TerraVia™
TerraVia Holdings, Inc. (Form: 10-Q, Received: 08/08/2016 16:15:55)
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, 2016
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
 
TerraVia Holdings, 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)
TerraVia Holdings, 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 August 1, 2016
Common Stock, $0.001 par value per share
 
85,219,925 shares
 



Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


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Table of Contents

PART I: FINANCIAL INFORMATION
Item 1. Financial Statements.
TERRAVIA HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except share and per share amounts
Unaudited
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
49,216

 
$
46,966

Marketable securities available-for-sale
33,307

 
51,009

Accounts receivable, net
2,373

 
3,552

Unbilled revenues
610

 
1,036

Inventories
13,681

 
12,018

Prepaid expenses and other current assets
4,709

 
4,363

Total current assets
103,896

 
118,944

Property, plant and equipment, net
25,155

 
26,344

Investment in Solazyme Bunge JV
38,913

 
35,910

Other assets
1,177

 
774

Total assets
$
169,141

 
$
181,972

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
6,752

 
$
7,016

Accrued liabilities
9,393

 
14,155

Deferred revenue
5,665

 
4,159

Total current liabilities
21,810

 
25,330

Deferred revenue

 
500

Convertible debt
197,828

 
202,015

Other liabilities
1,359

 
602

Total liabilities
220,997

 
228,447

Commitments and contingencies (Note 15)

 

Convertible preferred stock, par value $0.001—5,000,000 shares authorized; 27,850 and zero shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
26,732

 

Stockholders’ deficit:
 
 
 
Common stock, par value $0.001—225,000,000 and 150,000,000 shares authorized at June 30, 2016 and December 31, 2015, respectively; 84,705,844 and 81,734,078 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
85

 
82

Additional paid-in capital
600,776

 
585,679

Accumulated other comprehensive loss
(15,594
)
 
(22,331
)
Accumulated deficit
(663,855
)
 
(609,905
)
Total stockholders’ deficit
(78,588
)
 
(46,475
)
Total liabilities, convertible preferred stock and stockholders’ deficit
$
169,141

 
$
181,972

See accompanying notes to the unaudited condensed consolidated financial statements.

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Table of Contents

TERRAVIA HOLDINGS, 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,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Product revenues
$
6,355

 
$
8,307

 
$
13,627

 
$
17,128

Research and development programs
3,592

 
3,433

 
7,179

 
7,217

Total revenues
9,947

 
11,740

 
20,806

 
24,345

Costs and operating expenses:
 
 
 
 
 
 
 
Cost of product revenues
2,725

 
4,361

 
5,942

 
9,031

Research and development
8,276

 
12,747

 
16,507

 
25,301

Sales, general and administrative
16,000

 
20,981

 
32,768

 
42,249

Restructuring charges
49

 
(31
)
 
1,239

 
393

Total costs and operating expenses
27,050

 
38,058

 
56,456

 
76,974

Loss from operations
(17,103
)
 
(26,318
)
 
(35,650
)
 
(52,629
)
Other income (expense):
 
 
 
 
 
 
 
Interest and other income, net
286

 
137

 
600

 
400

Interest expense
(3,478
)
 
(3,547
)
 
(6,967
)
 
(7,083
)
Debt conversion expense
(1,785
)
 

 
(1,785
)
 

Loss from equity method investment
(5,358
)
 
(7,309
)
 
(10,230
)
 
(12,375
)
Change in fair value of derivative liabilities

 
(134
)
 
82

 
(149
)
Total other expense, net
(10,335
)
 
(10,853
)
 
(18,300
)
 
(19,207
)
Net loss
$
(27,438
)
 
$
(37,171
)
 
$
(53,950
)
 
$
(71,836
)
Net loss per share, basic and diluted
(0.33
)
 
(0.46
)
 
(0.65
)
 
(0.90
)
Weighted average number of common shares used in loss per share computation, basic and diluted
84,379,863

 
80,097,866

 
83,164,890

 
79,874,952

See accompanying notes to the unaudited condensed consolidated financial statements.


4


Table of Contents

TERRAVIA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
In thousands
Unaudited
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(27,438
)
 
$
(37,171
)
 
$
(53,950
)
 
$
(71,836
)
Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Change in unrealized gain/loss on available-for-sale securities
11

 
15

 
15

 
190

Foreign currency translation adjustment
3,637

 
1,942

 
6,722

 
(4,255
)
Other comprehensive income (loss)
3,648

 
1,957

 
6,737

 
(4,065
)
Total comprehensive loss
$
(23,790
)
 
$
(35,214
)
 
$
(47,213
)
 
$
(75,901
)
See accompanying notes to the unaudited condensed consolidated financial statements.


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Table of Contents
TERRAVIA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Unaudited


 
Six Months Ended June 30,
 
2016
 
2015
Operating activities:
 
 
 
Net loss
$
(53,950
)
 
$
(71,836
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,375

 
2,861

Net amortization of premiums on marketable securities
101

 
702

Amortization of debt discount and loan fees
1,307

 
1,256

Debt conversion expense
1,785

 

Warrant expense related to vesting of ADM Warrant

 
51

Provision for doubtful accounts
321

 

Non-cash restructuring charges

 
393

Stock-based compensation expense
5,821

 
8,788

Loss from equity method investment
10,230

 
11,980

Change in fair value of derivative liabilities
(82
)
 
149

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1,030
)
 
(2,387
)
Unbilled revenues
426

 
1,817

Inventories
(1,663
)
 
544

Prepaid expenses and other assets
(693
)
 
77

Accounts payable
(194
)
 
(3,447
)
Accrued liabilities
(3,387
)
 
(2,926
)
Deferred revenue
1,006

 
(375
)
Other current and long-term liabilities
757

 
3,327

Net cash used in operating activities
(36,870
)
 
(49,026
)
Investing activities:
 
 
 
Purchases of property, plant and equipment
(1,259
)
 
(703
)
Proceeds from the sale of equipment

 
121

Purchases of marketable securities
(1,621
)
 
(19,250
)
Maturities of marketable securities
16,378

 
69,506

Proceeds from sales of marketable securities
3,016

 
2,425

Capital contributions to Solazyme Bunge JV
(4,955
)
 
(10,287
)
Restricted certificates of deposit

 
181

Net cash provided by investing activities
11,559

 
41,993

Financing activities:
 
 
 
Proceeds from the issuance of common stock
325

 
427

Proceeds from issuance of preferred stock, net of offering costs
27,067

 

Other

 
(38
)
Net cash provided by financing activities
27,392

 
389

Effect of exchange rate changes on cash and cash equivalents
169

 
(392
)
Net increase in cash and cash equivalents
2,250

 
(7,036
)
Cash and cash equivalents — beginning of period
46,966

 
42,689

Cash and cash equivalents — end of period
$
49,216

 
$
35,653

Supplemental disclosures of cash flow information:
 
 
 
Interest paid in cash, net of capitalized interest
$
5,587

 
$
5,585

Non-cash financing activity:
 
 
 
Non-cash issuance of common stock options for offering costs
$
335

 
$

Issuance of common stock to settle restructuring liabilities              
$
1,205

 
$

Exchange of convertible debt for common stock pursuant to inducement:
 
 
 
Convertible debt exchanged
$
5,598

 
$

Issuance of common stock
$
7,231

 
$

See accompanying notes to the unaudited condensed consolidated financial statements.

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Table of Contents

TERRAVIA HOLDINGS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Nature of Business —TerraVia Holdings, Inc. (the “Company”) was incorporated in the State of Delaware on March 31, 2003. The Company creates food, nutrition and specialty ingredients from algae. In May 2016, the Company changed its name from “Solazyme, Inc.” to “TerraVia Holdings, Inc.”, and changed its Nasdaq ticker listing from SZYM to TVIA.
The Company’s proprietary technology uses microalgae to produce high-value triglyceride oils, proteins, fibers, micronutrients and other ingredients. The Company has developed and is commercializing products for food and nutrition ingredients, animal nutrition ingredients and specialty skin and personal care applications and its products can replace or enhance products derived from the world’s three existing oil sources: petroleum, plants and animal fats. The Company's technology platform harnesses the oil, protein and polysaccharide-producing characteristics of microalgae and the Company is able to tailor the composition of its oils, powders and other bioproducts to address specific customer requirements. The Company uses standard fermentation equipment to convert sugars into the desired end product. By feeding plant-based sugars to the Company’s proprietary microalgae in enclosed fermentation tanks, the Company is in effect utilizing “indirect photosynthesis.”
The Company is involved in a highly competitive industry that 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.
Liquidity —The Company has incurred substantial net losses since its inception; the Company incurred net losses of $54.0 million and $71.8 million during the six months ended June 30, 2016 and 2015, respectively. Accumulated deficit was $663.9 million as of June 30, 2016 . Net cash used in operating activities was $36.9 million and $49.0 million during the six months ended June 30, 2016 and 2015, respectively. Cash and cash equivalents and marketable securities available for sale were $82.5 million as of June 30, 2016 .

The Company is an emerging growth company with a limited operating history. The Company only recently began commercializing many of its products. To date, a substantial portion of revenues has consisted of funding from third party collaborative research agreements and government grants. The Company has generated limited revenues from commercial sales, principally derived from sales of skin and personal care products. A significant portion of future revenues are expected to come from commercial sales in the food and nutrition ingredients and specialty skin and personal care products.

