TerraVia™
SOLAZYME INC (Form: 10-Q, Received: 08/07/2013 17:21:19)
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 June 30, 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 July 31, 2013

Common Stock, $0.001 par value per share

  62,309,842 shares

 

 

 


Table of Contents

TABLE OF CONTENTS

 

             Page      

PART I: 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      24   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      40   

Item 4.

  Controls and Procedures      41   

PART II: OTHER INFORMATION

  

Item 1.

  Legal Proceedings      42   

Item 1A.

  Risk Factors      42   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      63   

Item 3.

  Defaults Upon Senior Securities      63   

Item 4.

  Mine Safety Disclosures      63   

Item 5.

  Other Information      63   

Item 6.

  Exhibits      64   

Signatures

     65   

 

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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

 

     June 30,
2013
    December 31,
2012
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 54,946      $ 30,818   

Marketable securities

     162,156        118,187   

Accounts receivable

     10,133        3,280   

Unbilled revenues

     1,308        3,150   

Inventories

     8,020        6,890   

Prepaid expenses and other current assets

     3,985        2,954   
  

 

 

   

 

 

 

Total current assets

     240,548        165,279   

Property, plant and equipment, net

     33,723        32,225   

Investments in unconsolidated joint ventures

     24,571        19,047   

Other assets

     922        473   
  

 

 

   

 

 

 

Total assets

   $ 299,764      $ 217,024   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 6,317      $ 7,552   

Accrued liabilities

     11,653        9,320   

Current portion of long-term debt

     62        7,331   

Deferred revenue

     2,123        292   

Other current liabilities

     —          443   
  

 

 

   

 

 

 

Total current liabilities

     20,155        24,938   

Deferred revenue

     978        —     

Warrant liability

     1,460        835   

Long-term debt

     10,407        7,637   

Convertible debt, inclusive of derivative liability of $4,674 and net of unamortized debt discount of $7,767 as of June 30, 2013

     121,907        —     

Other liabilities

     225        303   
  

 

 

   

 

 

 

Total liabilities

     155,132        33,713   
  

 

 

   

 

 

 

Commitments and contingencies (Note 12)

    

Stockholders’ equity:

    

Preferred stock, par value $0.001—5,000,000 shares authorized at June 30, 2013 and December 31, 2012; 0 shares issued and outstanding at June 30, 2013 and December 31, 2012

     —          —     

Common stock, par value $0.001—150,000,000 shares authorized at June 30, 2013 and December 31, 2012; 62,233,406 and 61,000,724 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     62        61   

Additional paid-in capital

     387,997        373,577   

Accumulated other comprehensive loss

     (1,149     (399

Accumulated deficit

     (242,278     (189,928
  

 

 

   

 

 

 

Total stockholders’ equity

     144,632        183,311   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 299,764      $ 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 June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Revenues:

        

Research and development programs

   $ 6,260      $ 9,468      $ 8,940      $ 19,028   

Product revenues

     4,915        4,077        8,915        8,073   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     11,175        13,545        17,855        27,101   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses:

        

Cost of product revenue

     1,496        1,330        2,950        2,576   

Research and development

     14,915        18,381        28,635        33,742   

Sales, general and administrative

     15,436        13,723        30,302        27,779   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     31,847        33,434        61,887        64,097   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (20,672     (19,889     (44,032     (36,996

Other income (expense):

        

Interest and other income, net

     371        556        719        1,102   

Interest expense

     (1,810     (247     (3,681     (466

Loss from equity method investments

     (2,222     (510     (3,181     (510

(Loss) gain from change in fair value of warrant liability

     (679     851        (625     851   

Loss from change in fair value of derivative liability

     (813     —          (1,550     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (5,153     650        (8,318     977   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (25,825   $ (19,239   $ (52,350   $ (36,019
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.42   $ (0.32   $ (0.85   $ (0.60
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     61,957,939        60,377,611        61,751,371        60,239,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net loss

   $ (25,825   $ (19,239   $ (52,350   $ (36,019

Other comprehensive income (loss), net:

        

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

     (264     (72     (333     489   

Foreign currency translation adjustment

     (430     (303     (417     (358
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (694     (375     (750     131   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

   $ (26,519   $ (19,614   $ (53,100   $ (35,888
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Six Months Ended June 30,  
     2013     2012  

Operating activities:

    

Net loss

   $ (52,350   $ (36,019

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

    

Depreciation and amortization

     2,338        1,460   

Net amortization of premiums on marketable securities

     906        1,455   

Amortization of debt discount

     626        76   

Amortization of loan fees

     120        —     

Stock-based compensation expense

     9,221        7,815   

Loss from equity method investment

     3,181        510   

Revaluation of warrant liability

     625        (851

Revaluation of derivative liability

     1,550        —     

Changes in operating assets and liabilities:

    

Accounts receivable

     (6,853     (3,685

Unbilled revenue

     1,842        645   

Inventories

     (1,129     (1,928

Prepaid expenses and other current assets

     928        711   

Accounts payable

     (2,697     (1,253

Accrued liabilities

     2,120        (2,894

Deferred revenue

     2,810        (3,014

Other current and long-term liabilities

     (504     (15
  

 

 

   

 

 

 

Net cash used in operating activities

     (37,266     (36,987
  

 

 

   

 

 

 

Investing activities:

    

Purchases of property, plant and equipment

     (2,503     (8,159

Purchases of marketable securities

     (107,628     (58,498

Maturities of marketable securities

     51,249        73,756   

Proceeds from sales of marketable securities

     10,964        20,047   

Capital contribution in unconsolidated joint venture

     (7,431     —     

Capitalized interest related to unconsolidated joint venture

     (236     —     
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (55,585     27,146   
  

 

 

   

 

 

 

Financing activities:

    

Repayments under loan agreements

     (14,887     (3,617

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

     1,906        1,111   

Proceeds from issuance of common stock, pursuant to ESPP

     516        699   

Early exercise of stock options subject to repurchase

     (17     (34

Proceeds from borrowings under loan agreements

     10,369        —     

Payment for loan costs and fees

     (550     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     117,087        (1,841
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (108     358   
  

 

 

   

 

 

 

Net increase (decrease) of cash and cash equivalents

     24,128        (11,324

Cash and cash equivalents — beginning of period

     30,818        28,780   
  

 

 

   

 

 

 

Cash and cash equivalents — end of period

   $ 54,946      $ 17,456   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Interest paid in cash, net of capitalized interest

   $ —        $ 363   
  

 

 

   

 

 

 

Income taxes paid in cash

   $ —        $ —     
  

 

 

   

 

 

 

Supplemental disclosure of noncash investing and financing activities:

    

Capital assets in accounts payable and accrued liabilities

   $ 1,911      $ 1,005   
  

 

 

   

 

 

 

Capitalized interest in accrued liabilities

   $ 382      $ —     
  

 

 

   

 

 

 

Change in unrealized (loss) gain on marketable securities

   $ (333   $ 489   
  

 

 

   

 

 

 

Warrant issued for investment in unconsolidated joint venture

   $ —        $ 10,361   
  

 

 

   

 

 

 

Reclassification of warrant liability to additional paid-in capital

   $ —        $ 4,586   
  

 

 

   

 

 

 

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 plant sugars to the Company’s proprietary oil-producing microalgae 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.

The Company has interests in certain joint venture entities that are variable interest entities (“VIEs”). Determining whether to consolidate a VIE in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation , requires judgment in assessing (i) whether an entity is a VIE entity and (ii) if the Company is the entity’s primary beneficiary and thus required to consolidate the entity. To determine if the Company is the primary beneficiary of a VIE, the Company evaluates whether it has (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

On November 3, 2010, the Company entered into a joint venture agreement, Solazyme Roquette Nutritionals, LLC (“Solazyme Roquette Nutritionals” or the “Solazyme Roquette JV”), with Roquette Frères, S.A. (“Roquette”), 50% owned by the Company and 50% owned by Roquette. The Company determined that this joint venture was a VIE and the Company was not required to consolidate its 50% ownership in this joint venture. Therefore, this joint venture was accounted for under the equity method of accounting. In June 2013, the Company and Roquette agreed to dissolve the Solazyme Roquette JV and on July 18, 2013, the Solazyme Roquette JV was dissolved (see Note 8).

 

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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 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 and six months ended June 30, 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.

Significant Accounting Policies – Except as described below, there have been no changes to the Company’s significant accounting policies since the Company’s Annual Report on Form 10-K for the year ended 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 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, Derivatives and Hedging (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.

 

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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 June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Numerator

        

Net loss

   $ (25,825   $ (19,239   $ (52,350   $ (36,019
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

        

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

     61,977,112        60,444,733        61,775,734        60,316,581   

Less: Weighted-average shares subject to repurchase

     (19,173     (67,122     (24,363     (77,187
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator: basic and diluted

     61,957,939        60,377,611        61,751,371        60,239,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (0.42   $ (0.32   $ (0.85   $ (0.60
  

 

 

   

 

 

   

 

 

   

 

 

 

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:

 

     June 30,  
     2013      2012  

Options to purchase common stock

     10,235,862         9,273,839   

Common stock subject to repurchase

     14,303         59,283   

Restricted stock units

     1,900,299         123,668   

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

     28,790,964         10,456,790   
  

 

 

    

 

 

 

 

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4. MARKETABLE SECURITIES

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

 

     June 30, 2013  
     Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Fair Value  

Corporate bonds

   $ 59,073       $ 99       $ (78   $ 59,094   

Asset-backed securities

     29,208         15         (39     29,184   

Government and agency securities

     27,287         22         (5     27,304   

Commercial paper

     23,977         10         —          23,987   

Mortgage-backed securities

     15,601         36         (68     15,569   

Municipal bonds

     6,268         5         (6     6,267   

Certificates of deposit

     750         1         —          751   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 162,164       $ 188       $ (196   $ 162,156   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     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   
  

 

 

    

 

 

    

 

 

   

 

 

 

The following table summarizes the amortized cost and fair value of the Company’s marketable securities, classified by stated maturity as of June 30, 2013 and December 31, 2012 (in thousands):

 

     June 30, 2013      December 31, 2012  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Marketable securities

           

Due in 1 year or less

   $ 85,801       $ 85,894       $ 53,761       $ 53,852   

Due in 1-2 years

     38,108         38,092         36,510         36,694   

Due in 2-3 years

     15,903         15,864         11,847         11,856   

Due in 3-4 years

     3,085         3,080         744         746   

Due in 4-9 years

     6,542         6,535         5,158         5,179   

Due in 9-20 years

     1,921         1,913         1,032         1,040   

Due in 20-32 years

     10,804         10,778         8,809         8,820   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 162,164       $ 162,156       $ 117,861       $ 118,187   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Marketable securities classified as available-for-sale are carried at fair value as of June 30, 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 was $66.9 million as of June 30, 2013. Gross unrealized losses on available-for-sale securities were $0.2 million as of June 30, 2013 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 $0 as of June 30, 2013. 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.

The following tables present the Company’s financial instruments that were measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 by level within the fair value hierarchy (in thousands):

 

     June 30, 2013  
     Level 1      Level 2      Level 3      Total  

Financial Assets

           

Cash equivalents

   $ 6,057       $ 2,552       $ —         $ 8,609   

Marketable securities

     1,999         160,157         —           162,156   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,056       $ 162,709       $ —         $ 170,765   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities

           

Derivative liability

   $ —         $ —         $ 4,674       $ 4,674   

Warrant liability

     —           —           1,460         1,460   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 6,134       $ 6,134   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 June 30, 2013 and December 31, 2012.

 

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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 and six months ended June 30, 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, Derivatives and Hedging . In accordance with ASC 815, Derivatives and Hedging , 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 derivative related to the early conversion feature of the Notes meets 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) 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:

 

     June 30,
2013
    Issuance
Date
 

Stock price

   $ 11.72      $ 6.88   

Conversion rate

     121.1240        121.1240   

Conversion price

   $ 8.26      $ 8.26   

Maturity date

     November 1, 2016        November 1, 2016   

Risk-free interest rate

     1.26     0.79

Estimated stock volatility

     60     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 June 30, 2013 (in thousands):

 

     June 30,
2013
     Issuance
Date
 

Estimated fair value of the embedded derivative

   $ 4,674       $ 3,124   

The $1.6 million increase in the estimated fair value of the embedded derivative between the issue date and June 30, 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 for the six months ended June 30, 2013.

