Solazyme, Inc.
SOLAZYME INC (Form: S-1/A, Received: 05/25/2011 08:10:29)
Table of Contents

As filed with the Securities and Exchange Commission on May 25, 2011

Registration No. 333-172790

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 6 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Solazyme, Inc.

(Exact name of Registrant as specified in its charter)

Delaware   2860   33-1077078

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

225 Gateway Boulevard

South San Francisco, CA 94080

(650) 780-4777

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

Jonathan S. Wolfson

Chief Executive Officer

Solazyme, Inc.

225 Gateway Boulevard

South San Francisco, CA 94080

Telephone: (650) 780-4777

Facsimile: (650) 989-6700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Alan F. Denenberg
Davis Polk & Wardwell LLP
1600 El Camino Real
Menlo Park, CA 94025
(650) 752-2000
 

Paul T. Quinlan

Solazyme, Inc.

225 Gateway Boulevard

South San Francisco, CA 94080

(650) 780-4777

 

Jeffrey D. Saper

Allison B. Spinner

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

 

Approximate date of commencement of proposed sale to the public : As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ¨

    Accelerated filer   ¨

Non-accelerated filer   x (Do not check if a smaller reporting company)

  Smaller reporting company   ¨

 

CALCULATION OF REGISTRATION FEE

                 

Title of Each Class

of Securities to Be Registered

  Amount to Be
Registered (1)
 

Proposed Maximum
Aggregate Offering

Price Per Share

 

Proposed Maximum

Aggregate Offering Price (2)

  Amount of
Registration Fee

Common Stock,

par value $0.001

per share

 

11,471,250

 

$17.00

  $195,011,250.00   $22,640.81 (3)
                 
  (1)   Includes 1,496,250 shares which the underwriters have the right to purchase to cover over-allotments.
  (2)   Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
  (3)   Previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued May 25, 2011

 

9,975,000 Shares

LOGO

COMMON STOCK

 

 

 

Solazyme, Inc. is offering 9,375,000 shares of its common stock and the selling stockholders are offering 600,000 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $15.00 and $17.00 per share.

 

 

 

Our common stock has been approved for listing on the Nasdaq Global Select Market under the symbol “SZYM.”

 

 

 

Investing in our common stock involves risks. See “ Risk Factors ” section beginning on page 11.

 

 

 

PRICE $             A SHARE

 

 

 

      

Price to

Public

    

Underwriting

Discounts and

Commissions

    

Proceeds to

Solazyme

    

Proceeds to

Selling

Stockholders

Per Share

     $               $               $               $         

Total

     $                          $                          $                          $                    

 

We have granted the underwriters the right to purchase up to an additional 1,496,250 shares of common stock to cover over-allotments.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on             , 2011.

 

 

 

MORGAN STANLEY

 

GOLDMAN, SACHS & CO.

 

JEFFERIES

 

PACIFIC CREST SECURITIES   LAZARD CAPITAL MARKETS

 

            , 2011


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     36   

Use of Proceeds

     37   

Dividend Policy

     37   

Capitalization

     38   

Dilution

     40   

Selected Consolidated Financial Data

     42   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     44   

Business

     75   

Partnerships and Strategic Arrangements

     98   

Management

     104   
     Page  

Executive Officer Compensation

     114   

Certain Relationships and Related Party Transactions

     135   

Principal and Selling Stockholders

     139   

Description of Capital Stock

     142   

Shares Eligible for Future Sale

     147   

Material US Federal Tax Considerations for Non-US Holders of Common Stock

     149   

Underwriters

     151   

Legal Matters

     157   

Experts

     157   

Market and Industry Data

     157   

Where You Can Find Additional Information

     157   

Consolidated Financial Statements

     F-1   
 

 

 

 

Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with information that is different from that contained in this prospectus. We and the selling stockholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Until                    , 2011 (25 days after the commencement of this offering), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the United States: neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

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PROSPECTUS SUMMARY

 

This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, especially the “Risk Factors” section and our consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock. Unless the context requires otherwise, references in this prospectus to “Solazyme,” “we,” “us” and “our” refer to Solazyme, Inc.

 

SOLAZYME, INC.

 

Our Company

 

We make oil. Our proprietary technology transforms a range of low-cost plant-based sugars into high-value oils. Our renewable products can replace or enhance oils derived from the world’s three existing sources—petroleum, plants and animal fats. We tailor the composition of our oils to address specific customer requirements, offering superior performance characteristics at a competitive cost to conventional oils. Our oils can address the major markets served by conventional oils, which represented an opportunity of over $3.1 trillion in 2010. Initially, we are focused on commercializing our products into three target markets: (1) fuels and chemicals, (2) nutrition and (3) skin and personal care.

 

We create oils that mirror or enhance the chemical composition of conventional oils used today. Until now, the physical and chemical characteristics of conventional oils have been dictated by oils found in nature or blends derived from them. We have created a new paradigm that enables us to design and produce novel tailored oils that cannot be achieved through blending of existing oils alone. These tailored oils offer enhanced value as compared to conventional oils. Our oils are “drop-in” replacements such that they are compatible with existing production, refining, finishing and distribution infrastructure in all of our target markets.

 

Our Technology Platform

 

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

 

Our Production Cost and Selling Prices

 

The production cost profile we have already achieved provides attractive margins when utilizing partner and contract manufacturing for the nutrition, and skin and personal care markets. Based on the technology milestones we have demonstrated, we believe that we can profitably enter the fuels and chemicals markets when we commence production in larger-scale, built-for-purpose commercial manufacturing facilities utilizing sugarcane feedstock. For example, our lead microalgae strains producing oil for the fuels and chemicals markets have achieved key performance metrics that we believe would allow us to manufacture oils today at a cost below $1,000 per metric ton ($3.44 per gallon or $0.91 per liter) if produced in a built-for-purpose commercial plant. This cost includes the cost of anticipated financing and facility depreciation.

 

 

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The following chart on the left illustrates the decrease in our production costs since 2007. The following chart on the right depicts our initial target markets, our expected average selling prices (ASPs) and our estimated production cost profile for oils and bioproducts in those markets.

 

LOGO

 

Our Target Markets

 

We are actively scaling up our manufacturing capacity to sell our oils and bioproducts in the following three target markets:

 

Fuels and Chemicals. Our renewable oils can be refined and sold as drop-in replacements for marine, motor vehicle and jet fuels, as well as replacements for chemicals that are traditionally derived from petroleum or other conventional oils. In the fuels market, we can either manufacture the end fuel product by contracting with refiners to produce fuels of targeted specifications or sell our unrefined oils to refiners. In the chemicals market, we expect to sell our oils to chemical companies that either use our oils directly as a functional fluid or as a raw material to convert into replacements and enhancements for their existing petrochemical and oleochemical products. We tailor our oils to meet industry specifications and customer demands and believe that we can achieve premium pricing as a result of the higher value products we can deliver without affecting our production costs.

 

Nutrition. We have developed microalgae-based food ingredients including oils and powders that enhance the nutritional profile and functionality of food products while reducing costs for consumer packaged goods (CPG) companies. In addition to greater health benefits, including reduced calories, saturated fat and cholesterol, these nutrition products offer a variety of functional benefits such as enhanced taste and texture for low-fat formulations and lower cost handling and processing requirements due to our shelf-stable powdered alternatives for traditional liquid or refrigerated ingredients.

 

Skin and Personal Care. We have developed a portfolio of innovative and branded microalgae-based products. Our first major ingredient is Alguronic Acid ® , which we have formulated into a full range of skin care products with significant anti-aging benefits. We are also developing algal oils as replacements for the essential oils currently used in skin and personal care products.

 

 

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Our Current Commercial Activity

 

We are actively commercializing our technology. We prioritize our market entry based on unit economics, capital requirements and value chain dynamics. In 2010, we launched our first products, the Golden Chlorella ® line of dietary supplements, as a market development initiative, with current sales of products incorporating Golden Chlorella ® at retailers including Whole Foods Market, Inc. (Whole Foods) and General Nutrition Centers, Inc. (GNC). In March 2011, we launched our Algenist brand for the luxury skin care market through marketing and distribution arrangements with Sephora S.A. (Sephora International), Sephora USA, Inc. (Sephora USA), and QVC, Inc. (QVC). Distribution of our Algenist line of skin care products is expected to reach 850 retail stores worldwide by year end. In addition, we are currently engaged in development activities with multiple partners, including Bunge Limited, Chevron U.S.A. Inc., through its division Chevron Technology Ventures (Chevron), The Dow Chemical Company (Dow), Ecopetrol S.A. (Ecopetrol), Qantas Airways Limited (Qantas) and Conopoco, Inc. d/b/a Unilever (Unilever). In conjunction with these development activities, we have entered into non-binding letters of intent with Dow and Qantas for the purchase of our products (offtakes). Subject to certain conditions, including entry into a supply agreement, Dow will purchase up to 20 million gallons (76 million liters) of our oils in 2013 rising to up to 60 million gallons (227 million liters) by 2015 and Qantas will purchase a minimum of 200 to 400 million liters of our jet fuel per year.

 

Our Existing Manufacturing Operations

 

Since 2007, we have been operating in commercially-sized standard industrial fermentation equipment (75,000-liter scale) with multiple contract manufacturing partners. We believe that we have produced more non-ethanol, microbial-based fuels and oils than any other company in the world. From January 2010 through February 2011, we produced well over 500,000 liters (455 metric tons) of oil. To satisfy the testing and certification requirements of the US Navy, we partnered with UOP LLC, a Honeywell company (Honeywell UOP), to refine a portion of this oil into over 200,000 liters (182 metric tons) of military specification marine diesel and jet fuel. The Navy then blended our fuel 50/50 with petroleum derived fuel, and tested it successfully in unmodified engines, including the test performed on our HRF-76 marine diesel in the Riverine Command Boat Experimental in November 2010. In December 2009, we were awarded an approximately $22 million “Integrated Bio-Refinery” grant from the US Department of Energy (DOE) which allows us to develop integrated US-based production capabilities for renewable fuels and chemicals derived from microalgae. In May 2011, we purchased a development and commercial production facility with multiple 128,000-liter fermenters, and an annual oil production capacity of over 2,000,000 liters (1,820 metric tons) located in Peoria, Illinois (the Peoria Facility). Our integrated biorefinery funded by the DOE grant discussed above will be located at the Peoria Facility. Additionally, we have completed detailed engineering designs for large commercial plants to service our fuels and chemical markets, developed in conjunction with Engineering, Procurement and Construction (EPC) firms Jacobs Engineering Group Inc. and Burns & McDonnell Engineering Co., Inc.

 

Manufacturing Capacity Scale-Up

 

We are pursuing capital efficient access to manufacturing capacity. In the skin and personal care market, we expect to continue to use contract manufacturing and/or the Peoria Facility. We expect further capital efficient scale up in the fuels and chemicals and nutrition markets through partnerships whereby our partners will invest capital and operational resources in building manufacturing capacity, while providing access to feedstock. By working with us, we expect that partners can improve the return they realize on their feedstock while diversifying their businesses beyond current product portfolios. This should enable our partners to obtain higher margins and reduced commodity price volatility. For example, in the nutrition market, we recently entered into a 50/50 joint venture with Roquette Frères, S.A. (Roquette), one of the largest global starch and starch-derivatives companies, with the goal of jointly developing, producing and marketing nutrition products worldwide. Roquette has agreed to provide all capital expenditures and working capital required to produce nutrition products for the joint venture (Solazyme Roquette Nutritionals, or the JV). Subject to approval of the board of directors of the JV, Roquette has

 

 

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also agreed to fund an approximately 50,000 metric ton per year facility that is expected to be sited at a Roquette wet mill and owned by the JV.

 

In the fuels and chemicals markets, we plan to launch a commercial facility in 2013 and additional commercial capacity in 2014 and 2015. We are currently negotiating with multiple potential feedstock and manufacturing partners in the United States and Latin America. For example, in December 2010, we signed a non-binding letter of intent with Bunge Limited, one of the largest sugarcane processing companies in Brazil, to form a joint venture and co-locate oil production at one or more of their sugarcane mills, which we believe would provide sufficient sugarcane crush to support manufacturing capacity of over 400,000 metric tons of oil per year. In May 2011, we also signed a joint development agreement with Bunge Global Innovation, LLC to solidify and extend our relationship with them in Brazil. In addition, we have signed a development agreement with Ecopetrol, the largest company in Colombia and one of the four major oil companies in Latin America, to evaluate manufacturing options based on Colombian sugarcane feedstock.