Net losses may continue as the Company ramps up manufacturing capacity and builds out its product pipeline. The Company expects to incur additional costs and expenses related to the continued development and expansion of its business, including research and development, the operation of its commercial production facility in Peoria, Illinois ("Peoria Facility"), the ramp up and operation of the commercial production facility in Brazil ("Solazyme Bunge JV") through its joint venture with Bunge Global Innovation, LLC (together with its affiliates, "Bunge") and other commercial facilities.

The Company, along with its development and commercialization partners, needs to develop products successfully, cost effectively produce them in large quantities and market and sell such products profitably. The Company’s failure to generate sufficient revenues, achieve planned gross margins, control operating costs or raise sufficient additional funds may require it to modify, delay or abandon its planned operations, which could have a material adverse effect on the business, operating results, financial condition and ability to achieve intended business objectives. The Company may be required to seek additional funds through collaborations, public or private debt or equity financings or government programs, and may also seek to reduce expenses related to the Company’s operations. In March 2016, the Company issued 27,850 shares of Convertible Preferred Stock for cash proceeds of $27.1 million , net of associated cash costs (see Note 17). There can be no assurance that any additional financing will be available or on acceptable terms.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
Basis of Presentation - The accompanying unaudited interim 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 condensed consolidated financial position, results of

7



operations and cash flows for the periods presented. The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Solazyme Brazil Renewable Oils and Bioproducts Limitada (“Solazyme Brazil”) and Solazyme Manufacturing 1, L.L.C., the latter of which owns the Company's facility located in Peoria, Illinois ("Peoria Facility"). All intercompany accounts and transactions have been eliminated in consolidation.
T he Solazyme Bunge JV is a variable interest entity ("VIE") that is 50.1% owned by the Company and 49.9% owned by Bunge. The Company determined that it was not required to consolidate the 50.1% ownership in this joint venture and, therefore, accounts for this joint venture under the equity method of accounting (see Note 11).
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, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, or for other interim periods or future years.
These unaudited interim 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, 2015, as filed with the United States Securities and Exchange Commission (“SEC”) on March 15, 2016. The December 31, 2015 unaudited interim condensed consolidated balance sheet included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes required by GAAP for complete financial statements.
Significant Accounting Policies – 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, 2015.
Recently Adopted Accounting Standards — In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs . The standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as an asset. The Company adopted ASU 2015-03 retrospectively in its fiscal quarter ended March 31, 2016. As a result of the retrospective adoption, the Company reclassified unamortized debt issuance costs of $0.5 million from other long-term assets to a reduction in convertible debt on the condensed consolidated balance sheet as of December 31, 2015.
Recent Accounting Pronouncements —In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition . ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In addition, in March and April 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606) and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606), which clarify the guidance in ASU 2014-09 and have the same effective date as the original standard. This guidance requires the recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration expected in exchange for those goods or services. In May 2016, the FASB issued ASU No. 2016-12, Narrow Scope Improvements and Practical Expedients (“ASU 2016-12”), which provides for improvements to the guidance on collectability, noncash consideration and completed contracts, and provides a practical expedient for contract modifications upon adoption of the updated guidance under ASC 606. This new guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted, but not before December 15, 2016, and are required to be adopted by taking either a full retrospective or a modified retrospective approach. The Company is currently assessing the potential impact of this new guidance on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of this new guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation, Stoc k Compensation (Topic 718) , a new standard simplifying certain aspects of accounting for share-based payments. The key provision of the new standard requires that excess tax benefits and shortfalls be recorded as income tax benefit or expense in the income statement, rather than in equity. The ASU is effective

8



for public companies for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of this new guidance on its consolidated financial statements.

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, including stock options, common stock issuable pursuant to the 2011 Employee Stock Purchase Plan, restricted stock, restricted stock units and common stock warrants. Basic and diluted net loss per share was the same for all periods presented as the inclusion of all potentially dilutive securities outstanding was anti-dilutive.

The following outstanding shares of potentially dilutive securities were excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2016 and 2015, as their effect was anti-dilutive:
 
June 30,
 
2016
 
2015
Options to purchase common stock
12,407,862

 
10,603,967

Restricted stock units
1,558,534

 
1,791,457

Warrants to purchase common stock
750,000

 
1,250,000

Shares of common stock to be issued upon conversion of Series A Preferred Stock
13,925,000

 

Shares of common stock to be issued upon conversion of convertible debt ("Notes")
18,177,681

 
18,790,996

Total
46,819,077

 
32,436,420

The table above does not reflect early conversion payment features of the Notes (see Notes 8 and 14) 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.

4. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss, by component, are as follows (in thousands):
 
Foreign Currency Translation Adjustments
 
Change in Unrealized Gain/(Loss) on Available-For-Sale Securities
 
Total Accumulated Other Comprehensive Loss
Balance at December 31, 2015
$
(22,333
)
 
$
2

 
$
(22,331
)
Other comprehensive income
6,722

 
15

 
6,737

Balance at June 30, 2016
$
(15,611
)
 
$
17

 
$
(15,594
)

5. SEGMENT INFORMATION
The Company has two operating segments for financial statement reporting purposes: Algenist ® and Ingredients & Other. The Company’s chief operating decision maker reviews and monitors gross margin by segment, however, the Company does not allocate its operating expenses between its different segments and its collaborative research and development programs, and therefore, the chief operating decision maker does not evaluate financial performance beyond product gross margin. The Company does not allocate its assets to its reportable segments. As further described in Note 18, on August 2, 2016 the Company entered into a definitive agreement to sell a majority interest in Algenist® to Tengram Capital Partners.
The following table shows gross margin for the Company's reportable segments for the three and six months ended June 30, 2016 and 2015, reconciled to the Company’s total product revenue and cost of product revenue as shown in its condensed consolidated statements of operations (in thousands):

9



Three months ended June 30, 2016
Algenist ®
 
Ingredients & Other
 
Total
Product revenues
$
5,499

 
$
856

 
$
6,355

Cost of product revenues
1,865

 
860

 
2,725

Segment gross margin (loss)
$
3,634

 
$
(4
)
 
$
3,630

Six Months Ended June 30, 2016
Algenist ®
 
Ingredients & Other
 
Total
Product revenues
$
11,470

 
$
2,157

 
$
13,627

Cost of product revenues
3,788

 
2,154

 
5,942

Segment gross margin
$
7,682

 
$
3

 
$
7,685

 
 
 
 
 
 
Three months ended June 30, 2015
 
 
 
 
 
Product revenues
$
5,191

 
$
3,116

 
$
8,307

Cost of product revenues
1,347

 
3,014

 
4,361

Segment gross margin
$
3,844

 
$
102

 
$
3,946

Six Months Ended June 30, 2015
 
 
 
 
 
Product revenues
$
11,402

 
$
5,726

 
$
17,128

Cost of product revenues
3,667

 
5,364

 
9,031

Segment gross margin
$
7,735

 
$
362

 
$
8,097

A reconciliation of total segment gross margin to operating loss is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Gross margin
$
3,630

 
$
3,946

 
$
7,685

 
$
8,097

Research and development programs revenue
3,592

 
3,433

 
7,179

 
7,217

Research and development expense
(8,276
)
 
(12,747
)
 
(16,507
)
 
(25,301
)
Sales, general and administrative expense
(16,000
)
 
(20,981
)
 
(32,768
)
 
(42,249
)
Restructuring charges
(49
)
 
31

 
(1,239
)
 
(393
)
Loss from operations
$
(17,103
)
 
$
(26,318
)
 
$
(35,650
)
 
$
(52,629
)
6. RESTRUCTURING CHARGES

In October 2015, the Company made a strategic decision to terminate its manufacturing agreements at the ADM Clinton and American Natural Processors ("ANP") Galva facilities to better align the Company's immediate production assets with its operating strategy while minimizing production costs. As part of the Company's continuing strategy to focus its operations on targeted, higher-value product categories, the Company streamlined operations by reducing workforce by approximately 20% in January 2016. Restructuring activities for the six months ended June 30, 2016 were as follows (in thousands):

 
Liability as of December 31, 2015
 
2016 Expense
 
Deductions/Payments
 
Liability as of June 30, 2016
Other exit costs
$
3,400

 
$
57

 
$
(3,157
)
 
$
300

Employee termination costs

 
1,182

 
(971
)
 
211

Total
$
3,400

 
$
1,239

 
$
(4,128
)
 
$
511



10



7. MARKETABLE SECURITIES AVAILABLE-FOR-SALE
Marketable securities classified as available-for-sale consisted of the following (in thousands):
 
June 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Corporate bonds
$
18,486

 
$
15

 
$
(10
)
 
$
18,491

Asset-backed securities
6,247

 
1

 
(7
)
 
6,241

Government and agency securities
4,016

 
17

 

 
4,033

Mortgage-backed securities
3,352

 
11

 
(14
)
 
3,349

Municipal bonds
1,190

 
3

 

 
1,193

Total
$
33,291

 
$
47

 
$
(31
)
 
$
33,307

 
 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Corporate bonds
$
25,608

 
$
122

 
$
(73
)
 
$
25,657

Asset-backed securities
12,424

 

 
(31
)
 
12,393

Mortgage-backed securities
4,800

 
2

 
(23
)
 
4,779

Government and agency securities
5,705

 
16

 
(9
)
 
5,712

Municipal bonds
2,470

 

 
(2
)
 
2,468

Total
$
51,007

 
$
140

 
$
(138
)
 
$
51,009

The following table summarizes the amortized cost and fair value of the Company’s marketable securities, classified by maturity as of June 30, 2016 and December 31, 2015 (in thousands):
 
June 30, 2016
 
December 31, 2015
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Marketable securities
 
 
 
 
 
 
 
Due in 1 year or less
$
19,556

 
$
19,566

 
$
17,783

 
$
17,870

Due in 1-2 years
6,626

 
6,640

 
15,900

 
15,858

Due in 2-3 years
2,973

 
2,971

 
7,959

 
7,934

Due in 3-4 years
808

 
807

 
2,399

 
2,408

Due in 4-9 years
1,113

 
1,116

 
2,844

 
2,843

Due in 9-20 years
1,042

 
1,038

 
1,397

 
1,394

Due in 20-35 years
1,173

 
1,169

 
2,725

 
2,702

 
$
33,291

 
$
33,307

 
$
51,007

 
$
51,009

Marketable securities classified as available-for-sale are carried at fair value as of June 30, 2016 and December 31, 2015 . 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 $14.7 million as of June 30, 2016 . Gross unrealized losses on available-for-sale securities were $31,000 as of June 30, 2016 , 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 Company had $2.0 million of available-for-sale securities which had been in a continuous loss position for more than 12 months as of June 30, 2016 . In addition, the Company intends to hold these securities. Hence it is not more likely than not that the Company will be required to sell these securities before the recovery of their amortized cost basis.