 

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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 June 30, 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

     1,550   

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

     625   
  

 

 

 

Fair value at June 30, 2013

   $ 6,134   
  

 

 

 

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 June 30, 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 $178.5 million at June 30, 2013 based upon Level 2 inputs, including the market price of the Notes derived from actual trades of the Notes.

6. INVENTORIES

Inventories consisted of the following (in thousands):

 

     June 30,
2013
     December 31,
2012
 

Raw materials

   $ 873       $ 1,044   

Work in process

     6,060         4,963   

Finished goods

     1,087         883   
  

 

 

    

 

 

 

Total inventories

   $ 8,020       $ 6,890   
  

 

 

    

 

 

 

7. PROPERTY, PLANT AND EQUIPMENT—NET

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

 

     June 30,
2013
    December 31,
2012
 

Plant equipment

   $ 19,088      $ 18,670   

Building and improvements

     5,478        5,478   

Lab equipment

     6,142        5,808   

Leasehold improvements

     2,680        2,665   

Computer equipment and software

     2,969        2,681   

Furniture and fixtures

     584        589   

Land

     430        430   

Automobiles

     49        49   

Construction in progress

     4,869        2,129   
  

 

 

   

 

 

 

Total

     42,289        38,499   

Less: accumulated depreciation and amortization

     (8,566     (6,274
  

 

 

   

 

 

 

Property, plant and equipment—net

   $ 33,723      $ 32,225   
  

 

 

   

 

 

 

Construction in progress as of June 30, 2013 and December 31, 2012 related primarily to the Peoria manufacturing facility and plant equipment not yet placed in service as of those dates.

 

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Depreciation and amortization expense was $1.2 million and $2.3 million for the three and six months ended June 30, 2013, respectively, and $0.8 million and $1.5 million for the three and six months ended June 30, 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 June 30, 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 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 Solazyme Bunge JV is 50.1% owned by the Company and 49.9% by Bunge and is governed by a four member board of directors, two from each investor. 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. The Company and Bunge each contributed capital in the amount of $10.0 million, $5.5 million and $1.8 million, in July 2012, February 2013 and April 2013, respectively, to the Solazyme Bunge JV. The Company’s 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. Currently, the construction of the Plant is the activity of the Solazyme Bunge JV that most significantly impacts its economic performance. Although the Company has the obligation to absorb losses and the right to receive benefits of the Solazyme Bunge JV that could potentially be significant to the Solazyme Bunge JV, the Company and Bunge have equally shared decision–making powers over certain significant activities of the Solazyme Bunge JV, including those related to the construction of the plant. Therefore, the Company does not consider itself to be the Solazyme Bunge JV’s primary beneficiary at this time, and as such has not consolidated the financial results of the Solazyme Bunge JV since the inception of this joint venture. 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 and six months ended June 30, 2013, the Company recognized $0.8 million and $1.8 million, respectively, of losses related to its equity method investment in the Solazyme Bunge JV. During the three and six months ended June 30, 2012, the Company recognized $0.5 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

 

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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 $1.5 million warrant liability associated with the unvested Bunge Warrant shares as of June 30, 2013. The fair value of the warrant liability as of June 30, 2013 was determined using the Black-Scholes option pricing model based upon the following assumptions: volatility of 50%, risk-free interest rate of 2.24%, exercise price of $13.50 and an expected life of 7.85 years. The Company recorded a net unrealized loss related to the change in the fair value of the warrant liability of $0.7 million and $0.6 million during the three and six months ended June 30, 2013, respectively, and $0.9 million during the three and six months ended June 30, 2012. As of June 30, 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 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. 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. In February 2013, the Solazyme Bunge JV entered into a loan agreement with the Brazilian Development Bank (“BNDES” or “BNDES Loan”) under which it may borrow up to R$245.7 million (approximately USD $109.9 million based on the exchange rate as of June 30, 2013). As a condition of the Solazyme Bunge JV drawing funds under the loan, the Company is required to provide a bank guarantee equal to 14.39% of the total amount available under the BNDES Loan and a corporate guarantee equal to 35.71% of the total amount available under the BNDES Loan (an amount not to exceed the Company’s ownership percentage in the Solazyme Bunge JV). The BNDES funding supports the construction of 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 BNDES Loan is eight years and has an average interest rate of approximately 4.0% per annum. As of June 30, 2013, the Company’s bank guarantee was in place and the corporate guarantee was not in place. The fees incurred on the cancelable bank guarantee were not material during the three and six months ended June 30, 2013.

The following table summarizes the carrying amounts of the assets and the fair value of the liabilities included in the Company’s condensed consolidated balance sheet and the maximum loss exposure related to the Company’s interest in its unconsolidated VIE (the Solazyme Bunge JV) as of June 30, 2013 (in thousands):

 

     Assets      Liabilities         

VIE

   Accounts
Receivable
     Investments in
Unconsolidated
Joint Ventures
     Loan
Guarantee
     Maximum
Exposure
to Loss (1)
 

Solazyme Bunge JV

   $ 3,034       $ 24,571       $ 0       $ 109,360   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes maximum exposure to loss attributable to the Company’s cancelable bank guarantee required to be provided for the Solazyme Bunge JV of R$35.4 million (approximately $15.8 million based on the exchange rate at June 30, 2013) and non-cancellable purchase obligations of R$147.6 million (approximately $66.0 million based on the exchange rate at June 30, 2013).

 

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The Company may be required to contribute additional capital to the VIE (for which the Company does not consider itself to be the primary beneficiary) in the future which would increase the Company’s maximum exposure to loss. These future contribution amounts cannot be quantified at this time.

Solazyme Roquette Joint Venture

In November 2010, the Company entered into a joint venture agreement with Roquette. The purpose of the joint venture, Solazyme Roquette Nutritionals, LLC (“Solazyme Roquette Nutritionals” or the “Solazyme Roquette JV”) was 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. In June 2013, the Company and Roquette agreed to dissolve the Solazyme Roquette JV and on July 18, 2013, the Solazyme Roquette JV was dissolved. After assessing the recoverability of the Solazyme Roquette JV amounts capitalized on the Company’s balance sheet, the Company recorded charges to Loss From Equity Method Investments in its condensed consolidated statement of operations of $0.6 million for unrecoverable receivables due from the Solazyme Roquette JV, and $0.7 million for unrecoverable capital contributions made to the Solazyme Roquette JV during the three and six months ended June 30, 2013.

The Company had determined that the Solazyme Roquette JV was 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. Prior to the Solazyme Roquette JV’s dissolution, the Phase 1 plant operations and market development activities were the activities of the Solazyme Roquette JV that most significantly impacted its economic performance. The Company did not have the obligation to absorb the losses of the Solazyme Roquette JV that could potentially be significant to the Solazyme Roquette JV, and the Company and Roquette had equally shared decision-making powers over certain significant activities of the Solazyme Roquette JV. Therefore, the Company did not consider itself to be the Solazyme Roquette JV’s primary beneficiary since inception of this joint venture and as such had never consolidated the financial results of the Solazyme Roquette JV. The Company accounted for its interests in the Solazyme Roquette JV under the equity method of accounting.

Related Party Transactions

The Company recognized revenues related to its research and development arrangements with its joint venture companies of $0.8 million and $1.6 million during the three and six months ended June 30, 2013, respectively, and $0.6 million during the three and six months ended June 30, 2012. At June 30, 2013 and December 31, 2012, the Company had receivables of $3.0 million and $2.2 million, respectively, due from the joint venture companies. At June 30, 2013 and December 31, 2012, the Company had unbilled revenues of $0.8 million related to the joint venture companies.

 

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9. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

 

     June 30,
2013
     December 31,
2012
 

Accrued compensation and related liabilities

   $ 6,118       $ 7,503   

Accrued interest

     3,397         —     

Accrued professional fess

     543         474   

Other accrued liabilities

     1,595         1,343   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 11,653       $ 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 called 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.

With respect to Phase 2 of the September 2010 DoD contract, the Company recognized $0 and $0.7 million of revenues in the three months ended June 30, 2013 and 2012, respectively, and $0 and $0.7 million of revenues in the six months ended June 30, 2013 and 2012, respectively. The Company had no unbilled revenue and deferred revenue balances related to Phase 2 of the agreement as of June 30, 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 June 30, 2013 and 2012, the Company recognized revenues of $0 and $4.0 million, respectively. During the six months ended June 30, 2013 and 2012, the Company recognized revenues of $7,000 and $5.9 million, respectively. The Company had no deferred revenue balance related to this award as of June 30, 2013 and December 31, 2012. Unbilled revenues related to this award were $0.5 million and $2.1 million as of June 30, 2013 and December 31, 2012, respectively.

 

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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.

Bunge —In May 2011, the Company entered into a joint development agreement (“JDA”) with Bunge, a global agribusiness and food company, that extended through May 2013. Pursuant to the joint development agreement, the Company and Bunge jointly developed microbe-derived oils, and explored the production of such oils from Brazilian sugarcane feedstock. The joint development agreement also provided for Bunge to provide research funding to the Company through May 2013, payable quarterly in advance throughout the research term. The Company accounted 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 recorded the payments for the performance of these services as revenue in its consolidated statement of operations. The Company recognized revenue on the JDA based on proportionate performance of actual efforts to date relative to the amount of expected effort incurred. The cumulative amount of revenue recognized under the JDA was limited by the amounts the Company was 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.

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 June 30, 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. Milestones within the Mitsui joint development

 

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agreement that are determined to be substantive and at risk at the inception of the arrangement are recognized as revenue upon achievement of the milestone, and are limited to those amounts for which collectability is reasonably assured. If these conditions are not met, the milestone payments are deferred and recognized as revenue over the estimated period of performance under the contract as completion of performance obligations occur.

11. DEBT

A summary of the Company’s debt as of June 30, 2013 and December 31, 2012 is as follows (in thousands):

 

     June 30,
2013
    December 31,
2012
    Maturity
Date

Secured and unsecured debt

      

Equipment note

   $ 100      $ 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

     10,469        14,968     

Convertible senior subordinated notes

     125,000        —        February 2018
  

 

 

   

 

 

   

Total debt

     135,469        14,968     

Add:

      

Fair value of embedded derivative

     4,674        —       

Less:

      

Unamortized debt discount

     (7,767     —       

Current portion of debt

     (62     (7,331  
  

 

 

   

 

 

   

Long-term portion of debt

   $ 132,314      $ 7,637     
  

 

 

   

 

 

   

Total interest costs incurred related to the Company’s total debt was $1.9 million and $3.5 million for the three and six months ended June 30, 2013, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2012, respectively. Total interest costs capitalized during the three and six months ended June 30, 2013 was $0.6 million related to the Company’s investment in the Solazyme Bunge JV, accounted for under the equity method, which has activities in progress necessary to commence its planned principal operations. The Company was in compliance with all debt covenants as of June 30, 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 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, and in May 2013 the Company entered into an amendment to the HSBC facility, increasing the HSBC facility amount to $35.0 million. 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 June 30, 2013, $10.4 million was outstanding under the HSBC facility. A portion of the HSBC facility supports the bank guarantee issued to BNDES in May 2013 (see Note 8). Therefore, $8.8 million of the HSBC facility remained available as of June 30, 2013.

 

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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 $35.0 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 June 30, 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 $1.0 million as of June 30, 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 $13,600 based on the exchange rate at June 30, 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 June 30, 2013 was 252,000 Brazilian Real (approximately $113,000 based on the exchange rate at June 30, 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 June 30, 2013, the Company had not commenced commercial production at the Clinton Facility, and therefore, a measurement date had not been established.

Rent expense was $0.8 million and $1.5 million for the three and six months ended June 30, 2013, respectively, and $0.7 million and $1.4 million for the three and six months ended June 30, 2012, respectively.

 

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Contractual Obligations —As of June 30, 2013 the Company had non-cancelable purchase obligations of $0.7 million.