 

Need for Oil Alternatives

 

Oil is essential to our lives. Oil is the basis for everything from transportation fuels, such as diesel and jet, to chemical-based products, including hydraulic fluids and paints, to many food and personal care products. In addition to petroleum extracted from the earth, other natural oils are found in plants, such as soy, palm and coconut, and are also rendered from animal fats. Rapidly growing demand coupled with limited supply, energy security concerns, oil price increases and volatility, government mandates, corporate sustainability initiatives and environmental considerations are all driving the need to find alternative sources of oil.

 

Price increases and volatility in the markets for petroleum and other conventional oils create significant economic risk to global business and trade. According to the Energy Information Administration (EIA), worldwide petroleum prices have fluctuated substantially and have risen more than 200% over the past decade to a price of $91 per barrel as of December 31, 2010, after reaching a peak price of $145 per barrel in July 2008. The International Energy Agency (IEA) forecasts the price of oil could reach $240 per barrel by 2035. According to Oil World, global plant oil and animal fat prices rose more than 300% over the last decade and exhibited similar volatility to that of petroleum.

 

Companies are aggressively seeking new sources of oils with greater price stability than petroleum and other conventional oils. Companies are also looking for new sources of oils with improved characteristics versus conventional oils. In addition, initiatives focused on fulfillment of corporate sustainability objectives and government mandates support an increased use of renewable oils.

 

Our Solution

 

Our solution combines the most efficient and productive oil-producing organism, microalgae, with scalable and cost-effective standard industrial fermentation processes in order to deliver high value, low cost, tailored oils. Oleaginous (oil-producing) microalgae have evolved over billions of years to produce large amounts of oil rapidly when grown in the right conditions. We use microalgae as a biocatalyst to produce oil from a wide variety of low-cost plant sugar feedstocks. Our microalgae are grown in the dark and use “indirect photosynthesis,” receiving their energy from the plant sugars fed to them in large steel tanks.

 

Our core competency is the ability to (1) identify, isolate and further optimize strains of microalgae to achieve high cell densities, high yield converting sugar to product and high productivity rates compared to other alternatives and (2) tailor the oil outputs to meet specific market needs. Our technology offers a renewable alternative source of oil that is environmentally sustainable. Life Cycle Associates (an independent GHG

 

 

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measurement firm) determined that when used for transportation our biofuels reduce lifecycle GHG emissions by 66-93% compared to conventional petroleum based fuels, depending on the plant sugar source, type of fuel and regional measurement methodology.

 

We believe that the following advantages of our platform position us to offer a new source of renewable oils to address the major markets served by conventional oils.

 

   

Large and diverse market opportunities. Because we make oil, we can access the vast markets currently served by petroleum, plant oils and animal fats. In addition, we leverage our proprietary biotechnology platform to tailor oils that address specific customer requirements by offering superior performance characteristics at a competitive price compared to conventional oils.

 

   

Cost-competitive at commercial scale. We harness the oil-producing characteristics of microalgae through a proven industrial fermentation process in a controlled environment to produce large volumes of oil in a cost-effective, scalable and predictable manner.

 

   

Compatible with existing equipment and infrastructure. We use standard industrial fermentation and downstream processing equipment that needs little or no modification. Our oils are compatible with existing refining, finishing and distribution infrastructure, logistics channels, and technical specifications, which enables them to be a drop-in replacement for conventional oils.

 

   

Rapid time to market. Our tailored-to-specification oils can be quickly adopted by our customers because they mirror existing conventional oils.

 

Our Competitive Strengths

 

We harness the power of microalgae to yield substantial volumes of oil and bioproducts. Our key competitive advantages are:

 

   

Low production cost enables broad market access . The production cost profile we have already achieved provides attractive margins when utilizing partner and contract manufacturing for the nutrition and skin and personal care markets in which we currently sell our products. Based on the technology milestones we have demonstrated, we believe that we can profitably enter the commercial fuels and chemicals markets when we commence production in larger-scale, built-for-purpose commercial manufacturing facilities utilizing sugarcane feedstock.

 

   

Premium pricing for tailored oils. While our cost structure allows us to access existing markets at prevailing prices, we also believe that the superior characteristics and enhanced value of our tailored oils as compared to conventional oils should garner premium pricing. For example, we believe that our tailored palm kernel oil (PKO+) with a substantially increased concentration of desired components versus conventional PKO would garner a price of over $2,600 per metric ton, as compared to $1,980 per metric ton for conventional PKO (year-end 2010 price per Oil World).

 

   

Technology proven at scale. We believe that we have produced more non-ethanol, microbial-based fuels and oils than any other company in the advanced biofuels industry. Since 2007, we have been operating in commercially-sized standard industrial fermentation equipment (75,000-liter scale) with contract manufacturing partners in Pennsylvania and California. From January 2010 through February 2011, we produced well over 500,000 liters (455 metric tons) of oil. To satisfy the testing and certification requirements of the US Navy, we partnered with Honeywell UOP to refine a portion of this oil into over 200,000 liters (182 metric tons) of military specification marine diesel and jet fuel.

 

   

Capital efficient access to manufacturing capacity . We believe that the anticipated attractive returns generated by our technology and product portfolio diversification will be compelling drivers for partners to invest capital and operational resources in building manufacturing capacity.

 

 

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C ommercial products today . We prioritize our market entry based on unit economics, capital requirements and value chain dynamics. In 2010, we launched our first products, the Golden Chlorella ® line of dietary supplements, as a market development initiative, with products incorporating Golden Chlorella ® currently being sold at retailers including Whole Foods and GNC. In March 2011, we launched our Algenist brand for the luxury skin care market through marketing and distribution arrangements with Sephora International, Sephora USA and QVC. Distribution of our Algenist line of skin care products is expected to reach more than 850 retail stores worldwide by year end.

 

   

F eedstock and target market flexibility . Our technology platform provides us with the flexibility to choose from among multiple feedstocks on the input side and multiple specific products (and markets) on the output side, while using the same standard industrial fermentation equipment.

 

   

Proprietary and innovative technology . Our technology platform, which enables us to produce novel tailored oils that cannot be achieved through blending of existing oils alone, is protected by intellectual property and know-how related to our targeted recombinant strain optimization, product development and manufacturing capabilities.

 

Our Strategy

 

We intend to be the global market leader in the design and production of renewable oils and bioproducts. Our oils supplement, replace or enhance conventional oils from petroleum, plant or animal sources. The principal elements of our strategy are:

 

   

Execute on our customer-driven approach to technology and product development. We intend to continue to work closely with our partners and customers to understand their requirements and design products specifically to address their needs.

 

   

Execute on our capital efficient strategy to access feedstock and manufacturing capacity. We expect to further scale-up in a capital efficient manner by signing agreements whereby our partners will invest capital and operational resources in building manufacturing capacity, while providing access to feedstock.

 

   

Prioritize market entry based on unit economics and capital requirements. Subsequent to our current commercialization efforts in the nutrition and skin and personal care markets, we plan to sell into the fuels and chemicals markets, which have higher capital requirements, higher volumes and attractive but lower ASPs.

 

   

Enter into offtake and additional partnership agreements to advance commercialization efforts. In addition to funding development work and performing application testing, we expect that our partners will enter into long-term purchase agreements (offtakes) with us. We expect future partnerships to provide access to distribution, merchandising, sales and marketing, customer relationship management and product development knowledge and resources.

 

Risks Affecting Us

 

Our business is subject to a number of risks and uncertainties that you should understand before making an investment decision. These risks are discussed more fully in the section of this prospectus entitled “Risk Factors” and include:

 

   

We have a limited operating history and have incurred significant losses to date, anticipate continuing to incur losses for at least the next several years and may never achieve or sustain profitability.

 

   

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

 

 

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

We cannot assure you that our products will meet necessary standards or be approved or accepted by customers or end users in our target markets.

 

Corporate Information

 

We were incorporated in the State of Delaware on March 31, 2003. Our executive offices are located at 225 Gateway Boulevard, South San Francisco, California 94080, and our telephone number is (650) 780-4777. Our website address is http://www.solazyme.com. The information contained on, or accessible through, our website is not part of this prospectus.

 

“Solazyme ® ,” “Soladiesel BD ® ,” “Soladiesel RD ® ,” “Solajet ,” “Algenist ,” “Alguronic Acid ® ,” “Golden Chlorella ® ,” and our logos are our trademarks and are protected under applicable intellectual property laws. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

This prospectus contains references to metric tons, barrels, gallons and liters. The following are the conversion rates for these four units of measure.

 

Metric Tons*

  

=

  

Barrels

  

=

  

Gallons

  

=

  

Liters

1

     

6.913

     

290.33

     

1,098.901

*  Based on oil density of 0.91 g/cm 3 .

 

 

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THE OFFERING

 

Common stock offered by us

  

9,375,000 shares

Common stock offered by the selling stockholders

  

600,000 shares

Common stock to be outstanding after this offering

  

56,736,830 shares

Use of proceeds

   We expect to use the net proceeds from this offering to fund research and development activities, and to fund working capital and capital expenditures and for other general corporate purposes. We will not receive any proceeds from the shares of common stock sold by the selling stockholders. See “Use of Proceeds.”

Risk factors

   See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock.

NASDAQ Global Select Market symbol

  

“SZYM”

 

 

 

The number of shares of common stock to be outstanding after this offering is based upon 47,361,830 shares outstanding as of March 31, 2011, and excludes:

 

   

6,892,146 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2011 at a weighted average exercise price of $4.00 per share;

 

   

64,103 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2011 at a weighted average exercise price of $0.39 per share;

 

   

1,000,000 shares of common stock, issuable pursuant to a warrant agreement executed in May 2011, that vest upon the successful completion of certain performance milestones;

 

   

1,627,722 shares of common stock reserved for future grant or issuance under our 2004 Equity Incentive Plan as of March 31, 2011;

 

   

7,000,000 shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective as of the date of the effectiveness of this registration statement; and

 

   

750,000 shares of common stock reserved for issuance under our 2011 Equity Employee Stock Purchase Plan, which will become effective as of the date of the effectiveness of this registration statement.

 

Unless otherwise indicated, this prospectus reflects and assumes the following:

 

   

outstanding shares include 224,134 shares of common stock subject to repurchase;

 

   

outstanding shares include 11,876 shares of unvested restricted stock;

 

 

   

no exercise of options outstanding as of March 31, 2011;

 

   

306,596 shares of common stock issuable upon the net exercise of Series B preferred stock warrants and the exercise of common stock warrants, in each case outstanding as of March 31, 2011, at a weighted average exercise price of $1.03 per share;

 

   

the conversion of all of our outstanding shares of preferred stock into an aggregate of 34,534,125 shares of common stock effective upon the completion of this offering, assuming a one-to-one conversion ratio of our outstanding shares of preferred stock into common stock;

 

   

no exercise by the underwriters of their over-allotment option to purchase up to 1,496,250 additional shares of our common stock from us; and

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the effectiveness of the offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following tables summarize our consolidated financial data. We derived the summary statement of operations data for the years ended December 31, 2008, 2009 and 2010 from our audited financial statements and related notes included elsewhere in this prospectus. We derived the summary statement of operations data for the three months ended March 31, 2010 and 2011 and the summary balance sheet data as of March 31, 2011 from our unaudited financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future and results of interim periods are not necessarily indicative of the results for the entire year. You should read this data together with our consolidated financial statements and related notes, “Selected Consolidated Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    Year Ended December 31,     Three Months Ended March 31,  
    2008     2009     2010     2010     2011  
   

(In thousands, except share and per share data)

 

Statement of Operations Data:

         

Total revenues

  $ 923      $ 9,161      $ 37,970      $ 5,758      $ 7,742   
                                       

Cost of product revenue

                                664   

Research and development expenses

    7,506        12,580        34,227        5,896        8,150   

Sales, general and administrative expenses

    7,029        9,890        17,422        3,130        6,109   
                                       

Total operating expenses (1)