11



8. 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, 2016 and December 31, 2015 by level within the fair value hierarchy (in thousands):
 
June 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$
4

 
$
5,287

 
$

 
$
5,291

Marketable securities:


 


 


 
 
Corporate bonds

 
18,491

 

 
18,491

Asset-backed securities

 
6,241

 

 
6,241

Government and agency securities
2,481

 
1,552

 

 
4,033

Mortgage-backed securities

 
3,349

 

 
3,349

Municipal bonds

 
1,193

 

 
1,193

 
2,481

 
30,826

 

 
33,307

Total
$
2,485

 
$
36,113

 
$

 
$
38,598

Financial Liabilities
 
 
 
 
 
 
 
Fair value of early conversion feature of convertible debt
$

 
$

 
$

 
$

 
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$
3

 
$
18,900

 
$

 
$
18,903

Marketable securities:


 


 


 

Corporate bonds

 
25,657

 

 
25,657

Asset-backed securities

 
12,393

 

 
12,393

Mortgage-backed securities

 
4,779

 

 
4,779

Government and agency securities
3,722

 
1,990

 

 
5,712

Municipal bonds

 
2,468

 

 
2,468

 
3,722

 
47,287

 

 
51,009

Total
$
3,725

 
$
66,187

 
$

 
$
69,912

Financial Liabilities
 
 
 
 
 
 
 
Fair value of early conversion feature of convertible debt
$

 
$

 
$
82

 
$
82

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

12



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, 2016 and 2015 , 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.
As of June 30, 2016 and December 31, 2015, the carrying values of the Company’s accounts receivables and secured and unsecured debt obligations, excluding the Notes, approximated their fair values. The Company has estimated the fair value of the Notes to be $107.0 million at June 30, 2016 , compared to a carrying value of $197.8 million . These estimates are based upon Level 2 inputs using the market price of the Notes derived from actual trades quoted from Bloomberg using a midmarket pricing convention (the midpoint price between bid and ask prices).

9. INVENTORIES
Inventories consisted of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Raw materials
$
2,738

 
$
1,837

Work in process
5,524

 
6,621

Finished goods
5,419

 
3,560

Total inventories
$
13,681

 
$
12,018


10. PROPERTY, PLANT AND EQUIPMENT—NET
Property, plant and equipment—net consisted of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Plant equipment
$
25,093

 
$
24,824

Building and improvements
5,811

 
5,810

Lab equipment
7,466

 
7,495

Leasehold improvements
2,599

 
1,876

Computer equipment and software
4,300

 
4,159

Furniture and fixtures
634

 
669

Land
430

 
430

Automobiles
194

 
194

Construction in progress
206

 
342

Total
46,733

 
45,799

Less: accumulated depreciation and amortization
(21,578
)
 
(19,455
)
Property, plant and equipment—net
$
25,155

 
$
26,344

Depreciation and amortization expense was $1.2 million and $2.4 million and for the three and six months ended June 30, 2016 , and was $1.4 million and $2.9 million for the three and six months ended June 30, 2015 , respectively.

11. INVESTMENT IN SOLAZYME BUNGE JOINT VENTURE
Background and Operations
In April 2012, the Company and Bunge formed the Solazyme Bunge JV to build, own and operate the Solazyme Bunge JV Plant, a commercial-scale renewable algae oils production facility adjacent to Bunge’s Moema sugarcane mill in Brazil, leveraging the Company's technology. The Solazyme Bunge JV is 50.1% owned by the Company and 49.9% % owned by Bunge and is governed by a six member board of directors, three from each investor.

13



The Solazyme Bunge JV's operational focus from inception to date was primarily on supporting the construction, ramp up and optimization of the commercial-scale production facility. While the Solazyme Bunge JV has incurred significant losses to date, the Company believes that the overall long-term expectation of profitability will drive positive cash flows sufficient for the Company to recover its investment in the Solazyme Bunge JV.

In October 2015, the Company and Bunge entered into an amended and restated joint venture agreement to expand the Solazyme Bunge JV to add a worldwide focus on human food and animal nutrition. Also in October 2015, the Company and Bunge entered into an amended and restated Development Agreement under which the Company granted to the Solazyme Bunge JV a worldwide royalty-bearing, field-limited license to all of its technology that is necessary or useful for the manufacture of certain algae oil products. Concurrently with the entry into such agreements, the Company and Solazyme Bunge JV entered into two funded research programs targeted at completing the development of additional products for the Solazyme Bunge JV; pursuant to these agreements:
Solazyme Bunge JV will:
continue to use the Company's proprietary technology to produce a range of algae-based oils and products from cane sugar through microbe-based catalysis;
pay the Company a royalty for certain products sold by the joint venture; and
pay the Company a technology maintenance fee in recognition of the Company's ongoing research investment in technology.
The Company will:
provide sales, marketing and application development for certain oils and technical expertise in regard to the implementation of its technology;
provide access to the Company's proprietary technology for the production of certain oils and structuring fats for the food and animal nutrition markets; and
retain co-primary sales rights for certain products.
Bunge will:
continue to provide cane sugar feedstock and utilities to the Solazyme Bunge JV Plant from Bunge's adjacent sugar cane processing mill;
provide sales, marketing and application development for certain food oils and will also provide oil processing, global distribution and logistics;
serve as the primary sales channel for some of the joint venture's products, with the Company as an additional sales channel, in each case in exchange for a distribution fee; and
continue to provide working capital to the Solazyme Bunge JV through a revolving loan facility.

The Company contributed $5.0 million and $10.3 million in the six months ended June 30, 2016 and 2015 , respectively. The Company also contributed $1.9 million and $3.8 million in the six months ended June 30, 2016 and 2015 , respectively, to the Solazyme Bunge JV through a reduction in the Company’s receivables due from the Solazyme Bunge JV.

Equity Accounting
The Company accounts for its interest in the Solazyme Bunge JV under the equity method of accounting. The Company's equity investment in the Solazyme Bunge JV was $38.9 million and $35.9 million as of June 30, 2016 and December 31, 2015, respectively. During the six months ended June 30, 2016 and 2015, the Company recognized $10.2 million and $12.4 million of losses, respectively, related to its equity method investment in the Solazyme Bunge JV.
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. The optimization and ramping up of the Solazyme Bunge JV Plant is the activity of the Solazyme Bunge JV that most significantly impacts its current 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, each of the Company and

14



Bunge has equally shared decision–making powers over certain significant activities of the Solazyme Bunge JV, including those related to the construction, optimization and ramping up of the Solazyme Bunge JV. Therefore, as of June 30, 2016 , the Company does not consider itself to be the Solazyme Bunge JV’s primary beneficiary, and as such has not consolidated the financial results of the Solazyme Bunge JV. Consolidation may be required 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.
The following table summarizes the carrying amounts of the assets and liabilities included in the Company’s consolidated balance sheets and the maximum loss exposure related to the Company’s interest in the Solazyme Bunge JV as of June 30, 2016 and December 31, 2015 (in thousands):
 
As of June 30, 2016
 
Assets
 
Liabilities
 
 
 
Accounts
Receivable
 
Unbilled
Revenues
 
Investments in
Unconsolidated
Joint Ventures
 
Loan
Guarantee
 
Maximum
Exposure
to Loss (1)
Solazyme Bunge JV
$
12

 
$
563

 
$
38,913

 
$

 
$
51,029

 
As of December 31, 2015
 
Assets
 
Liabilities
 
 
 
Accounts
Receivable
 
Unbilled
Revenues
 
Investments in
Unconsolidated
Joint Ventures
 
Loan
Guarantee
 
Maximum
Exposure
to Loss (2)
Solazyme Bunge JV
$
12

 
$
839

 
$
35,910

 
$

 
$
45,692

 
(1)  
Includes maximum exposure to loss attributable to the Company’s bank guarantee required to be provided for the Solazyme Bunge JV of $10.9 million and non-cancelable purchase obligations of $0.6 million (based on the exchange rate at June 30, 2016 ).
(2) Includes maximum exposure to loss attributable to the Company’s bank guarantee required to be provided for the Solazyme Bunge JV of $8.9 million (based on the exchange rate at December 31, 2015).
The Company may be required to contribute additional capital to the Solazyme Bunge JV which would increase the Company’s maximum exposure to loss. These future contribution amounts cannot be quantified at this time.
Summarized Financial Information
Summarized information on the Solazyme Bunge JV’s balance sheets and income statements as of June 30, 2016 and December 31, 2015, and for the three and six months ended June 30, 2016 and 2015 respectively, was as follows (in thousands):
 
As of June 30, 2016
 
As of December 31, 2015
Current assets
$
8,132

 
$
5,654

Property, plant and equipment, net
121,495

 
100,755

Recoverable taxes (1)
19,962

 
16,144

Total assets
$
149,589

 
$
122,553

 
 
 
 
Current liabilities
$
34,877

 
$
23,009

Noncurrent liabilities
46,425

 
43,054

JV’s partners’ capital, net
68,287

 
56,490

Total liabilities and partners’ capital, net
$
149,589

 
$
122,553

 
 
 
 
(1) Recoverable taxes are comprised of value-added taxes paid upon the acquisition of property, plant and equipment items and other goods and services, and other transactional taxes which can be recovered in cash or as compensation against income taxes or other taxes owed by

15



Solazyme Bunge JV in Brazil. The realization of these recoverable tax payments could take in excess of five years.
 
