resulting Common Stock. If the sale occurs after the time during which the Company is paying fees under the Strategic Collaboration Agreement, such amounts shall be paid to the


Company in cash as soon as reasonably possible after the Holder sells the Common Stock received from the exercise of this Warrant.

5. Reservation of Shares; No Impairment .

(a) The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant such number of its authorized but unissued shares of Common Stock or other securities of the Company from time to time issuable upon exercise of this Warrant as will be sufficient to permit the exercise in full of this Warrant. All such shares shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid and non-assessable, free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale and free and clear of all preemptive rights, in each case, except restrictions on transfer to the extent created by the Holder.

(b) The Company will not, by amendment of its Certificate of Incorporation or Bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against the avoidance of observance or performance of any of the terms of this Warrant, including, without limitation making the terms of this Warrant applicable to the shares of any successor corporation. Subject to the foregoing nothing herein shall be deemed to prevent the Company from taking any such action.

6. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant, and in lieu of delivery of any such fractional share to which the Holder may be entitled upon any exercise of this Warrant, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the Current Market Price Per Common Share on the Business Day immediately preceding the date on which the Holder delivers the Warrant Exercise Notice pursuant to paragraph 3(a).

7. Exchange, Transfer or Assignment of Warrant .

(a) Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that the registered holder hereof may be treated by the Company and all other Persons dealing with this Warrant as the absolute owner hereof for any purpose and as the Person entitled to exercise the rights represented hereby.

(b) Except as expressly provided herein, neither this Warrant nor any interest hereunder shall be assignable, nor any other obligation


delegable, by Holder without the prior written consent of the Company; provided, however, that Holder may assign or otherwise transfer this Warrant (a) to any Affiliate or (b) to any successor in interest by way of merger, sale of equity, or sale of all or substantially all of its assets provided that such successor agrees in writing to be bound by the terms of this Warrant as if it were the original Holder.

8. Loss or Destruction of Warrant . Upon receipt by the Company of evidence satisfactory to it (in the exercise of its reasonable discretion) of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date and containing the same terms and conditions set forth herein.

9. Stock Dividends and Acquisitions .

(a) Common Stock Dividends, Subdivisions or Combinations . If the Company shall at any time after the date hereof (A) declare and pay a dividend or make a distribution on Common Stock payable in Common Stock, (B) subdivide or split the outstanding shares of Common Stock into a greater number of shares, (C) combine or reclassify the outstanding shares of Common Stock into a smaller number of shares or (D) conduct any exchange, substitution or other similar event affecting the number of outstanding shares of Common Stock, then in each such case:

(i) the number of Warrant Shares issuable upon exercise of this Warrant (and the vesting of Warrant Shares) thereafter shall be proportionately adjusted so that the exercise of this Warrant after such event shall entitle the Holder to receive the aggregate number of shares of Common Stock that such Holder would have been entitled to receive had such Holder exercised this Warrant immediately prior to such event; and

(ii) the Exercise Price thereafter shall be adjusted to equal the product of the Exercise Price in effect immediately prior to such event multiplied by a fraction (A) the numerator of which shall be the number of Warrant Shares issuable upon the exercise of this Warrant immediately prior to such event and (B) the denominator of which shall be the number of Warrant Shares issuable upon the exercise of this Warrant immediately following such event.

Any adjustment made pursuant to this paragraph 9(a) shall become effective immediately after the applicable record date in the case of a dividend or distribution and immediately after the applicable effective date in the case of a subdivision, split, combination or reclassification.


(b) Consolidation, Merger or Sale of Assets. In the event of any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock) or any sale or transfer of all or substantially all of the assets of the Company to the Person formed by such consolidation or resulting from such merger or to the Person that acquires such assets pursuant to any such sale or transfer of all or substantially all of the assets of the Company, as the case may be, the Holder shall have the right thereafter to exercise this Warrant for the kind and amount of securities, cash and/or other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock for which this Warrant may have been exercised immediately prior to such consolidation, merger, sale or transfer. In determining the kind and amount of securities, cash and/or other property receivable upon such consolidation, merger, sale or transfer, if the holders of Common Stock have the right to elect as to the consideration to be received upon the consummation of such consolidation, merger, sale or transfer, then the consideration that the Holder shall be entitled to receive upon exercise shall be deemed to be the kind and amount of consideration received by the majority of all holders of Common Stock that affirmatively make an election (or of all such holders if none make an election). Adjustments for events subsequent to the effective date of such a consolidation, merger, sale or transfer of assets shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. In any such event, effective provisions shall be made in the certificate or articles of incorporation of the resulting or surviving corporation, in any contract of sale, merger, conveyance, lease, transfer or otherwise so that the provisions set forth herein for the protection of the rights of the Holder shall thereafter continue to be applicable; and any such resulting or surviving corporation shall expressly assume the obligation to deliver, upon exercise, such shares of stock, other securities, cash and property.

(c) Certain Determinations. For purposes of any computation of any adjustment required under this paragraph 9:

(i) adjustments shall be made successively whenever any event giving rise to such an adjustment shall occur;

(ii) if any portion of any consideration to be received by the Company in a transaction giving rise to such an adjustment shall be in a form other than cash, the fair market value of such non-cash consideration shall be utilized in such computation. Such fair market value shall be determined by the Board of Directors in good faith; provided that if the Principal Holder shall object to any such determination, the Board of Directors shall


retain an independent appraiser reasonably satisfactory to the Principal Holder to determine such fair market value. The expense of such independent appraiser shall be shared equally by the Company and the Principal Holder. The Holder shall be notified promptly of any consideration other than cash to be received by the Company and furnished with a description of the consideration and the fair market value thereof, as determined in accordance with the foregoing provisions;

(iii) such calculations shall be made to the nearest one-tenth of a cent or to the nearest hundredth of a share, as the case may be; and

(iv) no adjustment in the Exercise Price or the number of Warrant Shares issuable upon exercise of this Warrant, as the case may be, shall be required if the amount of such adjustment would be less than one-tenth of a cent or hundredth of a share, as the case may be.

(d) Certificates as to Adjustments. Upon the occurrence of each adjustment to the Exercise Price and/or the number of Warrant Shares issuable upon exercise of this Warrant, the Company shall promptly compute such adjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment and showing in reasonable detail the facts upon which such adjustment is based.

(e) Notices . In the event that the Company shall propose at any time to effect any of the events described in paragraphs (a) through (d) above that would result in an adjustment to the Exercise Price, the number of Warrant Shares issuable upon exercise of this Warrant or a change in the type of securities or property to be delivered upon exercise of this Warrant, the Company shall send notice to the Holder in the manner set forth in paragraph 12. In the case of a dividend or other distribution, such notice shall be sent at least 10 days prior to the applicable record date and shall specify such record date and the date on which such dividend or other distribution is to be made. In any other case, such notice shall be sent at least 15 days prior to the effective date of any such event and shall specify such effective date. In all cases, such notice shall specify such event in reasonable detail, including the effect on the Exercise Price and the number, kind or class of securities or other property issuable upon exercise of this Warrant. Failure to furnish any certificate pursuant to paragraph 9(d) or to give any notice pursuant to this paragraph 9(e), or any defect in any such certificate or notice, shall not affect the legality or the validity of the adjustment of the Exercise Price and/or the number of securities, cash and/or other property issuable upon exercise of this Warrant, or any transaction giving rise thereto.


10. Investment Representations .

(a) Holder represents and warrants that it is acquiring this Warrant and/or the Warrant Shares for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the “ Securities Act ”).

(b) Holder represents and warrants that it is an “accredited investor” as such term is defined in Rule 501 of the General Rules and Regulations prescribed by the U.S. Securities and Exchange Commission (the “ SEC ”) pursuant to the Securities Act, and Holder was not formed for the specific purpose of acquiring this Warrant or the Warrant Shares.

11. Company’s Representations and Warranties .

(a) The execution and delivery by the Company of this Warrant and the performance of all obligations of the Company hereunder, including the issuance to the Holder of the right to acquire the Warrant Shares hereunder, have been duly authorized by all necessary corporate action on the part of the Company, and this Warrant constitutes a legal, valid and binding agreement of the Company, enforceable in accordance with its remaining terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally, and subject to general principles of equity. The execution and delivery of this Warrant by the Company does not violate or conflict with the Company’s Articles of Incorporation or Bylaws.

(b) No consent or approval of, giving notice to, registration with, or taking of any other action in respect of any state, federal or other governmental authority or agency is required in connection with the execution, delivery and performance by the Company of its obligations under this Warrant.

(c) Based in part upon the accuracy of the Holder’s representations and warranties in paragraph 10, the issuance of this Warrant constitutes a transaction exempt from (i) the registration requirements of Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of applicable state securities laws.

12. Notices . Any notice, demand or delivery authorized by this Warrant Certificate shall be in writing and shall be given to the Holder or the Company, as the case may be, at its address (or facsimile number) set forth below, or such other address (or facsimile number) as shall have been furnished to the party giving or making such notice, demand or delivery:


If to the Company:

Solazyme, Inc.