    14,535        22,470        51,649        9,026        14,923   
                                       

Loss from operations

    (13,612     (13,309     (13,679     (3,268     (7,181

Total other income (expense), net

    (1,181     (361     (2,601     (684     (108
                                       

Net loss

    (14,793     (13,670     (16,280     (3,952     (7,289

Accretion on redeemable convertible preferred stock

    (60     (145     (140     (36     (36
                                       

Net loss attributable to Solazyme, Inc. common stockholders

  $ (14,853   $ (13,815   $ (16,420   $ (3,988   $ (7,325
                                       

Basic and diluted net loss per share (2)

  $ (1.66   $ (1.38   $ (1.42   $ (0.37   $ (0.60
                                       

Shares used to compute basic and diluted net loss per share (2)

    8,938,145        10,030,495        11,540,494        10,849,235        12,160,295   
                                       

Pro forma net loss attributable to Solazyme, Inc. common stockholders (3)

      $ (13,642     $ (6,806
                     

Pro forma net loss per share attributable to Solazyme, Inc. common stockholders, basic and diluted (unaudited) (3)

      $ (0.31     $ (0.14
                     

Weighted-average number of common shares used in computation of pro forma net loss per share of common stock, basic and diluted (unaudited) (3)

        43,418,534          47,021,329   
                     

 

 

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  (1)   Includes stock-based compensation expense of $259,000, $445,000 and $1,952,000 for the years ended December 31, 2008, 2009 and 2010, respectively, and $132,000 and $1,263,000 for the three months ended March 31, 2010 and 2011, respectively.
  (2)   See notes to our consolidated financial statements for an explanation of the method used to calculate basic and diluted net loss per share of common stock and the weighted-average number of shares used in computation of the per share amounts.
  (3)   The calculations for the unaudited pro forma basic and diluted net loss per share of common stock attributable to Solazyme, Inc. stockholders assume the conversion of all outstanding shares of redeemable convertible preferred stock into shares of common stock, as if the conversions had occurred at the beginning of the period or the issuance date for Series A, Series B, Series C and Series D redeemable convertible preferred stock issued during the year ended December 31, 2010 and the three months ended March 31, 2011 and the assumed net exercise of Series B preferred stock warrants and the exercise of a common stock warrant outstanding as of March 31, 2011. In addition, the numerator in the pro forma basic and diluted net loss per share calculation has been adjusted to remove losses resulting from re-measurements of the convertible preferred stock warrant liability and accretion on redeemable convertible preferred stock, as these measurements would no longer be required when the convertible preferred stock warrants become warrants to purchase shares of our common stock.

 

     As of March 31, 2011  
     Actual     Pro Forma As
Adjusted (4)(5)(6)
 
     (Unaudited)  
     (In thousands)  

Balance Sheet Data:

    

Cash and cash equivalents

   $ 28,943      $ 165,519   

Short-term investments

     38,049        38,049   

Working capital

     65,451        206,414   

Total assets

     86,703        221,402   

Preferred stock warrant liability

     3,444          

Indebtedness

     220        220   

Redeemable convertible preferred stock

     128,349          

Accumulated deficit

     (60,160     (60,160

Total stockholders’ (deficit) equity

     (54,572     212,863   

 

  (4)   Reflects the conversion of all shares of our redeemable convertible preferred stock outstanding as of March 31, 2011 into 34,534,125 shares of common stock effective upon the closing of this offering. Also reflects the reclassification of the preferred stock warrant liability to total stockholders’ (deficit) equity upon the completion of this offering due to the assumed (i) net exercise of Series B warrants for Series B preferred stock and subsequent conversion of Series B preferred stock into common stock and (ii) the conversion of Series A warrants into common stock warrants, and also reflects the exercise of common stock warrants.
  (5)   Reflects the receipt of $135.6 million from the sale of 9,375,000 shares of common stock in this offering at an assumed initial public offering price of $16.00 per share (the mid-point of the range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and exercise of common stock warrants.
  (6)   Each $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share would increase or decrease, respectively, the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity by $8.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

 

You should carefully consider the risks described below before making an investment decision. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and related notes.

 

Risks Related to Our Business and Industry

 

We have a limited operating history and have incurred significant losses to date, anticipate continuing to incur losses for at least the next several years and may never achieve or sustain profitability.

 

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

 

We have incurred substantial net losses since our inception, including net loss attributable to our common stockholders of $14.9 million, $13.8 million, $16.4 million and $7.3 million for the years ended December 31, 2008, 2009 and 2010 and the three months ended March 31, 2011, respectively. We expect these losses to continue for at least the next few years as we expand our manufacturing capacity and build-out our product pipeline. As of March 31, 2011, we had an accumulated deficit of $60.2 million. For the foreseeable future, we expect to incur additional costs and expenses related to the continued development and expansion of our business, including research and development, and the build-out and operation of our Peoria Facility and other commercial facilities. As a result, our annual operating losses will likely continue to increase in the short term.

 

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

 

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

 

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

 

   

reliance on third party manufacturers for significant parts of our production processes;

 

   

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

 

   

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

 

   

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

 

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

 

   

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

 

   

our ability to manage our growth;

 

   

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

 

   

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

 

   

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

 

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

 

A critical component of the production of our oils and bioproducts is access to feedstock in sufficient quantities and at an acceptable price to enable commercial production and sale. Currently we purchase feedstock, such as sugarcane-based sucrose and corn-based dextrose, for the production of our renewable products at prevailing market prices.

 

Except for the supply of feedstock to Solazyme Roquette Nutritionals, LLC (Solazyme Roquette Nutritionals, or the JV) for nutrition products by our partner, Roquette Frères, S.A. (Roquette), pursuant to joint venture arrangements, we do not have any long-term supply agreements or other guaranteed access to feedstock. As we scale our production, we anticipate that the production of our oils for the fuels and chemicals markets will require large volumes of feedstock and we may not be able to contract with feedstock producers to secure sufficient quantities of quality feedstock at sustainable costs or at all. If we cannot access feedstock in the quantities and at prices we need, we may not be able to commercialize our fuels and chemicals products and our business will suffer. We are currently negotiating with multiple potential feedstock partners in Latin America and the United States, including with one of the largest sugarcane producers in Brazil, but we cannot assure you that we will successfully enter into a long-term contract on terms favorable to us, or at all. If we do not succeed in entering into long-term supply contracts or otherwise procure feedstock as and when needed, our revenues and profit margins may fluctuate from period to period as we will remain subject to prevailing market prices.

 

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

 

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We are currently in discussions with multiple potential feedstock partners, including Bunge Limited and other sugarcane producers in Brazil. Brazilian sugarcane prices may also increase due to, among other things, changes in the criteria set by the Conselho dos Produtores de Cana, Açúcar e Álcool (Council of Sugarcane, Sugar and Ethanol Producers), known as Consecana. Consecana is an industry association of producers of sugarcane, sugar and ethanol that sets market terms and prices for general supply, lease and partnership agreements and may change such prices and terms from time to time. Moreover, Brazil has a developed industry for producing ethanol from sugarcane, and if we have operations in Brazil, we may need to compete for sugarcane feedstock with ethanol producers. Such changes and competition could result in higher sugarcane prices and/or a significant decrease in the volume of sugarcane available for the production of our products, which could adversely affect our business and results of operations.

 

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

 

We intend to expand our manufacturing capacity by entering into agreements with feedstock producers that require them to invest some or all of the capital needed to build new production facilities to produce our oils. In return, we expect to share in profits anticipated to be realized from the sale of these products. We are currently negotiating with multiple potential feedstock partners in Latin America and the United States. For example, in December 2010, we entered into a non-binding letter of intent with Bunge Limited, one of the largest sugarcane processing companies in Brazil, to form a joint venture and co-locate oil production at one or more of their sugarcane mills which will provide up to 8 million metric tons of annual sugarcane crush. In addition, we have signed a development agreement with Ecopetrol, the largest company in Colombia and one of the four major oil companies in Latin America, to evaluate manufacturing options based on Colombian sugarcane feedstock. Subsequently, we entered into two separate agreements with Bunge in May of 2011. The first is a joint development agreement that advances our work on Brazilian sugarcane feedstocks and extends through May 2013. The second is a Warrant Agreement that vests upon the successful completion of milestones that ultimately target the construction of a commercial facility with 100,000 metric tons of output oil coming online in 2013.

 

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

 

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

 

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

 

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

 

Production of both current and future oils will require that our technology and processes be scalable from laboratory, pilot and demonstration projects to large commercial-scale production. We may not have identified all of the factors that could affect our manufacturing processes. Our technology may not perform as expected when applied at large commercial scale, or we may encounter operational challenges for which we are unable to identify a workable solution. For example, contamination in the production process could decrease process efficiency, create delays and increase our costs. To date we have employed our technology using fermenters with a capacity of up to 75,000 liters, but will need to reproduce our productivity and yields using fermenters with a capacity of approximately 750,000 liters. We may not be able to scale up our production in a timely manner, on commercially reasonable terms, or at all. If we are unable to manufacture products at a large commercial scale, our ability to commercialize our technology will be adversely affected, and, with respect to any products that we do bring to market, we may not be able to achieve and maintain an acceptable production cost profile, which would adversely affect our ability to reach, maintain and increase the profitability of our business.

 

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

 

Unless and until we close on our purchase of the Peoria Facility, we do not own facilities that can produce and process our renewable products other than at small scale. As such, we rely, and we expect to continue to rely at least partially on third parties (including partners and contract manufacturers) for the production of our products. Except for the supply of nutrition products for Solazyme Roquette Nutritionals by our partner, Roquette, pursuant to joint venture arrangements, we have not yet entered into any long term manufacturing or supply agreements for any of our products. Our current and anticipated future dependence upon others for the production and processing of our products may adversely affect our ability to develop any products on a timely and competitive basis. The failure of any of these third parties to continue to provide acceptable products could delay the development and commercialization of our products.

 

We or our partners will need to enter into additional agreements for the commercial development, manufacturing and sale of our products. There can be no assurance that we or our partners can do so on favorable terms, if at all. Even if we reach agreements with manufacturing partners to produce our products, initially the partners will be unfamiliar with our technology and production processes. We cannot be sure that the partners will have or develop the operational expertise needed to run the additional equipment and processes required to manufacture our products. Further, we may have limited control over the amount or timing of resources that any partner is able or willing to devote to production of our products.

 

To date, our products have been produced and processed in quantities sufficient for our development work. For example, we delivered approximately 80,000 liters (73 metric tons) of microalgae-based military marine diesel and jet fuel to the US Navy in 2010. Even if there is demand for our products at a commercial scale, we or our partners may not be able to successfully increase the production capacity for any of our products in a timely or economic manner or at all. In addition, to the extent we are relying on contract manufacturers to produce our products, we cannot be sure that such contract manufacturers will have capacity available when we need their services, that they will be willing to dedicate a portion of their production capacity to our products or that we will

 

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be able to reach acceptable price and other terms with them for the provision of their production services. If we, our partners or our contract manufacturers are unable to increase the production capacity for a product when and as needed, the commercial launch of that product may be delayed, or there may be a shortage of supply, which could limit sales, cause us to lose customers and sales opportunities and impair the growth of our business.

 

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

 

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

 

Our business plan contemplates bringing significant commercial manufacturing capacity online over the next several years and we will need to construct, or otherwise secure access to, capacity significantly greater than what we have previously used as we commercialize our fuel and chemical products. We expect our Solazyme Roquette Nutritionals joint venture will have access to commercial plants that Roquette has agreed to construct.

 

We aim to commence production of oils for the fuels and chemicals markets at one large commercial facility by 2013 and additional facilities in 2014 and 2015. Although we intend to enter into arrangements with third parties to meet our capacity targets, it is possible that we will need to construct our own facility to meet a portion or all of these targets. If we decide to construct our own facility, we will need to secure necessary funding, complete design and other plans needed for the construction of such facility and secure the requisite permits, licenses and other governmental approvals, and we may not be successful in doing so. The construction of any such facility would have to be completed on a timely basis and within an acceptable budget.

 

Any facility, whether owned by a third party or by us, must perform as designed once it is operational. If we encounter significant delays, cost overruns, engineering problems, equipment supply constraints or other serious challenges in bringing any of these facilities online, we may be unable to meet our production goals in the time frame we have planned. In addition, we have limited experience in the management of manufacturing operations at large scale. We may not be successful in producing the amount and quality of oil or bioproduct we anticipate in such plant and our results of operations may suffer as a result. We have limited experience producing our products at commercial scale, and we will not succeed if we cannot maintain or decrease our production costs and effectively scale our technology and manufacturing processes.