Three months ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
1,937

 
$
401

 
$
2,996

 
$
658

Net losses
$
(10,325
)
 
$
(13,407
)
 
$
(19,679
)
 
$
(23,175
)
During 2013, the Solazyme Bunge JV entered into a loan agreement with the Brazilian Development Bank ("BNDES" or "BNDES Loan") under which it could borrow up to $76.0 million (based on the exchange rate as of June 30, 2016 ). Outstanding borrowings were $59.2 million and $53.4 million as of June 30, 2016 and December 31, 2015, respectively. The Company has provided a bank guarantee equal to 14.39% of the total amount available under the BNDES Loan and may be required to provide a corporate guarantee equal to 35.71% of the total amount available under the BNDES Loan (with the total amount covered by the guarantees not to exceed the Company’s ownership percentage in the Solazyme Bunge JV). The BNDES funding has supported the construction of the Solazyme Bunge JV’s production facility. The term of the BNDES Loan is eight years and the loan has an average interest rate of approximately 4.0% per annum. As of June 30, 2016 , 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, 2016 and 2015.
Impairment Assessment
The Company assessed the recoverability of its equity investment in Solazyme Bunge JV as of December 31, 2015 using a discounted cash flow analysis. Based upon such analysis, the Company expects to recover the carrying amount of its equity investment and concluded that its equity investment was not impaired. The Company is not aware of any events since that assessment was done that would indicate its equity investment was impaired as of June 30, 2016.
The process of evaluating the potential impairment is subjective and requires significant estimates and assumptions. The Company’s estimated future cash flows are based on assumptions that are consistent with its annual planning process and include estimates for revenue and operating margins and future economic and market conditions. Actual future results may differ significantly from those estimates.  Changes in assumptions or circumstances could result in an impairment in the period the change occurs and in future years. Management’s conclusion that its equity investment was not impaired as of December 31, 2015 was based upon the following critical estimates and assumptions:
No significant adverse change in the regulatory or economic environment in Brazil or other countries, as applicable
No significant difficulties as production increases from minimal capacity to full capacity over the next several years
Sales mix of products currently commercially produced and sold to existing customers as well as certain oil products for food and animal nutrition markets under development and expected to be commercialized in 2016 and 2017
Average selling prices based on current contracted prices and at or above market prices for comparable products
Additional capital investment to increase plant capacity for new products and process improvements of approximately $50 million in total
Increased fermentation and recovery efficiencies over the next 5 years based on strain and process improvements
Reduction to production costs based on ramp up of production volume to an aggregate maximum plant capacity in line with sales volume
Discount rate of approximately 14%
In order for the Solazyme Bunge JV to achieve sufficient cash flows to enable the Company to fully recover its equity investment, the Solazyme Bunge JV must:
Increase production volumes by:
Optimizing plant throughput
Improving lipid and oil content output
Increasing final recovery yields
Maintain access to low-cost cane sugar feedstock and power
Commercialize and sell its high value products
The estimates used for cash flow forecasts required significant exercise of judgment and are subject to change in future reporting periods as facts and circumstances change. Additionally, the Company may make changes to its business plan that could result in changes to the expected cash flows. As a result, it is possible that impairments may be required in future reporting periods.


16



12. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Accrued compensation and related liabilities
$
4,693

 
$
6,270

Accrued interest
3,287

 
3,495

Accrued restructuring costs
511

 
3,400

Other accrued liabilities
902

 
990

Total accrued liabilities
$
9,393

 
$
14,155


13. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS, DISTRIBUTION AGREEMENTS, AND LICENSES
Unilever —The Company has entered into multiple joint research and development agreements with Unilever, which expanded its research and development efforts. In September 2013, the Company and Unilever entered into a commercial supply agreement for at least 10,000 MT of the Company’s algae oil. In May 2014, Unilever announced the initial introduction of the Company's sustainable algae oil into one of its biggest soap brands, Lux.
In March 2016, the Company entered into a multi-year global supply agreement with Unilever, which includes a broad portfolio of our algae oils for Unilever to purchase. Production of these oils will take place at the Solazyme Bunge JV facility in Brazil and pricing terms are based upon variable production cost plus a defined contribution margin. The agreement contains certain minimum and maximum sales volumes and is subject to other terms and conditions. Unilever is a strategic development partner and customer for the Company. The Company intends to continue managing the strategic relationship with Unilever and has assigned the rights and responsibilities to deliver against the current supply agreement  to the Solazyme Bunge JV, and accordingly revenue related to the Unilever supply agreement was recognized by the Solazyme Bunge JV in the three months ended June 30, 2016. The Company expects to formalize the assignment agreement with the Solazyme Bunge JV in the three months ending September 30, 2016.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
14. DEBT
A summary of the Company’s debt as of June 30, 2016 and December 31, 2015 was as follows (in thousands):
 
June 30,
2016
 
December 31,
2015
Convertible debt:
 
 
 
2018 Notes
$
57,462

 
$
61,632

2019 Notes
148,072

 
149,500

Total debt
205,534

 
211,132

Add:
 
 
 
Fair value of embedded derivative

 
82

Less:
 
 
 
Unamortized debt discount
(7,341
)
 
(8,749
)
Debt issuance costs
(365
)
 
(450
)
Long-term portion of debt
$
197,828

 
$
202,015

The Company was in compliance with all debt covenants as of June 30, 2016 and December 31, 2015.
Convertible Senior Subordinated Notes -2018 Notes —As of June 30, 2016 , the Company had $57.5 million aggregate principal amount outstanding of 2018 Notes. The 2018 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. The 2018 Notes are convertible into the Company’s common stock and may be settled as described below. The 2018 Notes will mature on February 1, 2018, unless earlier repurchased or converted. The Company may not redeem the 2018 Notes prior to maturity.

17



The 2018 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 2018 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 2018 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.
Convertible Senior Subordinated Notes - 2019 Notes — As of June 30, 2016 , the Company had $148.1 million aggregate principal amount outstanding of 5.00% Convertible Senior Subordinated 2019 Notes. The 2019 Notes bear interest at a fixed rate of 5.00% per year, payable semiannually in arrears on April 1 and October 1 of each year. The 2019 Notes are convertible into the Company's common stock and may be settled early as described below. The 2019 Notes will mature on October 1, 2019, unless earlier repurchased or converted. The Company may not redeem the 2019 Notes prior to maturity.
The 2019 Notes are convertible at the option of the holders on any day prior to and including the scheduled trading day prior to October 1, 2019. The 2019 Notes will initially be convertible at a conversion rate of 75.7576 shares of Common Stock per $1,000 principal amount of 2019 Notes (equivalent to an initial conversion price of $13.20 per share of Common Stock), subject to adjustment upon the occurrence of certain events. With respect to any conversion prior to January 1, 2018 (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 2019 Notes surrendered for conversion that may be settled, at the Company’s election, in cash or shares of the Company's common stock.
Debt Conversion  —In April 2016, the Company exchanged 2018 and 2019 notes totaling approximately $5.6 million  by issuing  1,645,753  shares (including 804,986 inducement shares) of Common Stock. The Company recorded a non-cash debt conversion expense of approximately  $1.8 million  related to the exchange in the three months ended June 30, 2016.
HSBC Facility —The Company had a loan and security agreement with HSBC Bank, USA, National Association (“HSBC”) that provided for a $35.0 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. A portion of the HSBC facility also supported the bank guarantee issued to BNDES in May 2013. The HSBC Facility expired on May 31, 2016.
SVB Standby Letter of Credit and Loan and Security Agreement —In the second quarter of 2016, the Company and Silicon Valley Bank entered into an agreement ("SVB Agreement") that provides for a $12.9 million letter of credit facility (the “Facility”) denominated in U.S. dollars or a foreign currency. On April 29, 2016, Silicon Valley Bank issued a standby letter of credit (“SVB SLOC”) to support a bank guarantee issued on behalf of the Company to BNDES in connection with the loan agreement entered into in 2013 between BNDES and the Solazyme Bunge JV. The SVB SLOC is being supported by a bank confirmation issued by the Bank of Nova Scotia (the “Scotia Bank Confirmation”) on behalf of Silicon Valley Bank. The Company will pay fees of 1.5% and 0.7% of the collateral per annum related to the SVB SLOC and the Scotia Bank Confirmation, respectively. The Company will also pay a fee of 1.99% of the collateral per annum for the issuance of the bank guarantee to BNDES. The Company is subject to customary events of default under the SVB Agreement. The Company has not recorded any liability for this guarantee as of June 30, 2016, as the probability of performance is considered to be not sufficient to justify a liability.
Under the SVB Agreement, the Company is subject to financial covenants and covenants related to our 2018 Notes and 2019 Notes, as well as customary negative covenants. The SVB Agreement also contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default.

