TerraVia™
TerraVia Holdings, Inc. (Form: 10-Q, Received: 11/04/2016 16:37:45)
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  September 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 November 1, 2016
Common Stock, $0.001 par value per share
 
90,203,008 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.
 
 


2


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
 
September 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
60,027

 
$
46,966

Marketable securities available-for-sale
27,771

 
51,009

Accounts receivable, net
1,150

 
2,647

Inventories
3,915

 
3,212

Current assets of discontinued operations

 
13,389

Prepaid expenses and other current assets
1,566

 
1,721

Total current assets
94,429

 
118,944

Property, plant and equipment, net
23,962

 
25,996

Equity method investments
37,559

 
35,910

Noncurrent assets of discontinued operations

 
348

Other assets
1,151

 
774

Total assets
$
157,101

 
$
181,972

LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,516

 
$
4,951

Accrued liabilities
11,994

 
13,306

Deferred revenue
5,945

 
4,159

Current liabilities of discontinued operations

 
2,914

Total current liabilities
22,455

 
25,330

Deferred revenue

 
500

Convertible debt
191,651

 
202,015

Noncurrent liabilities of discontinued operations

 
26

Other liabilities
1,254

 
576

Total liabilities
215,360

 
228,447

Commitments and contingencies (Note 16)

 

Convertible preferred stock, par value $0.001—5,000,000 shares authorized; 26,850 and zero shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
25,749

 

Stockholders’ deficit:
 
 
 
Common stock, par value $0.001—225,000,000 and 150,000,000 shares authorized at September 30, 2016 and December 31, 2015, respectively; 88,110,857 and 81,734,078 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
88

 
82

Additional paid-in capital
616,099

 
585,679

Accumulated other comprehensive loss
(15,846
)
 
(22,331
)
Accumulated deficit
(684,349
)
 
(609,905
)
Total stockholders’ deficit
(84,008
)
 
(46,475
)
Total liabilities, convertible preferred stock and stockholders’ deficit
$
157,101

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Product revenues
$
709

 
$
2,251

 
$
2,866

 
$
7,977

Research and development programs
3,601

 
2,266

 
10,780

 
9,483

Total revenues
4,310

 
4,517

 
13,646

 
17,460

Costs and operating expenses:
 
 
 
 
 
 
 
Cost of product revenues
884

 
2,411

 
3,038

 
7,775

Research and development
7,708

 
13,207

 
24,215

 
38,508

Sales, general and administrative
11,169

 
15,143

 
33,645

 
47,966

Restructuring charges
216

 
(21
)
 
1,455

 
372

Total costs and operating expenses
19,977

 
30,740

 
62,353

 
94,621

Loss from continuing operations before other income (expense):
(15,667
)
 
(26,223
)
 
(48,707
)
 
(77,161
)
Other income (expense):
 
 
 
 
 
 
 
Interest and other income, net
562

 
317

 
1,174

 
715

Interest expense
(3,460
)
 
(3,540
)
 
(10,427
)
 
(10,623
)
Debt conversion expense
(3,242
)
 

 
(5,027
)
 

Loss from equity method investments
(6,378
)
 
(5,916
)
 
(16,608
)
 
(18,291
)
Change in fair value of derivative liabilities

 
176

 
82

 
27

Total other expense, net
(12,518
)
 
(8,963
)
 
(30,806
)
 
(28,172
)
Loss from continuing operations before income taxes
(28,185
)
 
(35,186
)
 
(79,513
)
 
(105,333
)
Benefit from income taxes
(1,839
)
 

 
(1,839
)
 

Loss from continuing operations
(26,346
)
 
(35,186
)
 
(77,674
)
 
(105,333
)
Income (loss) from discontinued operations, net of tax
5,852

 
268

 
3,230

 
(1,421
)
Net loss
$
(20,494
)
 
$
(34,918
)
 
$
(74,444
)
 
$
(106,754
)
Net income (loss) per share, basic and diluted:


 


 


 


Continuing operations
$
(0.31
)
 
$
(0.44
)
 
$
(0.93
)
 
$
(1.31
)
Discontinued operations
0.07

 
0.01

 
0.04

 
(0.02
)
Net loss per share, basic and diluted:
$
(0.24
)
 
$
(0.43
)
 
$
(0.89
)
 
$
(1.33
)
Weighted average number of common shares used in loss per share computation, basic and diluted
85,837,223

 
80,297,757

 
84,062,169

 
80,017,436

See accompanying notes to the unaudited condensed consolidated financial statements.


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Table of Contents

TERRAVIA HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
In thousands
Unaudited
 
Three Months Ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(20,494
)
 
$
(34,918
)
 
$
(74,444
)
 
$
(106,754
)
Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Change in unrealized gain/loss on available-for-sale securities
(9
)
 
16

 
6

 
206

Foreign currency translation adjustment
(243
)
 
(8,305
)
 
6,479

 
(12,560
)
Other comprehensive income (loss)
(252
)
 
(8,289
)
 
6,485

 
(12,354
)
Total comprehensive loss
$
(20,746
)
 
$
(43,207
)
 
$
(67,959
)
 
$
(119,108
)
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


 
Nine Months Ended September 30,
 
2016
 
2015
Operating activities:
 
 
 
Net loss
$
(74,444
)
 