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 never drew down on the Roquette Loan prior to the Solazyme Roquette JV’s dissolution, and therefore the Company did not record 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 $109.9 million based on the exchange rate as of June 30, 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 BNDES Loan, the Company is required to provide a bank guarantee and a corporate guarantee for a portion of the BNDES Loan (in an amount not to exceed its ownership percentage in the Solazyme Bunge JV). As of June 30, 2013 the bank guarantee was in place and the corporate guarantee was not. 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 June 30, 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 and six months ended June 30, 2013 and 2012 (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Stock options

   $ 3,273       $ 3,113       $ 6,528       $ 6,224   

RSUs/RSAs

     1,696         381         2,386         803   

PSUs

     35         208         70         546   

ESPP

     212         123         237         242   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation expense

   $ 5,216       $ 3,825       $ 9,221       $ 7,815   
  

 

 

    

 

 

    

 

 

    

 

 

 

Research and development

   $ 1,478       $ 1,013       $ 2,567       $ 1,938   

Sales, general and administrative

     3,738         2,812         6,654         5,877   
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock-based compensation expense

   $ 5,216       $ 3,825       $ 9,221       $ 7,815   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 14,303 and 34,832 shares of common stock subject to repurchase as of June 30, 2013 and December 31, 2012, respectively. The Company’s liability related to common stock subject to repurchase was $22,000 and $39,000 as of June 30, 2013 and December 31, 2012, respectively, and was recorded in other liabilities in the condensed consolidated balance sheets.

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 June 30, 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 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. 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 plant sugars to our proprietary oil-producing microalgae 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.

 

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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 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 six months ended June 30, 2013, our revenues were $17.9 million compared to $27.1 million in the six months ended June 30, 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 $52.4 million for the six months ended June 30, 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 venture, expect to utilize the manufacturing capacity of our joint venture entity, the Solazyme Bunge JV, along with our existing capacity at our Peoria Facility. By the end of 2013, 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 extended through May 2013. Pursuant to the JDA, we and Bunge jointly developed microbe-derived oils, and explored the production of such oils from Brazilian sugarcane feedstock.

In April 2012, we and Bunge formed 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 supports 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 in excess of amounts supported by bank guarantees, we will be required to provide a corporate guarantee of a portion of the loan (in an amount that when added to the amount supported by our bank guarantee does 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 the Solazyme Bunge JV to continue 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 us a technology maintenance fee in recognition of our ongoing research investment in technology that would benefit the Solazyme Bunge JV. We also entered into a Technology Service Agreement with the Solazyme Bunge JV under which the 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 the 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 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

 

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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 late 2013. 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.

Roquette . In November 2010, we entered into a joint venture agreement with Roquette. The purpose of the Solazyme Roquette JV was 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. In June 2013, we and Roquette agreed to dissolve the Solazyme Roquette JV and on July 18, 2013, the Solazyme Roquette JV was dissolved.

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.

 

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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 56% and 50% of our total revenues for the three and six months ended June 30, 2013, respectively, as compared to 70% of our total revenues for both the three and six month periods ended June 30, 2012. Revenues from government grants and agreements represented 1% and 2% of total R&D program revenues for the three and six months ended June 30, 2013, respectively, as compared to 51% and 55% of total R&D program revenues for the three and six months ended June 30, 2012, respectively. Revenues from commercial and strategic partner development agreements represented 99% and 98% of total R&D program revenues for the three and six months ended June 30, 2013, respectively, as compared to 49% and 45% of total R&D program revenues in the three and six months ended June 30, 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 44% and 50% of our total revenues for the three and six months ended June 30, 2013, respectively. Product revenues represented 30% of our total revenues in both the three and six month periods ended June 30, 2012.

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.

 

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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 June 30, 2013 and December 31, 2012, our outstanding debt, net of debt discounts, was approximately $132.4 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.

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 June 30, 2013, and will be remeasured to fair value at each balance sheet date until the warrant shares have vested.

 

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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

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”.

In the second quarter of 2013, we recorded a loss of $1.3 million to Income (loss) from equity method investments, net related to the dissolution of the Solazyme Roquette JV.

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. The 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.

Results of Operations

Comparison of Three Months Ended June 30, 2013 and 2012

Revenues

 

     Three Months ended June 30,  
     2013      2012      $ Change  
            (In thousands)         

Revenues:

        

Research and development programs

   $ 6,260       $ 9,468       $ (3,208

Net product revenue

     4,915         4,077         838   
  

 

 

    

 

 

    

 

 

 

Total revenues

   $ 11,175       $ 13,545       $ (2,370
  

 

 

    

 

 

    

 

 

 

Our total revenues decreased by $2.4 million in the second quarter of 2013 compared to the same period in 2012, due primarily to a $3.2 million decrease in R&D program revenue, partially offset by $0.8 million of increased Algenist ® product sales in the second quarter of 2013 compared to the same period in 2012.

 

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R&D program revenues decreased by $3.2 million, due to a $4.7 million decrease in government program revenues, partially offset by a $1.5 million increase in revenues from development agreements with strategic partners.

Our government program revenues decreased in the second quarter of 2013 compared to the same period in 2012, primarily due to the completion of the integrated biorefinery build out at our Peoria facility in mid-2012 under the DOE grant and completion of the second phase of our 2011 DoD fuels testing and certification contract in June 2012. 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. We are fully funding the remaining costs to complete the objectives of the DOE award.

Our revenues from development agreements with strategic partners increased due to timing of agreements that we entered into and completed since late 2011. During the three months ended June 30, 2013, we recorded $4.5 million primarily related to milestone achievements with one of our strategic partners. 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 continue to decrease substantially.

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.

Cost of Product Revenues

 

     Three Months ended June 30,  
     2013      2012      $ Change  
            (In thousands)         

Cost of revenue:

        

Product

   $ 1,496       $ 1,330       $ 166   
  

 

 

    

 

 

    

 

 

 

Gross profit:

        

Product

   $ 3,419       $ 2,747       $ 672   
  

 

 

    

 

 

    

 

 

 

Cost of product revenue increased slightly in the second quarter of 2013 compared to the same period in 2012, and sales of Algenist ® products increased by $0.8 million in the second quarter of 2013 compared to the same period in 2012. Gross margins increased from 67% in the second quarter of 2012 to 70% in the second quarter of 2013 due primarily to changes in customer mix in the second quarter of 2013 compared to the same period in 2012.

Operating Expenses

 

     Three Months ended June 30,  
     2013      2012      $ Change  
            (In thousands)         

Operating expenses:

        

Research and development

   $ 14,915       $ 18,381       $ (3,466

Sales, general and administrative

     15,436         13,723       $ 1,713   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 30,351       $ 32,104       $ (1,753
  

 

 

    

 

 

    

 

 

 

Research and Development Expenses

Our research and development expenses decreased by $3.5 million in the second quarter of 2013 compared to the same period in 2012, due primarily to decreased R&D program and third-party contractor costs of approximately $4.6 million, partially offset by increased personnel-related and facilities-related costs of $0.7 million and $0.5 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 and completion of the second phase of our 2011 DoD fuels testing and certification contract in June 2012, partially offset by increased costs incurred to scale up our industrial fermentation process at ADM’s Clinton Facility and increased personnel-

 

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related costs as a result of headcount growth to support Peoria and ADM manufacturing and collaborative research activities. Personnel-related costs include non-cash stock-based compensation expense of $1.5 million in the second quarter of 2013 compared to $1.0 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. We expect that as we ramp up our activities with ADM and other third party contractors, our costs will increase in the second half of 2013.

Sales, General and Administrative Expenses

Our sales, general and administrative expenses increased by $1.7 million in the second quarter of 2013 compared to the same period in 2012, primarily due to increased personnel-related costs of $2.1 million associated with headcount growth, increased professional fees of $0.5 million, partially offset by decreased marketing and promotional costs of $1.1 million. Personnel-related costs include non-cash stock-based compensation of $3.7 million in the second quarter of 2013 compared to $2.8 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 June 30,  
     2013     2012     $ Change  
           (In thousands)        

Other income (expense):

      

Interest and other income, net

   $ 371      $ 556      $ (185

Interest expense

     (1,810     (247     1,563   

Loss from equity method investment

     (2,222     (510     1,712   

(Loss) gain from change in fair value of warrant liability

     (679     851        (1,530

Loss from change in fair value of derivative liability

     (813     —          813   
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ (5,153   $ 650      $ (5,803
  

 

 

   

 

 

   

 

 

 

Interest and Other Income, net

Interest and other income, net decreased by $0.2 million in the second 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 $1.6 million in the second quarter of 2013 compared to the same period in 2012, due to $2.2 million of increased interest expense primarily as a result of the issuance of the Notes in January 2013, partially offset by $0.6 million of capitalized interest related to the investment in our Solazyme Bunge JV. We expect interest expense and amortization of debt discounts and debt issue costs to increase due to the issuance of the Notes in January 2013 (see Note 11 to our condensed consolidated financial statements).

Loss from Equity Method Investment

Loss from equity method investment increased by $1.7 million in the second quarter of 2013 compared to the same period in 2012, primarily due to the increase in our proportionate share of the net loss from the Solazyme Bunge JV of $0.9 million and $1.3 million loss related to the dissolution of the Solazyme Roquette JV. 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.

(Loss) gain from Change in Fair Value of Warrant Liability

Loss from the change in fair value of warrant liability increased by $1.5 million in the second 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

 

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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 $0.8 million for the three months ended June 30, 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.

Results of Operations

Comparison of Six Months Ended June 30, 2013 and 2012

Revenues

 

     Six Months ended June 30,  
     2013      2012      $ Change  
            (In thousands)         

Revenues:

        

Research and development programs

   $ 8,940       $ 19,028       $ (10,088

Net product revenue

     8,915         8,073         842   
  

 

 

    

 

 

    

 

 

 

Total revenues

   $ 17,855       $ 27,101       $ (9,246
  

 

 

    

 

 

    

 

 

 

Our total revenues decreased by $9.2 million in the first half of 2013 compared to the same period in 2012, due primarily to a $10.1 million decrease in R&D program revenue, partially offset by $0.8 million of increased Algenist ® product sales in the first half of 2013 compared to the same period in 2012.

R&D program revenues decreased by $10.1 million, due primarily to a $10.3 million decrease in government program revenues.

Our government program revenues decreased in the first half of 2013 compared to the same period in 2012, primarily due to the completion of the integrated biorefinery build out at our Peoria facility in mid-2012 under the DOE grant, delivery of our commitment of algal oil under the Dynamic Fuels subcontract in the first half of 2012 and completion of the second phase of our 2011 DoD fuels testing and certification contract in June 2012. 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.

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. During the six months ended June 30, 2103, we recorded $4.8 million primarily related to milestone achievements with one of our strategic partners. 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 continue to decrease substantially.

 

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Cost of Product Revenues

 

     Six Months ended June 30,  
     2013      2012      $ Change  
     (In thousands)  

Cost of revenue:

        

Product

   $ 2,950       $ 2,576       $ 374   
  

 

 

    

 

 

    

 

 

 

Gross profit:

        

Product

   $ 5,965       $ 5,497       $ 468   
  

 

 

    

 

 

    

 

 

 

Cost of product revenue increased by $0.4 million in the first half of 2013 compared to the same period in 2012, and sales of Algenist ® products increased by $0.8 million in the first half of 2013 compared to the same period in 2012. Gross margins decreased slightly from 68% in the first half in 2012 to 67% in the first half of 2013 due primarily to changes in product mix in the first half of 2013 compared to the same period in 2012.

Operating Expenses

 

     Six Months ended June 30,  
     2013      2012      $ Change  
     (In thousands)  

Operating expenses:

        

Research and development

   $ 28,635       $ 33,742       $ (5,107

Sales, general and administrative

     30,302         27,779       $ 2,523   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 58,937       $ 61,521       $ (2,584
  

 

 

    

 

 

    

 

 

 

Research and Development Expenses

Our research and development expenses decreased by $5.1 million in the first half of 2013 compared to the same period in 2012, due primarily to decreased R&D program and third-party contractor costs of approximately $8.3 million, partially offset by increased personnel-related and facilities-related costs of $2.0 million and $1.2 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 and third-party contractor costs incurred to complete the delivery our commitment of algal oil under the Dynamic Fuels subcontract and to complete the second phase of our 2011 DoD fuels testing and certification contract in June 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 and ADM manufacturing and collaborative research activities. Personnel-related costs include non-cash stock-based compensation expense of $2.6 million in the first half of 2013 compared to $1.9 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. We expect that as we ramp up our activities with ADM and other third party contractors, our costs will increase in the second half of 2013.

Sales, General and Administrative Expenses

Our sales, general and administrative expenses increased by $2.5 million in the first half of 2013 compared to the same period in 2012, primarily due to increased personnel-related and facilities-related costs of $3.1 million and $0.1 million, respectively, partially offset by decreased marketing and promotional costs of $0.9 million. Personnel-related and facilities-related costs increased due to headcount growth. Personnel-related costs include non-cash stock-based compensation of $6.7 million in the first half of 2013 compared to $5.9 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.