15. COMMITMENTS AND CONTINGENCIES
Legal Matters
Securities Class Action Litigation
In June 2015, a securities class action complaint entitled Norfolk County Retirement System v. Solazyme, Inc. et al. was filed against the Company, its CEO, Jonathan Wolfson, its CFO/COO, Tyler Painter, certain of its current and former directors, and the underwriters of its March 2014 equity and debt offerings, Goldman, Sachs & Co., Inc. and Morgan Stanley & Co. LLC,

18



in the U.S. District Court for the Northern District of California.  The complaint asserts claims for alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1934, as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks unspecified damages on behalf of a purported class that would comprise all individuals who acquired the Company's securities (i) between February 27, 2014 and November 5, 2014 and (ii) pursuant and/or traceable to the Company's public equity and debt offerings in March 2014. The complaint alleges that investors were misled by statements made during that period about the construction progress, development, and production capacity associated with the production facility located in Brazil owned by the Company’s joint venture, Solazyme Bunge Produtos Renovaveis Ltda.  In October 2015, the lead plaintiff was selected in the action and an amended complaint was filed in December 2015. The Company filed a Motion to Dismiss the action in February 2016 that was heard in May 2016. The Company believes the complaint lacks merit, and intends to defend itself vigorously.
Derivative Litigation
In July 2015, a complaint entitled Jim Bertonis, derivatively on behalf of Solazyme, Inc. v. Jonathan Wolfson et al. was filed in the Superior Court of California, County of San Mateo. The complaint seeks unspecified damages, purportedly on behalf of the Company from certain of its current and former directors and officers and alleges these defendants breached their fiduciary duties to the Company and unjustly enriched themselves by making allegedly false and misleading statements and omitting certain material facts in the Company's securities filings and other public disclosures. This purported stockholder derivative action is based on substantially the same facts as the securities class action described above. Based on a review of the plaintiffs’ allegations, the Company believes that the plaintiff has not demonstrated standing to sue on its behalf.

In August 2015, a complaint entitled Gregory M. Miller, derivatively on behalf of Solazyme, Inc. v. Jonathan S. Wolfson et al. was filed in the U.S. District Court for the Northern District of California. The complaint seeks unspecified damages, purportedly on behalf of the Company from certain of its current and former directors and officers and alleges these defendants breached their fiduciary duties to the Company and aided and abetted the Company in making allegedly false and misleading statements and omitting certain material facts in the Company's securities filings and other public disclosures. This purported stockholder derivative action is based on substantially the same facts as the securities class action and the Bertonis derivative action described above. Based on a review of the plaintiffs’ allegations, the Company believes that the plaintiff has not demonstrated standing to sue on its behalf.

In May 2016, a complaint entitled Ben Wang, derivatively on behalf of TerraVia Holdings, Inc. v. Jonathan S. Wolfson et al. was filed in the Superior Court of California, County of San Mateo. The complaint seeks unspecified damages, purportedly on behalf of the Company from certain of its current and former directors and officers and alleges these defendants breached their fiduciary duties to the Company and aided and abetted the Company in making allegedly false and misleading statements and omitting certain material facts in the Company's securities filings and other public disclosures. This purported stockholder derivative action is based on substantially the same facts as the securities class action and the Bertonis and Miller derivative actions described above. Based on a review of the plaintiffs’ allegations, the Company believes that the plaintiff has not demonstrated standing to sue on its behalf.
Roquette Frères, S.A.
In September 2013, an arbitration (the “Roquette Arbitration”) was initiated with Roquette Frères, S.A. (“Roquette”) in connection with the dissolution of a joint venture between the Company and Roquette known as Solazyme Roquette Nutritionals L.L.C. (“SRN”). The Company sought a declaration that, in accordance with the terms of the joint venture agreement between the parties, the Company should be assigned all improvements made by or on behalf of SRN to the Company’s intellectual property. On February 19, 2015 the arbitration panel released its decision, ordering, inter alia, the assignment to the Company of (i) all SRN patent applications, (ii) all SRN know-how related to high lipid algae flour and high protein algae powder and (iii) all Roquette patent applications filed since November 2010 relating to algae food and food ingredients, as well as methods for making and using them. In addition, the arbitration panel ordered Roquette to pay to the Company, $2.3 million in legal costs and fees. The arbitration award was confirmed by order of the U.S. District Court for the District of Delaware on December 21, 2015. Roquette has appealed the confirmation of the arbitration award to the U.S. Court of Appeals for the Third Circuit. Pending this appeal, the confirmation of the arbitration award has been stayed by order of the U.S. District Court for the District of Delaware by order dated January 12, 2016, in which the Court granted not only a stay but also enjoined Roquette from pursuing any further commercialization of any technology arguably within the ambit of the arbitral decision, including the sale of products. The appeal is scheduled to be heard by the Third Circuit in September 2016.
In November 2014, Roquette filed an action against the Company in U.S. District Court for the District of Delaware for declaratory judgment related to the Roquette Arbitration. Roquette seeks a declaration that (i) the arbitrators in the Roquette Arbitration exceeded their authority by failing to render a timely arbitration award, (ii) any award issued by the arbitrators is void and (iii) all intangible assets of SRN should be assigned jointly to Roquette and the Company. Other than seeking its

19



attorney fees and costs in the action, Roquette did not make any monetary claims against the Company. The Company filed an Answer to the Complaint in January 2015, denying substantially all of Roquette’s claims and all of its prayers for relief.
In February 2015 Roquette filed a second action against the Company in U.S. District Court for the District of Delaware for declaratory judgment related to the Roquette Arbitration. Roquette sought a declaration that (A) the order of the arbitrators in the Roquette Arbitration for more discovery and new hearings was unenforceable and (B) in the alternative, the proposed new discovery and hearings concerned an issue that was outside the scope of the arbitration. Other than seeking its attorney fees and costs in the action, Roquette did not make any monetary claims against the Company. The two Delaware actions were consolidated in February 2015. The Company filed its Answer to the second Complaint in February 2015, denying all claims made in the Complaint and all related prayers for relief. In addition, the Company cross-claimed for (x) confirmation of the arbitration award, (y) an order compelling Roquette to comply with the arbitration award and (z) damages for misappropriation of the Company’s trade secrets, misuse of the Company’s confidential information and breach of contract. In April 2015 Roquette filed motions for summary judgment in each of the two declaratory judgment actions commenced by Roquette and a motion to vacate the award rendered in the Roquette Arbitration, which included counterclaims alleging the Company misused certain Roquette trade secrets. The summary judgment motions made by Roquette were denied in an opinion of the court dated December 21, 2015. All further proceedings under the declaratory actions have been stayed pending the Third Circuit appeal described above.
The Company may be involved, from time to time, in additional 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. 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 individually and in the aggregate 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.

16. STOCK-BASED COMPENSATION
The following table summarizes the components and classification of stock-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, 2016 and 2015 (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Stock options
$
2,011

 
$
3,208

 
$
4,045

 
$
5,455

RSUs/RSAs
1,016

 
1,334

 
2,021

 
3,111

ESPP
58

 
177

 
(245
)
 
222

Stock-based compensation expense
$
3,085

 
$
4,719

 
$
5,821

 
$
8,788

Research and development
$
757

 
$
1,473

 
$
1,301

 
$
2,585

Sales, general and administrative
2,328

 
3,246

 
4,520

 
6,203

Stock-based compensation expense
$
3,085

 
$
4,719

 
$
5,821

 
$
8,788


17. CONVERTIBLE PREFERRED STOCK
In March 2016, the Company issued 27,850 shares of Convertible Preferred Stock for cash proceeds of $27.1 million , net of issuance costs of $0.8 million . Starting in July 2016, shares of the Series A Preferred Stock are convertible at the option of the holders into shares of Common Stock, at an initial conversion price of $2.00 per share, subject to customary adjustments in the event of stock splits and certain other changes to the Company’s capitalization. The Company has classified the convertible preferred stock as temporary equity in the condensed consolidated balance sheet as of June 30, 2016 due to the existence of certain change in control provisions that are not solely within the Company’s control.                                            
The convertible preferred stock contains the following terms and conditions: 

20



Dividends . The holders are entitled to participate equally and ratably with the Common Stock in all dividends and distributions on an as-converted basis, subject to certain customary exceptions. The Preferred Stock will also rank senior to the Common Stock.
Liquidation Preference . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or certain change of control transactions, each holder will be entitled to receive a liquidation preference before any distribution or payment is made to holders of the Common Stock or any other security that ranks junior to the Preferred Stock.
Voting Rights. Holders will be entitled to vote together as a single class with the holders of the Common Stock on all matters submitted for a vote by holders of the Common Stock, with each such holder of Preferred Stock being entitled to cast a number of votes equal to the number of whole shares of Common Stock issuable upon conversion of such Preferred Stock.
Board Representation . For so long the outstanding shares of Preferred Stock represent at least 5.0% of the Company’s outstanding voting power on an as-converted basis, the holders will have the right to designate a nominee for election to the Company’s Board of Directors, subject to certain exceptions.
Protective Provisions . For so long as at least 1,392 shares of Preferred Stock remain outstanding, the Company may not, without the approval of the holders of at least two-thirds of the then outstanding shares of Preferred Stock: (i) amend any provision of the Certificate of Designations or the Company’s Amended and Restated Certificate of Incorporation or bylaws so as to adversely affect the rights, preferences or privileges of the Preferred Stock; or (ii) declare or pay any divided on the Common Stock, subject to certain customary exceptions. In addition, for so long as at least 11,140 shares of Preferred Stock remain outstanding, the Company may not, without the approval of the holders of at least two-thirds of the then outstanding shares of Preferred Stock, create, authorize or issue any equity securities senior to the Preferred Stock.
Mandatory Conversion . The Company can require the conversion of the outstanding shares of Preferred Stock if either the trading price of the Common Stock is greater than three times the conversion price before the third anniversary of the Initial Closing or is greater than four times the conversion price thereafter, subject to certain customary conditions.
Transfer Restrictions . No holder of any shares of Preferred Stock may transfer such shares except to an affiliate of such holder or the Company. If the transfer is to an affiliate, such affiliate must become a party to the Registration Rights Agreements. In addition, if such affiliate would beneficially own five percent or more of the Company’s aggregate voting power after giving effect to the transfer, they must enter into a customary standstill agreement.