$
(106,754
)
Income (loss) from discontinued operations
3,230

 
(1,421
)
Loss from continuing operations
(77,674
)
 
(105,333
)
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:
 
 
 
Depreciation and amortization
3,558

 
4,406

Non-cash benefit from income taxes
(1,839
)
 

Net amortization of premiums on marketable securities
127

 
908

Amortization of debt discount and loan fees
1,969

 
1,900

Debt conversion expense
5,027

 

Warrant expense related to vesting of ADM Warrant

 
72

Provision for doubtful accounts
321

 

Non-cash restructuring charges

 
372

Stock-based compensation expense
8,961

 
11,533

Loss from equity method investments
16,608

 
17,896

Change in fair value of derivative liabilities
(82
)
 
(27
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1,530
)
 
(2,970
)
Inventories
(703
)
 
2,252

Prepaid expenses and other assets
(184
)
 
5

Accounts payable
(766
)
 
(278
)
Accrued liabilities
(1,151
)
 
(1,651
)
Deferred revenue
1,285

 
77

Other current and long-term liabilities
679

 
4,875

Net cash used in operating activities — continuing operations
(45,394
)
 
(65,963
)
Net cash used in operating activities — discontinued operations
(4,107
)
 
(3,057
)
Net cash used in operating activities
(49,501
)
 
(69,020
)
Investing activities:
 
 
 
Purchases of property, plant and equipment
(1,488
)
 
(942
)
Proceeds from the sale of equipment

 
119

Purchases of marketable securities
(2,707
)
 
(23,349
)
Maturities of marketable securities
22,665

 
86,952

Proceeds from sales of marketable securities
3,331

 
31,277

Capital contributions to Solazyme Bunge JV
(7,798
)
 
(19,494
)
Restricted certificates of deposit

 
181

Net cash provided by investing activities — continuing operations
14,003

 
74,744

Net cash provided by (used in) investing activities — discontinued operations
19,065

 
(220
)
Net cash provided by investing activities
33,068

 
74,524

Financing activities:
 
 
 
Proceeds from the issuance of common stock
2,291

 
720

Proceeds from issuance of preferred stock, net of offering costs
27,044

 

Other

 
(38
)
Net cash provided by financing activities
29,335

 
682

Effect of exchange rate changes on cash and cash equivalents
159

 
(633
)
Net increase in cash and cash equivalents
13,061

 
5,553

Cash and cash equivalents — beginning of period
46,966

 
42,689

Cash and cash equivalents — end of period
$
60,027

 
$
48,242

Supplemental disclosures of cash flow information:
 
 
 
Interest paid in cash, net of capitalized interest
$
7,311

 
$
7,438

Non-cash investing and financing activities:
 
 
 
Unpaid closing costs on sale of discontinued operations
$
228

 
$

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
$
12,671

 
$

Issuance of common stock
$
16,298

 
$

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 produces 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 symbol 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 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 and protein-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.
Discontinued Operations As further described in Note 3, on August 16, 2016 the Company sold its Algenist skincare business to TCP Algenist LLC, an affiliate of Tengram Capital Partners and Algenist Holdings, Inc. in exchange for $20.2 million in cash (before $1.4 million closing costs), 19.9% of the fully diluted equity of Algenist Holdings, Inc. and the assumption of substantially all of the liabilities related to the Algenist skincare business by Algenist Holdings, Inc . The Algenist skincare business was previously presented as an operating segment. The results of operations and financial position of Algenist have been presented as discontinued operations for all periods. Unless otherwise noted, the notes to the unaudited condensed consolidated financial statements pertain to continuing operations.
Liquidity —The Company has incurred substantial net losses since its inception; the Company incurred net losses of $74.4 million and $106.8 million during the nine months ended September 30, 2016 and 2015, respectively. Accumulated deficit was $684.3 million as of September 30, 2016 . Net cash used in operating activities was $49.5 million and $69.0 million during the nine months ended September 30, 2016 and 2015, respectively. Cash and cash equivalents and marketable securities available for sale were $87.8 million as of September 30, 2016 .

The Company is an emerging growth company with a limited operating history. The Company is relatively early in commercializing its food, nutrition and specialty ingredient 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.

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 facility in Peoria, Illinois ("Peoria Facility"), and 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").

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 adequate 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. There can be no assurance that any additional financing will be available or on acceptable terms.


7



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 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. 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 12). The Company owns 19.9% of Algenist Holdings, Inc. which is accounted for under the equity method of accounting (see Note 3).
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. Certain reclassifications and changes in presentation were made to the 2015 condensed consolidated financial statements to conform to the 2016 presentation.
The results of operations for the three and nine months ended September 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 , 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

8



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, Stock 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 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. SALE OF ALGENIST AND DISCONTINUED OPERATIONS
On August 16, 2016, the Company sold its Algenist skincare business to TCP Algenist LLC, an affiliate of Tengram Capital Partners and Algenist Holdings, Inc., in exchange for $18.8 million in cash, net of closing costs, 19.9% of the fully diluted equity of Algenist Holdings, Inc. and the assumption of substantially all of the liabilities related to the Algenist skincare business by Algenist Holdings, Inc.
The gain on the sale of Algenist was as follows (in thousands):
Cash received, net of closing costs
$
18,836