 

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Other Income (Expense), Net  

 

     Six Months ended June 30,  
     2013     2012     $ Change  
     (In thousands)  

Other income (expense):

      

Interest and other income, net

   $ 719      $ 1,102      $ (383

Interest expense

     (3,681     (466     3,215   

Loss from equity method investment

     (3,181     (510     2,671   

(Loss) gain from change in fair value of warrant liability

     (625     851        (1,476

Loss from change in fair value of derivative liability

     (1,550     —          1,550   
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ (8,318   $ 977      $ (9,295
  

 

 

   

 

 

   

 

 

 

Interest and Other Income, net

Interest and other income, net decreased by $0.4 million in the first half 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 $3.2 million in the first half of 2013 compared to the same period in 2012, due to $3.8 million of increased interest expense primarily a result of the issuance of the Notes in January 2013, partially offset by $0.6 million of capitalized interest related to the investment in our Solazyme Bunge JV. We expect interest expense and amortization of debt discounts and debt issue costs to increase due to the issuance of the Notes in January 2013 (see Note 11 to our condensed consolidated financial statements).

Loss from Equity Method Investment

Loss from equity method investment increased by $2.7 million in the first half of 2013 compared to the same period in 2012, primarily due to the increase in our proportionate share of the net loss from the Solazyme Bunge JV of $1.4 million and a $1.3 million loss related to the dissolution of the Solazyme Roquette JV. 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.

(Loss) gain from Change in Fair Value of Warrant Liability

Loss from the change in fair value of warrant liability increased by $1.5 million in the first half 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 $1.6 million for the first half of 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.

 

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Liquidity and Capital Resources

 

     June 30,
2013
     December 31,
2012
 
     (In thousands)  

Cash and cash equivalents

   $ 54,946       $ 30,818   

Marketable securities

     162,156         118,187   

Cash, cash equivalents and marketable securities increased by $68.1 million in the six months ended June 2013, primarily due to $119.2 million of net cash proceeds received from the issuance of the Notes (net of $5.3 million of debt discounts and $0.5 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 $37.3 million, $14.9 million of repayments under loan agreements, $7.4 million of capital contributed to the Solazyme Bunge JV and $2.5 million of property and equipment purchases.

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

 

     Six Months Ended June 30,  
     2013     2012  
     (In thousands)  

Net cash used in operating activities

   $ (37,266   $ (36,987

Net cash (used in) provided by investing activities

     (55,585     27,146   

Net cash provided by (used in) financing activities

     117,087        (1,841

Sources and Uses of Capital

Since our inception, we have incurred significant net losses, and, as of June 30, 2013, we had an accumulated deficit of $242.3 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 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 $109.9 million based on the exchange rate as of June 30, 2013). As a condition of the Solazyme Bunge JV drawing funds under the loan in excess of amounts supported by bank guarantees, we will be required to provide a corporate guarantee for a portion of the loan (in an amount that when added to the amount supported by our bank guarantee does not to exceed our ownership percentage in the Solazyme Bunge JV). The BNDES funding is supporting 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

 

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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 is 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.

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 (the HSBC facility) for working capital, letters of credit denominated in U.S. dollars or a foreign currency and other general corporate purposes, and in May 2013 the Company entered into an amendment to increase the HSBC facility to $35.0 million. Also on March 26, 2013, we drew down approximately $10.4 million under the HSBC facility to repay the outstanding term loan plus accrued interest under the SVB facility. The HSBC facility is unsecured unless (i) we take action that could cause or permit obligations under the HSBC 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 $35.0 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 HSBC facility or bankruptcy or insolvency events relating to us. As of June 30, 2013, $10.4 million was outstanding under the HSBC facility and we were in compliance with all the financial covenants under the loan. A portion of the HSBC facility supports the bank guarantee issued to BNDES in May 2013. Therefore, $8.8 million of the HSBC facility remained available as of June 30, 2013.

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.

 

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Cash Flows from Operating Activities

Cash used in operating activities of $37.3 million in the six months ended June 30, 2013 reflect a loss of $52.4 million, and a net change of $3.5 million in our net operating assets and liabilities, partially offset by aggregate non-cash charges of $18.6 million. Non-cash charges primarily included $9.2 million of stock-based compensation, $1.6 million related to the revaluation of our derivative liability, $0.9 million of net amortization of premiums on marketable securities, $2.3 million of depreciation and amortization and $3.2 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 $5.0 million, increased deferred revenues of $2.8 million, increased inventories of $1.1 million, net decreased accounts payable and accrued liabilities of $0.6 million, decreased prepaid expenses and other current assets of $0.9 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 the first half of 2013 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. Inventories increased to meet increased consumer demand and due to the expansion of the Algenist ® product line. The net decrease in accounts payable and accrued liabilities was due to payments made for employee bonuses and expenditures made to complete the buildout of the integrated biorefineries (in Peoria and in the South San Francisco pilot plant) partially funded by the DOE and CEC, partially offset by interest accrued on our Notes and increased payroll liabilities accrued as of the quarter-end. Prepaid expenses and other current assets decreased primarily due to the write off of receivables from the Solazyme Roquette JV as a result of the dissolution. 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 $37.0 million in the six months ended June 30, 2012 reflect a loss of $36.0 million, and a net change of $11.4 million in our net operating assets and liabilities, partially offset by aggregate non-cash charges of $10.5 million. Non-cash charges primarily included $7.8 million of stock-based compensation, $1.5 million of net amortization of premiums on marketable securities and $1.5 million of depreciation and amortization. The net change used in our operating assets and liabilities was primarily a result of increases in our net accounts receivable and unbilled revenue of $3.0 million, increases in inventories of $1.9 million, decreased deferred revenue of $3.0 million and decreases in accounts payable and accrued liabilities of $4.1 million, partially offset by decreases in prepaid expenses and other current assets of $0.7 million. Accounts receivable and unbilled revenues increased primarily due to increased sales of Algenist ® product and increased R&D program revenues. Inventories increased due to increased production of Algenist ® product to meet higher customer demand. Deferred revenue decreased primarily due to timing of payments received on R&D programs. Accounts payable and accrued liabilities decreased primarily due to payments made to third-party contract manufacturers and employee bonus payments. Prepaid expense and other current assets decreased due primarily to settlement of receivables from our Solazyme Roquette JV and decreased interest receivable on a lower average cash, cash equivalents and marketable securities balances.

Cash Flows from Investing Activities

In the six months ended June 30, 2013, cash used in investing activities was $55.6 million, primarily as a result of $45.4 million of net marketable securities purchases, $7.4 million of capital contributed to the Solazyme Bunge JV and the Solazyme Roquette JV and $2.5 million of capital expenditures related primarily to equipment installed at ADM.

In the six months ended June, 2012, cash provided by investing activities was $27.1 million, primarily as a result of $35.3 million of net marketable securities maturities, partially offset by $8.2 million of capital expenditures related primarily to the construction of the Peoria Facility.

Cash Flows from Financing Activities

In the six months ended June 30, 2013, cash provided by financing activities was $117.1 million, primarily due to $119.2 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 $2.4 million received from common stock issuances pursuant to our equity plans, partially offset by $14.9 million of principal debt payments.

In the six months ended June 30, 2012, cash used in financing activities was $1.8 million, primarily due to $3.6 million of repayments under loan agreements, partially offset by proceeds of $1.8 million received from common stock issuances pursuant to our equity plans.

 

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Contractual Obligations and Commitments

The following is a summary of our contractual obligations and commitments as of June 30, 2013 (in thousands):

 

     Total      Remainder of
2013
     2014      2015      2016      2017
and beyond
 

Principal payments on long-term debt

   $ 135,469       $ 30       $ 65       $ 10,374       $ —         $ 125,000   

Interest payments on long-term debt, fixed rate

     38,161         7,172         7,796         7,568         7,500         8,125   

Non-cancellable operating leases

     13,021         3,163         6,367         3,491         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 186,651       $ 10,365       $ 14,228       $ 21,433       $ 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 $13,600 based on the exchange rate at June 30, 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) and that portion of the expenses that we expect to incur, up to $0.7 million from July through December 2013, in connection with research activities under the DOE program for which we will not be reimbursed.

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 June 30, 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 June 30, 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 June 30, 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 June 30, 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 June 30, 2013 levels. Our other outstanding debt as of June 30, 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 Brazil through our Solazyme Bunge JV. 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 June 30, 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 June 30, 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 June 30, 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 food ingredients, 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 food ingredients or chemicals market.

We have incurred substantial net losses since our inception, including a net loss of $52.4 million during the six months ended June 30, 2013. We expect these losses may continue as we expand our manufacturing capacity and build out our product pipeline. As of June 30, 2013, we had an accumulated deficit of $242.3 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 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 our joint venture arrangement that includes a feedstock supply agreement, and pursuant 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 food ingredients, 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 food ingredients, 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 from the landowners 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 could 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 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. Currently, we have two manufacturing arrangements for industrial fermentation: an agreement for the future manufacture of certain triglyceride oil products by the Solazyme Bunge JV pursuant to a joint venture arrangement 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. We have used a portion of our $35.0 million revolving facility with HSBC Bank, USA, National Association (HSBC) to support a bank guarantee of the BNDES loan, and the Solazyme Bunge JV has begun drawing funds under the BNDES loan. As a condition of the Solazyme Bunge JV drawing funds under the loan in excess of amounts supported by bank guarantees, we will be required to provide a corporate guarantee of a portion of the loan (in an amount that when added to the amount supported by our bank guarantee does not exceed our ownership percentage in the Solazyme Bunge JV). Negotiating the terms of the corporate guarantee documentation may take longer than anticipated and may contain terms that are not favorable to us. If we are unable to negotiate our corporate guarantee documentation on acceptable terms, the Solazyme Bunge JV will be unable to draw down the maximum amount available under the BNDES loan, it 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 from the landowners 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, collaboration, research and development, supply 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). In addition, we have entered into a strategic collaboration with ADM for the

 

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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 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 from the landowners and construction of the Solazyme Bunge JV production facility. There may also be delays in our negotiation of the corporate loan guarantee to be entered into as a condition of the Solazyme Bunge JV drawing down amounts in excess of amounts supported by bank guarantees 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 joint venture with Roquette has been dissolved. We may have disputes with Roquette related to the dissolution and /or wind-down of the joint venture. We may also have disputes related to the ability of others to pursue the joint venture’s business.

In 2010, we entered into a 50/50 joint venture with Roquette Frères, S.A. (Roquette). As part of this relationship, we and Roquette formed Solazyme Roquette Nutritionals, LLC (Solazyme Roquette Nutritionals) through which both we and Roquette agreed to 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 Solazyme Roquette Nutritionals, we entered into a license agreement with Solazyme Roquette Nutritionals, and Solazyme Roquette Nutritionals entered into a manufacturing agreement with Roquette. Due in part to divergent views on an acceptable commercial strategy and timeline for the manufacturing and marketing of Solazyme Roquette Nutritionals products, on June 21, 2013, we and Roquette agreed to dissolve Solazyme Roquette Nutritionals. On July 18, 2013, Solazyme Roquette Nutritionals was dissolved. As a result of the dissolution, the joint venture and operating agreement between us and Roquette, and the license agreement, whereby we licensed to Solazyme Roquette Nutritionals certain of our intellectual property for use in the Solazyme Roquette Nutritionals field, automatically terminated.

Solazyme Roquette Nutritionals, we and Roquette are in the process of winding down the affairs of Solazyme Roquette Nutritionals. We and Roquette have not yet reached agreement as to several issues associated with the dissolution of Solazyme Roquette Nutritionals and the wind-down of its affairs. We cannot be sure that other disputes will not arise between us and Roquette as Solazyme Roquette Nutritionals is wound down. Disputes could divert management attention and could be costly, time-consuming to resolve and distracting to our management.

Disputes regarding our intellectual property rights, and the rights of others (including Roquette) to manufacture and sell the Solazyme Roquette Nutritionals products, could delay or negatively impact our commercialization of products in the markets Solazyme Roquette Nutritionals was targeting. Any such disputes could be costly, time-consuming to resolve and distracting to our management. In addition, if our commercialization in these markets is delayed or unsuccessful, our financial results could be negatively impacted.

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.

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.