 

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

 

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

 

We have entered into a joint venture with Roquette in connection with our nutrition business (See “—Our relationship with our strategic partner Roquette may have a substantial impact on our company.”). In the skin and personal care market, we have entered into arrangements with Sephora S.A. (Sephora International), Sephora USA, Inc. (Sephora USA) and QVC, Inc. (QVC). In the fuels and chemicals markets, we have entered into development agreements with Bunge Global Innovation, LLC, Chevron U.S.A. Inc., through its division Chevron

 

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Technology Ventures (Chevron), and with The Dow Chemical Company (Dow). See “Partnerships and Strategic Arrangements.” There can be no guarantee that we can successfully manage these strategic collaborations. For example, under our agreement with Sephora International, we bear a significant portion of the costs and risk of marketing the products, but do not exercise sole control of marketing strategy. In some cases, we will need to meet certain milestones to continue our activities with these partners. The exclusivity provisions of certain strategic arrangements limit our ability to otherwise commercialize our products.

 

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

 

   

we may be required to relinquish important rights, including intellectual property, marketing and distribution rights or may disagree with our partners as to rights to intellectual property we develop, or their research programs or commercialization activities;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

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

 

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

 

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

 

Our ability to generate value from the JV will depend, among other things, on our ability to work cooperatively with Roquette and Solazyme Roquette Nutritionals for the commercialization of the JV’s products. We may not be able to do so. For example, under the joint venture, Roquette personnel and facilities will be used

 

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to produce nutrition products using our licensed technology. Roquette does not have previous experience working with our technology, and we cannot assure you that the JV will be successful in commercializing its products. In addition, the agreements governing our partnership are complex and cover a range of future activities, and disputes may arise between us and Roquette that could delay the development and commercialization of the JV’s products or cause the dissolution of the JV. For example, the joint venture agreement contemplates that Roquette will construct and own two JV-dedicated, Roquette-owned facilities that are expected to have aggregate capacity of approximately 5,000 metric tons per year. In addition, subject to approval of the board of directors of the JV to enter into Phase 3, Roquette has committed to fund a JV-owned facility in Phase 3 that is expected to have capacity of approximately 50,000 metric tons per year. However, because the four-person board of directors of the JV includes two Roquette designees, the decision to proceed with Phase 3 will functionally require Roquette’s approval. If we are unable to obtain the approval of the board of directors of the JV, our ability to commercialize the JV’s nutrition products and the financial performance of the JV will suffer.

 

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

 

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

 

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

 

In the chemicals market, the potential customers for our oils are generally companies that have well-developed manufacturing processes and arrangements with suppliers for the chemical components of their products and may resist changing these processes and components. These potential customers frequently impose lengthy and complex product qualification procedures on their suppliers, influenced by consumer preference, manufacturing considerations, supplier operating history, regulatory issues, product liability and other factors, many of which are unknown to, or not well understood by, us. Satisfying these processes may take many months or years.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

   

political, economic, diplomatic or social instability;

 

   

land reform movements;

 

   

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

 

   

inflation, changing interest rates and exchange controls;

 

   

tax burden and policies;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

difficulties and costs of staffing and managing foreign operations.

 

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

 

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

 

We currently incur some costs and expenses in Euros and the Brazilian Real and expect in the future to incur additional expenses in these and other foreign currencies, and derive a portion of our revenues in the local currencies of customers throughout the world. As a result, our revenues and results of operations are subject to foreign exchange fluctuations, which we may not be able to manage successfully. During the past few decades, the Brazilian currency in particular has faced frequent and substantial exchange rate fluctuations in relation to the US dollar and other foreign currencies. For example, the Real appreciated 12%, 8% and 17% against the US dollar in 2005, 2006, and 2007, respectively. By comparison, the Euro depreciated 15% against the US dollar in 2005 and appreciated 11% and 10% against the US dollar in 2006 and 2007, respectively. As a result of the global financial crisis in mid-2008, the Real depreciated 31% against the US dollar. In 2009, due in part to the recovery of the Brazilian economy at a faster rate than the global economy, the Real once again appreciated 25% against the US dollar. In 2010, the Real appreciated 5% against the US dollar. As a result of the European sovereign debt crisis, the Euro depreciated 7% against the US dollar in 2010. There can be no assurance that the Real or the Euro will not significantly appreciate or depreciate against the US dollar in the future.

 

We bear the risk that the rate of inflation in the foreign countries where we incur costs and expenses or the decline in value of the US dollar compared to those foreign currencies will increase our costs as expressed in US dollars. Future measures by foreign governments to control inflation, including interest rate adjustments,

 

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intervention in the foreign exchange market and changes to the fixed value of their currencies, may trigger increases in inflation. We may not be able to adjust the prices of our products to offset the effects of inflation on our cost structure, which could increase our costs and reduce our net operating margins. If we do not successfully manage these risks through hedging or other mechanisms, our revenues and results of operations could be adversely affected.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The sale of diesel and jet fuels produced from our oils is subject to regulation by various government agencies, including the Environmental Protection Agency (EPA) and the California Air Resources Board in the U.S. To date, we have not registered any fuels made from our oils in the U.S. or elsewhere. We or our refining or commercialization partners or customers may be required to register our fuel in the U.S., with the European Commission and elsewhere before selling our products.

 

Our chemical products may be subject to government regulation in our target markets. In the U.S., the EPA administers the Toxic Substances Control Act (TSCA), which regulates the commercial registration, distribution, and use of chemicals. TSCA will require us to obtain and comply with the Microbial Commercial Activity Notice process to manufacture and distribute products made from our microalgae strains. Before we can manufacture or distribute significant volumes of a chemical, we need to determine whether that chemical is listed in the TSCA inventory. If the substance is listed, then manufacture or distribution can commence immediately. If not, then a pre-manufacture notice must be filed with the EPA for a review period of up to 90 days including extensions. Some of the products we produce or plan to produce are already in the TSCA inventory. Others are not yet listed. We may not be able to expediently receive approval from the EPA to list the molecules we would like to make on the TSCA registry, resulting in delays or significant increases in testing requirements. A similar program exists in the European Union, called REACH (Registration, Evaluation, Authorization, and Restriction of Chemical Substances). We are required to register some of our products with the European Commission, and this process could cause delays or significant costs. To the extent that other geographies, such as Brazil, may rely on the TSCA or REACH for chemical registration in their geographies, delays with the US or European authorities may subsequently delay entry into these markets as well.

 

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

 

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

 

We expect to encounter regulations in most if not all of the countries in which we may seek to sell our renewable products, and we cannot assure you that we will be able to obtain necessary approvals in a timely manner or at all. If our microalgae-based oils and bioproducts do not meet applicable regulatory requirements in a particular country or at all, then we may not be able to commercialize them and our business will be adversely affected. The various regulatory schemes applicable to our products will continue to apply following initial

 

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approval for sale. Monitoring regulatory changes and ensuring our ongoing compliance with applicable requirements will be time-consuming and may affect our results of operations. If we fail to comply with such requirements on an ongoing basis, we may be subject to fines or other penalties, or may be prevented from selling our oils and bioproducts, and our business may be harmed.

 

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

 

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

 

Although we have implemented safety procedures for handling and disposing of these materials and waste products in an effort to comply with these laws and regulations, we cannot be sure that our safety measures will be compliant or capable of eliminating the risk of injury or contamination from the generation, manufacturing, use, storage, transportation, handling, disposal of, and human exposure to hazardous materials. Failure to comply with environmental, health and safety laws could subject us to liability and resulting damages. There can be no assurance that violations of environmental, health and safety laws will not occur as a result of human error, accident, equipment failure or other causes. Compliance with applicable environmental laws and regulations may be expensive, and the failure to comply with past, present, or future laws could result in the imposition of fines, regulatory oversight costs, third party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of production, or a cessation of operations, and our liability may exceed our total assets. Liability under environmental laws, such as the Comprehensive Environmental Response Compensation and Liability Act in the United States can impose liability for the full amount of damages without regard to comparative fault for the investigation and cleanup of contamination and impacts to human health and for damages to natural resources. Contamination at properties we will own and operate, and at properties to which we sent hazardous materials, may result in liability for us under environmental laws and regulations.

 

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

 

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

 

The market for renewable fuels is heavily influenced by foreign, federal, state and local government regulations and policies. Changes to existing or adoption of new domestic or foreign federal, state or local legislative initiatives that impact the production, distribution, sale or import and export of renewable fuels may harm our business. For example, in 2007, the Energy Independence and Security Act of 2007 set targets for alternative sourced liquid transportation fuels (approximately 14 billion gallons in 2011, increasing to 36 billion gallons by 2022). Of the 2022 target amount, a minimum of 21 billion gallons must be advanced biofuels. In the U.S. and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. The elimination of or any reduction in mandated requirements for fuel alternatives and additives to gasoline may cause demand for biofuels to decline and deter investment in the research and

 

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development of renewable fuels. In addition, the US Congress has passed legislation, including the Blender’s Credit for Ethanol, that extends tax credits to blenders of certain renewable fuel products. However, there is no assurance that this or any other favorable legislation will remain in place. For example, the biodiesel tax credit expired in December 2009, and its extension was not approved until March 2010. Any reduction in, phasing out or elimination of existing tax credits, subsidies and other incentives in the U.S. and foreign markets for renewable fuels, or any inability of our customers to access such credits, subsidies and incentives, may adversely affect demand for our products and increase the overall cost of commercialization of our renewable fuels, which would adversely affect our business. In addition, market uncertainty regarding future policies may also affect our ability to develop new renewable products or to license our technologies to third parties and to sell products to end customers. Any inability to address these requirements and any regulatory or policy changes could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

Concerns associated with renewable fuels, including land usage, national security interests and food crop usage, are receiving legislative, industry and public attention. This could result in future legislation, regulation and/or administrative action that could adversely affect our business. Any inability to address these requirements and any regulatory or policy changes could have a material adverse effect on our business, financial condition and results of operations.

 

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

 

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

 

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

 

We expect to encounter regulations of microorganisms designed using targeted recombinant technology in most if not all of the countries in which we may seek to establish manufacturing operations, and the scope and nature of these regulations will likely be different from country to country. For example, in the U.S., when used in an industrial process, our microalgae strains designed using targeted recombinant technology may be considered new chemicals under the TSCA, administered by the EPA. We will be required to comply with the EPA’s Microbial Commercial Activity Notice process and are preparing to file a Microbial Commercial Activity Notice for the strain of optimized microalgae that we use for our fuels and chemicals businesses. In Brazil, microorganisms designed using targeted recombinant technology are regulated by the National Biosafety Technical Commission, or CTNBio. We will need to submit an application for approval from CTNBio to use microalgae designed using targeted recombinant technology in a contained environment in order to use these microalgae for research and development and commercial production purposes in any facilities we establish in Brazil. If we cannot meet the applicable requirements in Brazil and other countries in which we intend to produce microalgae-based products, or if it takes longer than anticipated to obtain such approvals, our business could be adversely affected.

 

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

 

Implementing a new enterprise resource planning system could interfere with our business or operations and could adversely impact our financial position, results of operations and cash flows.

 

We are in the process of implementing a new enterprise resource planning (ERP) system. This project requires significant investment of capital and human resources, the re-engineering of many processes of our business, and the attention of many employees who would otherwise be focused on other aspects of our business. Any disruptions, delays or deficiencies in the design and implementation of the new ERP system could result in potentially much higher costs than we had anticipated and could adversely affect our ability to develop and commercialize products, provide services, fulfill contractual obligations, file reports with the Securities and Exchange Commission (SEC) in a timely manner and/or otherwise operate our business, or otherwise impact our controls environment. Any of these consequences could have an adverse effect on our results of operations and financial condition.

 

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

 

We expect that our oils will compete with petroleum, plant oils and animal fats currently used in production of conventional fuel and chemical products. Our oils may also compete with materials produced by other companies producing advanced biofuels and from producers of other renewable oils such as jatropha, camelina, and other algal oils.

 

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

 

In the chemical markets, we will compete with the established providers of oils currently used in chemical products. Producers of these incumbent products include global oil companies, including those selling agricultural products such as palm oil, palm kernel oil, castor bean oil and sunflower oil, large international

 

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chemical companies and other companies specializing in specific products or essential oils. We may also compete in one or more of these markets with manufacturers of other products such as highly refined petrochemicals, synthetic polymers and other petroleum-based fluids and lubricants as well as new market entrants offering renewable products.