19.9% interest in Algenist at fair value
1,600

 
20,436

Net assets sold (primarily working capital)
(11,763
)
Gain on sale of Algenist before income taxes
$
8,673

The summary comparative financial results of the Algenist discontinued operations were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Total revenues
$
2,204

 
$
6,882

 
$
13,674

 
$
18,284

Costs and operating expenses:
 
 
 
 
 
 
 
Cost of product revenues
936

 
2,159

 
4,724

 
5,826

Sales, general and administrative
2,233

 
4,453

 
12,525

 
13,879

Total costs and operating expenses
3,169

 
6,612

 
17,249

 
19,705

Income (loss) before other expense
(965
)
 
270

 
(3,575
)
 
(1,421
)
Other expense
(17
)
 
(2
)
 
(29
)
 

Gain on sale of Algenist
8,673

 

 
8,673

 

Income (loss) from discontinued operations before income taxes
7,691

 
$
268

 
$
5,069

 
$
(1,421
)
Income tax provision
1,839

 

 
1,839

 

Income (loss) from discontinued operations
$
5,852

 
$
268

 
$
3,230

 
$
(1,421
)
Assets and liabilities related to Algenist presented as discontinued operations as of December 31, 2015 were as follows (in thousands):

9



Accounts receivable
$
1,941

Inventories
8,806

Prepaid expenses and other current assets
2,642

Current assets of discontinued operations
$
13,389

Property, plant and equipment, net
$
348

Accounts payable
$
2,065

Accrued liabilities
849

Current liabilities of discontinued operations
$
2,914

Noncurrent liabilities of discontinued operations
$
26


4. 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 nine months ended September 30, 2016 and 2015, as their effect was anti-dilutive:
 
September 30,
 
2016
 
2015
Options to purchase common stock
13,200,266

 
10,252,607

Restricted stock units
1,403,888

 
1,525,736

Warrants to purchase common stock
750,000

 
1,250,000

Shares of common stock to be issued upon conversion of Series A Preferred Stock
13,425,000

 

Shares of common stock to be issued upon conversion of convertible debt ("Notes")
17,320,971

 
18,790,996

Total
46,100,125

 
31,819,339

The table above does not reflect early conversion payment features of the Notes (see Notes 9 and 15) 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.

5. 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
6,479

 
6

 
6,485

Balance at September 30, 2016
$
(15,854
)
 
$
8

 
$
(15,846
)

6. SEGMENT INFORMATION
As further described in Note 3, on August 16, 2016 the Company sold its Algenist skincare business to TCP Algenist LLC, an affiliate of Tengram Capital Partners and Algenist Holdings, Inc. in exchange for $20.2 million in cash (before $1.4 million closing costs), 19.9% of the fully diluted equity of Algenist Holdings, Inc. and the assumption of substantially all of the liabilities related to the Algenist skincare business by Algenist Holdings, Inc . As a result, all Algenist amounts have been included as discontinued operations for all periods presented, and Ingredients and Other is the sole operating segment. Prior to

10



the sale of Algenist, the Company had two operating segments for financial statement reporting purposes: Algenist and Ingredients and Other.

7. RESTRUCTURING CHARGES

In October 2015, the Company made a strategic decision to terminate its manufacturing agreements at the Archer Daniels Midland Company ("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 nine months ended September 30, 2016 were as follows (in thousands):

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

 
$
254

 
$
(3,402
)
 
$
252

Employee termination costs

 
1,201

 
(1,175
)
 
26

Total
$
3,400

 
$
1,455

 
$
(4,577
)
 
$
278


8. MARKETABLE SECURITIES AVAILABLE-FOR-SALE
Marketable securities classified as available-for-sale consisted of the following (in thousands):
 
September 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Corporate bonds
$
16,404

 
$
9

 
$
(6
)
 
$
16,407

Asset-backed securities
4,857

 
1

 
(3
)
 
4,855

Government and agency securities
3,517

 
5

 

 
3,522

Mortgage-backed securities
2,195

 
8

 
(7
)
 
2,196

Municipal bonds
790

 
1

 

 
791

Total
$
27,763

 
$
24

 
$
(16
)
 
$
27,771

 
 
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


11



The following table summarizes the amortized cost and fair value of the Company’s marketable securities, classified by maturity as of September 30, 2016 and December 31, 2015 (in thousands):
 
September 30, 2016
 
December 31, 2015
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Marketable securities
 
 
 
 
 
 
 
Due in 1 year or less
$
17,372

 
$
17,374

 
$
17,783

 
$
17,870

Due in 1-2 years
5,277

 
5,284

 
15,900

 
15,858

Due in 2-3 years
2,754

 
2,753

 
7,959

 
7,934

Due in 3-4 years
140

 
140

 
2,399

 
2,408

Due in 4-9 years
917

 
919

 
2,844

 
2,843

Due in 9-20 years
931

 
929

 
1,397

 
1,394

Due in 20-35 years
372

 
372

 
2,725

 
2,702

 
$
27,763

 
$
27,771

 
$
51,007

 
$
51,009

Marketable securities classified as available-for-sale are carried at fair value as of September 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 $12.5 million as of September 30, 2016 . Gross unrealized losses on available-for-sale securities were $16,000 as of September 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 $2.5 million of available-for-sale securities which had been in a continuous loss position for more than 12 months as of September 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.