225 Gateway Boulevard

South San Francisco, CA 94080

Facsimile:  650-989-1258

Attention: General Counsel

If to the Holder:

Archer-Daniels-Midland Company

4666 Faries Parkway

Decatur, IL 62526

Facsimile:  217-424-4989

Attention: President – Corn Processing

with a copy to:

Archer-Daniels-Midland Company

4666 Faries Parkway

Decatur, IL 62526

Facsimile:  217-424-6196

Attention: General Counsel

Each such notice, demand or delivery shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a Business Day. Otherwise, any such notice, demand or delivery shall be deemed not to have been received until the next succeeding Business Day.

13. Rights of the Holder . Prior to any exercise of this Warrant, the Holder shall not, by virtue hereof, be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote, to receive dividends or other distributions, to exercise any preemptive right or to receive any notice of meetings of stockholders or any notice of any proceedings of the Company except as may be specifically provided for herein.

14. GOVERNING LAW . THIS WARRANT CERTIFICATE AND ALL RIGHTS ARISING HEREUNDER SHALL BE CONSTRUED AND DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, AND THE PERFORMANCE THEREOF SHALL BE GOVERNED AND ENFORCED IN ACCORDANCE WITH SUCH LAWS.

15. Amendments; Waivers . Any provision of this Warrant may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Holder and the Company, or in the


case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

IN WITNESS WHEREOF, the Company has duly caused this Warrant Certificate to be signed by its duly authorized officer and to be dated as of January 18, 2013.

 

SOLAZYME, INC.
By:  

    /s/ Tyler Painter

  Name:   Tyler Painter
  Title:   CFO

Acknowledged and Agreed:

 

ARCHER-DANIELS-MIDLAND COMPANY
By:  

    /s/ Ray Young

  Name:   Ray Young
  Title:   CFO


WARRANT EXERCISE NOTICE

 

To: Solazyme, Inc.

The undersigned irrevocably exercises Warrant CS-2 as to             vested and exercisable shares (the “ Warrant Shares ”) of Common Stock, par value $0.001 per share, of Solazyme, Inc. (the “ Company ”) at $7.17 per share (the Exercise Price currently in effect pursuant to the Warrant) and herewith makes payment of the aggregate Exercise Price of $            (such payment being made as specified in Section 3(e) of the Warrant), all on the terms and conditions specified in the Warrant, surrenders the Warrant and directs that the Warrant Shares deliverable upon the exercise of this Warrant (and the reissued Warrant if the surrendered Warrant has not been fully exercised) be delivered as provided in the attached delivery instructions.

Date:                     

 

 

(Signature of Owner)

 

(Street Address)

 

(City)        (State)        (Zip Code)

Exhibit 10.2

SOLAZYME, INC.

WARRANT FOR THE PURCHASE OF SHARES OF

COMMON STOCK OF SOLAZYME, INC.

 

No. CS-[number]    $[warrant amount]

THIS WARRANT AND ANY SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN COMPLIANCE THEREWITH.

FOR VALUE RECEIVED, SOLAZYME, INC. , a Delaware corporation (the “ Company ”), hereby certifies that Archer-Daniels-Midland Company, its successor or permitted assigns (the “ Holder ”), is entitled, subject to the provisions of this Warrant, to receive, upon exercise of this Warrant, a Settlement Amount (as hereinafter defined), at the time specified herein, in respect of $ [warrant amount] , which is payable, at the Company’s election, in cash, in fully paid and non-assessable shares of Common Stock of the Company, par value $0.001 per share (the “ Common Stock ”), or a combination thereof, upon payment by the Holder of the Exercise Price (as hereinafter defined) as provided herein.

1. Definitions. The following terms, as used herein, have the following meanings:

Affiliate ” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. For the purpose of this definition, the term “ control ” (including, with correlative meanings, the terms “ controlling ”, “ controlled by ” and “ under common control with ”), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

Business Day ” means any day except a Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law or executive order to close.

Cash Settlement ” means the payment of all or a portion of the Warrant Amount in cash, at the Company’s election pursuant to the terms of this Warrant (not including cash in lieu of fractional Warrant Shares as set forth in paragraph 5).


Cash Settlement Amount ” means any portion of the Warrant Amount in respect of which the Company elects to pay in cash pursuant to paragraph 2, subject to Section 3(f).

Exercise Price ” means $0.001 per Warrant Share.

Manufacturing Commencement Date ” means the date of completion of the first commercial fermentation run that produces a dried biomass intermediate after construction and commissioning of the Triglyceride Oil Facility.

Person ” means an individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

Physical Settlement ” means the delivery of shares of Common Stock in respect of all or a portion of the Warrant Amount pursuant to the terms of this Warrant, including cash in lieu of fractional Warrant Shares as set forth in paragraph 5.

Physical Settlement Amount ” means the quotient of X/Y where X = the Warrant Amount with respect to which the Company elects to deliver shares of Common Stock in respect of its exercise obligation as set forth in paragraph 2 and Y = the Warrant Share Price; plus cash in lieu of any fractional Warrant Share as set forth in paragraph 5, subject to paragraph 3(e).

Settlement Amount ” means the sum of any Cash Settlement Amount and any Physical Settlement Amount.

Strategic Collaboration Agreement ” means the strategic collaboration agreement by and between the original Holder and the Company effective November 13, 2012, in which such parties have agreed to build-out and operate a triglyceride oil production facility sited at the original Holder’s Clinton, IA corn wet mill (the “ Triglyceride Oil Facility ”).

Warrant Amount ” means $ [warrant amount] .

Warrant Shares ” means the shares of Common Stock issuable upon exercise of this Warrant, if any, as the same may be adjusted from time to time as provided in this Warrant.

Warrant Share Price ” means the volume weighted average price of shares of Common Stock, as reported by Bloomberg over the three (3) trading days immediately preceding (and including) the Exercise Date.

2. Vesting of the Warrant/Cash Settlement Election. This Warrant shall vest and become exercisable on the [number] anniversary of the Manufacturing Commencement Date (such date the “ Exercise Date ”). The


Company shall provide notice to the Holder of any Cash Settlement it elects to make no later than (3) Business Days prior to the Exercise Date; provided, however, that unless the Cash Settlement Amount equals the Warrant Amount, the Company may not elect a Cash Settlement Amount that would result in Physical Settlement in respect of less than $2,000,000 of the Warrant Amount.

3. Exercise of the Warrant/Settlement Amount.

(a) This Warrant will automatically exercise on the Exercise Date. This Warrant shall be exercised and settled, at the Company’s election by Cash Settlement, Physical Settlement or a combination thereof. Payment of the aggregate Exercise Price shall be made in accordance with paragraph 3(e) or 3(f), as applicable. Upon the Exercise Date, the Holder shall be deemed to be the holder of record of any Warrant Shares deliverable in connection with such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that electronic evidence of such Warrant Shares shall not have been actually delivered to the Holder or its agent.

(b) The Company shall pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of any Warrant Shares; provided, however, that the Company shall not be required to pay any taxes that may be payable in respect of any transfer involved in the issuance and delivery of any Warrant Shares in a name other than that of the Holder.

(d) On the Business Day next succeeding the Exercise Date, the Company shall deliver the Physical Settlement Amount as set forth in Exhibit A – Settlement Instructions. The Company shall deliver the Cash Settlement Amount in equal monthly installments over the course of the year immediately following the Exercise Date as set forth in Exhibit A – Settlement Instructions.

(e) The Exercise Price with respect to exercise hereunder will be paid, in the case of any Physical Settlement, by converting (and the Company withholding) a sufficient number of Warrant Shares to satisfy the applicable aggregate Exercise Price for the exercise. In such event the Company will issue to the Holder the number of shares of Common Stock equal to the quotient resulting from the following equation:

X = (A - B) x C/A where:

                      A

 

X    =    the number of shares of Common Stock issuable upon exercise pursuant to this paragraph 3(e);
A    =    the Warrant Share Price;


B    =    the Exercise Price; and
C    =    the Physical Settlement Amount.

If the foregoing calculation results in zero or a negative number, then no shares of Common Stock shall be issued upon exercise pursuant to this paragraph 3(e).

(f) In the case of any Cash Settlement, the Exercise Price shall be paid by the Company withholding an amount of cash equal to the Exercise Price that would be payable if the Company had elected Physical Settlement with respect to the Cash Settlement Amount. In such event the Company will withhold an amount in cash equal to:

 

X = B x C/A where:
X    =    the amount of cash to be withheld;
A    =    the Warrant Share Price;
B    =    the Exercise Price; and
C    =    the Cash Settlement Amount.

If the foregoing calculation results in zero or a negative number, then no cash shall be withheld upon exercise pursuant to this paragraph 3(f).