18. SUBSEQUENT EVENTS
On August 2, 2016, the Company entered into a definitive agreement to sell a majority interest in its Algenist® business to Tengram Capital Partners. The Company expects this transaction to close by September 30, 2016. Upon closing, the Company will receive approximately $20 million in cash and will retain approximately a 20% ownership interest in the Algenist business. The Company will continue to supply active ingredients formulated in the Algenist product line to Algenist. After closing, the Company will reclassify the historical results of Algenist as discontinued operations in future filings.





21




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 unaudited interim 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 strategy and expectations as to future financial and operating performance and focus, future selling prices and margins for our products, attributes and performance of our products, manufacturing capacity, expense levels and liquidity sources and our ability to successfully complete the sale of our Algenist business 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 are a food, nutrition and specialty ingredients company that harnesses the power of algae, the origin of all plants. Our innovative platform uses microalgae to produce high-value triglyceride oils, proteins, fibers, micronutrients and other ingredients. The inherent flexibility of our technology platform and the broad usage of these materials across multiple industries allow us to approach a wide range of customers across myriad end markets. In May 2016, we changed our name from “Solazyme, Inc.” to “TerraVia Holdings, Inc.”, and changed our Nasdaq ticker listing from SZYM to TVIA. With the transition to the TerraVia brand and our refined focus on food, nutrition and specialty ingredients, we announced in March 2016 our intention to attract a new CEO with proven industry experience in food and nutrition to drive commercial growth.  On August 8, 2016, we announced the appointment of Apu Mody as our Chief Executive Officer, effective upon the commencement of his employment with TerraVia, expected to occur on or about August 22, 2016.
The unique composition of our oils, powders and other algae-derived products address specific customer requirements. We are commercializing high-value oils and powder products with companies that primarily use them as ingredients. We have developed and are commercializing products for specialty food ingredients, animal nutrition ingredients, consumer food products and specialty skin and personal care ingredients. Over our history, we have also invested in and developed products, technology and market opportunities in the industrials area, which includes fuels, industrial oils, and the oilfield/Encapso ® business. In line with our strategy to focus our commercial efforts on food and specialty personal care ingredients, we expect to pursue strategic alternatives for the industrials business and our objective will be to identify partners who have the operational capabilities needed to realize the potential of those businesses.
Our food oils are formulated to offer a variety of functional benefits such as enhanced structuring capabilities and stability while providing robust formulation and process flexibility. These food oils have the potential to improve upon conventionally utilized specialty fats and oils and our high oleic algae oil has received an FDA generally recognized as safe (GRAS) "No Questions" letter. Currently, these oils are commercially available in our AlgaWise ® branded food oil platform and in our consumer culinary oil Thrive® brand. In addition, we have developed novel methods of preparing powdered forms of triglyceride oils and vegan proteins, and our powdered ingredients are composed of unmodified whole algae cells. AlgaVia ® Lipid Powder (commonly known as whole algae flour) and AlgaVia ® Protein (commonly known as whole algae protein) are whole algae ingredients that can improve the nutritional profile of foods and beverages. AlgaVia ® Lipid Powder is a new fat source that allows for the reduction or replacement of dairy fats, oils, and eggs. AlgaVia ® Protein is a new vegan source of protein that is free of known allergens and gluten. Both AlgaVia ® Lipid Powder and Protein can be used across a range of applications such as beverages (ready-to-drink and powdered), bakery, snacks, bars, dressings, sauces and frozen desserts and have received FDA GRAS “No Questions” letters. In May 2016, we and Bunge announced that we launched a native, whole algae DHA, docosahexaenoic acid, a long chain omega-3 fatty acid as a sustainable specialty feed ingredient, prioritizing the aquaculture market.
Our process is compatible with commercial-scale, widely-available fermentation and oil recovery equipment. We operate our lab and pilot fermentation and recovery equipment as scaled-down versions of our large commercial engineering designs, such as those used to perform development work under certain agreements with strategic partners and to fulfill commercial supply agreements. We have scaled up our technology platform and have successfully operated at lab (5-15 liter), pilot (600-1,000 liter), demonstration/small commercial (120,000 liter) and large commercial (approximately 500,000 liter and above) fermenter scale.

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Table of Contents

On August 2, 2016 we entered into a definitive agreement to sell a majority interest in Algenist® to Tengram Capital Partners . We expect this transaction to close by September 30, 2016. Upon closing, we will receive approximately $20 million in cash and will retain approximately a 20% ownership interest in the Algenist business. We will continue to supply active ingredients formulated in the Algenist product line to Algenist. After closing, we will reclassify the historical results of Algenist as discontinued operations in future filings.

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 2015 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to revenue recognition, inventories, stock-based compensation and income taxes. There have been no material changes to the Company’s critical accounting policies described in the Company’s 2015 Annual Report on Form 10-K.
Results of Operations
Comparison of Three Months Ended June 30, 2016 and 2015
Revenues
 
Three Months Ended June 30,
 
2016
 
2015
 
$ Change
 
(In thousands)
Revenues:
 
 
 
 
 
Product revenues
$
6,355

 
$
8,307

 
$
(1,952
)
Research and development programs
3,592

 
3,433

 
159

Total revenues
$
9,947

 
$
11,740

 
$
(1,793
)
We have two reportable segments for financial statement reporting purposes: 1) Algenist®, and 2) Ingredients and Other. The Algenist segment includes sales of our Algenist® brand skin and personal care products. The Ingredients and Other segment includes sales of our food, nutrition and specialty ingredients; and also includes sales of our Industrial oils, Encapso ®  product, and fuel blend sales related to our fuels marketing and commercial development programs. Our discussions below surrounding changes in product revenue and gross margin are based on these two reportable segments. As discussed in the overview above, on August 2, 2016 we entered into a definitive agreement to sell a majority interest in Algenist® to Tengram Capital Partners

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Table of Contents

Product Revenues and Cost of Product Revenues
Product revenues and cost of product revenues by segment for the three months ended June 30, 2016 and 2015 were as follows:
 
Three Months Ended June 30,
 
2016
 
2015
 
Change
 
(In thousands)
Algenist ®
 
 
 
 
 
  Product revenues
$
5,499

 
$
5,191

 
$
308

  Cost of product revenues
1,865

 
1,347

 
518

  Gross margin
$
3,634

 
$
3,844

 
$
(210
)
  Gross margin %
66
 %
 
74
%
 
(8
)%
 
 
 
 
 
 
Ingredients and Other
 
 
 
 
 
  Product revenues
$
856

 
$
3,116

 
$
(2,260
)
  Cost of product revenues
860

 
3,014

 
(2,154
)
  Gross margin (loss)
$
(4
)
 
$
102

 
$
(106
)
  Gross margin %
 %
 
3
%
 
(3
)%
Algenist ®  
Algenist ® product revenues increased $0.3 million in the three months ended June 30, 2016 compared to the same period last year primarily as a result of new product launches. Algenist ® gross margin of 66% in the three months ended June 30, 2016 was lower than the gross margin of 74% in the three months ended June 30, 2015 primarily as a result of second quarter 2015 inventory reserve adjustments, which increased the second quarter 2015 gross margin by 6%. As discussed in the overview above, on August 2, 2016 we entered into a definitive agreement to sell a majority interest in Algenist® to Tengram Capital Partners .

Ingredients and Other
Ingredients and Other product revenues decreased $2.3 million in the three months ended June 30, 2016 compared to the same period last year due to decreased product sales related to our fuels marketing and commercial development program, Encapso ® and industrial oil products, consistent with our strategy to focus on high value product sales.

During scale-up of the manufacturing process at the ADM Clinton and ANP Galva Facilities in 2015, certain production costs were charged to research and development and selling, general and administrative expenses. Gross margins for our Ingredients and Other products would have been lower in 2015 if such production costs had not been charged to operating expenses.
The gross margin for Ingredients and Other product sales gross margin was 0% in the three months ended June 30, 2016 compared to a 3% gross margin in the same period last year, primarily due to changes in product mix.

We plan to focus on our production at the Solazyme Bunge JV facility and at our Peoria facility in the immediate future and believe this strategic decision will better align our immediate production assets with our operating strategy while minimizing production costs.

Research and Development Programs Revenue

We are currently engaged in development activities with multiple strategic partners and the Solazyme Bunge JV, and although we expect funded program revenue to remain an important indication of strategic commitment from partners and a source of future customers, we expect funded program revenue to become a less meaningful part of our overall revenue as our focus shifts to commercialization and product revenues. Our revenues from development agreements with the Solazyme Bunge JV and strategic partners fluctuate due to timing and terms of the development work performed and achievement of contract milestones defined in these agreements. Revenues from research and development of $3.6 million were relatively constant in the three months ended June 30, 2016 compared to the same period last year.