 

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In the nutrition market, our food ingredients will compete with oils and other food ingredients currently in use. Potential customers may not perceive a benefit to microalgae-based ingredients as compared to existing ingredients or may be otherwise unwilling to adopt their use. If consumer packaged goods (CPG) companies do not accept our food ingredients as ingredients for their widely distributed finished products, or if end customers are unwilling to purchase finished products made using our oils or food ingredients, we 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 began commercializing our skin and personal care products in the last few years, have only very recently begun to commercialize food ingredient products on our own, and are still in the process of developing our products for the food ingredients, 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, bioproducts and food ingredients 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, food ingredients 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 from the landowners 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

 

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for oil derived from one of our recombinant microalgae strains, the review of which was completed by the EPA in July 2012. We filed 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 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. A GRAS Notice of Determination for algal oil was submitted to the FDA, and notification was received from the FDA in June 2012 that it had no further questions. A GRAS Notice of Determination for high lipid algal flour was submitted to the FDA, and notification was received from the FDA that it had no further questions. If the FDA were to disagree with the conclusions in future GRAS Notices of Determination, they could ask that the products be voluntarily withdrawn 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, bioproducts and food ingredients 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

 

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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 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

 

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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 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

 

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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. Our success in the development of nutrition products will depend on our ability to effectively compete with established companies and successfully commercialize our products.

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

 

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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.

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;

 

   

our capital requirements or 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.

 

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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.

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 that provides for a $30.0 million revolving facility for working capital and letters of credit, and in May 2013 we entered into an amendment to the revolving facility, increasing the available loan amount to $35.0 million. 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, and has begun to draw on the funds, if we are unable to finalize the corporate guarantee documentation on acceptable terms, the Solazyme Bunge JV will be unable to draw down amounts under the loan in excess of amounts supported by bank guarantees 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

 

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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.

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 June 30, 2013 our executive officers, directors and beneficial holders of 5% or more of our outstanding stock beneficially owned approximately 37.5% 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.

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.

 

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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
 
10.1    Credit Facility Agreement No. 12.2.1149.1, Executed Between Banco Nacional de Desenvolvimento Economico e Social – BNDES and Solazyme Bunge Produtos Renovaveis Ltda., dated February 14, 2013                  X   
10.2    First Amendment to Loan and Security Agreement by and between HSBC Bank USA, National Association and Solazyme, Inc., dated May 9, 2013                  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 June 30, 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 and duly authorized signatory)

Date: August 7, 2013

 

65

Exhibit 10.1

BNDES

[D ecal of the 4th Registry of Deeds and Documents of Rio de Janeiro (RTD-RJ) No. 932550 and bar code ]

[S tamp of the 4th Registry of Deeds and Documents of Rio de Janeiro (RTD-RJ) with signature of Marcelino Silva – 93580 stating that a copy of the document is available in CD-R format ]

CREDIT FACILITY AGREEMENT No. 12.2.1449.1, EXECUTED BETWEEN

BANCO NACIONAL DE DESENVOLVIMENTO ECONÔMICO E SOCIAL –

BNDES AND SOLAZYME BUNGE PRODUTOS RENOVÁVEIS LTDA., AS

STATED BELOW:

BANCO NACIONAL DE DESENVOLVIMENTO ECONÔMICO E SOCIAL – BNDES (the NATIONAL ECONOMIC AND SOCIAL DEVELOPMENT BANK), herein referred to simply as BNDES, a federal public company with principal place of business in Brasília, Federal District, and services in this City, at Avenida República do Chile, 100, enrolled in the National Register of Legal Entities (CNPJ) under No. 33.657.248/0001-89, by its representatives signed below;

And

SOLAZYME BUNGE PRODUTOS RENOVÁVEIS LTDA., hereinafter referred to as BENEFICIARY, a limited liability company with principal place of business in Orindiúva, State of São Paulo, at Fazenda Moema s/nº, Zona Rural, CEP 15480-000, enrolled in the CNPJ under No. 13.190.609/0001-12, by its representatives signed below;

NOW, THEREFORE, the parties agree with the provisions in the clauses below:

CLAUSE ONE

NATURE, VALUE AND PURPOSE OF THE AGREEMENT

BNDES hereby opens to BENEFICIARY a credit facility in the amount of two hundred and forty-five million, six hundred and ninety-nine thousand Reais (R$ 245,699,000.00), divided into four (04) subcredits, as follows:

I – Subcredit “A” : one hundred and twenty-six million, three hundred and thirty-six thousand Reais (R$ 126,336,000.00), to its account of common funds, which is composed, among other sources, of funds from the Worker’s Aid Fund (FAT), and of funds originating from FAT – Special Deposits, the allocation of which must comply with the laws and regulations applicable to each of the mentioned sources, observing the provisions established for the BNDES Program for Investment Support – BNDES PSI, subject matter of Resolution No. 2.374/2012-BNDES of December 18, 2012, pursuant to the federal laws and regulations in force, as well as the regulations issued by the Brazilian Monetary Council and the State Minister of Finance, with due regard for the provisions in Paragraph Three of Clause Two;


II – Subcredit “B” : eighty-two million, nine hundred and fifty-one thousand Reais (R$ 82,951,000.00), to its account of common funds, which is composed, among other sources, of funds from the Worker’s Aid Fund (FAT), and of funds originating from FAT – Special Deposits, the allocation of which must comply with the laws and regulations applicable to each of the mentioned sources, observing the provisions for the BNDES Program for Investment Support – BNDES PSI, subject matter of Resolution No. 2.374/2012-BNDES of December 18, 2012, pursuant to the federal laws and regulations in force, as well as the regulations issued by the Brazilian Monetary Council and the State Minister of Finance, with due regard for the provisions in Paragraph Three of Clause Two;

III – Subcredit “C” : thirty-five million, one hundred and ninety thousand Reais (R$ 35,190,000.00), to its account of common funds, which is composed, among other sources, of funds from the Worker’s Aid Fund (FAT), and of funds originating from FAT – Special Deposits, the allocation of which must comply with the laws and regulations applicable to each of the mentioned sources, with due regard for the provisions in Paragraph Two of Clause Two;

IV – Subcredit “D” : one million, two hundred and twenty-two thousand Reais (R$ 1,222,000.00), to its account of common funds, which is composed, among other sources, of funds from the Worker’s Aid Fund (FAT), and of funds originating from FAT – Special Deposits, the allocation of which must comply with the laws and regulations applicable to each of the mentioned sources, with due regard for the provisions in Paragraph Two of Clause Two.

PARAGRAPH ONE

The credit now granted is intended to be used as follows:

I – Subcredit “A” : implementation of a pioneering facility with capacity to produce 100 thousand tons/year of oils, through a fermentation process using heterotrophic microalgae, in Orindiúva – SP;

II – Subcredit “B” : acquisition of domestic machinery and equipment that meet the criteria of the Special Industrial Financing Agency [ Fundo de Financiamento para Aquisição de Máquinas e Equipamentos Industriais – FINAME], required for the project referred to in item I above;

III – Subcredit “C” : acquisition of machinery and equipment to be imported by BENEFICIARY, required for the project referred to in item I above; and

IV – Subcredit “D” : social investments in the community, in BENEFICIARY’s area of influence.

PARAGRAPH TWO

For purposes of article 12, Paragraph Two, and article 47-A of the “ PROVISIONS APPLICABLE TO BNDES AGREEMENTS ” referred to in Clause Thirteen, item I, the project is the one defined under item I of Paragraph One of this Clause.


CLAUSE TWO

AVAILABILITY OF CREDIT

The credit shall be made available to BENEFICIARY in installments once the conditions precedent for its use referred to in Clause Fifteen have been fulfilled based on the need for implementing the financed project and observing the financial schedule of BNDES, which is subject to definition of funds for applications by the Brazilian Monetary Council (CMN).

PARAGRAPH ONE

The funds of this transaction shall be made available to BENEFICIARY by means of non-transferable credit to the checking account opened in its name with BNDES, in which the debits determined by law and those contractually authorized by BENEFICIARY shall be made upon clearance, whose total remaining balance of funds shall be immediately transferred to checking account No. 01722-7, held by BENEFICIARY with Banco Itaú BBA (No. 184), branch No. 0910.

PARAGRAPH TWO

The value of each installment of Subcredits “C” and “D” to be made available to BENEFICIARY shall be calculated according to the criterion established in the law that instituted the Long-Term Interest Rate (TJLP) for determining the debt balance of the financing contracted by the BNDES System by November 30, 1994.

PARAGRAPH THREE

The amount of each installment of Subcredits “A” and “B” to be made available to BENEFICIARY shall be held in Reais (R$) and shall not be changed until the actual clearance thereof.

CLAUSE THREE

INTEREST LEVIED ON SUBCREDIT “A”

Interest shall be levied on the debt principal of BENEFICIARY resulting from Subcredit “A” at the rate of three point five zero percent (3.50%) per year (as remuneration).

SOLE PARAGRAPH

The interest amount shall be payable quarterly, on the fifteenth (15 th ) day of the months of February, May, August and November of each year, in the period between February 15, 2013 and February 15, 2015, and monthly on, as of and including March 15, 2015, along with the principal amortization installments and upon maturity or settlement of this Agreement, observing the provisions of the Clause “Maturity on Holidays.”

CLAUSE FOUR

INTEREST LEVIED ON SUBCREDIT “B”

Interest shall be levied on the debt principal of BENEFICIARY resulting from Subcredit “B” at the rate of three percent (3.00%) per year (as remuneration).


SOLE PARAGRAPH

The interest amount shall be payable quarterly, on the fifteenth (15 th ) day of the months of February, May, August and November of each year, in the period between February 15, 2013 and February 15, 2015, and monthly on, as of and including March 15, 2015, along with the principal amortization installments and upon maturity or settlement of this Agreement, observing the provisions of the Clause “Maturity on Holidays”.

CLAUSE FIVE

INTEREST LEVIED ON SUBCREDIT “C”

Interest shall be levied on the debt principal of BENEFICIARY resulting from Subcredit “C” at the rate of one point eight seven percent (1.87%) per year (as remuneration), above the Long-Term Interest Rate (TJLP), disclosed by the Central Bank of Brazil (BC), using the following method:

I – When the TJLP is above six percent (6%) per year:

a) The amount corresponding to the TJLP installment that exceeds six percent (6%) per year shall be compounded on the fifteenth (15th) day of each month of effectiveness of the Agreement and upon its maturity or settlement, observing the provisions in the Clause “Maturity on Holidays” and calculated based on assessment of the following compounding term over the debt balance, considering therein all of the financial events occurring during the period:

TC = [(1 + TJLP)/1.06] n/360 - 1 (compounding term equal to, open brackets, ratio between TJLP plus one unit, and one six hundredth, close brackets, raised to the ratio of “n” and three hundred and sixty, minus one unit), where:

TC – compounding term:

TJLP – Long-Term Interest Rate, disclosed by the Central Bank of Brazil; and

n – Number of days from the date of the financial event to the compounding date, maturity or settlement of the obligation, considering that a financial event is any and all facts of a financial nature which result, or may result, in a change in the debt balance of this Agreement.

b) The percentage of one point eight seven (1.87%) per year above the TJLP (remuneration), mentioned in the main section of this Clause, accreted of the non-compounded installment of the TJLP of six percent (6%) per year, shall accrue over the debt balance on the interest maturity dates mentioned in Paragraph Two or on the date of maturity or settlement of this Agreement, observing the provision in line “a” and considering, for the daily calculation of interest, the number of days elapsed between the date of each financial event and the maturity dates cited above.

II – When the TJLP is lower than or equal to six percent (6%) per year:

The percentage of one point eight seven (1.87%) per year above the TJLP (remuneration), mentioned in the main section of this Clause, accreted of the TJLP itself, shall accrue over the debt balance on the interest maturity dates mentioned in Paragraph Two or on the date of maturity or settlement of this Agreement, considering, for the daily calculation of interest, the number of days elapsed between the date of each financial event and the maturity dates cited above.


PARAGRAPH ONE

The amount mentioned in item I, line “a,” which shall be compounded and incorporated to the debt principal, shall be payable under the terms of Clause Nine.

PARAGRAPH TWO

The amount of interest shall be payable quarterly, on the fifteenth (15th) day of the months of February, May, August and November of each year, in the period between February 15, 2013 and February 15, 2015 and monthly on, as of and including March 15, 2015, along with the principal amortization installments and upon maturity or settlement of this Agreement, observing the provisions of the Clause “Maturity on Holidays.”