4. Reservation of Shares; No Impairment .

(a) The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon exercise of this Warrant such number of its authorized but unissued shares of Common Stock or other securities of the Company from time to time issuable upon exercise of this Warrant as will be sufficient to permit the exercise in full of this Warrant by means of Physical Settlement. All such shares shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid and non-assessable, free and clear of all liens, security interests, charges and other encumbrances or restrictions on sale and free and clear of all preemptive rights, in each case, except restrictions on transfer to the extent created by the Holder.

(b) The Company will not, by amendment of its Certificate of Incorporation or Bylaws, or through reorganization, consolidation, merger, dissolution, issue or sale of securities, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may


be necessary or appropriate in order to protect the rights of the Holder against the avoidance of observance or performance of any of the terms of this Warrant, including, without limitation making the terms of this Warrant applicable to the shares of any successor corporation. Subject to the foregoing nothing herein shall be deemed to prevent the Company from taking any such action.

5. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant, and in lieu of delivery of any such fractional Warrant Share to which the Holder may be entitled upon any exercise of this Warrant, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the Warrant Share Price.

6. Exchange, Transfer or Assignment of Warrant .

(a) Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that the registered holder hereof may be treated by the Company and all other Persons dealing with this Warrant as the absolute owner hereof for any purpose and as the Person entitled to exercise the rights represented hereby.

(b) Except as expressly provided herein, neither this Warrant nor any interest hereunder shall be assignable, nor any other obligation delegable, by Holder without the prior written consent of the Company; provided, however, that Holder may assign or otherwise transfer this Warrant (a) to any Affiliate or (b) to any successor in interest by way of merger, sale of equity, or sale of all or substantially all of its assets provided that such successor agrees in writing to be bound by the terms of this Warrant as if it were the original Holder.

7. Loss or Destruction of Warrant . Upon receipt by the Company of evidence satisfactory to it (in the exercise of its reasonable discretion) of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date and containing the same terms and conditions set forth herein.

8. Acquisitions .

(a) Consolidation, Merger or Sale of Assets. In the event of any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company (other than a merger that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock) or any sale or transfer of all or substantially all of the assets of the Company to the Person formed by such consolidation or resulting from such merger or to the Person that


acquires such assets pursuant to any such sale or transfer of all or substantially all of the assets of the Company, as the case may be, this Warrant shall thereafter be exercisable for the equivalent securities of the successor Person and/or cash as herein provided. In any such event, effective provisions shall be made in the certificate or articles of incorporation of the successor Person, in any contract of sale, merger, conveyance, lease, transfer or otherwise so that the provisions set forth herein for the protection of the rights of the Holder shall thereafter continue to be applicable; and any such successor Person shall expressly assume the obligation to deliver, upon exercise, such equivalent securities and/or cash.

(b) Notices . In the event that the Company shall propose at any time to effect any of the events described in paragraph (a) that would result in a change in the type of securities or property to be delivered upon exercise of this Warrant, the Company shall send notice to the Holder in the manner set forth in paragraph 11. Such notice shall be sent at least 15 days prior to the effective date of any such event and shall specify such effective date. In all cases, such notice shall specify such event in reasonable detail, including the effect on the kind or class of securities issuable upon exercise of this Warrant. Failure to furnish any notice pursuant to this paragraph 8(b), or any defect in any such notice, shall not affect the legality or the validity of the adjustment of the property issuable upon exercise of this Warrant, or any transaction giving rise thereto.

9. Investment Representations .

(a) Holder represents and warrants that it is acquiring this Warrant and/or the Warrant Shares for its own account, not as nominee or agent, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the “ Securities Act ”).

(b) Holder represents and warrants that it is an “accredited investor” as such term is defined in Rule 501 of the General Rules and Regulations prescribed by the U.S. Securities and Exchange Commission (the “ SEC ”) pursuant to the Securities Act, and Holder was not formed for the specific purpose of acquiring this Warrant or the Warrant Shares.

10. Company’s Representations and Warranties .

(a) The execution and delivery by the Company of this Warrant and the performance of all obligations of the Company hereunder, including the issuance to the Holder of the right to acquire the Warrant Shares hereunder, have been duly authorized by all necessary corporate action on the part of the Company, and this Warrant constitutes a legal, valid and binding agreement of the Company, enforceable in accordance with its remaining terms, except as such enforceability may be limited by


bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally, and subject to general principles of equity. The execution and delivery of this Warrant by the Company does not violate or conflict with the Company’s Articles of Incorporation or Bylaws.

(b) No consent or approval of, giving notice to, registration with, or taking of any other action in respect of any state, federal or other governmental authority or agency is required in connection with the execution, delivery and performance by the Company of its obligations under this Warrant.

(c) Based in part upon the accuracy of the Holder’s representations and warranties in paragraph 9, the issuance of this Warrant constitutes a transaction exempt from (i) the registration requirements of Section 5 of the Securities Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of applicable state securities laws.

11. Notices . Any notice, demand or delivery authorized by this Warrant Certificate shall be in writing and shall be given to the Holder or the Company, as the case may be, at its address (or facsimile number) set forth below, or such other address (or facsimile number) as shall have been furnished to the party giving or making such notice, demand or delivery:

If to the Company:

Solazyme, Inc.

225 Gateway Boulevard

South San Francisco, CA 94080

Facsimile:

Attention: General Counsel

If to the Holder:

Archer-Daniels-Midland Company

4666 Faries Parkway

Decatur, IL 62526

Facsimile:

Attention: President – Corn Processing

with a copy to:

Archer-Daniels-Midland Company

4666 Faries Parkway

Decatur, IL 62526

Facsimile:

Attention: General Counsel


Each such notice, demand or delivery shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a Business Day. Otherwise, any such notice, demand or delivery shall be deemed not to have been received until the next succeeding Business Day.

12. Rights of the Holder . Prior to any exercise of this Warrant, the Holder shall not, by virtue hereof, be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote, to receive dividends or other distributions, to exercise any preemptive right or to receive any notice of meetings of stockholders or any notice of any proceedings of the Company except as may be specifically provided for herein.

14. GOVERNING LAW . THIS WARRANT CERTIFICATE AND ALL RIGHTS ARISING HEREUNDER SHALL BE CONSTRUED AND DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, AND THE PERFORMANCE THEREOF SHALL BE GOVERNED AND ENFORCED IN ACCORDANCE WITH SUCH LAWS.

14. Amendments; Waivers . Any provision of this Warrant may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Holder and the Company, or in the case of a waiver, by the party against whom the waiver is to be effective. No failure or delay by either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

15. Termination . This Warrant shall terminate on the date of termination of the Strategic Collaboration Agreement; provided, however , that in the event the Warrant is exercised during the term, the delivery instructions set forth herein shall survive termination.


IN WITNESS WHEREOF, the Company has duly caused this Warrant Certificate to be signed by its duly authorized officer and to be dated as of             .

 

SOLAZYME, INC.
By:  

 

  Name:
  Title:

Acknowledged and Agreed:

 

ARCHER-DANIELS-MIDLAND COMPANY
By:  

 

  Name:
  Title:

Exhibit 10.3

LOAN AND SECURITY AGREEMENT

LOAN AND SECURITY AGREEMENT (this “ Agreement ”) dated as of March 26, 2013 (the “ Effective Date ”) among HSBC BANK, USA, NATIONAL ASSOCIATION , a national banking association, and SOLAZYME, INC. , a Delaware corporation (“ Borrower ”). The parties agree as follows:

 

  1 ACCOUNTING AND OTHER TERMS; DEFINITIONS

1.1 Accounting and Other Terms . As used in this Agreement, the Revolving Note, any other Loan Document, or any certificate, report or other document made or delivered pursuant to this Agreement, accounting terms not defined in Section 1.2 or elsewhere in this Agreement and accounting terms partly defined in Section 1.2 to the extent not defined, shall have the respective meanings given to them under GAAP. If at any time any change in GAAP would affect the computation of any financial ratio set forth in any Loan Document, and Borrower or HSBC shall so request, HSBC and Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to approval by HSBC and Borrower); provided that, until so amended, such ratio shall continue to be computed in accordance with GAAP prior to such change therein, and Borrower shall provide to HSBC within five days after delivery of each certificate or financial report required hereunder that is affected thereby a written statement of a Responsible Officer of Borrower setting forth in reasonable detail the differences (including any differences that would affect any calculations relating to the financial covenants) that would have resulted if such financial statements had been prepared giving effect to such change. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 1.2. All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein.