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Table of Contents


Operating Expenses
 
Three Months Ended June 30,
 
2016
 
2015
 
$ Change
 
(In thousands)
Operating expenses:
 
 
 
 
 
Research and development
$
8,276

 
$
12,747

 
$
(4,471
)
Sales, general and administrative
16,000

 
20,981

 
(4,981
)
Restructuring charges
49

 
(31
)
 
80

Total operating expenses
$
24,325

 
$
33,697

 
$
(9,372
)
Research and Development Expenses
Research and development expenses decreased $4.5 million in the three months ended June 30, 2016 compared to the same period last year, due primarily to decreases in personnel-related costs of $2.3 million, scale-up production costs related to operations at the Clinton/Galva facilities of $0.6 million, consumable and supply costs of $0.4 million and product development, process development costs, and other costs of $0.7 million. Personnel-related costs include non-cash stock-based compensation expense of $0.8 million in the three months ended June 30, 2016 compared to $1.5 million in the same period last year.
We expect overall research and development costs to decrease in 2016, compared to 2015, in particular personnel-related costs, as a result of the reduction in workforce and other cost-cutting measures we have implemented. We plan to continue to make investments in research and development for the foreseeable future, but at a lower rate, as we continue to (1) identify, isolate and further optimize strains of microalgae to achieve high cell densities, high yield converting sugar to product and high productivity rates compared to other alternatives; (2) customize oil outputs to meet specific market needs; and (3) engage in product and process development projects aimed at reducing the cost of oil production.
Sales, General and Administrative Expenses
Sales, general and administrative expenses decreased $5.0 million in the three months ended June 30, 2016 compared to the same period last year primarily due to decreased fixed third-party facilities costs associated with the Clinton/Galva facilities of $3.4 million and decreased personnel-related costs of $1.7 million. Personnel-related costs include non-cash stock-based compensation expense of $2.3 million in the three months ended June 30, 2016 compared to $3.2 million in the same period last year.
We plan to continue to invest in commercialization of our high value products within the food, nutrition and specialty ingredients markets, which may increase our overall selling, general and administrative expense, but expect personnel-related expenses to decrease as a result of a reduction in workforce and other cost-cutting measures we implemented starting in December 2014 and January 2016.
Debt Conversion Expense
In April 2016, we exchanged 2018 and 2019 Notes totaling approximately $5.6 million by issuing 1,645,753 shares (including 804,986 inducement shares) of Common Stock. We recorded a non-cash non-operating charge of approximately  $1.8 million  related to the exchange agreement in the three months ended June 30, 2016.
Loss from Equity Method Investment
Loss from equity method investments decreased to $5.4 million in the three months ended June 30, 2016 compared to $7.3 million in the same period last year, primarily due to an increase in the Solazyme Bunge JV revenue, and changes in the Brazilian real compared to the United States dollar. We expect the loss from our equity method investment to decrease as the Solazyme Bunge JV continues optimization of the Solazyme Bunge JV Plant and works toward high volume commercial-scale production.


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Table of Contents

Results of Operations
Comparison of Six Months Ended June 30, 2016 and 2015
Revenues
 
Six Months Ended June 30,
 
2016
 
2015
 
$ Change
 
(In thousands)
Revenues:
 
 
 
 
 
Product revenues
$
13,627

 
$
17,128

 
$
(3,501
)
Research and development programs
7,179

 
7,217

 
(38
)
Total revenues
$
20,806

 
$
24,345

 
$
(3,539
)
Product Revenues and Cost of Product Revenues
Product revenues and cost of product revenues by segment for the six months ended June 30, 2016 and 2015 were as follows:
 
Six Months Ended June 30,
 
2016
 
2015
 
Change
 
(In thousands)
Algenist ®
 
 
 
 
 
  Product revenues
$
11,470

 
$
11,402

 
$
68

  Cost of product revenues
3,788

 
3,667

 
121

  Gross margin
$
7,682

 
$
7,735

 
$
(53
)
  Gross margin %
67
%
 
68
%
 
(1
)%
 
 
 
 
 
 
Ingredients and Other
 
 
 
 
 
  Product revenues
$
2,157

 
$
5,726

 
$
(3,569
)
  Cost of product revenues
2,154

 
5,364

 
(3,210
)
  Gross margin
$
3

 
$
362

 
$
(359
)
  Gross margin %
%
 
6
%
 
(6
)%
Algenist ®  
Algenist ® product revenues increased $0.1 million in the six months ended June 30, 2016 compared to the same period last year. Algenist ® gross margin decreased to 67% in the six months ended June 30, 2016 from 68% in the six months ended June 30, 2015 . As discussed in the overview above, on August 2, 2016 we entered into a definitive agreement to sell a majority interest in Algenist® to Tengram Capital Partners .

Ingredients and Other
Ingredients and Other product revenues decreased $3.6 million in the six months ended June 30, 2016 compared to the same period last year due to decreased product sales related to our fuels marketing and commercial development program, Encapso ® and industrial oil products, consistent with our strategy to focus on high value product sales.

During scale-up of the manufacturing process at the ADM Clinton and ANP Galva Facilities in 2015, certain production costs were charged to research and development and selling, general and administrative expenses. Gross margins for our Ingredients and Other products would have been lower in 2015 if such production costs had not been charged to operating expenses.
The gross margin for Ingredients and Other product sales gross margin was 0% in the six months ended June 30, 2016 compared to a 6% gross margin in the same period last year, primarily due to changes in product mix.


26


Table of Contents

We plan to focus on our production at the Solazyme Bunge JV facility and at our Peoria facility in the immediate future and believe this strategic decision will better align our immediate production assets with our operating strategy while minimizing production costs. We expect costs of goods as a percentage of revenues will be higher for ingredient products as compared to Algenist ® cost of goods.

Research and Development Programs Revenue

Revenues from research and development revenues of $7.2 million in the six months ended June 30, 2016 were relatively constant compared to the same period last year.

Operating Expenses
 
Six Months Ended June 30,
 
2016
 
2015
 
$ Change
 
(In thousands)
Operating expenses:
 
 
 
 
 
Research and development
$
16,507

 
$
25,301

 
$
(8,794
)
Sales, general and administrative
32,768

 
42,249

 
(9,481
)
Restructuring charges
1,239

 
393

 
846

Total operating expenses
$
50,514

 
$
67,943

 
$
(17,429
)
Research and Development Expenses
Research and development expenses decreased $8.8 million in the six months ended June 30, 2016 compared to the same period last year, due primarily to decreases in personnel-related costs of $4.2 million, product development, process development, and other costs of $2.1 million, scale-up production costs related to operations at the Clinton/Galva facilities of $0.8 million, and consumable supply costs of $0.5 million. Personnel-related costs include non-cash stock-based compensation expense of $1.3 million in the six months ended June 30, 2016 compared to $2.6 million in the same period last year.
Sales, General and Administrative Expenses
Sales, general and administrative expenses decreased $9.5 million in the six months ended June 30, 2016 compared to the same period last year primarily due to decreased fixed third-party facilities costs associated with the Clinton/Galva facilities of $7.3 million and decreased personnel-related costs of $3.3 million, partially offset by increased external legal costs of $0.8 million. Personnel-related costs include non-cash stock-based compensation expense of $4.5 million in the six months ended June 30, 2016 compared to $6.2 million in the same period last year.
Debt Conversion Expense
In April 2016, we exchanged 2018 and 2019 Notes totaling approximately $5.6 million  by issuing 1,645,753 shares (including 804,986 inducement shares) of Common Stock. We recorded a non-cash non-operating charge of approximately  $1.8 million  related to the exchange agreement in the six months ended June 30, 2016.
Loss from Equity Method Investment
Loss from equity method investments decreased to $10.2 million in the six months ended June 30, 2016 compared to $12.4 million in the same period last year, primarily due to an increase in the Solazyme Bunge JV revenue, and changes in the Brazilian real compared to the United States dollar.

Liquidity and Capital Resources
Total cash and cash equivalents and marketable securities available-for-sale were:

27



 
June 30,
2016
 
December 31,
2015
 
(In thousands)
Cash and cash equivalents
$
49,216

 
$
46,966

Marketable securities, available for sale
33,307

 
51,009

Total cash and cash equivalents and marketable securities
$
82,523

 
$
97,975

Cash, cash equivalents and marketable securities decreased by $15.5 million in the six months ended June 30, 2016 , primarily due to cash used in operating activities of $36.9 million and $5.0 million of capital contributed to the Solazyme Bunge JV, partially offset by net proceeds from issuance of convertible preferred stock of approximately $27.1 million .
The following table shows a summary of our cash flows for the periods indicated:
 
Six Months Ended June 30,
 
2016
 
2015
 
(In thousands)
Net cash used in operating activities
$
(36,870
)
 
$
(49,026
)
Net cash provided by investing activities
11,559

 
41,993

Net cash provided by financing activities
27,392

 
389

Liquidity
We are an emerging growth company with a limited operating history. We only recently began commercializing our products. To date, a substantial portion of revenues has consisted of funding from third party collaborative research agreements and government grants. We have generated limited revenues from commercial sales, principally derived from sales of skin and personal care products. A significant portion of future revenues are expected to come from commercial sales in the food and nutrition ingredients and specialty skin and personal care product markets.