 

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

 

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

 

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

 

We expect that our nutrition products will compete with providers in both the specialty and mass food ingredient markets. Many of these companies, such as SALOV North America Corporation (through its Filippo Berio products), Archer Daniels Midland Company and Cargill, Incorporated, are larger than we are, have well-developed distribution systems and networks for their products and have valuable historical relationships with the potential customers and distributors we hope to serve. We may also compete with companies seeking to produce nutrition products based on renewable oils, including DSM Food Specialties and Danisco A/S (who recently agreed to be acquired by E. I. du Pont de Nemours and Company). We plan to develop nutrition products both within and independent of our joint venture with Roquette, but our success will depend on our ability to effectively compete with established companies and successfully commercialize our products.

 

In the skin and personal care market, we expect to compete with established companies and brands with loyal customer followings. The market for skin and personal care products is characterized by strong established brands, loyal brand following and heavy brand marketing. We will compete with companies with well-known brands such as Kinerase ® , Perricone MD ® , and StriVectin ® . These companies have greater sales and marketing resources. We will also compete in the mass consumer market. Some of our competitors in this market have well-known brands such as Meaningful Beauty ® and Principal Secret ® and have substantially greater sales and marketing resources. We have limited experience in the skin and personal care market and neither our brand nor the active ingredient in our products is known. We will need to devote substantial resources to the marketing of our products and there can be no assurance that we will be successful.

 

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

 

We believe that some of the present and projected demand for renewable fuels results from relatively recent increases in the cost of petroleum and certain plant oils. We anticipate that most of our oils, and in particular those used to produce fuels, will be marketed as alternatives to corresponding products based on petroleum and plant oils. If the price of any of these oils falls, we may be unable to produce tailored oils that are cost-effective alternatives to their petroleum or other plant oil-based counterparts. Declining oil prices, or the perception of a

 

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future decline in oil prices, may adversely affect the prices we can obtain from our potential customers or prevent potential customers from entering into agreements with us to buy our oils. During sustained periods of lower oil prices we may be unable to sell our oils, which could materially and adversely affect our operating results.

 

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

 

Prices of plant oils have also experienced significant volatility. If prices for oils such as palm kernel were to materially decrease in the future, there may be less demand for oil alternatives, which could reduce demand for our products and harm our business. The prices of commodities that serve as food ingredients have also been volatile. For example, the prices of wheat and corn increased during 2010. To the extent that the prices of these commodities decline and remain at lower levels for extended periods of time, the demand for our nutrition products may be reduced, and our ability to successfully compete in this market may be harmed.

 

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

 

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

 

Risks Related to Our Intellectual Property

 

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

 

Our success depends in part on our ability to obtain and maintain patent protection sufficient to prevent others from utilizing our manufacturing components, manufacturing processes or marketing our products, as well as to successfully defend and enforce our patents against infringement by others. In order to protect our products, manufacturing components and manufacturing processes from unauthorized use by third parties, we must hold patent rights which cover our products, manufacturing components and manufacturing processes. As of May 9, 2011 we owned three issued patents and over 125 patent applications, some of which are foreign counterparts, that were filed in the United States and in various foreign jurisdictions.

 

The patent position of biotechnology and bio-industrial companies can be highly uncertain because obtaining and determining the scope of patent rights involves complex legal and factual questions. The standards applied by the US Patent and Trademark Office and foreign patent offices in granting patents are not always applied uniformly or predictably. There is no uniform worldwide policy regarding patentable subject matter, the scope of claims allowable in biotechnology and bio-industrial patents, or the formal requirements to obtain such patents. Consequently, patents may not issue from our pending patent applications. Furthermore, in the process of seeking patent protection or even after a patent is granted, we could become subject to expensive and protracted proceedings, including patent interference, opposition and re-examination proceedings, which could

 

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invalidate or narrow the scope of our patent rights. As such, we do not know nor can we predict the scope and/or breadth of patent protection that we might obtain on our proprietary products and technology.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Third parties may misappropriate our proprietary strains.

 

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

 

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challenge the misappropriation and prevent reverse engineering, especially in countries with limited legal and intellectual property protection.

 

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

 

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

 

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

 

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

 

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

 

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

 

We may be exposed to future litigation based on claims that one of our products, manufacturing processes or manufacturing components infringe the intellectual property rights of others. There is inevitable uncertainty in any litigation, including patent litigation. Defending against claims of patent infringement is costly and time consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle at an early stage, such litigation could burden us with substantial unanticipated costs. Some of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex

 

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patent litigation longer than we could. In addition, the costs and uncertainty associated with patent litigation could have a material adverse effect on our ability to continue our internal research and development programs, in-license needed technology, or enter into strategic partnerships that would help us commercialize our technologies. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business.

 

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

 

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

 

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

 

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

 

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

 

Risks Related to Our Finances and Capital Requirements

 

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

 

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

 

   

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

 

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

 

   

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

 

   

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

 

   

increases in price or decreases in availability of feedstocks;

 

   

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

 

   

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

 

   

fluctuations in foreign currency exchange rates;

 

   

seasonal production and sale of our products;

 

   

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

 

   

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

 

   

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

 

   

departure of key employees;

 

   

business interruptions, such as earthquakes and other natural disasters;

 

   

our ability to integrate businesses that we may acquire;

 

   

risks associated with the international aspects of our business; and

 

   

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

 

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

 

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

 

To date, we have financed our operations primarily through private placements of our equity securities and government grants as well as funding from strategic partners. In May 2011, we entered into a loan and security agreement with Silicon Valley Bank that provided for a $20.0 million credit facility consisting of (i) a $15.0 million term loan and (ii) a $5.0 million revolving facility. While we plan to enter into relationships with partners or collaborators for them to provide some portion or all of the capital needed to build production facilities, we may determine that it is more advantageous for us to provide some portion or all of the financing that we currently expect to be provided by these owners. Some of our previous funding has come from government grants; however, our future ability to obtain government grants is uncertain due to the competitive bid process and other factors.

 

We may have to raise additional funds through public or private debt or equity financings to meet our capital requirements. We may not be able to raise sufficient additional funds on terms that are favorable to us, if at all. If we fail to raise sufficient funds and continue to incur losses, our ability to fund our operations, take advantage of strategic opportunities, develop and commercialize products or technologies, or otherwise respond to competitive pressures could be significantly limited. If this happens, we may be forced to delay or terminate research and development programs or the commercialization of products resulting from our technologies, curtail or cease operations or obtain funds through collaborative and licensing arrangements that may require us to

 

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relinquish commercial rights, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we will not be able to successfully execute our business plan or continue our business.

 

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

 

We have been awarded an approximately $22 million “Integrated Bio-Refinery” grant from the US Department of Energy (DOE). The terms of this grant make the funds available to us to develop US-based production capabilities for renewable fuels and chemicals derived from microalgae to be sited at the Peoria Facility. Government grant agreements generally have fixed terms and may be terminated, modified or recovered by the granting agency under certain conditions. If the DOE later terminates or adversely modifies its grant agreement with us, our US-based research and development activities could be impaired, which could affect our ability to meet planned production levels and harm our business.

 

Activities funded by a government grant are subject to audits by government agencies. As part of an audit, these agencies may review our performance, cost structures and compliance with applicable laws, regulations and standards. Grant funds must be applied by us toward the research and development programs specified by the granting agency, rather than for all of our programs generally. If any of our costs are found to be allocated improperly, the costs may not be reimbursed and any costs already reimbursed may have to be refunded. Accordingly, an audit could result in an adjustment to our revenues and results of operations. We are also subject to additional regulations based on our receipt of government grant funding and entry into government contracts. If we fail to comply with these requirements, we may face penalties and may not be awarded government funding or contracts in the future.

 

If we engage in any acquisitions, we will incur a variety of costs and may potentially face numerous risks that could adversely affect our business and operations.

 

If appropriate opportunities become available, we may seek to acquire additional businesses, assets, technologies or products to enhance our business. In connection with any acquisitions, we could issue additional equity securities, which would dilute our stockholders, incur substantial debt to fund the acquisitions, or assume significant liabilities.

 

Acquisitions involve numerous risks, including problems integrating the purchased operations, technologies or products, unanticipated costs and other liabilities, diversion of management’s attention from our core businesses, adverse effects on existing business relationships with current and/or prospective collaborators, customers and/or suppliers, risks associated with entering markets in which we have no or limited prior experience and potential loss of key employees. Acquisitions may also require us to record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur write offs and restructuring and other related expenses, any of which could harm our operating results and financial condition. If we fail in our integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business and financial condition may be adversely affected.

 

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

 

If we elect to raise additional funds through public or private equity offerings, our stockholders would likely experience dilution. Debt financing, if available, may subject us to restrictive covenants that could limit our flexibility in conducting future business activities. For example, the loan and security agreement we entered into with Silicon Valley Bank in May 2011 contains financial covenants that, if breached, would require us to secure our obligations thereunder. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary for us to share a portion of the margin from the sale of our products. We may also be required to relinquish or license on unfavorable terms our rights to technologies or products that we otherwise would seek to develop or commercialize ourselves.

 

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If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002 will require us and, in the event we are an accelerated filer, our independent registered public accounting firm to evaluate and report on our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2012. The process of implementing our internal controls and complying with Section 404 will be expensive and time consuming, and will require significant attention of management. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we conclude, and our independent registered public accounting firm concurs, that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. In addition, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions, including SEC action, ineligibility for short form resale registration, the suspension or delisting of our common stock from the stock exchange on which it is listed and the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price and could harm our business.

 

Risks Relating to Securities Markets and Investment in Our Stock

 

A viable trading market for our common stock may not develop.

 

Prior to this offering, there has been no public market for shares of our common stock. Although our common stock has been approved for listing on the NASDAQ Global Select Market, an active trading market for our shares may never develop or be sustained following this offering. We and the underwriters will determine the initial public offering price of our common stock through negotiation. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. This initial public offering price may vary from the market price of our common stock after the offering. In addition, the trading volume of companies such as ours is often very low, and thus your ability to resell your shares may be severely constrained. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price.

 

The price of our common stock may be volatile.

 

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

 

These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.

 

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Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

 

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $12.25 in net tangible book value per share from the price you paid, based on an assumed initial public offering price of $16.00 per share (the mid-point of the range set forth on the cover page of this prospectus). The exercise of outstanding options and warrants will result in further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

 

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

 

As of March 31, 2011 our executive officers, directors and beneficial holders of 5% or more of our outstanding stock owned approximately 76.1% of our voting stock, including shares subject to outstanding options and warrants, and we expect that upon completion of this offering, the same group will continue to hold at least 63.6% of our outstanding voting stock. As a result, these stockholders, acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders.

 

A significant portion of total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

 

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. As of March 31, 2011, our directors, executive officers and our five largest stockholders beneficially own, collectively, approximately 76.1% of our outstanding common stock, including shares subject to outstanding options and warrants. If one or more of them were to sell a substantial portion of the shares they hold, it could cause our stock price to decline. Based on shares outstanding as of March 31, 2011, upon completion of this offering, we will have 56,736,830 outstanding shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares. This includes the shares that we are selling in this offering. As of the date of this prospectus, of the remaining shares, substantially all of the shares of common stock will be subject to a 180-day contractual lock-up with the underwriters, and the remaining shares of common stock will be subject to a 180-day contractual lock-up with us.

 

In addition, as of March 31, 2011, there were 6,892,146 shares subject to outstanding options that will become eligible for sale in the public market upon exercise of such options to the extent permitted by any applicable vesting requirements, the lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended (the Securities Act). Moreover, after this offering, holders of an aggregate of 34,534,125 shares of our common stock will have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders.

 

We also intend to register all 7,750,000 shares of common stock that we may issue under our 2011 Equity Incentive Plan and 2011 Employee Stock Purchase Plan. Once we register these shares, they can be freely sold in the public market upon issuance and once vested and exercised, as applicable, subject to the 180-day lock-up periods under the lock-up agreements described in the “Underwriters” section of this prospectus.