The terms “herein”, “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Each reference to a Section, an Exhibit or a Schedule shall be deemed to refer to a Section, an Exhibit or a Schedule, as applicable, of this Agreement, as modified or supplemented pursuant to the terms hereof. Any pronoun used shall be deemed to cover all genders. Wherever appropriate in the context, terms used herein in the singular also include the plural and vice versa . All references to statutes (including the Code) and related regulations shall include any amendments of same and any successor statutes and regulations. Unless otherwise provided, all references to any instruments or agreements to which HSBC is a party, including, without limitation, references to any of the other Loan Documents, shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. All references herein to the time of day shall mean the time in New York. A Default or Event of Default shall be deemed to exist at all times during the period commencing on the date that such Default or Event of Default occurs to the date on which such Default or Event of Default is waived in writing pursuant to this Agreement or, in the case of a Default that is capable of being cured, is cured within any period of cure expressly provided for in this Agreement; and an Event of Default shall “continue” or be “continuing” until such Event of Default has been so cured or waived in writing by HSBC. Wherever the phrase “to the best of Borrower’s knowledge” or words of similar import relating to the knowledge or the awareness of Borrower are used in this Agreement or other Loan Documents, such phrase shall mean and refer to (i) the actual knowledge of a senior officer of Borrower or (ii) the knowledge that a senior officer would have obtained if he had engaged in good faith and diligent performance of his duties, including the making of such reasonably specific inquiries as may be necessary of the employees or agents of Borrower and a good faith attempt to ascertain the existence or accuracy of the matter to which such phrase relates.

1.2 Definitions . As used in the Loan Documents, the word “shall” is mandatory, the word “may” is permissive, the word “or” is not exclusive, the words “includes” and “including” are not limiting, the singular includes the plural, and numbers denoting amounts that are set off in brackets are negative. As used in this Agreement, the following capitalized terms have the following meanings:

Account ” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to Borrower.

Account Debtor ” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.

Adjusted LIBO Rate ” shall mean, with respect to any Eurodollar Advance for any Interest Period, a rate of interest equal to:


(a) the offered rate for deposits in U.S. dollars in the London interbank market for the relevant Interest Period which is shown on the Reuters “LIBOR01” screen (or any successor thereto) that displays the average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) as of 11:00 a.m. (London time) on the day which is two (2) Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided , however , that if, for any reason, such a rate is not published by the British Bankers’ Association or available on the Reuters Screen LIBO Page, Adjusted LIBO Rate shall be equal to a rate per annum equal to the average rate (rounded upwards, if necessary, to the next 1/100 of 1%) at which HSBC determines that U.S. dollars in an amount comparable to the amount of the applicable Advances are being offered to prime banks at approximately 11:00 a.m. (London time) on the day which is two (2) Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period for settlement in immediately available funds by leading banks in the London interbank market selected by HSBC; divided by

(b) a number equal to 1.0 minus the aggregate (but without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on the day which is two (2) Business Days prior to the beginning of such Interest Period (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other governmental authority having jurisdiction with respect thereto, as now and from time to time in effect) for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of such Board) which are required to be maintained by a member bank of the Federal Reserve System (the “Euro-Rate Reserve Percentage”); such rate (if greater than zero) to be rounded upward to the next whole multiple of one-sixteenth of one percent (0.0625%).

Advance ” or “ Advances ” means an advance (or advances) under the Revolving Line and Letters of Credit.

Affiliate ” is, with respect to any Person, each other Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person.

Agreement ” is defined in the preamble hereof.

Availability Amount ” is (a) the Revolving Line , minus (b) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit), and minus (c) the outstanding principal balance of any Advances.

Base Rate ” shall mean a variable rate of interest per annum equal to the highest of the “prime rate,” “reference rate,” “base rate” or other similar rate as announced from time to time by HSBC (with the understanding that any such rate may merely be a reference rate and may not necessarily represent the lowest or best rate actually charged to any customer by HSBC), such rate to be adjusted automatically, without notice, on the effective date of any change in such rate.

Base Rate Advance ” means an Advance that bears interest based at the Base Rate.

Base Rate Margin ” means the applicable rate per annum corresponding to Pricing Liquidity, all as set forth in the following table:

 

Pricing Liquidity

  

Base Rate Margin

< $50,000,000    0.50%
>  $50,000,000, but  <  $75,000,000    0.75%
> $75,000,000    1.00%

BNDES Guarantee ” means the guarantee issued by HSBC Bank Brasil S.A. in satisfaction of the bank guarantee required by the Banco Nacional de Desenvolvimento Econômico e Social (“ BNDES ”) in Brazil for the account of the Borrower’s joint venture, Solazyme Bunge Produtos Renováveis Ltda.

 

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Borrower ” is defined in the preamble hereof.

Borrower’s Books ” are all Borrower’s books and records including ledgers, federal and state tax returns, records regarding Borrower’s assets, liabilities, the Collateral, if any, business operations or financial condition, and all computer programs or storage or any equipment containing such information.

Borrowing Resolutions ” are, with respect to any Person, those resolutions adopted by such Person’s Board of Directors and delivered by such Person to HSBC approving the Loan Documents to which such Person is a party and the transactions contemplated thereby, together with a certificate executed by its Secretary, Assistant Secretary or authorized officer on behalf of such Person certifying that (a) such Person has the authority to execute, deliver, and perform its obligations under each of the Loan Documents to which it is a party, (b) that attached as Exhibit A to such certificate is a true, correct, and complete copy of the resolutions then in full force and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute the Loan Documents on behalf of such Person, together with a sample of the true signature(s) of such Person(s), and (d) that HSBC may conclusively rely on such certificate unless and until such Person shall have delivered to HSBC a further certificate canceling or amending such prior certificate.

Business Day ” is any day that is not a Saturday, Sunday or other day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close, except that if any determination of a “Business Day” shall relate to a Eurodollar Advance, the term “Business Day” shall also mean a day on which dealings are carried on in the London interbank market.

Cash ” means unrestricted cash which shall not be subject to any Lien other than a Lien in favor of HSBC.

Cash Equivalents ” means (a) marketable securities issued, or directly, unconditionally and fully guaranteed or insured, by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than one (1) year from the date of acquisition by such person, (b) time deposits and certificates of deposit of HSBC or any commercial bank having, or which is the principal banking subsidiary of a bank holding company organized under the laws of the United States, any state thereof or the District of Columbia having, capital and surplus aggregating in excess of $250,000,000 and a rating of “A” (or such other similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) with maturities of not more than one year from the date of acquisition by such person, (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) above entered into with any person meeting the qualifications specified in clause (b) above, (d) commercial paper having one of the two highest ratings obtainable from S&P or Moody’s, in each case maturing not more than one year after the date of acquisition by such person, (e) investments in money market funds at least 95% of whose assets are comprised of securities of the types described in clauses (a) through (d) above, and (f) demand deposit accounts maintained in the ordinary course of business with any bank meeting the qualifications specified in clause (b) above.

CFC ” means (a) each Person that is a “controlled foreign corporation” for purposes of the US Internal Revenue Code and (b) each subsidiary of any such controlled foreign corporation.

CFC Holding Company ” means a Subsidiary of Borrower substantially all of the assets of which consist of Equity Interests in CFCs.

Change in Control ” means any event, transaction, or occurrence as a result of which (a) any “person” (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of Borrower, representing 40% or more of the combined voting power of Borrower’s then outstanding securities; or (b) during any period of twelve consecutive calendar months, individuals who at the beginning of such period constituted the Board of Directors of Borrower (together with any new directors whose election by the Board of Directors of Borrower was approved by a vote of not less than a majority of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason other than death or disability to constitute a majority of the directors then in office.

 

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Change in Law ” means the occurrence after the date of this Agreement of any of the following: (a) the adoption or taking effect of any treaty, law, rule or regulation, (b) any change in any treaty, law, rule or regulation or in the interpretation or application thereof by any Governmental Authority, or (c) the making or issuance of any request, guideline, requirement or directive (whether or not having the force of law) by any Governmental Authority; provided, however , that notwithstanding anything herein to the contrary, (i) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines, requirements and directives thereunder, issued in connection therewith or in implementation thereof, and (ii) all requests, rules, guidelines, requirements and directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law,” regardless of the date enacted, adopted, issued or implemented. For purposes of this definition references to HSBC also shall include any corporation or bank directly or indirectly controlling HSBC.

Code ” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of New York; provided , that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article 9 shall govern; provided further , that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, HSBC’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of New York, the term “ Code ” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.

Collateral is any and all properties, rights and assets of Borrower described on Exhibit B .

Collateral Account ” is any Deposit Account, Securities Account, or Commodity Account.

Committed Availability ” means, as the date of determination, an amount equal to the Availability Amount.

Commodity Account ” is any “commodity account” as defined in the Code with such additions to such terms as may hereafter be made.

Compliance Certificate ” is that certain certificate in the form attached hereto as Exhibit C .

Contingent Obligation ” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any Indebtedness under clauses (a) through (e) of the definition thereof of another Person; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices (in each case, a “ Hedging Obligation ”); but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

Control Agreement ” is any control agreement entered into among the depository institution at which Borrower maintains a Deposit Account or the securities intermediary or commodity intermediary at which Borrower maintains a Securities Account or a Commodity Account, Borrower, and HSBC pursuant to which HSBC obtains control (within the meaning of the Code) over such Deposit Account, Securities Account, or Commodity Account.

Copyrights ” are any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret.