9. 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 September 30, 2016 and December 31, 2015 by level within the fair value hierarchy (in thousands):

12



 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$

 
$
4,689

 
$

 
$
4,689

Marketable securities:


 


 


 
 
Corporate bonds

 
16,407

 

 
16,407

Asset-backed securities

 
4,855

 

 
4,855

Government and agency securities
2,477

 
1,045

 

 
3,522

Mortgage-backed securities

 
2,196

 

 
2,196

Municipal bonds

 
791

 

 
791

 
2,477

 
25,294

 

 
27,771

Total
$
2,477

 
$
29,983

 
$

 
$
32,460

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 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 nine months ended September 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 September 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 $104.1 million at September 30, 2016 , compared to a carrying value of $191.7 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).


13



10. INVENTORIES
Inventories consisted of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Raw materials
$
23

 
$
180

Work in process
789

 
1,301

Finished goods
3,103

 
1,731

Total inventories
$
3,915

 
$
3,212


11. PROPERTY, PLANT AND EQUIPMENT—NET
Property, plant and equipment—net consisted of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Plant equipment
$
25,233

 
$
24,824

Building and improvements
5,811

 
5,810

Lab equipment
7,491

 
7,495

Leasehold improvements
2,602

 
1,866

Computer equipment and software
3,968

 
3,988

Furniture and fixtures
566

 
539

Land
430

 
430

Automobiles
194

 
194

Construction in progress
312

 
258

Total
46,607

 
45,404

Less: accumulated depreciation and amortization
(22,645
)
 
(19,408
)
Property, plant and equipment—net
$
23,962

 
$
25,996


12. INVESTMENT IN EQUITY METHOD INVESTMENTS
Solazyme Bunge JV
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.
The Solazyme Bunge JV's operational focus from inception to date has been primarily to support 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 long-term 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 the 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:

14



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 $7.8 million and $19.5 million to the Solazyme Bunge JV in the nine months ended September 30, 2016 and 2015 , respectively. The Company also contributed $2.7 million and $5.5 million to the Solazyme Bunge JV in the nine months ended September 30, 2016 and 2015 , respectively, 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 $36.0 million and $35.9 million as of September 30, 2016 and December 31, 2015, respectively. During the nine months ended September 30, 2016 and 2015, the Company recognized $16.6 million and $18.3 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 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 September 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.

15



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 September 30, 2016 and December 31, 2015 (in thousands):
 
As of September 30, 2016
 
Assets
 
Liabilities
 
 
 
Accounts
Receivable
 
Unbilled
Revenues
 
Investments in
Unconsolidated
Joint Ventures
 
Loan
Guarantee
 
Maximum
Exposure
to Loss (1)
Equity investment - Solazyme Bunge JV
$
12

 
$
563

 
$
35,959

 
$

 
$
47,703

 
As of December 31, 2015
 
Assets
 
Liabilities
 
 
 
Accounts
Receivable
 
Unbilled
Revenues
 
Investments in
Unconsolidated
Joint Ventures
 
Loan
Guarantee
 
Maximum
Exposure
to Loss (2)
Equity investment - 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 $0.3 million (based on the exchange rate at September 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 September 30, 2016 and December 31, 2015, and for the three and nine months ended September 30, 2016 and 2015 respectively, was as follows (in thousands):
 
As of September 30, 2016
 
As of December 31, 2015
Current assets
$
13,829

 
$
5,654

Property, plant and equipment, net
114,991

 
100,755

Recoverable taxes (1)
20,852

 
16,144

Total assets
$
149,672

 
$
122,553

 
 
 
 
Current liabilities
$
41,929

 
$
23,009

Noncurrent liabilities
42,966

 
43,054

JV’s partners’ capital, net
64,777

 
56,490

Total liabilities and partners’ capital, net
$
149,672

 
$
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 the Solazyme Bunge JV in Brazil. The realization of these recoverable tax payments could take in excess of five years.
 
Three months ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
2,495

 
$
953

 
$
5,491

 
$
1,611

Net losses
$
(12,357
)
 
$
(11,435
)
 
$
(32,036
)
 
$
(34,610
)
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 $75.4 million (based on the exchange rate as of September 30, 2016 ).

16



Outstanding borrowings were $55.6 million and $53.4 million as of September 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 September 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 nine months ended September 30, 2016 and 2015.
Impairment Assessment
The Company assessed the recoverability of its equity investment in the 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 September 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.
Algenist Holdings, Inc.
As further described in Note 3, on August 16, 2016 the Company sold its Algenist skincare business to TCP Algenist LLC, an affiliate of Tengram Capital Partners and Algenist Holdings, Inc. in exchange for $20.2 million in cash (before $1.4 million closing costs), 19.9% of the fully diluted equity of Algenist Holdings, Inc. and the assumption of substantially all of the liabilities related to the Algenist skincare business by Algenist Holdings, Inc . The Company recognized the  19.9%  ownership interest in Algenist Holdings, Inc. at fair value on the date of closing of the transaction. After the sale, the Company considers that it has sufficient influence over Algenist Holdings, Inc. to require equity accounting. Hence the Company recognizes its proportionate share of the earnings (losses) of Algenist Holdings, Inc. under the equity method of accounting within results of continuing operations. 