 

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

 

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

 

   

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

 

   

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

 

   

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

 

   

prohibiting stockholder action by written consent;

 

   

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

 

   

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

 

Being a public company will increase our expenses and administrative burden.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to perform additional tasks. For example, in anticipation of becoming a public company, we will need to adopt additional internal controls and disclosure controls and procedures and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under applicable securities laws.

 

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

 

The increased costs associated with operating as a public company may decrease our net income or increase our net loss, and may cause us to reduce costs in other areas of our business or increase the prices of our products or services to offset the effect of such increased costs. Additionally, if these requirements divert our

 

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management’s attention from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

 

We will have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

 

We will have broad discretion in the use of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development and commercialization of our products and cause the price of our common stock to decline.

 

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

 

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

 

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

 

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

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Some of the statements under “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Partnerships and Strategic Arrangements” and elsewhere in this prospectus constitute forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” the negative of these terms or other words that convey uncertainty of future events or outcomes, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. While we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

 

   

our ability to maintain our production costs at scale in order to profitably enter our three target markets;

 

   

our ability to secure access to manufacturing capacity and feedstock;

 

   

our ability to successfully manage our joint venture with Roquette;

 

   

our ability to retain Bunge Limited, Chevron, the DoD, the DOE, Dow, Ecopetrol, Honeywell UOP, Qantas, QVC, Sephora International, Sephora USA and Unilever as strategic partners;

 

   

our plans to develop, manufacture and commercialize our products;

 

   

our research and development activities, including development of new products, and projected expenditures;

 

   

our ability to retain and hire necessary employees;

 

   

the size and growth potential of the potential markets for our products and our ability to serve those markets;

 

   

our ability to obtain and maintain regulatory approval for our products and regulatory developments in the United States and foreign countries;

 

   

the rate and degree of market acceptance of any future products;

 

   

our use of the proceeds from this offering;

 

   

the accuracy of our estimates regarding expenses, future revenues, capital requirements and needs for additional financing and our ability to obtain additional financing;

 

   

our ability to attract strategic partners with development and commercialization expertise;

 

   

our ability to obtain and maintain intellectual property protection for our products and processes; and

 

   

intense competition in the renewable energy and biobased products markets and the ability of our competitors, many of whom have greater resources than we do, to offer different or better alternatives than our products and processes.

 

In addition, you should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all the forward-looking statements contained in this prospectus by the foregoing cautionary statements.

 

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USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $135.6 million from the sale of the shares of common stock offered in this offering, or approximately $157.9 million if the underwriters exercise their option to purchase additional shares of common stock to cover any over-allotment in full, based on an assumed initial public offering price of $16.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share would increase or decrease the net proceeds to us from this offering by approximately $8.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us. We will not receive any proceeds from the shares of common stock sold by the selling stockholders.

 

The principal purposes for this offering are to fund research and development activities, and to fund working capital and capital expenditures and for other general corporate purposes. We intend to accelerate our commercial strategy in multiple geographies, which includes accessing feedstock arrangements and establishing manufacturing capacity with partners in which we may invest capital when the returns are justified. We may also use a portion of the proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business. However, we have no present understandings, commitments or agreements to enter into any potential acquisitions or investments. We cannot currently allocate specific percentages of the net proceeds that we may use for the purposes described above. Accordingly, we will have broad discretion in the use of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock.

 

DIVIDEND POLICY

 

We have never declared or paid any dividends on our common stock or any other securities. We currently intend to retain our future earnings, if any, for use in the expansion and operation of our business and therefore do not anticipate paying cash dividends on our common stock in the foreseeable future. Any future determination relating to our dividend policy will be made at the discretion of our board of directors, based upon our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

 

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CAPITALIZATION

 

The following table sets forth our cash, cash equivalents and short-term investments and capitalization as of March 31, 2011:

 

   

on an actual basis; and

 

   

on a pro forma as adjusted basis to give effect to:

 

   

the conversion of all outstanding shares of our convertible preferred stock into 34,534,125 shares of common stock;

 

   

the reclassification of the preferred stock warrant liability to stockholders’ (deficit) equity upon the completion of this offering due to the assumed net exercise of (i) Series B warrants for Series B preferred stock and subsequent conversion of Series B preferred stock into common stock and (ii) the conversion of Series A warrants into common stock warrants;

 

   

proceeds from the assumed (i) net exercise of Series B preferred stock warrants and (ii) exercise of common stock warrant; and

 

   

the issuance and sale by us of 9,375,000 shares of common stock in this offering at an assumed initial public offering price of $16.00 per share (the mid-point of the range set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of March 31, 2011  
     Actual     Pro Forma  As
Adjusted (1)
 
     (Unaudited)  
     (In thousands, except share
and per share data)
 

Cash, cash equivalents and short-term investments

   $ 66,992      $ 203,568   
                

Preferred stock warrant liability

   $ 3,444      $   

Indebtedness

     220        220   

Redeemable convertible preferred stock, $0.001 par value; 34,920,140 shares authorized, 34,534,125 shares issued and outstanding actual; 5,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted

     128,349          

Stockholders’ equity (deficit):

    

Common stock, $0.001 par value, 60,000,000 shares authorized, 12,285,099 shares issued and outstanding, actual; 150,000,000 shares authorized, 56,736,830 shares issued and outstanding, pro forma as adjusted (1)

     12        57   

Additional paid-in capital

     5,810        273,200   

Notes receivable from stockholders

              

Accumulated other comprehensive loss

     (234     (234

Accumulated deficit

     (60,160     (60,160
                

Total stockholders’ (deficit) equity

     (54,572     212,863   
                

Total capitalization

   $ 77,441      $ 213,083   
                

 

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  (1)   Each $1.00 increase or decrease in the assumed initial public offering price of $16.00 per share would increase or decrease, respectively, the amount of cash, cash equivalents and short-term investments, additional paid-in capital and total capitalization by approximately $8.7 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us.

 

The number of common shares shown as issued and outstanding on a pro forma as adjusted basis in the table is based on the number of shares of our common stock outstanding as of March 31, 2011, and excludes:

 

   

6,892,146 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2011 at a weighted average exercise price of $4.00 per share;

 

   

64,103 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2011 at a weighted average exercise price of $0.39 per share

 

   

1,000,000 shares of common stock issuable pursuant to a warrant agreement executed in May 2011, that vest upon the successful completion of certain performance milestones;

 

   

1,627,722 shares of common stock reserved for future grant or issuance under our 2004 Equity Incentive Plan as of March 31, 2011;

 

   

7,000,000 shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective as of the date of the effectiveness of this registration statement; and

 

   

750,000 shares of common stock reserved for issuance under our 2011 Employee Stock Purchase Plan, which will become effective as of the date of the effectiveness of this registration statement.

 

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DILUTION

 

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering.

 

Our historical net tangible book value (deficit) as of March 31, 2011 was approximately $(54.6) million or $(4.36) per share of common stock. Our historical net tangible book value (deficit) per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and redeemable convertible preferred stock, divided by the total number of shares of our common stock outstanding as of March 31, 2011. Pro forma net tangible book value as of March 31, 2011 was approximately $73.8 million, or $1.57 per share of common stock. Pro forma net tangible book value gives effect to the conversion of all of our outstanding preferred stock into 34,534,125 shares of our common stock, which will occur automatically upon the closing of this offering.

 

After giving effect to our sale in this offering of 9,375,000 shares of our common stock at an assumed initial public offering price of $16.00 per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us, and net exercise of Series B preferred stock warrants and exercise of common stock warrant, our pro forma as adjusted net tangible book value as of March 31, 2011 would have been $212.9 million, or $3.75 per share of our common stock. This represents an immediate increase of net tangible book value of $2.18 per share to our existing stockholders and an immediate dilution of $12.25 per share to investors purchasing shares in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

     $ 16.00   

Historical net tangible book value (deficit) per share as of March 31, 2011

   $ (4.36  

Increase per share due to pro forma conversion of preferred stock

     5.93     

Pro forma net tangible book value per share before this offering

     1.57     

Increase per share attributable to this offering

     2.18     
          

Pro forma as adjusted net tangible book value per share after this offering

       3.75   
          

Dilution per share to new investors

     $ 12.25   
          

 

Each $1.00 increase or decrease in the assumed public offering price of $16.00 per share would increase or decrease our pro forma as adjusted net tangible book value by approximately $8.7 million, the pro forma as adjusted net tangible book value per share after this offering by approximately $0.15 per share and the dilution as adjusted to investors purchasing shares in this offering by approximately $0.85 per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us.

 

The following table summarizes, as of March 31, 2011, the number of shares of common stock purchased from us, on a pro forma as adjusted basis to give effect to the conversion of all of our outstanding preferred stock into 34,534,125 shares of common stock, which will occur automatically upon the closing of this offering, and the total consideration and the average price per share paid by existing stockholders and new investors at an initial public offering price of $16.00 per share before deducting underwriting discounts and commissions and estimated offering costs payable by us:

 

     Total Shares      Total Consideration      Weighted-
Average Price
Per Share
 
       Number      %      Amount      %         
     (In thousands, except per share data and percent)  

Existing stockholders

     47,361,830         83.5       $ 130,456         46.5       $ 2.75   

Investors participating in this offering

     9,375,000         16.5         150,000         53.5       $ 16.00   
                                      

Total

     56,736,830         100.0       $ 280,456         100.0      
                                      

 

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Each $1.00 increase or decrease in the assumed public offering price of $16.00 per share would increase or decrease total consideration paid by new investors, total consideration paid by all stockholders and the average price per share paid by all stockholders by $8.7 million, $289.8 million and $5.11, respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering costs payable by us.

 

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to 46,761,830 shares, or 82.4% of the total number of shares of our common stock outstanding after this offering.

 

If the underwriters exercise their over-allotment option in full, the following will occur:

 

   

the pro forma as adjusted percentage of shares of our common stock held by existing stockholders will decrease to approximately 80.3% of the total number of pro forma as adjusted shares of our common stock outstanding after this offering; and

 

   

the pro forma as-adjusted number of shares of our common stock held by investors participating in this offering will increase to 11,471,250, or approximately 19.7% of the total pro forma as-adjusted number of shares of our common stock outstanding after this offering.

 

The foregoing discussion and tables exclude:

 

   

6,892,146 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2011 at a weighted average exercise price of $4.00 per share;

 

   

64,103 shares of common stock issuable upon the exercise of warrants outstanding as of March 31, 2011 at a weighted average exercise price of $0.39 per share;

 

   

1,000,000 shares of common stock issuable pursuant to a warrant agreement executed in May 2011, that vest upon the successful completion of certain performance milestones;

 

   

1,627,722 shares of common stock reserved for future grant or issuance under our 2004 Equity Incentive Plan as of March 31, 2011;

 

   

7,000,000 shares of common stock reserved for future issuance under our 2011 Equity Incentive Plan, which will become effective as of the date of the effectiveness of this registration statement; and

 

   

750,000 shares of common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan, which will become effective as of the date of the effectiveness of this registration statement.

 

The foregoing discussion and tables assumes the following:

 

   

outstanding shares include 224,134 shares of common stock subject to repurchase;

 

   

outstanding shares include 11,876 shares of unvested restricted stock;

 

   

no exercise of options outstanding as of March 31, 2011;

 

   

306,596 shares of common stock issuable upon the net exercise of Series B preferred stock warrants and the exercise of common stock warrants, in each case outstanding as of March 31, 2011, at a weighted average exercise price of $1.03 per share;

 

   

the conversion of all of our outstanding shares of preferred stock into an aggregate of 34,534,125 shares of common stock effective upon the completion of this offering, assuming a one-to-one conversion ratio of our outstanding shares of preferred stock into common stock;

 

   

no exercise by the underwriters of their over-allotment option to purchase up to 1,496,250 additional shares of our common stock from us; and

 

   

the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the effectiveness of the offering.

 

To the extent that outstanding options or warrants are exercised, new investors will experience further dilution. In addition, we may grant more options or warrants in the future.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

In the tables below, we provide you with our selected historical financial data. We derived the selected statement of operations data for the years ended December 31, 2008, 2009 and 2010 and the selected balance sheet data as of December 31, 2009 and 2010 from our audited financial statements and related notes included elsewhere in this prospectus. We derived the selected statement of operations data for the year ended December 31, 2007 and the selected balance sheet data as of December 31, 2007 and 2008 from our audited financial statements and related notes not included in this prospectus. The selected statement of operations data for the year ended December 31, 2006 and the selected balance sheet data as of December 31, 2006 is unaudited. We derived the selected statement of operations data for the three months ended March 31, 2010 and 2011 and the selected balance sheet data as of March 31, 2011 from our unaudited financial statements and related notes included elsewhere in this prospectus. You should read this data together with our financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future, and results for the three months ended March 31, 2011 are not necessarily indicative of results to be expected for the fiscal year.