CLAUSE SIX

INTEREST LEVIED ON SUBCREDIT “D”

Interest shall be levied on the debt principal of BENEFICIARY resulting from Subcredit “D” using the Long-Term Interest Rate (TJLP) disclosed by the Central Bank of Brazil (BC), observing the following method:

I – When the TJLP exceeds six percent (6%) per year:

a) The amount corresponding to the TJLP installment that exceeds six percent (6%) per year shall be compounded on the fifteenth (15th) day of each month of effectiveness of the Agreement and upon its maturity or settlement, observing the provisions in the Clause “Maturity on Holidays” and calculated based on the assessment of the following compounding term over the debt balance, considering therein all of the financial events occurring during the period:

TC = [(1 + TJLP)/1.06] n/360 - 1 (compounding term equal to, open brackets, ratio between TJLP plus one unit, and one six hundredth, close brackets, raised to the ratio of “n” and three hundred and sixty, minus one unit), where:

TC – compounding term:

TJLP – Long-Term Interest Rate, disclosed by the Central Bank of Brazil; and

n – Number of days from the date of the financial event to the compounding date, maturity or settlement of the obligation, considering that a financial event is any and all facts of a financial nature which result, or may result, in a change in the debt balance of this Agreement.

b) The non-compounded installment of the TJLP of six percent (6%) per year shall accrue over the debt balance on the maturity interest dates mentioned in Paragraph Two or on the date of maturity or settlement of this Agreement, observing the provision in line “a” and considering, for the daily calculation of interest, the number of days elapsed between the date of each financial event and the maturity dates cited above.

II – When the TJLP is lower than or equal to six percent (6%) per year:

The TJLP shall accrue over the debt balance on the interest maturity dates mentioned in Paragraph Two or on the date of maturity or settlement of this Agreement, considering, for the daily calculation of interest, the number of days elapsed between the date of each financial event and the maturity dates cited above.


PARAGRAPH ONE

The amount mentioned in item I, line “a,” which shall be compounded and incorporated to the debt principal, shall be payable under the terms of Clause Nine.

PARAGRAPH TWO

The amount of interest shall be payable quarterly, on the fifteenth (15th) day of the months of February, May, August and November of each year, in the period between February 15, 2013 and February 15, 2015 and monthly on, as of and including March 15, 2015, along with the principal amortization installments and upon maturity or settlement of this Agreement, observing the provisions of the Clause “Maturity on Holidays”.

CLAUSE SEVEN

CREDIT RESERVE CHARGES

BENEFICIARY shall pay BNDES a Credit Reserve Charge of zero point one percent (0.1%), to be charged for a period of thirty (30) days, or a fraction thereof, and accrued over:

I – the unused balance of each credit installment, as of the day immediately following the date it was made available up to the date it is used, when payment thereof shall be required; and

II – the unused credit balance, as of the day immediately following the date it was made available up to the cancellation date, made at the request of BENEFICIARY or by the initiative of BNDES, the payment of which shall be required on the date of the request or the date of the decision by BNDES, as the case may be.

SOLE PARAGRAPH

Accrual of the charge referred to in items I and II, mentioned above, shall occur upon determination of a fund availability method.

CLAUSE EIGHT

DEBT PROCESSING AND COLLECTION

Collection of the principal and charges shall be made by means of a Collection Notice sent by BNDES, in advance, so that BENEFICIARY can settle said obligation on the maturity dates thereof.

SOLE PARAGRAPH

Failure to receive the Collection Notice shall not exempt BENEFICIARY from its obligation to pay the principal installments and the charges on the dates established in this Agreement.


CLAUSE NINE

AMORTIZATION

The debt principal resulting from this Agreement shall be paid to BNDES in seventy-two (72) successive monthly installments, each one in the amount of the debt principal maturing, divided by the number of amortization installments yet to mature, with the first installment maturing on the fifteenth (15 th ) day of March 2015 and the last on the fifteenth (15 th ) day of February 2021, observing the provision in the Clause “Maturity on Holidays.”

SOLE PARAGRAPH

BENEFICIARY undertakes to settle on February 15, 2021, with the last amortization installment, all obligations arising from this Agreement.

CLAUSE TEN

TRANSACTION GUARANTEE

In order to ensure the payment of any obligations resulting from this Agreement, such as debt principal, interest, commissions, agreed penalty, fines and expenses, BENEFICIARY shall provide BNDES, through an addendum to this Agreement, as a first mortgage, the surface right held by BENEFICIARY, located in Orindiúva, State of São Paulo, over the actual area of the project referred to in Paragraph One of Clause One, for a term of at least fifty (50) years, to be duly registered under record No. 7,544 of Book No. 2 of the Real Estate Registry Office of the Judicial District of Paulo de Faria – SP, valued at two hundred and eighty-eight million, one hundred and eighty-three thousand Reais (R$ 288,183,000.00), on November 15, 2012.

PARAGRAPH ONE

BENEFICIARY represents to have peaceful and uncontested possession of the properties mentioned in this Clause, free and clear of any lien, including tax charges.

PARAGRAPH TWO

The mortgage created herein shall comprise, in addition to the surfaces rights, all buildings, facilities, machinery, equipment and any other accessions and/or appurtenances which, during the effectiveness of this Agreement, are incorporated into the property, except for the machinery and equipment acquired with FINAME SYSTEM and BNDES funds, while encumbered in favor of the Agents in the related transactions.

PARAGRAPH THREE

BNDES reserves the right to require revaluation of the encumbered properties if, at its discretion, the guarantee suffers depreciation.


PARAGRAPH FOUR

The properties making up the guarantee cannot be disposed of, encumbered, leased, assigned or removed without the prior written consent of BNDES, and must be maintained in perfect operating condition, considering the wear and depreciation resulting from the regular use thereof, free of any taxes and other tax charges.

PARAGRAPH FIVE

BNDES may accept other collateral(s) in replacement of the guarantee defined in the main section of this Clause, subject to the provisions in article 27, and paragraphs of the PROVISIONS APPLICABLE TO BNDES AGREEMENTS, ” referred to in Clause Thirteen, item I.

CLAUSE ELEVEN

CHANGE TO LEGAL CRITERION FOR REMUNERATION OF FUNDS

ORIGINATING FROM PIS/PASEP AND FAT FUNDS

In the event the legal criterion for remuneration of funds transferred to BNDES originating from the PIS/PASEP Participation Fund and from the Worker’s Aid Fund (FAT) is replaced, the remuneration set forth in Clauses Five and Six may, at the discretion of BNDES, be performed using the new remuneration criterion for the aforementioned funds, or other criterion indicated by BNDES which not only preserves the actual value of the transaction, but also remunerates it at the same previous levels. In this case, BNDES shall communicate the change in writing to BENEFICIARY.

CLAUSE TWELVE

MATURITY ON HOLIDAYS

All due dates for the amortization installments related to principal and charges occurring on Saturdays, Sundays or national, state, district or municipal holidays, including bank holidays, shall be, for all purposes and effects of this Agreement, transferred to the first subsequent business day, with all charges calculated up to such date, at which time the subsequent regular period for ascertainment and calculation of the charges of this Agreement shall also begin.

SOLE PARAGRAPH

For purposes of the provisions in the main section of this Clause, unless expressly established otherwise herein, the holidays at the location of the principal place of business of BENEFICIARY , the address of which is indicated in this Agreement, shall be considered.


CLAUSE THIRTEEN

SPECIAL OBLIGATIONS OF BENEFICIARY

BENEFICIARY undertakes to:

I – Comply with, as applicable, until final settlement of the debt derived from this Agreement, the “PROVISIONS APPLICABLE TO BNDES AGREEMENTS , approved by Resolution No. 665 of December 10, 1987; partially amended by Resolution No. 775 of December 16, 1991; by Resolution No. 863 of March 11, 1996; by Resolution No. 878 of September 4, 1996; by Resolution No. 894 of March 6, 1997; by Resolution No. 927 of April 1, 1998; by Resolution No. 976 of September 24, 2001; by Resolution No. 1,571 of March 4, 2008; by Resolution No. 1,832 of September 15, 2009; by Resolution No. 2,078 of March 15, 2011; by Resolution No. 2,139 of August 30, 2011; and by Resolution No. 2,181 of November 8, 2011, all by the BNDES Executive Board, published in the Official Gazette of the Federal Executive (Section I) of December 29, 1987; December 27, 1991; April 8, 1996; September 24, 1996; March 19, 1997; April 15, 1998; October 31, 2001; March 25, 2008; November 6, 2009; April 4, 2011; September 13, 2011 and November 17, 2011, respectively, an issue of which is hereby delivered to BENEFICIARY, which, after becoming aware of the entire content thereof, declares its acceptance thereto as an integral and inseparable part of this Agreement for all legal purposes and effects;

II – Use the total credit amount within the term of up to twenty-four (24) months counted from the date this Agreement is signed, without prejudice to BNDES’ authority, before or after the final day of this term, pursuant to the guarantees established in this Agreement, to extend such term upon express authorization via letter, regardless of other formalities or registration, with the exception that such term shall not be extendable for Subcredits “A” and “B.”

III – Deliver to BNDES, within one hundred and eighty (180) days as of the date of release of the last credit installment resulting from this Agreement, the officially published Operating License for the project financed hereunder issued by the competent environmental agency;

IV – If, due to the project object of Clause One, there occurs a reduction in the staff of BENEFICIARY during the term of effectiveness of this Agreement, offer a training program aimed at work opportunities in the region and/or programs for the reassignment of workers into other companies after having submitted a document to BNDES for evaluation which specifies and confirms the conclusion of the negotiations performed with the competent representative(s) of the workers involved in the dismissal process;

V – Adopt, during the term of effectiveness of this Agreement, measures and actions intended to prevent or correct damages to the environment, occupational safety and health, which may be caused by the project mentioned in Clause One;

VI – Regularly comply with its obligations before environmental bodies throughout the term of effectiveness of this Agreement;

VII – Observe, throughout the term of effectiveness of this Agreement, the legal provisions applicable to individuals with disabilities;

VIII – Communicate to BNDES, on the date of the event, the name and the CPF/MF (Individual Taxpayers’ Register) number of the person who, performing a remunerated role or being one of its owners, controlling parties or directors, has been licensed or invested in office as a Federal Representative or Senator;


IX – Forward to BNDES, within six (6) months as of the date of execution of this Agreement, a term extendable via letter at the sole discretion of BNDES, the details on the social projects mentioned in item IV of Clause One, which must contain at least a description of the intended actions and objectives, as well as the time schedules for implementation and disbursements, to be approved by BNDES.

X – Submit to BNDES, yearly, by the 30 th day of April of each year, financial statements for the previous year, audited by an independent auditing firm registered with the Brazilian Securities Commission – CVM.

XI – Submit to BNDES, within one hundred and eighty (180) days as of the date of release of the last credit installment resulting from this Agreement, an authorization from the Brazilian Technical Commission on Biosecurity – CTNBio for the use of genetically modified heterotrophic microalgae in the project mentioned in Paragraph One of Clause One.

XII – Keep BNDES informed of any internal decisions that adversely affect BENEFICIARY’s ability to comply with the obligations set out herein.

XIII – Observe the applicable legal provisions with respect to the contracting of individuals or legal entities located outside Brazil.

XIV – Not dispose of or create a lien on its permanent assets which, individually or collectively, represent an amount in excess of five hundred thousand United States dollars (US$ 500,000.00) per financial year, without the prior authorization of BNDES.

XV – Mention, always with emphasis, the cooperation of BNDES in any disclosure regarding its project, as defined in Paragraph One of Clause One.

XVI – Submit to BNDES, by the thirtieth (30 th ) day of the months of June and December of each year, a report containing information on its technical, economic and financial condition, subject to the provisions in Paragraph Two of this Clause.

XVII – In and as of the 2014 financial year, to pay dividends in an amount exceeding the minimum mandatory amount and/or pay interest on net equity only after evidencing observance of the financial ratios set out below, in relation to the previous year, as well as having complied with the other obligations established herein. Such ratios shall be ascertained each year in a balance sheet audited by an independent auditing firm registered with the Brazilian Securities Commission, which shall be confirmed to BNDES by the 30 th day of April of each year, through the presentation of the mentioned audited financial statements:

a) Debt Service Coverage Ratio greater than or equal to one whole (1.00) related to the years 2014, 2015 and 2016; and one point one zero (1.10) for the 2017 financial year and on; and

b) Net Equity/Total Assets greater than or equal to zero point two zero (0.20).