17



The Company's investment in Algenist Holdings, Inc. included in equity method investment assets on the condensed consolidated balance sheet was $1.6 million as of September 30, 2016 , and the Company's equity income from its investment in Algenist Holdings, Inc. for the period from August 16, 2016 to September 30, 2016 was de minimis.


13. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
 
September 30,
2016
 
December 31,
2015
Accrued compensation and related liabilities
$
4,737

 
$
5,614

Accrued interest
4,168

 
3,495

Accrued restructuring costs
278

 
3,400

Other accrued liabilities
2,811

 
797

Total accrued liabilities
$
11,994

 
$
13,306


14. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS, DISTRIBUTION AGREEMENTS, AND LICENSES
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 its 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 and nine months ended September 30, 2016 . The Company expects to formalize the assignment agreement with the Solazyme Bunge JV.
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
15. DEBT
A summary of the Company’s debt as of September 30, 2016 and December 31, 2015 was as follows (in thousands):
 
September 30,
2016
 
December 31,
2015
Convertible debt:
 
 
 
2018 Notes
$
50,389

 
$
61,632

2019 Notes
148,072

 
149,500

Total debt
198,461

 
211,132

Add:
 
 
 
Fair value of embedded derivative

 
82

Less:
 
 
 
Unamortized debt discount
(6,498
)
 
(8,749
)
Debt issuance costs
(312
)
 
(450
)
Long-term portion of debt
$
191,651

 
$
202,015

The Company was in compliance with all debt covenants as of September 30, 2016 and December 31, 2015.

18



Convertible Senior Subordinated Notes -2018 Notes —As of September 30, 2016 , the Company had $50.4 million aggregate principal amount outstanding of 6.00% Convertible Senior Subordinated Notes due 2018 ("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.
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.

19



Convertible Senior Subordinated Notes - 2019 Notes — As of September 30, 2016 , the Company had $148.1 million aggregate principal amount outstanding of 5.00% Convertible Senior Subordinated Notes due 2019 ("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 the Company's Common Stock per $1,000 principal amount of 2019 Notes (equivalent to an initial conversion price of $13.20 per share of the Company's 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  —During the nine months ended September 30, 2016 , the Company exchanged 2018 and 2019 Notes totaling approximately $12.7 million  by issuing  3,459,567  new shares (including 1,544,039 inducement shares) of the Company's common stock. The Company recorded a non-cash debt conversion expense of approximately $3.2 million and  $5.0 million related to the exchange in the three and nine months ended September 30, 2016 , respectively. As of September 30, 2016 accrued liabilities included accrued debt conversion liabilities of $1.1 million for the exchange of Notes that were agreed to as of September 30, 2016 , and Notes payable was reduced by $3.8 million when the final transaction settled in October 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 is required to 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 is also required to 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 September 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.
16. 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 then 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, in the U.S. District Court for the Northern District of California (the “Securities Class Action”).  The complaint asserts claims for alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, 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.  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.

20



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. In May 2016, a second, related derivative complaint, captioned Ben Wang, derivatively on behalf of Solazyme, Inc. v. Jonathan Wolfson et al, was filed in the same court. Both actions have been consolidated going forward as In re TerraVia Holdings, Inc. f/k/a Solazyme, Inc. Shareholder Litigation (the “State Derivative Action”). The complaints seek unspecified damages, purportedly on behalf of the Company, from certain of its current and former directors and officers. The complaints assert claims against these defendants for breach of fiduciary duty, unjust enrichment, and aiding and abetting. The complaints allege that these defendants are liable for making allegedly false and misleading statements and omitting certain material facts in the Company's securities filings and other public disclosures. The State Derivative Action is based on substantially the same facts as the Securities Class Action described above. The State Derivative Action is presently stayed by court order through January 1, 2017. Based on a review of the plaintiffs’ allegations, the Company believes that the plaintiffs have 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 “Federal Derivative Action”). The complaint seeks unspecified damages, purportedly on behalf of the Company from certain of its current and former directors and officers. The complaint asserts claims against these defendants for breach of fiduciary duty and aiding and abetting. The complaint alleges that these defendants are liable for making allegedly false and misleading statements and omitting certain material facts in the Company's securities filings and other public disclosures. The Federal Derivative Action is based on substantially the same facts as the Securities Class Action and the State Derivative Action described above. The Federal Derivative Action is presently stayed pending resolution of the motion to dismiss in the Securities Class Action. 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. In February 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 in December 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 was stayed by the U.S. District Court for the District of Delaware in January 2016 by an order wherein 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 was heard by the Third Circuit in September 2016 and the Company expects a decision by the end of 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 sought 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 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

21



certain Roquette trade secrets. The summary judgment motions made by Roquette were denied by the court in December 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.