 

    Year Ended December 31,     Three Months
Ended March 31,
 
    2006     2007     2008     2009     2010     2010     2011  
                                           
    (In thousands, except share and per share data)  

Statement of Operations Data:

             

Total revenues

  $      $ 185      $ 923      $ 9,161      $ 37,970      $ 5,758      $ 7,742   
                                                       

Cost of product revenue

                                              664   

Research and development

    461        2,555        7,506        12,580        34,227        5,896        8,150   

Sales, general and administrative

    781        2,759        7,029        9,890        17,422        3,130        6,109   
                                                       

Total operating expenses (1)

    1,242        5,314        14,535        22,470        51,649        9,026        14,923   
                                                       

Loss from operations

    (1,242     (5,129     (13,612     (13,309     (13,679     (3,268     (7,181

Total other income (expense), net

    20        96        (1,181     (361     (2,601     (684     (108
                                                       

Net loss

    (1,222     (5,033     (14,793     (13,670     (16,280     (3,952     (7,289

Accretion on redeemable convertible preferred stock

                  (60     (145     (140     (36     (36
                                                       

Net loss attributable to Solazyme, Inc. common stockholders

  $ (1,222   $ (5,033   $ (14,853   $ (13,815   $ (16,420   $ (3,988   $ (7,325
                                                       

Basic and diluted net loss per share attributable to Solazyme, Inc. common stockholders (2)

  $ (0.15   $ (0.62   $ (1.66   $ (1.38   $ (1.42   $ (0.37   $ (0.60
                                                       

Shares used in computation of basic and diluted net loss per share (2)

    8,105,098        8,132,943        8,938,145        10,030,495        11,540,494        10,849,235        12,160,295   
                                                       

Pro forma net loss attributable to Solazyme, Inc. common stockholders (3)

          $ (13,642     $ (6,806
                         

Pro forma net loss per share attributable to Solazyme, Inc. common stockholders, basic and diluted (unaudited) (3)

          $ (0.31     $ (0.14
                         

Weighted-average number of common shares used in computation of pro forma net loss per share of common stock, basic and diluted (unaudited) (3)

            43,418,534          47,021,329   
                         

 

  (1)   Includes stock-based compensation expense of $259,000, $445,000 and $1,952,000 for the years ended December 31, 2008, 2009 and 2010, respectively, and $132,000 and $1,263,000 for the three months ended March 31, 2010 and 2011, respectively.
  (2)   See notes to our consolidated financial statements for an explanation of the method used to calculate basic and diluted net loss per share of common stock and the weighted-average number of shares used in computation of the per share amounts.
  (3)  

The calculations for the unaudited pro forma basic and diluted net loss per share of common stock attributable to Solazyme, Inc. stockholders assume the conversion of all outstanding shares of redeemable convertible preferred stock into shares of common stock, as if the conversions had occurred at the beginning of the period or the issuance date for Series A, Series B, Series C and Series D redeemable convertible preferred stock issued during the year ended December 31, 2010 and the three months ended March 31, 2011

 

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and the assumed net exercise of Series B preferred stock warrants and the exercise of a common stock warrant outstanding as of March 31, 2011. In addition, the numerator in the pro forma basic and diluted net loss per share calculation has been adjusted to remove losses resulting from re-measurements of the convertible preferred stock warrant liability and accretion on redeemable convertible preferred stock, as these measurements would no longer be required when the convertible preferred stock warrants become warrants to purchase shares of our common stock.

 

     As of December 31,     As of
March 31,
 
     2006     2007     2008     2009     2010     2011  
     (In thousands)        

Balance Sheet Data:

            

Cash and cash equivalents

   $ 945      $ 9,221      $ 29,046      $ 19,845      $ 32,497      $ 28,943   

Short-term investments

                   19,943        15,043        49,533        38,049   

Working capital

     937        7,085        42,979        29,693        73,152        65,451   

Total assets

     1,145        10,050        50,840        41,891        93,984        86,703   

Indebtedness

     552        4,702        3,881               229        220   

Redeemable convertible preferred stock

                   65,322        68,459        128,313        128,349   

Accumulated deficit

     (2,714     (7,747     (22,599     (36,415     (52,835     (60,160

Total stockholders’ (deficit) equity

     474        4,300        (22,865     (36,164     (50,067     (54,572

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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

 

Overview

 

We make oil. Our proprietary technology transforms a range of low-cost plant-based sugars into high-value oils. Our renewable products can replace or enhance oils derived from the world’s three existing sources—petroleum, plants and animal fats. We tailor the composition of our oils to address specific customer requirements, offering superior performance characteristics at a competitive cost to conventional oils. Our oils can address the major markets served by conventional oils, which represented an opportunity of over $3.1 trillion in 2010. Initially, we are focused on commercializing our products into three target markets: (1) fuels and chemicals, (2) nutrition and (3) skin and personal care.

 

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

 

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

 

The production cost profile we have already achieved provides attractive margins when utilizing partner and contract manufacturing today for the nutrition, and skin and personal care markets. Based on the technology milestones we have demonstrated, we believe that we can profitably enter the fuels and chemicals markets when we commence production in larger-scale, built-for-purpose commercial manufacturing facilities utilizing sugarcane feedstock. For example, our lead microalgae strains producing oil for the fuels and chemicals markets have achieved key performance metrics that we believe would allow us to manufacture oils today at a cost below $1,000 per metric ton if produced in a built-for-purpose commercial plant. This cost includes the anticipated cost of financing and facility depreciation.

 

We believe that we have produced more non-ethanol, microbial-based fuels and oils than any other company in the advanced biofuels industry. Since 2007, we have been operating in commercially-sized standard industrial

 

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fermentation equipment (75,000-liter scale) with multiple contract manufacturing partners. From January 2010 through February 2011, we produced well over 500,000 liters (455 metric tons) of oil. To satisfy the testing and certification requirements of the US Navy, we partnered with UOP LLC, a Honeywell company (Honeywell UOP) to refine a portion of this oil into over 200,000 liters (182 metric tons) of military specification marine diesel and jet fuel.

 

Through December 31, 2010, we generated revenues primarily from research and development programs and license fees. Our revenues in 2010 were primarily generated from key contracts with two government agencies and three commercial partners. In 2010, we launched our first products, the Golden Chlorella ® line of dietary supplements, as a market development initiative, with current sales of products incorporating Golden Chlorella ® at retailers including Whole Foods Markets, Inc. (Whole Foods) and General Nutrition Centers, Inc. (GNC). In the first quarter of 2011, we commenced commercial sale of our skin and personal care products which were launched internationally with Sephora S.A. (Sephora International) and Sephora USA, Inc. (Sephora USA) in March 2011. As we scale up our manufacturing capacity, we expect a large portion of our sales to be from products sold into the fuels and chemicals markets. In 2010, we generated $38.0 million in revenues, as compared to $9.2 million in 2009. In 2010, we incurred a net loss attributable to our common stockholders of $16.4 million, as compared to a net loss attributable to our common stockholders of $13.8 million in 2009 as we expanded our operations in anticipation of our future growth. In the first quarter of 2011, we generated $7.7 million in revenues and incurred a net loss attributable to our common stockholders of $7.3 million, as compared to $5.8 million in revenues and a net loss attributable to our common stockholders of $4.0 million, in the same quarter in 2010. As of December 31, 2010, and March 31, 2011 we had an accumulated deficit of $52.8 million and $60.2 million, respectively. We anticipate that we will continue to incur net losses as we continue our scale-up activities, expand our research and development activities and support commercialization activities for our products.

 

Since our inception, we have raised an aggregate of $129.3 million from private placements of equity securities. Strategic investors in the private placements of our equity securities included Bunge N.A. Holdings, Inc., Chevron U.S.A. Inc., Conopoco, Inc. d/b/a Unilever (Unilever) and San-Ei Gen F.F.I., Inc.

 

Through a combination of partnerships and internal development, we plan to scale rapidly. To meet demand through 2012, we expect to utilize contract manufacturing, Solazyme owned manufacturing capacity, including the 2,000,000 liters per year development and commercial production facility located in Peoria, Illinois (the Peoria Facility) that we acquired in May 2011, and the manufacturing capacity of Solazyme Roquette Nutritionals, LLC (Solazyme Roquette Nutritionals, or the JV), our joint venture entity. We plan to launch a commercial fuels and chemicals facility in 2013 and additional commercial capacity in 2014 and 2015. We are currently negotiating with multiple potential feedstock partners in Latin America and the United States. For example, in December 2010, we signed a non-binding letter of intent with Bunge Limited, one of the largest sugarcane processing companies in Brazil, to form a joint venture and co-locate oil production at one or more of their sugarcane mills which will provide up to 8 million metric tons of annual sugarcane crush capacity. We believe this would be sufficient to supply manufacturing capacity of over 400,000 metric tons of oil per year. In addition, we have signed a development agreement with Ecopetrol S.A. (Ecopetrol), the largest company in Colombia and one of the four major oil companies in Latin America, to evaluate manufacturing options based on Colombian sugarcane feedstock. Subsequently, we entered into two separate agreements with Bunge in May of 2011. The first is a joint development agreement that advances our work on Brazilian sugarcane feedstocks and extends through May 2013. The second is a Warrant Agreement that vests upon the successful completion of milestones that ultimately target the construction of a commercial facility with 100,000 metric tons of annual output oil coming online in 2013.

 

Key Milestones

 

Since our inception, we have been focused on developing our proprietary technology platform to tailor oils and scaling our platform to commercial levels while driving down our production cost. We have established, or are seeking to establish, partnerships with industry leading feedstock, production and commercialization partners. Key milestones in our development include:

 

   

In 2003, we founded the company with the mission of utilizing microalgae to create a renewable source of energy and transportation fuels;

 

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In 2004 and 2005, we began development of our algal molecular biology platform including identification and initiation of development of our first platform for microalgae-based oil production. In addition, we expanded our focus to skin and personal care products;

 

   

In 2006, we continued development of our algal molecular biology platform. We identified key microalgae strains for oil production into fuels and chemicals; demonstrated our ability to produce and extract oil from microalgae; produced our first meaningful quantities of Alguronic Acid ® ; received our first positive in-vitro skin care results for Alguronic Acid ® ; and expanded our focus into nutrition where we received our first positive animal trial results;

 

   

In 2007 , we received our first substantial government grant, a $2 million grant from the National Institute of Standards and Technology; signed our first joint development agreement with Chevron U.S.A. Inc., through its division Chevron Technology Ventures (Chevron), our first major fuels collaboration; began operating in commercially-sized standard industrial fermentation equipment (75,000-liter scale); worked with a third party refiner to demonstrate the compatibility of our oil with standard refining equipment; produced over 400 liters of microalgae-based oils; produced and road tested in unmodified car engines what we believe to be the world’s first microalgae-based biodiesel that met ASTM specifications;

 

   

In 2008 , we produced what we believe to be the first microalgae-based renewable diesel (meeting standard #2 diesel specifications), the first microalgae-based military marine diesel (meeting appropriate military specifications), and the first microalgae-based jet fuel (meeting all 11 key requirements for the standard Jet-A specifications); produced over 8,000 liters of algal oil; completed our first life cycle analyses evaluating greenhouse gas (GHG) emissions from our fuels; pioneered cellulosic algal oil production; met and exceeded the technical milestones under our first joint development agreement with Chevron; identified additional strains for the nutrition market, and initiated work for self-affirmed generally recognized as safe (GRAS) status for our nutrition products;

 

   

In 2009 , we were awarded approximately $22 million from the US Department of Energy (DOE) for the construction of an integrated biorefinery project to be located at the Peoria Facility; we were awarded two contracts from the US Department of Defense (DoD) for delivery to the US Navy of both microalgae-based marine (renewable F-76) diesel fuel and jet (renewable JP-5) fuel; produced over 24,000 liters of algal oil; produced in-spec (ASTM) cellulosic biodiesel from multiple feedstocks; delivered unblended biodiesel for road testing; entered into an additional joint development agreement with Chevron and an initial joint development agreement with Ecopetrol; and entered into a joint development agreement with Unilever under which the first soap from our algal oil was produced;