XVII.(i) – Definitions :

a) Debt Service Coverage Ratio: Cash Generated in the Period over the Debt Service in the Period;

b) Cash Generated in the Period: EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), less Working Capital Variation, less payment of Income Tax and Social Contribution for the previous year. Exclusively for the first period of twelve months of verification of this ratio, the calculation of the Cash Generated in the Period will not take into account the variation of the working capital.

c) EBITDA: Net Operating Income, less Cost of Products Sold, less Operating Expenses (excluding Financial Expenses), plus Depreciation and Amortization;

d) Debt Service in the Period: payment of interest and financial expenses incurred over the Financial Indebtedness, plus amortization of the Financial Indebtedness verified over the period;

e) Financial Indebtedness: short and long term loans, financing, debentures and similar items;

f) Working Capital Variation:

+ accounts receivable at year-end

+ inventory at year-end

+ supplier advances at year-end

- suppliers payable at year-end

- salaries and charges payable at year-end

- taxes payable at year-end

- client advances at year-end

- accounts receivable at previous year-end

- inventory at previous year-end

- supplier advances at previous year-end

+ suppliers payable at previous year-end

+ salaries and charges payable at previous year-end

+ taxes payable at previous year-end

+ client advances at previous year-end

XVIII – Evidence of the creation, in terms satisfactory to BNDES, of a surface right in favor of BENEFICIARY over the actual area of the project, for a minimum term of fifty (50) years, described in item I of Paragraph One of Clause One, through its registration under record No. 7.544 of Book No. 2 of the Real Estate Registry Office of the Judicial District of Paulo de Faria – SP, within a period of eighteen (18) months as of the date of execution of this Agreement.

XIX – Inform BNDES via letter, by the ninetieth (90 th ) day prior to the final term of the letter(s) of guarantee mentioned in item I and in Paragraph One of Clause Sixteen, if any, of the financial institution(s) that will renew or issue the new letter(s) of guarantee, as provided for in item XX of this Clause;

XX – Present to BNDES, by the forty-fifth (45 th ) day prior to the final term of the letter(s) of guarantee mentioned in item I and in Paragraph One of Clause Sixteen, the renewal thereof or new letter(s) of guarantee, according to the model supplied by BNDES, respectively issued in accordance with item I and Paragraph One of Clause Sixteen, and duly registered, on pain of this Agreement being deemed early matured, with the debt becoming immediately enforceable and any disbursement being promptly cancelled.


PARAGRAPH ONE

For the purposes of this Agreement, the terms below shall have the following meanings:

I – Economic Group: means the group of persons or entities that, directly or indirectly, are under common Corporate Control, except that the companies submitted to the Shared Corporate Control shall be deemed separate from their controlling shareholders and, therefore, not part of an Economic Group.

II – Corporate Control: means the power held, directly or indirectly, by a person or group of persons with rights that assure them the majority vote in corporate resolutions and/or the power to elect most of the managers of such company, and which actually use their powers to direct the corporate activities and guide the operation of the company’s bodies.

III – Shared Corporate Control: means the Corporate Control exercised by a controlling group made up of individuals or legal entities, who may or may not be bound to a shareholders’ agreement, and who are independent and do not hold individually the Corporate Control, being connected by converging interests.

PARAGRAPH TWO

The Parties agree that the information and documents disclosed under the terms of items XII and XVI of this Clause comply, respectively, with the provisions in item VII (a) and in item XV of article 34 of the “PROVISIONS APPLICABLE TO BNDES AGREEMENTS” mentioned above.

CLAUSE FOURTEEN

RESPONSIBILITY IN CORPORATE SUCCESSION

In the event of corporate succession, any successors of BENEFICIARY must be jointly and severally liable for the obligations arising out of this Agreement.

SOLE PARAGRAPH

The provisions in the main section of this Clause shall not be applicable in case of prior approval by BNDES to the removal of joint and several liability in partial spin-off.


CLAUSE FIFTEEN

CONDITIONS FOR USE OF CREDIT

Use of the credit beyond fulfillment, as applicable, of the conditions set out in articles 5 and 6 of the “PROVISIONS APPLICABLE TO BNDES AGREEMENTS” mentioned above, and of the conditions established in the “FOLLOW-UP RULES AND INSTRUCTIONS” , referred to in article 2 of such “PROVISIONS” , shall be subject to compliance with the following:

I – For use of the first credit installment :

a) Opening, by BENEFICIARY, of a checking account with BNDES.

b) Delivery to BNDES of the personal guarantee instruments referred to in items II and III of Clause Sixteen, according to a notarized and consularized form provided by BNDES, accompanied by an opinion issued, in terms satisfactory to BNDES, by a renowned specialized foreign attorney or law firm designated by BENEFICIARY and accepted by BNDES, attesting to the regularity of the creation of personal guarantees. Such opinion must contain at least the following considerations:

b.1 – The subscribing attorney shall declare that he/she has reviewed the laws and regulations of the guarantor’s country, its bylaws and internal regulatory acts, as well as any other acts that were needed to issue the respective opinion;

b.2 – The lawfulness of the guarantor’s appointment, as well as the capacity and legitimacy thereof to render the guarantee, and compliance with the laws and regulations to assume the obligations set out in the instruments of guarantee, attaching to the opinion a copy of the bylaws or similar document;

b.3 – The guarantor, by its legal representatives, and subject to approval by its decision-making bodies, is empowered to execute and comply with the terms and conditions established in the instruments of guarantee, attaching to the opinion a copy of the act(s) of appointment of the legal representative(s) of the guarantor and of the act of deliberation regarding the rendering of guarantee;

b.4 – The guarantor’s legal representatives who signed the instruments of guarantee are empowered to bind and oblige the guarantor to the terms and conditions contained therein;

b.5 – The execution of the instruments of guarantee does not violate (a) the guarantor’s bylaws, (b) the constitutional rules, treaties, laws, normative and regulatory acts applicable to the guarantor, or any determination by a governmental body imposed to the guarantor, or result in (c) default on any agreement to which the guarantor is a party or through which the guarantor’s properties are encumbered;

b.6 – The instruments of guarantee were executed according to the formalities set forth by the laws and regulations of the guarantor’s country, and constitute a valid, effective and enforceable instrument;

b.7 – All acts were performed and all registrations or authorizations were obtained from governmental agencies, departments, bodies or authorities of the guarantor’s country, designed to assure the execution, validity and performance of the instrument of guarantee by the guarantor;

b.8 – There are no legal or administrative proceedings filed against the guarantor, and should there be any, such proceedings do not hinder the payment capacity of the guarantor.


c) Evidence of reimbursement to BNDES of all costs (including tax charges) and fees incurred with the services provided by the foreign law firm contracted by BNDES to provide assistance related to the guarantees referred to in items II and III of Clause Sixteen;

d) Submission of Letter(s) of Guarantee issued by the financial institution(s) approved by BNDES, in accordance with and under the terms of item I of Clause Sixteen.

e) Evidence of the creation, in terms satisfactory to BNDES, of a surface right in favor of BENEFICIARY over the actual area of the project, described in item I of Paragraph One of Clause One, through its registration under record No. 7.544 of Book No. 2 of the Real Estate Registry Office of the Judicial District of Paulo de Faria – SP;

f) Submission, in terms satisfactory to BNDES, of the instrument of creation of guarantee referred to in Clause Ten, duly registered with the competent Real Estate Registry Office;

g) Submission, in terms satisfactory to BNDES, of the instrument of assignment, conditioned to the occurrence of default on obligations resulting from this Agreement by BENEFICIARY and/or by the guaranteeing parties referred to in items II and III of Clause Sixteen, of the rights of BENEFICIARY resulting from the agreements listed below, with the intermediation and/or consent of the respective counterparties, containing a provision on unilateral termination at the sole discretion of BNDES:

g)1. Utility Supply Agreement, entered into on March 30, 2012 between BENEFICIARY and Usina Moema Açúcar e Álcool Ltda.;

g)2. Feedstock Purchase and Sale Agreement, entered into on March 30, 2012 between BENEFICIARY and Usina Moema Açúcar e Álcool Ltda.

h) In replacement of the conditions contained in items b), c), d), e), f) and g) above, BENEFICIARY may choose to submit to BNDES Letter(s) of Guarantee issued by financial institution(s) approved by BNDES, in accordance with Paragraph One of Clause Sixteen, whereby the guarantor(s) are accountable for a portion of the debt in an amount previously defined by BNDES based on the amount of credit to be cleared.

II – For use of each credit installment :

a) inexistence of any fact that, at the discretion of BNDES, may substantially alter the economic/financial situation of BENEFICIARY or which may jeopardize the execution of the undertaking herein financed, in a manner that changes it or makes its execution impossible, under the terms established in the project approved by BNDES;

b) Presentation, by BENEFICIARY, of the Debt Clearance Certificate related to Social Security Contributions (CND) or the Debt Liability Certificate with Clearance Effects (CPD-EN), issued by the Federal Revenue Office of Brazil through the INTERNET to be extracted by BENEFICIARY at the address www.receita.fazenda.gov.br and verified by BNDES therein;


c) Confirmation of good standing with the environmental bodies, or when said confirmation has already been presented and is in effect, declaration by BENEFICIARY regarding the continued validity of such document;

III – For use of each installment of Subcredit “B” : Presentation, preferably by means of electronic file, of a list containing data which identifies the assets corresponding to the credit installment to be used, describing the equipment, manufacturer, amount, as well as other information that may be requested by BNDES in order to confirm that the machinery and equipment purchased using the funds of this Subcredit are accredited by BNDES.

IV – For use of each installment of Subcredit “C” :

(i) submission of the Foreign Trade Chamber (CAMEX) Resolution, with a list of the assets contemplated by the tax reduction regime [ regime de ex-tarifários ] specifying the machinery or equipment to be financed, which shall be in force on the date the transaction is contracted; or

(ii) submission of the financed asset import license, attesting to the inexistence of a similar item in the country, through an annotation made by the Foreign Trade Department (DECEX) therein.

V – For use of each installment of Subcredit “D” : submission of the details on the social projects dealt with in item IX of Clause Thirteen of this Agreement.

PARAGRAPH ONE

When the official language of the country is not Portuguese, the opinion mentioned in item I, “b” of this Clause shall be issued in English.

PARAGRAPH TWO

If the opinion mentioned in item I, “b”, of this Clause is issued by an in-house attorney of the guarantor, such opinion shall be notarized.

CLAUSE SIXTEEN

PERSONAL GUARANTEES

The personal guarantees hereunder shall comprise:

I – A guarantee limited to fourteen point three nine percent (14.39%) of the debt, to be formalized through Letter(s) of Guarantee as per the form provided by BNDES, for a minimum term of three (3) years, issued by financial institution(s) which, at the discretion of BNDES, is/are in such economic/financial condition as to grant it/them a certain level of known solvency, and the guarantor(s) shall assume the position of primary obligor(s) for the obligations resulting from this Agreement until they are finally settled, expressly waiving the benefits set out in articles 366, 827 and 838 of the Civil Code, provided that any change in the term or value of the guarantee shall always depend on the prior consent of the guarantor(s), and that, should there be more than one guarantor, the responsibility of each of the guarantors shall correspond to debt percentages that, together, total fourteen point three nine percent (14.39%) of the amount of the debt;


I.(i) The letter(s) of guarantee mentioned in item I must be successively renewed or replaced by letter(s) of guarantee issued under the same terms as those described above, observing the terms and procedures set out in items XIX and XX of Clause Thirteen.

II – A personal guarantee to be rendered by Bunge Limited, in the capacity of joint debtor of BENEFICIARY and primary obligor for the obligations deriving from the Agreement, until final settlement thereof, whose responsibility shall be limited to forty-nine point nine zero percent (49.90%) of the debt, through issuance of an instrument of personal guarantee in terms satisfactory to BNDES, notarized and consularized, expressly waiving the benefits set out in articles 366, 827 and 838 of the Brazilian Civil Code, or, as the case may be, any equivalent benefits that may exist under the laws applicable to the guarantee; and

III – A personal guarantee to be rendered by Solazyme Inc., in the capacity of joint debtor of BENEFICIARY and primary obligor for the obligations deriving from the Agreement, until final settlement thereof, whose responsibility shall be limited to thirty-five point seven one percent (35.71%) of the debt, through the issuance of an instrument of personal guarantee in terms satisfactory to BNDES, notarized and consularized, expressly waiving the benefits of articles 366, 827 and 838 of the Brazilian Civil Code, or, as the case may be, any equivalent benefits that may exist in the laws applicable to the guarantee.