Net losses may continue as we ramp up manufacturing capacity and build out our product pipeline. We expect to incur additional costs and expenses related to the continued development and expansion of our business, including research and development, the operation of our Peoria Facility and the ramp up and operation of the Solazyme Bunge JV Plant in Brazil.

We, along with our development and commercialization partners, need to develop products successfully, cost effectively produce them in large quantities and market and sell such products profitably. Our failure to generate sufficient revenues, achieve planned gross margins, control operating costs, successfully complete the sale of our Algenist business or raise sufficient additional funds may require us to modify, delay or abandon our planned operations, which could have a material adverse effect on the business, operating results, financial condition and ability to achieve intended business objectives. We may be required to seek additional funds through collaborations, public or private debt or equity financings or government programs, and may also seek to reduce expenses related to our operations. There can be no assurance that any financing will be available or on acceptable terms.

We believe that our current cash, cash equivalents, marketable securities and revenue from product sales 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.
Cash Flows from Operating Activities
Cash used in operating activities was $36.9 million in the six months ended June 30, 2016 , primarily due to a loss of $54.0 million offset by non-cash charges. Non-cash charges included loss from equity method investments, debt conversion expense, stock-based compensation, depreciation and amortization, net amortization of premiums on marketable securities and debt discount and loan fee amortization.

Cash used in operating activities was $49.0 million in the six months ended June 30, 2015 primarily due to a loss of $71.8 million , aggregate non-cash charges of $26.2 million and a net change of $3.4 million in our net operating assets and liabilities.

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Cash Flows from Investing Activities
Cash provided by investing activities was $11.6 million for the six months ended June 30, 2016 , primarily due to $17.8 million net proceeds from marketable securities, partially offset by $5.0 million of capital contributed to the Solazyme Bunge JV.

In the six months ended June 30, 2015 , cash provided by investing activities was $42.0 million , primarily due to $52.7 million of net marketable securities maturities, partially offset by $10.3 million of capital contributed to the Solazyme Bunge JV.
Cash Flows from Financing Activities
Cash provided by financing activities was $27.4 million in the six months ended June 30, 2016 , primarily due to net proceeds received of $27.1 million from the convertible preferred stock issuance in March 2016.
In the six months ended June 30, 2015 , cash provided by financing activities was $0.4 million , primarily due to proceeds received from common stock issuances pursuant to our equity plans.
BNDES Loan
In April 2012, we entered into the Solazyme Bunge JV, which is jointly capitalized by us and Bunge and which operates an oil production facility in Brazil. Through June 30, 2016 we contributed $104.8 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 could borrow up to R$245.7 million (approximately USD $76.0 million based on the exchange rate as of June 30, 2016 ). As of June 30, 2016 , approximately $59.2 million was outstanding under the BNDES loan based on the exchange rate as of June 30, 2016 . We have provided a bank guarantee equal to 14.39% of the total amount available under the BNDES Loan and may be required to provide a corporate guarantee equal to 35.71% of the total amount available under the BNDES Loan (with the total amount covered by the guarantees not to exceed our ownership percentage in the Solazyme Bunge JV). We expect to evaluate the optimal amount of Solazyme Bunge JV-related 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.
SVB Letter of Credit and Loan and Security Agreement
In the second quarter of 2016, we entered into an agreement with Silicon Valley Bank that provides for a $12.9 million letter of credit facility (the “Facility”) for letters of credit denominated in U.S. dollars or a foreign currency. On April 29, 2016, Silicon Valley Bank issued a standby letter of credit (“SVB SLOC”) to support the bank guarantee issued on our behalf to BNDES in connection with the loan agreement entered into in 2013 between BNDES and the Solazyme Bunge JV. The SVB SLOC is being supported by a bank confirmation issued by the Bank of Nova Scotia (the “Scotia Bank Confirmation”) on behalf of Silicon Valley Bank.

Contractual Obligations and Commitments
There have been no significant changes to the Company’s contractual obligations and commitments since the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Off-Balance Sheet Arrangements
For information on variable interest entities and guarantees, refer to Note 11 in the accompanying notes to our unaudited interim condensed consolidated financial statements.
Recent Accounting Pronouncements
Refer to Note 2 in the accompanying notes to our unaudited interim 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, 2016 . 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, 2016 , our investment portfolio consisted primarily of corporate debt obligations, U.S. 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, 2016 . Due to the short-term nature of these instruments, we do not believe that there would be a significant negative impact to our condensed consolidated financial position or results of operations as a result of interest rate fluctuations in the financial markets. Our outstanding debt as of June 30, 2016 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 sell our Algenist ® products in Europe 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 U.S. dollar. In addition, the local currency is the functional currency of our Brazil subsidiary and the Solazyme Bunge JV (an unconsolidated joint venture). The assets and liabilities of the Brazil subsidiary 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 condensed consolidated statements of comprehensive loss. The assets and liabilities of the Solazyme Bunge JV are also translated to U.S. dollars similar to our Brazil subsidiary, and we adjust our investment in the Solazyme Bunge JV and cumulative translation adjustment in equity for our ownership portion of the cumulative translation gain or loss recognized on the Solazyme Bunge JV's financial statements. 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 U.S. dollar declines in value as compared to the foreign currencies in which we incur expenses, our foreign-currency based expenses increase when translated into U.S. dollars. A hypothetical 10% adverse change in foreign currency exchange rate would have had a $0.7 million impact on our net loss for the six months ended June 30, 2016 . 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 U.S. dollars, future fluctuations in the value of the U.S. 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, and fuel in connection with our blended fuels marketing and commercial development programs. A hypothetical 10% change in the cost of plant sugar feedstock would have had approximately a $0.2 million impact on our share of loss from equity method investment in the Solazyme Bunge JV for the six months ended June 30, 2016 . We have not historically hedged the price volatility of plant sugar feedstock. Also, fluctuations in the prices of petroleum or certain plant oils may also impact our business to the extent our products compete with petroleum or plant-oil-derived products. In the future, we may manage our exposure to these risks by hedging the price volatility of such products, principally through futures contracts, and entering into joint venture agreements that would enable us to obtain secure access to feedstock. See also “Risk Factors-Risks Related to Our Business and Industry," A decline in the price of petroleum and petroleum-based products, plant oils or other commodities may reduce demand for our products and may otherwise adversely affect our business.




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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, 2016 . 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, 2016 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, 2016 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.
We may be involved, from time to time, in legal proceedings and claims arising in the course of our business. Such matters are subject to many uncertainties and there can be no assurance that such legal proceedings will not have a material adverse effect on our business, results of operations, financial position or cash flows. The information relating to “Legal Matters” set forth under Note 15 - Commitments and Contingencies of the notes to the unaudited interim condensed consolidated financial statements of this Quarterly Report on Form 10-Q is incorporated into this item by reference.
Item 1A.
Risk Factors.
You should carefully consider the risks and uncertainties described below before investing in our publicly-traded securities. Additional risks and uncertainties 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 and uncertainties, you should also refer to the other information contained in this Report, including our consolidated financial statements and related notes. The risks and uncertainties 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 emerging growth 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 generated only limited revenues from commercial sales, the majority of which have been derived from sales of our skin and personal care products through our Algenist business, which we agreed to sell to a third party in August 2016. We expect a significant portion of our future revenues to come from commercial sales in food, nutrition, and specialty personal care ingredients.
We have incurred substantial net losses since our inception, including a net loss of $54.0 million during the six months ended June 30, 2016 . We expect these losses may continue as we ramp up our manufacturing capacity and build out our product pipeline. As of June 30, 2016 , we had an accumulated deficit of $663.9 million . We expect to incur additional costs and expenses related to the continued development and expansion of our business, including research and development, the operation of our Peoria Facility, the ramp up and operation of the Solazyme Bunge JV production facility (described below) and other commercial facilities. As a result, our annual and quarterly operating losses may continue.
We, along with our development and commercialization partners, will need to develop products successfully, cost effectively produce them in large quantities, and market and sell them profitably. 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, the majority of which have been derived from our Algenist business, which we agreed to sell to a third party in August 2016, and sales of our ingredients and other products have not historically generated positive gross margins. If we are not successful in replacing sales of Algenist products with sales of our other products at acceptable prices, further advancing our existing commercial arrangements with strategic partners, developing new arrangements, ramping up 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;

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our ability to achieve commercial-scale production of our products on a cost-effective basis and in a timely manner;
our ability to secure consistent and reliable supplies of power and steam for production facilities;
technical or operational challenges with our manufacturing processes or with development of new products that we are not able to overcome;
our ability to consistently manufacture our products within specifications;
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;
our ability to sell our products at an acceptable price;
our ability to manage our growth;
our ability to meet applicable regulatory requirements 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 potential diversion of resources from food production.
The production of our microalgae-based products 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 microalgae-based products 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 do not have any long-term supply agreements or other guaranteed access to feedstock other than for the supply of feedstock to Solazyme Bunge Produtos Renováveis Ltda. (“Solazyme Bunge Renewable Oils” or the “Solazyme Bunge JV”) 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. As we scale our production, we anticipate that the production of our microalgae-based products 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, sugarcane-based sucrose for the Solazyme Bunge JV facility in Moema, Brazil is being provided by Bunge. Sugar and corn are traded as commodities and are subject to price volatility. While we may 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 arrangement, 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, fuels, chemicals, encapsulated lubricant and other products, and our business will suffer. If we do not succeed in entering into long-term supply contracts when necessary or successfully hedge against our exposure to fluctuations in the price of feedstock, our costs 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, 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, 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

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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 be