17. 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 and the 2011 ESPP for the three and nine months ended September 30, 2016 and 2015 (in thousands):

 
Three Months Ended September 30,

Nine Months Ended September 30,
 
2016

2015

2016

2015
Stock options
$
2,550


$
2,354


$
6,185


$
7,554

RSUs
967


1,061


2,987


3,913

ESPP
34


(160
)

(211
)

66

Stock-based compensation expense
$
3,551


$
3,255


$
8,961


$
11,533

Research and development
$
682


$
1,011


$
1,983


$
3,595

Sales, general and administrative
2,869


2,244


6,978


7,938

Stock-based compensation expense
$
3,551


$
3,255


$
8,961


$
11,533


18. 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 . Shares of the Series A Preferred Stock are convertible at the option of the holders into shares of the Company's 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. In July 2016, one of the holders of preferred stock converted 1,000 shares of Convertible Preferred Stock into 500,000 shares of the Company's common stock. This transaction resulted in an increase to common stock and additional paid in capital, and a decrease to convertible preferred stock of approximately $1.0 million . The Company has classified the convertible preferred stock as temporary equity in the condensed consolidated balance sheet as of September 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: 
Dividends . The holders are entitled to participate equally and ratably with the Company's 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 Company's 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 Company's 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 Company's common Stock on all matters submitted for a vote by holders of the Company's 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 the Company's common stock issuable upon conversion of such Preferred Stock.

22



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 Company's 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 Company's 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.


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, liquidity sources and our expectations regarding certain legal matters 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. We have streamlined our strategy to focus on food, nutrition and specialty ingredient products and began to more broadly commercialize these products in 2015, and in May 2016, we changed our name from “Solazyme, Inc.” to “TerraVia Holdings, Inc.”, and changed our Nasdaq ticker listing symbol 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, which occurred on August 22, 2016. Additionally, in August 2016, we sold our Algenist skincare brand, a transaction in line with our strategy to focus efforts on core growth engines in food, nutrition and specialty ingredients.
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 personal care ingredients. Over our history, we have also invested in and developed products, technology

23


Table of Contents

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 each ingredient received a FDA GRAS “No Questions” letter. 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 manufacturing 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.
On August 16, 2016 we sold our Algenist skincare business to TCP Algenist LLC, an affiliate of Tengram Capital Partners and Algenist Holdings, Inc. Upon closing, we received approximately $18.8 million in cash, net of closing costs and a 19.9% ownership interest in Algenist Holdings Inc., which will be accounted for under the equity method. We expect to supply active ingredients formulated in the Algenist product line to Algenist. We have presented the historical results of Algenist as discontinued operations for all periods presented in this filing.
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 September 30, 2016 and 2015
Revenues
 
Three Months Ended September 30,
 
2016
 
2015
 
$ Change
 
(In thousands)
Revenues:
 
 
 
 
 
Product revenues
$
709

 
$
2,251

 
$
(1,542
)
Research and development programs
3,601

 
2,266

 
1,335

Total revenues
$
4,310

 
$
4,517

 
$
(207
)
Prior to the three months ended September 30, 2016, we had two reportable segments for financial statement reporting purposes: 1) Algenist, and 2) Ingredients and Other. The Algenist segment included 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

24


Table of Contents

development programs. Following the sale of our Algenist segment, we have a single operating segment, whose results are discussed in the following sections.
Product Revenues and Cost of Product Revenues
Product revenues and cost of product revenues for the three months ended September 30, 2016 and 2015 were as follows:
 
Three Months Ended September 30,
 
2016
 
2015
 
Change
 
(In thousands)
  Product revenues
$
709

 
$
2,251

 
$
(1,542
)
  Cost of product revenues
884

 
2,411

 
(1,527
)
  Gross margin (loss)
$
(175
)
 
$
(160
)
 
$
(15
)
  Gross margin %
(25
)%
 
(7
)%
 
(18
)%
Product revenues decreased $1.5 million in the three months ended September 30, 2016 compared to the same period last year primarily due to decreased revenues related to our fuels marketing and commercial development program, Encapso ® and industrial oil products, in line with our strategy to focus on high value oil and powder product sales.

During scale-up of the manufacturing process at the Archer Daniels Midland Company Clinton and American Natural Processors Galva facilities in 2015, and in our Peoria facility in 2016, certain production costs were charged to research and development and selling, general and administrative expenses in line with applicable accounting standards. Gross margins would have been lower in 2015 and 2016 if such production costs had been charged to cost of product revenues.
Production volumes have not fully covered fixed costs at our production facilities in the periods presented, and the gross margin was negative 25% in the three months ended September 30, 2016 compared to a negative 7% 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 we expect funded program revenue to remain an important indication of strategic commitment from partners and a source of future customers. While we expect funded program revenue to comprise a significant portion of overall revenue for the foreseeable future, we expect the rate of growth in product revenues to be greater as our focus shifts to commercialization of our products. 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 programs of $3.6 million increased by $1.3 million in the three months ended September 30, 2016 compared to the same period last year , primarily due to a new agreement that was established in 2015 with the Solazyme Bunge JV.

Operating Expenses
 
Three Months Ended September 30,
 
2016
 
2015
 
$ Change
 
(In thousands)
Operating expenses:
 
 
 
 
 
Research and development
$
7,708

 
$
13,207

 
$
(5,499
)
Sales, general and administrative
11,169

 
15,143

 
(3,974
)
Restructuring charges
216

 
(21
)
 
237

Total operating expenses
$
19,093

 
$
28,329

 
$
(9,236
)