PARAGRAPH ONE

In replacement of the guarantees defined in items I, II and III of the main caption of this Clause and in Clause Ten, BENEFICIARY may submit to BNDES, in guarantee of this Agreement, a guarantee limited to debt installments in amounts to be defined under line “h” of item I of Clause Fifteen, to be formalized through Letter(s) of Guarantee, according to the model supplied by BNDES, for a term of at least three (3) years, to be rendered by financial institution(s) which, at the discretion of BNDES, is/are in such economic/financial condition as to grant it/them a certain level of known solvency, and the guarantor(s) shall assume the position of joint debtor(s) and primary obligor(s) for the obligations resulting from this Agreement, expressly waiving the benefits set out in articles 366, 827 and 838 of the Civil Code, and should there be more than one guarantor, the combined responsibility of each must total the full amount of the debt installment to be guaranteed, provided that any change to the term or the amount of the guarantee shall always depend on the prior consent of the guarantor(s).

PARAGRAPH TWO

The letter(s) of guarantee mentioned in Paragraph One shall be successively renewed or replaced by letter(s) of guarantee issued under the same terms described above, observing the terms and procedures set out in items XIX and XX of Clause Thirteen, until the following items are evidenced to BNDES:

a) The regular creation of all the guarantees defined in items I, II and III of the main section of this Clause;


b) The regular creation of the collateral under the terms of the main section or of Paragraph Five of Clause Ten;

c) The submission, in terms satisfactory to BNDES, of the contractual instruments set out in lines e) and g) of item I of Clause Fifteen.

CLAUSE SEVENTEEN

DEFAULT

In the event of default on the obligations undertaken by BENEFICIARY, the provisions of articles 40 to 47-A of the “ PROVISIONS APPLICABLE TO BNDES AGREEMENTS ” referred to in Clause Thirteen, item I, shall be observed.

CLAUSE EIGHTEEN

PROSECUTION FINE

In the event of judicial collection of the debt resulting from this Agreement, BENEFICIARY shall pay a fine of ten percent (10%) over the principal amount and debt charges, as well as extrajudicial and judicial expenses, and attorneys’ fees, due as of the date the judicial collection action is filed.

CLAUSE NINETEEN

EARLY SETTLEMENT OF THE DEBT

In the event of early settlement of the debt, the guarantees shall be lifted and the remaining obligations shall be subject to article 18, paragraph two, of the “ PROVISIONS APPLICABLE TO BNDES AGREEMENTS ” mentioned in Clause Thirteen, item I.

PARAGRAPH ONE

BNDES shall not refuse to receive payments in full or partial advance of the debt, provided BENEFICIARY duly communicates such fact at least thirty (30) days in advance.

CLAUSE TWENTY

EARLY TERMINATION

BNDES may declare this Agreement early terminated, considering the debt immediately enforceable, with prompt cancellation of any disbursement, if, in addition to the events set forth in articles 39 and 40 of the “ PROVISIONS APPLICABLE TO BNDES AGREEMENTS ”, referred to in Clause Thirteen, item I, the following events are confirmed by BNDES:

a) Reduction in BENEFICIARY staff without compliance with the provision in item IV of Clause Thirteen;


b) Existence of a final and unappeallable decision to condemn due to the performance of acts, by BENEFICIARY, related to child labor, slave labor or crime against the environment;

c) Inclusion in the corporate agreement, bylaws or articles of association of BENEFICIARY, or its controlling companies, of a provision that results in loss to the ability to pay the financial obligations of BENEFICIARY resulting from this transaction;

d) Failure to fulfill any obligation of BENEFICIARY, subject to the provisions in Paragraph Five of this Clause.

e) Occurrence of legal proceeding(s) in a unit or joint amount exceeding five million Reais (R$ 5,000,000.00) against the guaranteeing legal entities, referred to in items II and III of Clause Sixteen, or ruling of bankruptcy or judicial reorganization of such legal entities.

f) Occurrence of a legal proceeding against BENEFICIARY or any event related thereto, which may affect the guarantees created in favor of BNDES.

PARAGRAPH ONE

This Agreement shall be early terminated, with the debt becoming immediately enforceable, and any disbursement being promptly cancelled, in the event of application of the funds granted by this Agreement for a purpose other than that set forth in Clause One. BNDES shall communicate such fact to the Federal Public Attorney’s Office, for the purposes and effects of Law No. 7,492 of June 16, 1986.

PARAGRAPH TWO

This Agreement shall also be early terminated, with the debt becoming immediately enforceable, and any disbursement being promptly cancelled, on the date that the office of Federal Representative or Senator is assumed by any individual who occupies a remunerated position at BENEFICIARY, or is one of its owners, controlling parties or directors, persons subject to the prohibitions set forth in the Federal Constitution, article 54, items I and II. No charges for default shall be incurred, provided payment is made within five (5) business days counting from the date the office is taken, under penalty, if they fail to do so, of application of the charges anticipated for the cases of early termination due to default.

PARAGRAPH THREE

The declaration of early termination based on the stipulation contained in line “b” shall not occur if the imposed redress is fulfilled or while the penalty imposed on BENEFICIARY is being fulfilled, in observance of due legal process.


PARAGRAPH FOUR

In the cases of early termination declared based on article 47-A of the “Provisions Applicable to BNDES Agreements”, the outstanding balance ascertained shall be accreted of the value corresponding to the reimbursement, to the National Treasury, of the amounts related to equalization of interest rate, as set forth in the applicable laws and regulations.

PARAGRAPH FIVE

With respect to the main section of this Clause, BNDES may rule the early termination of this Agreement after the lapse of the following terms, counted from the date BENEFICIARY is notified under the terms of Paragraph Seven of this Clause:

I – Fifteen (15) days, in the event of default on any financial obligations, which include, without limitation, all obligations of payment of principal, interest, fines and other charges established in this Agreement, also encompassing the fines set out in articles 47 and 47-A of the “PROVISIONS APPLICABLE TO BNDES AGREEMENTS” , or;

II – Thirty (30) days, in the event of default on non-financial obligations.

PARAGRAPH SIX

The terms dealt with in Paragraph Five above shall not be applicable in the following situations, and BNDES may determine the early termination of this Agreement immediately after the notice sent under the terms of Paragraph Seven of this Clause:

I – Ruling of bankruptcy or judicial reorganization of BENEFICIARY, and/or;

II – In the cases where the subject must necessarily be communicated to the Public Attorney’s Office, and/or;

III – In the event described in item “b” of the main section of this Clause, observing the provisions of Paragraph Three of this Clause;

PARAGRAPH SEVEN

The notice referred to in Paragraph Five of this Clause shall be made in writing and delivered via fax, mail or in person, to the address of BENEFICIARY included in the preamble of this Agreement.

PARAGRAPH EIGHT

Any notice under the terms of Paragraph Seven above shall be valid and deemed delivered on the date it is received, as evidenced by a protocol signed by BENEFICIARY or, when transmitted by fax or sent by mail, by a notice of receipt.

PARAGRAPH NINE

In the event of financial default, the default interest and other penalties shall be assessed immediately after the maturity thereof, regardless of the ruling of early maturity by BNDES.


PARAGRAPH TEN

In case of noncompliance with a non-financial obligation, the fine set out in article 47 of the “PROVISIONS APPLICABLE TO BNDES AGREEMENTS” shall apply as of the day following the day set by BNDES in this Agreement, or through a judicial or extrajudicial notice for performance of the defaulted obligation, regardless of the ruling of early maturity by BNDES.

CLAUSE TWENTY-ONE

AUTHORIZATION

BENEFICIARY authorizes BNDES to discount from the first credit installment, at the time of its use, the following amounts:

I – Two hundred and thirty-eight thousand, eight hundred and twenty Reais and five centavos (R$ 238,820.05), related to the second and last installment of the Study Commission for the project mentioned in Clause One of this Agreement, the first installment of which, in the amount of two hundred and fifty-two thousand, five hundred and seventy-seven Reais and ninety-five centavos (R$ 252,577.95), was paid on December 14, 2012;

II – Up to fifty-five thousand, five hundred United States dollars (US$55,500.00), corresponding to the amounts incurred with the services rendered by the foreign law firm retained by BNDES to provide assistance services for the project mentioned in Paragraph One of Clause One of this Agreement, by way of Expenses to Reimburse, including, without limitation, the sums referring to the services actually rendered, also to be added taxes, and any other expenses.

SOLE PARAGRAPH

If the amounts mentioned in the main section of this Clause have not been discounted from any installment of release of funds, BENEFICIARY undertakes to pay, within thirty (30) days as of the date of receipt of the written notice sent by BNDES, all costs (including tax charges) and fees incurred with the services provided by the foreign law firm.

CLAUSE TWENTY-TWO

JURISDICTION

The parties elect the courts of Rio de Janeiro and of the headquarters of BNDES to settle any disputes arising out of this Agreement, which cannot be settled out of court.

BENEFICIARY presented Debt Clearance Certificate related to Social Security Contributions—CND No. 001102012-21036609, issued by the Federal Revenue Office of Brazil on November 14, 2012 and valid until May 13, 2013.

The pages of this instrument are initialed by Anaê Matsushita Veronezi, attorney of BNDES, upon authorization by the legal representatives that sign it.


IN WITNESS WHEREOF, the parties sign this instrument in four (04) counterparts of identical content and to one sole effect, in the presence of the undersigned witnesses.

Rio de Janeiro, February 14, 2013

Signature Page of Agreement No. 12.2.1449.1, between BNDES and SOLAZYME BUNGE PRODUTOS RENOVÁVEIS LTDA.

By BNDES :

[ signature ]     [ signature ]
Luciano Coutinho     Roberto Zurli Machado
President     Director
           

BANCO NACIONAL DE DESENVOLVIMENTO ECONÔMICO E SOCIAL—BNDES

 

By BENEFICIARY :    
[ signature ]     [ signature ]
Hildo Francisco Henz     Erico Tavares Lopes
CPF     CPF:
           

SOLAZYME BUNGE PRODUTOS RENOVÁVEIS LTDA.

 

WITNESSES :    
[ signature ]     [ signature ]
           
Name: Thiago Spacek Januario     Name: Ricardo Puccia Filho
Identity:     Identity:
CPF:     CPF:

[ Stamp and signature of attorney Anaé M. Veronezi - Brazilian Economic and Social Development Bank found on every page ]

[Decal and stamps of the 39 th Civil Registry Office of Vila Madalena attesting to the signatures of Hildo Francisco Henz and Erico Tavares Lopes]

[Stamps of the 24 th Notary Office of Rio de Janeiro, RJ, attesting to the signature of Luciano Galvao Coutinho and Roberto Zurli Machado]

[Inspection Seals]

[Stamps overleaf]

Exhibit 10.2

FIRST AMENDMENT

TO

LOAN AND SECURITY AGREEMENT

T HIS F IRST A MENDMENT TO L OAN AND S ECURITY A GREEMENT (this “ Amendment ”) is entered into as of May 9, 2013 (“Amendment Date”), by and between HSBC B ANK USA, N ATIONAL A SSOCIATION , a national banking association (“ HSBC ”) and S OLAZYME , I NC . , a Delaware corporation (“ Borrower ”).

R ECITALS

Borrower and HSBC are parties to that certain Loan and Security Agreement dated as of March 26, 2013 (as amended, restated or modified from time to time, the “ Agreement ”). The parties desire to amend the Agreement in accordance with the terms of this Amendment. Unless otherwise defined herein, capitalized terms in this Amendment shall have the meanings assigned in the Agreement.

N OW , T HEREFORE , the parties agree as follows:

1. The following definitions in Section 1.2 of the Agreement are hereby added or amended to read as follows:

Maximum Revolving Line Amount ” means Thirty-Five Million Dollars ($35,000,000).

Revolving Line ” is an Advance or Advances in an aggregate principal amount up to the Maximum Revolving Line Amount.

2. Section 2.1.2(d) of the Agreement is hereby amended and restated in its entirety as follows:

“(d) Each Letter of Credit shall, among other things, at HSBC’s sole discretion, have an expiry date up to three (3) years after such Letter of Credit’s date of issuance (except to the extent of any renewal or extension thereof). At HSBC’s sole discretion, a Letter of Credit may be amended, renewed or extended for an additional twelve (12) month period from the initial expiry date only if, before giving effect to such amendment, renewal or extension, the aggregate Dollar Equivalent amount available to be used for the renewal of such Letter of Credit exceeds (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)). If any Letter of Credit issued (or renewed or extended) hereunder has an expiry date later than the Revolving Line Maturity Date, the Borrower shall provide cash collateral as described above in Section 2.1.2(b) no later than the Revolving Line Matu