Credit Extension ” is any Advance or any other extension of credit by HSBC for Borrower’s benefit.

Credit Party ” means Borrower and each of Borrower’s Subsidiaries.

 

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Default ” shall mean an event which, with the giving of notice or passage of time or both, would constitute an Event of Default.

Default Rate ” is defined in Section 2.3(c).

Deposit Account ” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.

Designated Deposit Account ” is Borrower’s Deposit Account, account number 048387851, maintained with HSBC.

Diligence Certificate ” is defined in Section 5.1.

Dollars , ” “ dollars ” or use of the sign “ $ ” means only lawful money of the United States and not any other currency, regardless of whether that currency uses the “$” sign to denote its currency or may be readily converted into lawful money of the United States.

Dollar Equivalent ” is, at any time, (a) with respect to any amount denominated in Dollars, such amount, and (b) with respect to any amount denominated in a Foreign Currency, the equivalent amount therefor in Dollars as determined by HSBC at such time on the basis of the then-prevailing rate of exchange in New York, New York for sales of the Foreign Currency for transfer to the country issuing such Foreign Currency.

Domestic Subsidiary ” means a Subsidiary organized under the laws of the United States or any state thereof or the District of Columbia.

Effective Date ” is defined in the preamble hereof.

“Eligible Assignee” shall mean (a) HSBC; (b) an Affiliate of a HSBC; (c) any bank of similar regulated financial institution or finance company that is engaged in the business of making commercial loans or similar extensions of credit in the ordinary course of its business; or (d) after an Event of Default has occurred and is continuing, any other Person (other than a natural person) approved by HSBC in its sole discretion.

Equipment ” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

Equity Interests ” means shares of capital stock, partnership interests, membership interests, beneficial interests or other ownership interests, whether voting or nonvoting, in, or interests in the income or profits of, a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any of the foregoing.

ERISA ” is the Employee Retirement Income Security Act of 1974, and its regulations.

Eurodollar Advance ” means an Advance that bears interest based at the Eurodollar Rate.

Eurodollar Rate ” means for any Eurodollar Advance for the then current Interest Period relating thereto the rate per annum (such Eurodollar Rate to be adjusted to the next higher 1/100 of 1%) equal to the Adjusted LIBO Rate.

Eurodollar Rate Margin ” means the applicable rate per annum corresponding to Pricing Liquidity, all as set forth in the following table:

 

Pricing Liquidity

  

Eurodollar Rate Margin

< $50,000,000    2.50%
$50,000,000, but  <  $75,000,000    2.25%
>$75,000,000    2.00%

 

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Euro-Rate Reserve Percentage ” shall have the meaning set forth in the definition of Adjusted LIBO Rate.

Event of Default ” is defined in Section 8.

Exchange Act ” is the Securities Exchange Act of 1934, as amended.

Excluded Assets ” means (i) any US Agency Grant Funds, any Collateral Accounts holding US Agency Grant Funds, any assets purchased (including by reimbursing Borrower for such purchases) in whole or in part with US Agency Grant Funds, any inventory produced with equipment purchased (including by reimbursing Borrower for such purchases) in whole or in part with US Agency Grant Funds and any revenues produced from any of the foregoing and any proceeds of the foregoing, and (ii) any assets subject to Liens permitted pursuant to clause (p) of the definition of “Permitted Liens”; provided, however, in no event will “Excluded Assets” include any domestic operating and other deposit accounts and securities accounts maintained with HSBC and HSBC’s Affiliates.

Excluded Taxes ” means any of the following: (a) taxes imposed on or measured by net income (however denominated), franchise taxes, and branch profits taxes imposed as a result of a present or former connection between HSBC and the jurisdiction imposing such tax (other than connections solely arising from HSBC having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document), (b) U.S. federal withholding taxes imposed pursuant to a law in effect on the date on which HSBC changes its lending office, except to the extent that, pursuant to Section 3.6(a)(i) amounts with respect to such taxes were payable to HSBC immediately before it changed its lending office, (c) taxes attributable to HSBC’s failure to comply with Section 3.7 and (d) any U.S. federal withholding taxes imposed under FATCA.

FATCA ” means Sections 1471 through 1474 of the Internal Revenue Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof and any agreements entered into pursuant to Section 1471(b)(1) of the Internal Revenue Code.

Foreign Currency ” means lawful money of a country other than the United States.

Foreign Subsidiary ” means any Subsidiary which is not a Domestic Subsidiary.

Funding Date ” is any date on which an Advance is made to or for the account of Borrower, which shall be a Business Day.

GAAP ” shall mean generally accepted accounting principles in the United States of America in effect from time to time.

General Intangibles ” is all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all Intellectual Property, claims, income and other tax refunds, security and other deposits, payment intangibles, contract rights, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

Governmental Approval ” is any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.

Governmental Authority ” is any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive,

 

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legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.

Grant Effective Date ” is defined in Section 4.1 hereof.

Hedging Obligation ” is defined in the definition of “Contingent Obligation.”

HSBC ” means HSBC Bank, USA, National Association, a national banking association, and for purposes of issuing Letters of Credit, any of its Affiliates.

HSBC Expenses ” are all audit and field exam fees and expenses, costs, and expenses (including reasonable attorneys’ fees and expenses) for preparing, amending, negotiating, administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower.

Indebtedness ” is (a) indebtedness for borrowed money or the deferred price of property or services, (b) reimbursement and other obligations for surety bonds and letters of credit, (c) obligations evidenced by notes, bonds, debentures or similar instruments, (d) capital lease obligations, and (e) Contingent Obligations.

“Indenture” means that certain Indenture dated as of January 24, 2013 by and between Borrower and Wells Fargo Bank, National Association, as Trustee, in connection with Borrower’s 6% Convertible Senior Subordinated Notes due 2018.

Insolvency Proceeding ” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking dissolution, liquidation, reorganization, arrangement, or other relief.

Intellectual Property ” means all of Borrower’s right, title, and interest in and to the following:

(a) its Copyrights, Trademarks and Patents;

(b) any and all trade secrets and trade secret rights, including, without limitation, any rights to unpatented inventions, know-how, operating manuals;

(c) any and all source code;

(d) any and all design rights;

(e) any and all claims for damages by way of past, present and future infringement of any of the foregoing, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the Intellectual Property rights identified above;

(f) All licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights;

(g) All amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents; and

(h) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing.

Interest Payment Date ” means, (i) with respect to any Eurodollar Advance, the last day of each Interest Period applicable to such Eurodollar Advance and, (ii) with respect to any Base Rate Advance, the first day of each calendar month (or, if that day of the calendar month does not fall on a Business Day, then on the first Business Day following such date) and each date a Base Rate Advance is converted into a Eurodollar Advance to the extent of the amount converted to a Eurodollar Advance.

 

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Interest Period ” shall mean, with respect to any Eurodollar Advance, the period commencing on the date such Advance is made as, renewed as or converted into a Eurodollar Advance and ending on the date one, two or three months thereafter as selected by Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of such period, as selected by Borrower pursuant to the provisions below. The duration of each Interest Period for any Eurodollar Advance shall be for a number of months selected by Borrower upon notice as set forth in Section 3.5; provided that:

(i) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall occur on the next succeeding Business Day; provided , that if such extension of time would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the last Business Day immediately preceding the last day of such Interest Period; and

(ii) if Borrower renews any Eurodollar Advance for an additional Interest Period, the first day of the new Interest Period shall be the last day of the preceding Interest Period; however, interest shall only be charged once for such day at the rate applicable to the Eurodollar Advance for the new Interest Period.

Inventory ” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

Investment ” is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to, or guarantee or assumption of debt of, any Person.

Letter of Credit” means a letter of credit issued by HSBC as set forth in Section 2.1.2.

Letter of Credit Application ” is defined in Section 2.1.2(b).

Letter of Credit Reserve ” is defined in Section 2.1.2(e).

Lien ” is a claim, mortgage, deed of trust, levy, charge, pledge, security interest or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.

Loan Documents ” are, collectively, this Agreement, the Diligence Certificate, the Revolving Note, any other note or notes or guaranties executed by Borrower or any Guarantor, and any other present or future agreement between Borrower any Guarantor and/or for the benefit of HSBC in connection with this Agreement, all as amended, restated, or otherwise modified.

Material Adverse Change ” is (a) a material impairment in the perfection or priority of HSBC’s Lien in the Collateral on or after the Grant Effective Date; (b) a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower and its consolidated Subsidiaries, taken as a whole; or (c) a material impairment of the prospect of repayment of any portion of the Obligations.

Notice of Borrowing ” means a notice given by Borrower to HSBC in accordance with Section 3.5(b), substantially in the form of Exhibit D , with appropriate insertions.

Notice of Conversion ” means a notice given by Borrower to HSBC in accordance with Section 3.5(g), substantially in the form of Exhibit E , with appropriate insertions.