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Table of Contents

In October 2015, we made a strategic decision to terminate our manufacturing agreements at the ADM Clinton and American Natural Processors (ANP) Galva facilities. Certain scale-up production costs related to operations at the Clinton/Galva and Peoria facilities focused on process development associated with the manufacturing scale-up at the facilities in 2015 were charged to research and development costs. In addition, unallocated fixed costs for the Clinton/Galva facilities were charged to selling, general and administrative expenses when facilities were not operating at full capacity.
Research and Development Expenses
Research and development expenses decreased $5.5 million in the three months ended September 30, 2016 compared to the same period last year, due primarily to decreases in scale-up production costs related to operations at the Clinton/Galva facilities of $1.9 million and Peoria of $0.6 million, personnel-related costs of $1.6 million, product development, process development costs, and other costs of $0.6 million and consumable and supply costs of $0.4 million as a result of cost cutting measures. Personnel-related costs include non-cash stock-based compensation expense of $0.7 million in the three months ended September 30, 2016 compared to $1.0 million in the same period last year.
Sales, General and Administrative Expenses
Sales, general and administrative expenses decreased $4.0 million in the three months ended September 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 $2.6 million, lower personnel-related costs of $0.5 million, sales and marketing costs of $0.5 million and litigation costs of $0.2 million. Personnel-related costs include non-cash stock-based compensation expense of $2.9 million in the three months ended September 30, 2016 compared to $2.2 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 be lower than in 2015 as a result of a reduction in workforce and other cost-cutting measures we implemented.
Other Expense, net
 
Three Months Ended September 30,
 
2016
 
2015
 
$ Change
 
(In thousands)
Interest and other income, net
$
562

 
$
317

 
$
245

Interest expense
(3,460
)
 
(3,540
)
 
80

Debt conversion expense
(3,242
)
 

 
(3,242
)
Loss from equity method investments
(6,378
)
 
(5,916
)
 
(462
)
Change in fair value of derivative liabilities

 
176

 
(176
)
Total other expense, net
$
(12,518
)
 
$
(8,963
)
 
$
(3,555
)
Debt Conversion Expense
In the three months ended September 30, 2016, we exchanged 6.00% Convertible Senior Subordinated Notes due 2018 totaling approximately $7.1 million by issuing 1,813,814 new shares (including 739,053 inducement shares) of our common stock. We recorded a non-cash non-operating charge of approximately  $3.2 million  related to the exchange agreement in the three months ended September 30, 2016 .
Loss From Equity Method Investments
Loss from the Solazyme Bunge JV equity method investments increased to $6.4 million in the three months ended September 30, 2016 compared to $5.9 million in the same period last year. 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 Nine Months Ended September 30, 2016 and 2015
Revenues
 
Nine Months Ended September 30,
 
2016
 
2015
 
$ Change
 
(In thousands)
Revenues:
 
 
 
 
 
Product revenues
$
2,866

 
$
7,977

 
$
(5,111
)
Research and development programs
10,780

 
9,483

 
1,297

Total revenues
$
13,646

 
$
17,460

 
$
(3,814
)
Product Revenues and Cost of Product Revenues
Product revenues and cost of product revenues for the nine months ended September 30, 2016 and 2015 were as follows:
 
Nine Months Ended September 30,
 
2016
 
2015
 
Change
 
(In thousands)
  Product revenues
$
2,866

 
$
7,977

 
$
(5,111
)
  Cost of product revenues
3,038

 
7,775

 
(4,737
)
  Gross margin
$
(172
)
 
$
202

 
$
(374
)
  Gross margin %
(6
)%
 
3
%
 
(9
)%
Product revenues decreased $5.1 million in the nine months ended September 30, 2016 compared to the same period last year primarily due to decreased revenues from our fuels marketing and commercial development program, Encapso ® and industrial oil products, in line with our strategy to focus on high value oil and powder product sales.

During scale-up of the manufacturing process at the Archer Daniels Midland Company Clinton and American Natural Processors Galva facilities in 2015, and in our Peoria facility in 2016, certain production costs were charged to research and development and selling, general and administrative expenses in line with applicable accounting standards. Gross margins would have been lower in 2015 and 2016 if such production costs had been charged to cost of product revenues.
Our gross margin was negative 6% in the nine months ended September 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.

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

Revenues from research and development programs increased $1.3 million in the nine months ended September 30, 2016 compared to the same period last year , primarily due to a new agreement that was established in 2015 with the Solazyme Bunge JV.


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Table of Contents

Operating Expenses
 
Nine Months Ended September 30,
 
2016
 
2015
 
$ Change
 
(In thousands)
Operating expenses:
 
 
 
 
 
Research and development
$
24,215

 
$
38,508

 
$
(14,293
)
Sales, general and administrative
33,645

 
47,966

 
(14,321
)
Restructuring charges
1,455

 
372

 
1,083

Total operating expenses
$
59,315

 
$
86,846

 
$
(27,531
)
In October 2015, we made a strategic decision to terminate our manufacturing agreements at the ADM Clinton and American Natural Processors (ANP) Galva facilities. Certain scale-up production costs related to operations at the Clinton/Galva and Peoria facilities focused on process development associated with the manufacturing scale-up at the facilities in 2015 were charged to research and development costs. In addition, unallocated fixed costs for the Clinton/Galva facilities were charged to selling, general and administrative expenses when facilities were not operating at full capacity.
Research and Development Expenses
Research and development expenses decreased $14.3 million in the nine months ended September 30, 2016 compared to the same period last year, due primarily to decreased personnel-related costs of $5.8 million, product development, process development, and other costs of $3.6 million, scale-up production costs related to operations at the Clinton/Galva facilities of $2.7 million, and consumable supply costs of $0.9 million. Personnel-related costs include non-cash stock-based compensation expense of $2.0 million in the nine months ended September 30, 2016 compared to $3.6 million in the same period last year.
Sales, General and Administrative Expenses
Sales, general and administrative expenses decreased $14.3 million in the nine months ended September 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 $9.9 million and decreased personnel-related costs of $3.6 million. Personnel-related costs include non-cash stock-based compensation expense of $7.0 million in the nine months ended September 30, 2016 compared to $7.9 million in the same period last year.
Other Expense, net
 