Obligations ” are Borrower’s obligations to pay when due any debts, principal, interest, HSBC Expenses and other amounts Borrower owes HSBC now or later, whether under this Agreement, the Loan Documents, or otherwise, including, without limitation, all obligations relating to letters of credit (including reimbursement obligations for drawn and undrawn letters of credit), and foreign exchange contracts, if any, and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to HSBC, and to perform Borrower’s duties under the Loan Documents.

 

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Operating Documents ” are, for any Person, such Person’s formation documents, as certified with the Secretary of State of such Person’s state of formation on a date that is no earlier than 30 days prior to the Effective Date, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current amendments or modifications thereto.

Patents ” means all patents and patent applications including without limitation, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

Peoria Equipment ” is up to One Million Dollars ($1,000,000) of equipment located at Borrower’s facilities in Peoria, Illinois.

Payment Office ” shall mean initially MM Customer Service Manager; MM Commercial Banking; 1 HSBC Center, 18th Fl; Buffalo, NY 14203; thereafter, such other office of HSBC, if any, which it may designate by notice to Borrower to be the Payment Office.

Permitted Distributions ” are:

(a) purchases of capital stock from former employees, consultants and directors in an aggregate amount not to exceed Two Hundred Fifty Thousand Dollars ($250,000) in any fiscal year provided that at the time of such purchase no Event of Default has occurred and is continuing;

(b) distributions or dividends consisting solely of Borrower’s capital stock;

(c) purchases for value of any rights distributed in connection with any stockholder rights plan;

(d) purchases of capital stock or options to acquire such capital stock with the proceeds received from a substantially concurrent issuance of capital stock or convertible securities;

(e) purchases of capital stock pledged as collateral for loans to employees;

(f) purchases of capital stock in connection with the exercise of stock options or stock appreciation rights by way of cashless exercise or in connection with the satisfaction of withholding tax obligations;

(g) purchases or cash in lieu of fractional shares of capital stock arising out of stock dividends, splits or combinations or business combinations or in connection with the issuance of warrants, options or other securities convertible or exchangeable into or exchangeable for capital stock in Borrower; and

(h) conversions of any convertible securities into other securities or settlement in cash pursuant to the terms of such convertible securities or otherwise in exchange therefor.

Permitted Indebtedness ” is:

(a) Borrower’s Indebtedness to HSBC under this Agreement and the other Loan Documents;

(b) Indebtedness existing on the Effective Date and shown on the Diligence Certificate (other than the SVB Indebtedness to be paid off on or prior to the Effective Date);

(c) Subordinated Debt;

(d) unsecured Indebtedness to trade creditors incurred in the ordinary course of business;

(e) Indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of business;

(f) Indebtedness secured by Liens permitted under clauses (a) and (c) of the definition of “Permitted Liens” hereunder;

 

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(g) capital lease obligations;

(h) Indebtedness of Borrower or any Subsidiary to Borrower or any Subsidiary;

(i) Contingent Obligations in respect of Permitted Indebtedness;

(j) Indebtedness of any Person that becomes a Subsidiary (or of any Person not previously a Subsidiary that is merged or consolidated with or into a Subsidiary in a transaction permitted hereunder) after the date hereof, or Indebtedness of any Person that is assumed by Borrower or any Subsidiary in connection with an acquisition of assets by Borrower or such Subsidiary in an acquisition permitted hereunder or another Permitted Investment; provided that (i) such Indebtedness exists at the time such Person becomes a Subsidiary (or is so merged or consolidated) or such assets are acquired and is not created in contemplation of or in connection with such Person becoming a Subsidiary (or such merger or consolidation) or such assets being acquired; (ii) neither Borrower nor any Subsidiary (other than such Person or the Person with which such Person is merged or consolidated or that so assumes such Person’s Indebtedness) shall guarantee or otherwise become liable for the payment of such Indebtedness and (iii) so long as no Event of Default has occurred at the time of such transaction or will occur as a result of such transaction and in the case of such transaction involving Borrower, Borrower is the surviving legal entity;

(k) Indebtedness owed in respect of any overdrafts and related liabilities arising from treasury, depository, credit card and cash management services or in connection with any automated clearing house transfers of funds; provided that such Indebtedness shall be repaid in full before the same shall become delinquent;

(l) Indebtedness in respect of letters of credit, bank guarantees and similar instruments issued for the account of Borrower or any Subsidiary in the ordinary course of business supporting obligations under (i) workers’ compensation, unemployment insurance and other social security laws and (ii) bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and obligations of a like nature incurred in the ordinary course of business;

(m) Indebtedness of Borrower or any Subsidiary in the form of purchase price adjustments, earn-outs, non-competition agreements or other arrangements representing acquisition consideration or deferred payments of a similar nature incurred in connection with any Permitted Investment;

(n) non-speculative Hedging Obligations in the ordinary course of business;

(o) Indebtedness incurred substantially concurrently with and used to fund an acquisition permitted under Section 7.3 in an aggregate principal amount not exceeding Forty Million Dollars ($40,000,000) so long as no Event of Default has occurred at the time of the incurrence of such Indebtedness or will occur as a result of the incurrence of such Indebtedness;

(p) Indebtedness in respect of letters of credit in an aggregate face amount not exceeding One Million Dollars ($1,000,000);

(q) Indebtedness in respect of lines of credit provided to Foreign Subsidiaries;

(r) Investments permitted under clause (a) or (l) of the definition of Permitted Investments constituting Indebtedness;

(s) other Indebtedness in an aggregate principal amount not to exceed $5,000,000 at any time outstanding; and

(t) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (s) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be;

Permitted Investments ” are:

 

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(a) Investments (including, without limitation, Subsidiaries) existing on the Effective Date and shown on the Diligence Certificate;

(b)(i) Investments consisting of Cash Equivalents, and (ii) any Investments approved by Borrower’s Board of Directors or otherwise pursuant to a Board approved investment policy;

(c) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrower;

(d) Investments consisting of Collateral Accounts, so long as on and after the Grant Effective Date, HSBC has a perfected security interest in such Collateral Accounts if and to the extent required under Section 6.5(b);

(e) Investments accepted in connection with Transfers permitted by Section 7.1;

(f) Investments (i) by Borrower in Subsidiaries, so long as such Investments are made in good faith by Borrower for bona fide business purposes, including the establishment and operation of such Subsidiary, and (ii) by Subsidiaries in other Subsidiaries or in Borrower;

(g) Investments consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower’s Board of Directors;

(h) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business including the Transfers of accounts receivable in the ordinary course of business in connection with the collection or compromise thereof;

(i) Investments consisting of extensions of credit to Borrower’s or its Subsidiaries’ customers in the nature of accounts receivable, prepaid royalties or notes receivable in the ordinary course of business arising from the sale or lease of goods, provision of services or licensing activities;

(j) non-speculative Hedging Obligations in the ordinary course of business;

(k) licensing and other contributions of Intellectual Property to joint ventures, and research and/or development agreements;

(l) additional Investments in joint ventures;

(m) additional Investments in strategic manufacturing collaborations with third parties, including but not limited to the existing collaboration with Archer-Daniels-Midland Company (“ADM”) at the ADM fermentation facility in Clinton, Iowa;

(m) other Investments not otherwise permitted by Section 7.7 not exceeding Five Million Dollars ($5,000,000) in the aggregate outstanding at any time; and

(n) Investments permitted by Section 7.3.

Permitted Liens ” are:

(a)(i) Liens existing on the Effective Date and shown on the Diligence Certificate (other than any Liens in favor of Silicon Valley Bank relating to the SVB Indebtedness), or (ii) Liens arising under this Agreement and the other Loan Documents;

(b) Liens for taxes, fees, assessments or other government charges or levies, either (i) not due and payable or (ii) being contested in good faith and for which Borrower maintains adequate reserves on Borrower’s Books, provided that no notice of any such Lien has been filed or recorded under the Internal Revenue Code of

 

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1986, as amended, and the Treasury Regulations adopted thereunder in an aggregate amount in excess of One Million Dollars ($1,000,000) and no collection proceedings with respect to such Liens have begun against any property of Borrower (other than the filing of a notice of any such Lien or Liens);

(c)(i) Liens on assets acquired or held by Borrower or any Subsidiary incurred for financing the acquisition of such assets, if the Lien is confined to the property acquired and improvements and the proceeds of such assets, or (ii) Liens existing on assets when acquired, if the Lien is confined to the property acquired and improvements and the proceeds of such assets;

(d) Liens of carriers, warehousemen, suppliers, or other Persons that are possessory in nature arising in the ordinary course of business so long as such Liens are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;

(e) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA);

(f) any Lien existing on any asset of any Person that becomes a Subsidiary (or of any Person not previously a Subsidiary that is merged or consolidated with or into Borrower or a Subsidiary in a transaction permitted hereunder) after the date hereof prior to the time such Person becomes a Subsidiary (or is so merged or consolidated); provided that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary (or such merger or consolidation), (ii) such Lien shall not apply to any other asset of Borrower or any Subsidiary and (iii) such Lien shall secure only those obligations that it secures on the date of such acquisition or the date such Person becomes a Subsidiary (or is so merged or consolidated);

(g)(i) Liens to secure Indebtedness permitted pursuant to clause (o) of the defined term “Permitted Indebtedness”; provided, that such Lien shall only apply to the assets and capital stock of any Person being acquired and not apply to any other asset of Borrower or any Subsidiary and (ii) Liens on assets of a Foreign Subsidiary to secure Indebtedness of such Foreign Subsidiary permitted under clause (q) of the definition of Permitted Indebtedness;

(h) leases or subleases of real property granted in the ordinary course of Borrower’s business (or, if referring to another Person, in the ordinary course of such Person’s business), and leases, subleases, non-exclusive licenses or sublicenses of personal property (other than Intellectual Property) granted in the ordinary course of Borrower’s business (or, if referring to another Person, in the ordinary course of such Person’s business), if the leases, subleases, licenses and sublicenses do not prohibit granting HSBC a security interest therein;

(i)(1) licenses of Intellectual Property of Borrower or its Subsidiaries, and (2) other contributions of Intellectual Property to joint ventures, research and/or development programs, material transfer agreements or evaluation agreements;

(j) Liens arising from attachments or judgments, orders, or decrees in circumstances not constituting an Event of Default under Sections 8.4 and 8.7;

(k) Liens in favor of other financial institutions arising in connection with deposit and/or securities accounts held at such institutions, provided that on and after the Grant Effective Date, HSBC has a first priority perfected security interest in the amounts held in such deposit and/or securities accounts if and to the extent required under Section 6.5(b);

(l) Liens in favor custom and revenue authorities arising as a matter of law to secure the payment of custom duties in connection with the importation of goods;

(m) Liens in favor of HSBC arising in connection with Borrower’s Deposit and/or Securities Accounts maintained with HSBC or its Affiliates;

(n) deposits to secure the performance of bids, trade contracts (other than for borrowed money), contracts for the purchase of property, leases, statutory obligations, surety and appeal bonds, performance bonds and

 

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other obligations of a like nature, in each case, incurred in the ordinary course of business and not representing an obligation for borrowed money;

(o) easements, zoning restrictions, rights of way, licenses, reservations, covenants, utility easements, building restrictions and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of Borrower or any Subsidiary;

(p) any interest or title of a lessor under any capital lease; provided that interest or title does not extend to any property other than the property leased by such lessor to Borrower or any of its Subsidiary under such capital lease;

(q) pledges and deposits in the ordinary course of business securing insurance premiums or reimbursement obligations under insurance policies, in each case payable to insurance carriers that provide insurance to Borrower and any Subsidiary;

(r) Liens on deposit accounts, certificates of deposits or other cash or securities pledged in an aggregate face amount not exceeding One Million Dollars ($1,000,000) to secure reimbursement obligations with respect to letters of credit which encumber documents and other property relating to letters of credit and products and proceeds thereof;

(s) Liens attaching solely to cash earnest money deposits in connection with Investments permitted by Section 7.3;

(t) Liens arising out of conditional sale, title retention, consignment or similar arrangements for sale of goods entered into by Borrower or any Subsidiary in the ordinary course of business covering such goods and not prohibited by this Agreement;

(u) Liens securing obligations in an aggregate outstanding principal amount not exceeding $2,500,000 at any time; and

(v) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (u), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase.

Permitted Pledged Accounts ” are Collateral Accounts subject to Liens permitted pursuant to the following clauses of the definition of “Permitted Liens” (f), (n), (q), (r), (s) and (u) (so long as the aggregate amount held in such Collateral Accounts pledged pursuant to clause (u) of the definition of “Permitted Liens” does not exceed the aggregate amount of obligations so secured) and (v) (to the extent related to Liens permitted pursuant to clauses (f), (n), (q), (r), (s) and (u)); provided, however, in no event will “Permitted Pledged Accounts” include any Collateral Accounts maintained with HSBC and HSBC’s Affiliates.

Person ” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

Pricing Liquidity ” means, as of any date of determination, the average daily balance during the most recently ended fiscal quarter of the sum of Cash and unrestricted Cash Equivalents maintained by Borrower in Collateral Accounts at HSBC and not subject to any Lien other than a Lien in favor of HSBC .

Quarterly Financial Statements ” is defined in Section 6.2(c).

Registered Organization ” is any “registered organization” as defined in the Code with such additions to such term as may hereafter be made.

Regulatory Change ” means, with respect to HSBC, any change on or after the date of this Agreement in United States federal, state, or foreign laws or regulations, including Regulation D, or the adoption or making on or after such date of any interpretations, directives, or requests applying to a class of lenders including HSBC, of or

 

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under any United States federal or state, or any foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof.

Requirement of Law ” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

Reserve Requirement ” means, for any Interest Period, the average maximum rate at which reserves (including any marginal, supplemental, or emergency reserves) are required to be maintained during such Interest Period under Regulation D against “Eurocurrency liabilities” (as such term is used in Regulation D) by member banks of the Federal Reserve System. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by HSBC by reason of any Regulatory Change against (a) any category of liabilities which includes deposits by reference to which the Eurodollar Rate is to be determined as provided in the definition of Adjusted LIBO Rate or (b) any category of extensions of credit or other assets which include Advances.

Responsible Officer ” is any of the Chief Executive Officer, President, Chief Financial Officer and Controller of Borrower.

Revolving Line ” is an Advance or Advances in an aggregate principal amount up to Thirty Million Dollars ($30,000,000).

Revolving Line Maturity Date ” is March 26, 2015.

Revolving Note ” means a Promissory Note in substantially the form of Exhibit A.

Securities Account ” is any “securities account” as defined in the Code with such additions to such term as may hereafter be made.

SEC ” shall mean the Securities and Exchange Commission, any successor thereto, and any analogous Governmental Authority.

“Senior Debt” has the meaning ascribed to such term in the Indenture.

Springing Lien Event ” means the occurrence and continuance of any of the following: (a) Borrower fails or neglects to perform any obligation in Section 5.9, Section 6.6 or Section 7.12, (b) an Event of Default under Section 8.1 and Section 8.5, (c) or the representation made by Borrower in Section 5.11 is incorrect.

Subordinated Debt ” is indebtedness incurred by Borrower subordinated to all of Borrower’s now or hereafter indebtedness to HSBC (pursuant to a subordination, intercreditor, or other similar agreement in form and substance satisfactory to HSBC entered into between HSBC and the other creditor).

Subsidiary ” is, as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless the context otherwise requires, each reference to a Subsidiary herein shall be a reference to a Subsidiary of Borrower.

“SVB Indebtedness” means all Obligations (as defined under that certain Loan and Security Agreement dated as of May 11, 2011 between Borrower and Silicon Valley Bank, as amended from time to time).

Trademarks ” means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.

 

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Transfer ” is defined in Section 7.1.

USA PATRIOT Act ” shall mean the Uniting and Strengthening America by Providing Appropriate Tools Required To Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56, as the same has been, or shall hereafter be renewed, extended, amended or replaced from time to time.

US Agency Grant Funds ” shall mean any funds provided to the Borrower or its Affiliates pursuant to a grant from any US Governmental Authority.

 

  2 LOAN AND TERMS OF PAYMENT

2.1 Promise to Pay . Borrower hereby unconditionally promises to pay HSBC the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon as and when due in accordance with this Agreement.

2.1.1 Revolving Advances .

(a) Availability . Subject to the terms and conditions of this Agreement (including without limitation Borrower’s compliance with Section 6.6), HSBC shall make Advances not exceeding the Availability Amount. Amounts borrowed hereunder may be repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject to the applicable terms and conditions precedent herein.

(b) Termination; Repayment . The Revolving Line terminates on the Revolving Line Maturity Date, when the principal amount of all Advances, the accrued and unpaid interest thereon, and all other Obligations relating to the Revolving Line shall be immediately due and payable (except as set forth in Section 2.1.2(b)).

2.1.2 Letters of Credit Sublimit .

(a) As part of the Revolving Line, HSBC shall issue Letters of Credit denominated in Dollars or a Foreign Currency for Borrower’s account. The aggregate Dollar Equivalent amount utilized for the issuance of Letters of Credit shall at all times reduce the amount otherwise available for Advances under the Revolving Line. The aggregate Dollar Equivalent amount available to be used for the issuance of Letters of Credit may not exceed (i) the Revolving Line, minus (ii) the sum of all outstanding principal amounts of any Advances (including the face amount of any outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit)).