Nine Months Ended September 30,
 
2016
 
2015
 
$ Change
 
(In thousands)
Interest and other income, net
$
1,174

 
$
715

 
$
459

Interest expense
(10,427
)
 
(10,623
)
 
196

Debt conversion expense
(5,027
)
 

 
(5,027
)
Loss from equity method investments
(16,608
)
 
(18,291
)
 
1,683

Change in fair value of derivative liabilities
82

 
27

 
55

Total other expense, net
$
(30,806
)
 
$
(28,172
)
 
$
(2,634
)
Debt Conversion Expense
During the nine months ended September 30, 2016 we exchanged 2018 and 2019 Notes totaling approximately $12.7 million by issuing  3,459,567  new shares (including 1,544,039 inducement shares) of our common stock. We recorded a non-cash non-operating charge of approximately  $5.0 million related to the exchange agreement in the nine months ended September 30, 2016 .
Loss from Equity Method Investment
Loss from equity method investments decreased to $16.6 million in the nine months ended September 30, 2016 compared to $18.3 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.


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Liquidity and Capital Resources
Total cash and cash equivalents and marketable securities available-for-sale were:
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Cash and cash equivalents
$
60,027

 
$
46,966

Marketable securities available-for-sale
27,771

 
51,009

Total cash and cash equivalents and marketable securities
$
87,798

 
$
97,975

Cash, cash equivalents and marketable securities decreased by $10.2 million in the nine months ended September 30, 2016 , primarily due to cash used in operating activities of $49.5 million and $7.8 million of capital contributed to the Solazyme Bunge JV, partially offset by net proceeds from issuance of convertible preferred stock of approximately $27.0 million , and net proceeds from the sale of Algenist of $19.1 million .
The following table shows a summary of our cash flows for the periods indicated:
 
Nine Months Ended September 30,
 
2016
 
2015
 
(In thousands)
Net cash used in operating activities — continuing operations
$
(45,394
)
 
$
(65,963
)
Net cash provided by investing activities — continuing operations
14,003

 
74,744

Net cash provided by financing activities — continuing operations
29,335

 
682

Liquidity
We are an emerging growth company with a limited operating history. In line with our strategy to focus our efforts on core growth in food, nutrition and specialty ingredients, we sold our Algenist skincare business in August 2016. To date, a substantial portion of our revenues has consisted of funding from third party collaborative research agreements and government grants. We are relatively early in commercializing our food, nutrition and specialty ingredient products, and have generated limited revenues from commercial sales, with historic positive gross margins principally derived from the commercial sale of skin and personal care products through the Algenist business, which we recently sold, and negative gross margins on certain other commercial product sales. We expect the rate of growth in product revenues to be greater than the rate of growth in research and development program revenues, as we shift our focus to commercialization of our products in the food, nutrition and specialty personal care ingredient 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 positive gross margins, control operating costs, 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.

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Cash Flows from Operating Activities from Continuing Operations
Cash used in operating activities from continuing operations was $45.4 million in the nine months ended September 30, 2016 , primarily due to a loss of $77.7 million offset by non-cash charges. Non-cash charges included a $37.6 million 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 from continuing operations was $66.0 million in the nine months ended September 30, 2015 primarily due to a loss of $105.3 million , offset by aggregate non-cash charges of $37.1 million .
Cash Flows from Investing Activities
Cash provided by investing activities from continuing operations was $14.0 million in the nine months ended September 30, 2016 , primarily due to $23.3 million net proceeds from marketable securities, partially offset by $7.8 million of cash contributed to the Solazyme Bunge JV.

In the nine months ended September 30, 2015 , cash provided by investing activities from continuing operations was $74.7 million , primarily due to $94.9 million of net marketable securities maturities, partially offset by $19.5 million of cash contributed to the Solazyme Bunge JV.
Cash Flows from Financing Activities
Cash provided by financing activities was $29.3 million in the nine months ended September 30, 2016 , primarily due to net proceeds received of $27.0 million from the convertible preferred stock issuance in March 2016.
In the nine months ended September 30, 2015 , cash provided by financing activities was $0.7 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 September 30, 2016 we contributed $108.4 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 $75.4 million based on the exchange rate as of September 30, 2016 ). As of September 30, 2016 , approximately $55.6 million was outstanding under the BNDES loan based on the exchange rate as of September 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.

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Off-Balance Sheet Arrangements
For information on variable interest entities and guarantees, refer to Note 12 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.
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 September 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 September 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 September 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 September 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. 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 $1.2 million impact on our net loss for the nine months ended September 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. A hypothetical 10% change in the cost of plant sugar feedstock would have had approximately a $0.3 million impact on our share of loss from equity method investment in the Solazyme Bunge JV for the nine months ended September 30, 2016