(b) If, on the Revolving Line Maturity Date (or the effective date of any termination of this Agreement), there are any outstanding Letters of Credit, then on such date Borrower shall provide to HSBC cash collateral in an amount equal to (x) if such Letters of Credit are denominated in Dollars, then up to one hundred five percent (105%), and (y) if such Letters of Credit are denominated in a Foreign Currency, then up to one hundred ten percent (110%), of the Dollar Equivalent of the face amount of all such Letters of Credit plus all interest, fees, and costs due or to become due in connection therewith (as estimated by HSBC in its commercially reasonable business judgment), to secure all of the Obligations relating to such Letters of Credit. All Letters of Credit shall be in form and substance acceptable to HSBC in its sole discretion and shall be subject to the terms and conditions of HSBC’s standard Application and Letter of Credit Agreement (the “ Letter of Credit Application ”). Borrower agrees to execute any further documentation in connection with the Letters of Credit as HSBC may reasonably request. Borrower understands and agrees that HSBC shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower’s instructions in good faith or those contained in the Letters of Credit or any modifications, amendments, or supplements thereto.

(c) The obligation of Borrower to immediately reimburse HSBC for drawings made under Letters of Credit shall be absolute, unconditional, and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, such Letters of Credit, and the Letter of Credit Application.

(d) Each Letter of Credit shall, among other things, have an expiry date not later than twelve (12) months after such Letter of Credit’s date of issuance. In no event shall any Letters of Credit issued hereunder have an expiry date later than the Revolving Line Maturity Date unless Borrower provides cash collateral as described above in Section 2.1.2(b).

 

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2.1.3 General Provisions Relating to the Advances . Each Advance shall, at Borrower’s option in accordance with the terms of this Agreement, be either in the form of a Base Rate Advance or a Eurodollar Advance; provided , that in no event shall there be outstanding more than three (3) Eurodollar Advances at any time. Borrower shall pay interest accrued on the Advances at the rates and in the manner set forth in Section 2.3.

2.2 Overadvances . If, at any time, the outstanding principal amount of all Advances (including the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit)), exceeds the Revolving Line, Borrower shall immediately pay to HSBC in cash such excess.

2.3 Payment of Interest on the Credit Extensions .

(a) Computation of Interest . Interest on the Credit Extensions and all fees payable hereunder shall be computed on the basis of a 360-day year and the actual number of days elapsed in the period during which such interest accrues. In computing interest on any Credit Extension, the date of the making of such Credit Extension shall be included and the date of payment shall be excluded; provided, however, that if any Credit Extension is repaid on the same day on which it is made, such day shall be included in computing interest on such Credit Extension.

(b) Interest; Payment . Each Advance shall bear interest on the outstanding principal amount thereof from the date when made, continued or converted until paid in full at a rate per annum equal to (i) for Base Rate Advances, the Base Rate minus the applicable Base Rate Margin and (ii) for Eurodollar Advances, the Eurodollar Rate plus the applicable Eurodollar Rate Margin. Pursuant to the terms hereof, interest on each Advance shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of any Advance pursuant to this Agreement for the portion of any Advance so prepaid and upon payment (including prepayment) in full thereof. All accrued and unpaid interest on the Advances shall be due and payable on the Revolving Line Maturity Date.

(c) Default Rate . Upon the occurrence and during the continuance of an Event of Default, Obligations shall bear interest at a rate 2% above the rate that would otherwise be applicable thereto (the “ Default Rate ”). Payment or acceptance of the increased interest provided in this Section 2.3(c) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of HSBC.

(d) Debit of Accounts . HSBC may debit any of Borrower’s Deposit Accounts maintained with HSBC, including the Designated Deposit Account, for principal and interest payments or any other amounts Borrower owes HSBC when due. In addition, during the existence of an Event of Default, HSBC may debit any other accounts of Borrower maintained with HSBC with respect to any amounts owing by Borrower to HSBC.

(e) Letter of Credit Reserve . Borrower may request that HSBC issue a Letter of Credit payable in a Foreign Currency. If a demand for payment is made under any such Letter of Credit, HSBC shall treat such demand as an Advance to Borrower of the Dollar Equivalent of the amount thereof (plus fees and charges in connection therewith such as wire, cable, SWIFT or similar charges). To guard against fluctuations in currency exchange rates, upon the issuance of any Letter of Credit payable in a Foreign Currency, HSBC may create at its sole discretion a reserve (the “ Letter of Credit Reserve ”) under the Revolving Line in an amount up to ten percent (10%) of the face amount of such Letter of Credit. The amount of the Letter of Credit Reserve may be adjusted by HSBC from time to time to account for fluctuations in the exchange rate. The availability of funds under the Revolving Line shall be reduced by the amount of such Letter of Credit Reserve for as long as such Letter of Credit remains outstanding.

2.4 Fees . Borrower shall pay to HSBC:

(a) Commitment Fee . A fully earned, non-refundable commitment fee of $75,000 (equal to 0.25% of the Revolving Line), on the Effective Date.

(b) Letter of Credit Fee . HSBC’s customary fees and expenses for the issuance or renewal of Letters of Credit, including, without limitation, a letter of credit fee of 2.50% per annum (the “ LC Fee ”) of the face amount of each Letter of Credit issued, upon the issuance of such Letter of Credit and each anniversary of the issuance during the term of such Letter of Credit, and upon the renewal of such Letter of Credit by HSBC. It is understood and agreed that the Borrower shall pay no other fee in connection with the BNDES Guaranty other than

 

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the LC Fee paid on the Letter of Credit issued in connection with the BNDES Guaranty pursuant to this Section 2.4(b).

(c) HSBC Expenses . All HSBC Expenses (including reasonable attorneys’ fees and expenses for documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due.

2.5 Payments; Application of Payments .

(a) All payments (including prepayments) to be made by Borrower under any Loan Document shall be made in immediately available funds in Dollars, without setoff or counterclaim, before 3:00 PM (New York time) on the date when due to HSBC at the Payment Office. Payments of principal and/or interest received after 3:00 PM (New York time) are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment shall be due the next Business Day, and additional fees or interest, as applicable, shall continue to accrue until paid; provided , that with respect to Eurodollar Advances, if extending such payment would cause the last day of the applicable Interest Period to be extended into the next calendar month, then the due date for such payment shall be the immediately preceding Business Day.

(b) HSBC shall apply the whole or any part of collected funds against the Revolving Line and other Obligations or credit such collected funds to a depository account of Borrower with HSBC (or an account maintained by an Affiliate of HSBC), the order and method of such application to be in the sole discretion of HSBC. Borrower shall have no right to specify the order or the accounts to which HSBC shall allocate or apply any payments required to be made by Borrower to HSBC or otherwise received by HSBC under this Agreement when any such allocation or application is not specified elsewhere in this Agreement.

 

  3 CONDITIONS OF CREDIT EXTENTIONS

3.1 Conditions Precedent to Initial Credit Extension . HSBC’s obligation to make the initial Credit Extension is subject to the condition precedent that HSBC shall have received, in form and substance satisfactory to HSBC in its sole discretion, such documents, and completion of such other matters, as HSBC may reasonably deem necessary or appropriate, including, without limitation:

(a) duly executed original signatures to the Loan Documents;

(b) Borrower’s Operating Documents and a good standing certificate of Borrower certified by the Secretary of State of the State of Delaware as of a date no earlier than thirty (30) days prior to the Effective Date;

(c) duly executed original signatures to the completed Borrowing Resolutions for Borrower;

(d) duly executed original signature to a payoff letter from Silicon Valley Bank;

(e) evidence that (i) the Liens securing Indebtedness owed by Borrower to Silicon Valley Bank will be terminated prior to or concurrent with the initial Credit Extension and (ii) the documents and/or filings evidencing the perfection of such Liens, including without limitation any financing statements and/or control agreements, have or will, concurrently with the initial Credit Extension, be terminated;

(f) certified copies, dated as of a recent date, of bankruptcy, judgment and lien searches, as HSBC shall request, accompanied by written evidence (including any UCC termination statements) that the Liens and judgments indicated in any such search results either constitute Permitted Liens or have been or, in connection with the initial Credit Extension, will be terminated or released;

(g) the Diligence Certificate of Borrower, together with the duly executed original signatures thereto;

(h) a legal opinion of Borrower’s counsel dated as of the Effective Date together with the duly executed original signature thereto;

 

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(i) evidence satisfactory to HSBC that the insurance policies required by Section 6.4 hereof are in full force and effect; and

(j) payment of the fees and HSBC Expenses then due as specified in Section 2.4 hereof.

3.2 Conditions Precedent to all Credit Extensions . HSBC’s obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following conditions precedent:

(a) except as otherwise provided in Section 3.5(a), timely receipt of an executed Notice of Borrowing;

(b) evidence satisfactory to HSBC that the Designated Deposit Account holds Cash equal to at least one hundred ten percent (110%) of the aggregate Dollar Equivalent amount of the outstanding Advances and the Dollar Equivalent amount of the requested Credit Extensions;

(c) the representations and warranties in this Agreement shall be true, accurate, and complete in all material respects on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Event of Default shall have occurred and be continuing or result from the Credit Extension. Each Credit Extension is Borrower’s representation and warranty on that date that the representations and warranties in this Agreement remain true, accurate, and complete in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; and