 

   

In 2010 , we entered into a 50/50 joint venture with Roquette Frères, S.A. (Roquette), one of the world’s largest starch and starch-derivatives companies, with the goal of jointly developing, producing and marketing nutrition products worldwide; saw the first launch of consumer nutrition products containing Golden Chlorella ® on store shelves including Whole Foods and GNC; executed our first major distribution agreement with Sephora International for our Algenist skin care product brand outside of the United States; produced well over 400,000 liters (364 metric tons) of oil and, to satisfy the testing and certification requirements of the US Navy, partnered with Honeywell UOP to refine a portion of this oil into approximately 200,000 liters (182 metric tons) of military specification marine diesel and jet fuel; met and exceeded the technical milestones under our second joint development agreement with Chevron and first joint development agreement with Ecopetrol and entered into expanded joint development agreements with each; executed a non-binding letter of intent with Bunge Limited, one of the largest sugarcane processing companies in Brazil, to form a joint venture and co-locate oil production at one or more of their sugarcane mills which will provide up to 8 million metric tons of annual sugarcane crush; and executed a non-exclusive and non-binding letter of intent with Hawaiian Commercial & Sugar Company (HC&S), Hawaii’s last active sugarcane mill operator, for the potential development of an on-site testing facility; and

 

   

In the first quarter of 2011 , we entered into arrangements with Sephora USA and QVC for our Algenist skin care product; executed a non-binding letter of intent with Qantas Airways Limited

 

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(Qantas) for the purchase of renewable jet fuel in Australia; entered into both a joint development agreement and a non-binding offtake letter of intent with The Dow Chemical Company (Dow); and entered into an agreement to purchase the Peoria Facility for $11.5 million.

 

   

In the second quarter of 2011 , we entered into a joint development agreement with Bunge Global Innovation, LLC (Bunge) and granted Bunge Limited a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $13.50 per share, in connection with developing specific microbe-derived oils and exploring the production of such oils from Brazilian sugarcane feedstock.

 

Significant Partner Agreements

 

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

 

Bunge . In May 2011, we entered into a Joint Development Agreement (the JDA) with Bunge Global Innovation, LLC (Bunge) that extends through May 2013. Pursuant to the JDA, we and Bunge will jointly develop microbe-derived oils, and explore the production of such oils from Brazilian sugarcane feedstock. If the JDA is successful, the parties contemplate entering into a commercialization arrangement that would include the formation of a joint venture in Brazil to initially produce up to 100,000 metric tons per year of triglyceride oils using sugarcane feedstock. The JDA also provides that Bunge will provide research funding to us through May 2013, payable quarterly in advance throughout the research term.

 

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

 

The JDA and the Warrant were negotiated between us and Bunge, and Bunge Limited, respectively. The JDA was executed on May 2, 2011 and the Warrant was executed the next day. The JDA has provisions such that upon successful completion of the development activities of the JDA, we and Bunge Limited may enter into a commercialization arrangement. The Warrant was executed with the objective to accelerate the timing of this commercialization arrangement. No formal joint venture agreement was in place when the Warrant was executed, nor is there any requirement for us and Bunge to enter into a commercialization arrangement as a result of the execution of the Warrant.

 

In following the provisions of ASC 730-20, the Bunge JDA will be accounted for as an obligation to perform research and development services for others. The performance of research and development services is central to our principal ongoing operations, and we will record the funding for the performance of these services as revenue in our consolidated statement of operations. We will recognize revenue using a proportionate performance based recognition model over the term of the JDA from May 2, 2011 to May 2, 2013. In applying a

 

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proportionate performance based recognition model, we will recognize revenue in proportion to the level of service provided on a systematic and rational basis. The cumulative amount of revenue recognized will be limited by the amounts we are contractually obligated to receive as cash reimbursements under the terms of the JDA. The revenue from this JDA may be impacted by the accounting for the Warrant issued to Bunge as discussed below.

 

We will follow the provisions of ASC 505-50 to account for the Warrant. Under the provisions of ASC 505-50, the measurement date for an instrument is the earlier of the date at which a commitment for performance by the counter party is reached or the date at which the counter party’s performance is complete. A performance commitment is a commitment under which performance by the counterparty to earn the equity instruments is probable because of sufficiently large disincentives for nonperformance. Under the terms of the Warrant, the only disincentives to Bunge are the potential of not vesting in any of the shares underlying the Warrant should the formation of a joint venture not occur, and the potential of reductions in the number of shares exercisable if the other performance milestones are not met on a timely basis. As a result, we will give ASC 505-50 measurement date accounting recognition to the Warrant upon achievement of the various performance milestones that are required for the Warrant to vest.

 

Prior to achievement of a measurement date, we will recognize the cost of the Warrant based on the “then-current lowest aggregate fair value”, as the quantity of shares that will ultimately vest depends on achievement of the various milestones. This value may be equal to zero. If a joint venture is ultimately formed between us and Bunge, and we receive an ownership interest in the joint venture, we will recognize the cost associated with the Warrant first as an asset to the extent of our interest received in the joint venture, then as a reduction to any previously recognized revenue earned under the JDA, and then an expense to the extent of any excess. The impact on our future operating results as a result of the final measurement of the Warrant cannot be determined at this time as the ultimate recording will be impacted by our stock price. Our future operating results could be negatively affected if the future valuation of the Warrant is materially greater than the valuation of our ownership in the joint venture to be formed.

 

Chevron . We have entered into multiple research and development agreements with Chevron to conduct research related to algal technology in the fields of diesel fuel, lubes and additives and coproducts. Under the terms of the current agreement, Chevron is providing research funding through June 30, 2012, subject to specified maximum amounts to be allocated to particular activities. The agreement contemplates that the parties may consider commercializing licensed products in a number of different ways.

 

US Navy . In September 2010, we entered into a firm fixed price research and development contract with the DoD, through the Defense Logistics Agency, Fort Belvoir, VA (DLA), to provide marine diesel fuel. We agreed to produce up to 550,000 liters of HRF-76 marine diesel for the US Navy’s testing and certification program. This contract is the third contract that we have entered into with the DoD and the largest of the three. We completed two earlier contracts to research, develop and demonstrate commercial-scale production of microalgae-based advanced biofuels to establish appropriate status for future commercial procurements.

 

Dow. In February 2011, we entered into a joint development agreement with Dow in connection with the development of microalgae-based oils for use in dielectric insulating fluids. It is anticipated that the research program of Phase 1 will end on or about September 30, 2011. The agreement is mutually exclusive in the area of microbe-based oils for use in dielectric insulating fluids until January 1, 2013. In conjunction with the execution of the joint development agreement, we entered into a non-binding letter of intent whereby Dow could purchase up to 20 million gallons (76 million liters) of our oils in 2013 rising to up to 60 million gallons (227 million liters) of our oils by 2015, subject to certain conditions.

 

Roquette . In November 2010, we entered into a joint venture agreement with Roquette. The purpose of the Solazyme Roquette Nutritionals joint venture is to engage in manufacturing, distribution, sales, marketing and support of products and services related to the use of microalgae to which we have not applied our targeted recombinant technology in a fermentation production process to produce materials for use in the following fields:

 

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(1) human foods and beverages; (2) animal feed; and (3) nutraceuticals. Solazyme Roquette Nutritionals is 50% owned by us and 50% by Roquette. While the JV will establish a manufacturing platform for the products, Roquette has committed to provide expertise and resources with respect to manufacturing, including such volumes of corn-based dextrose feedstock as the joint venture may request subject to the terms of a manufacturing agreement. Roquette has also agreed to provide (1) a full capital commitment for two JV-dedicated, Roquette-owned facilities that are expected to have aggregate capacity of approximately 5,000 metric tons per year, (2) subject to the approval of the board of directors of the JV, debt and equity financing for a larger JV-owned facility that is expected to have capacity of approximately 50,000 metric tons per year, and (3) working capital financing during various scale-up phases.

 

Sephora . In December 2010, we entered into an exclusive distribution contract with Sephora International to distribute our Algenist™ product line in Sephora International stores in Europe and select countries in the Middle East and Asia. In January 2011, we also made arrangements with Sephora USA to sell our Algenist product line in Sephora USA stores (which currently includes locations in the United States and Canada).

 

Factors Affecting our Performance

 

Manufacturing Capacity . In May 2011, we purchased the Peoria Facility. Other than this facility, we do not currently own or operate facilities that can produce and process our products other than at pilot scale; consequently, we rely on third parties (including our strategic partners and contract manufacturers) for the production of development and commercial quantities of our products. This dependence upon others for the production and processing of our products may adversely affect our ability to develop and commercialize products on a timely and competitive basis. Except for the production of products for Solazyme Roquette Nutritionals pursuant to our joint venture arrangement, we have not yet entered into any long term manufacturing or feedstock supply agreements. We plan to bring a commercial fuels and chemicals facility online in 2013 and additional capacity in 2014 and 2015. Our ability to successfully bring this capacity online when and as planned could affect our revenues and operating expenses.

 

Production Cost . Maintaining a low production cost is critical to our ability to sell our products profitably. The efficiency of our microalgae strains is a key component of cost. We consider both the productivity and yield of our microalgae strains as well as other production factors when determining the efficiency of our strains in converting feedstock into oil. The production cost profile we have already achieved can provide attractive margins utilizing partner and contract manufacturing today for the nutrition, and skin and personal care markets. Based on the technology milestones we have demonstrated, we believe that we can profitably enter the fuels and chemicals markets when we commence production in larger-scale, built-for-purpose commercial manufacturing facilities utilizing sugarcane feedstock.

 

Access to Feedstock . We have developed proprietary microalgae strains that are capable of converting different plant sugars into desired oils; access to such feedstock in sufficient quantity and at an acceptable price to enable commercial production is critical to our business. Currently Solazyme Roquette Nutritionals has access to feedstock through multi-year supply arrangements with Roquette, but we use market priced commercially available sugar for the production, at 75,000-liter scale, of oils for the fuels and chemicals markets and the production at commercial scale of our skin and personal care products. Although we are currently negotiating with multiple potential feedstock partners in Latin America and the United States to supply the feedstock necessary to produce our products, we do not have a committed feedstock arrangement other than for the JV’s nutrition business. Feedstock availability and pricing can be affected by numerous factors outside of our control, including weather conditions, government programs and regulations, changes in global demand resulting from population growth and changes in standards of living, rising commodities and equities markets, and availability of credit to producers.

 

Reliance on Partners . Our ability to enter into, maintain and manage partnerships and strategic collaborations is fundamental to the success of our business. We rely on our partners for manufacturing, sales and marketing and distribution services and intend to seek new partners to further advance the commercialization

 

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of our products. The failure to enter into collaborative arrangements on favorable terms or at all, could delay or hinder our ability to develop and commercialize our products and could increase our costs of development and commercialization.

 

International Operations . Our international operations, particularly in developing countries, subject us to uncertainties that could impact our results of operations. Government intervention or changes to monetary, taxation, credit, tariff and other policies in any of the countries we operate, or social and political unrest, could impact our operations in such countries. Our financial results could be adversely affected either directly (such as by fluctuations in foreign currency, increases in interest or tax rates, exchange controls or restrictions on exports, imports or remittances) or indirectly (such as through staffing difficulties, delays or failures in securing licenses, permits or other necessary governmental approvals, consolidation among our local partners or competitors or poor local transportation and other infrastructure).

 

Oil Prices . We anticipate that many of our oils, and in particular those used to produce fuels, will be marketed as alternatives to products derived from petroleum or plant oils. If the price of any of these oils falls, we may be unable to produce tailored oils that are cost-effective alternatives to their petroleum or plant oil-based counterparts. Declining oil prices, or the perception of a future decline in oil prices, may adversely affect the prices we can obtain for our oils or prevent potential customers from entering into agreements with us to buy our oils or fuels produced therefrom. We intend to deliver our end products into markets that can support our anticipated prices and production costs without assumptions concerning government mandates or other legislative support for renewable oils, but sustained periods of lower oil prices could affect our ability to sell our oils profitably or at all.

 

Financial Operations Overview

 

Revenues

 

Through the end of 2010, we focused on building our corporate infrastructure, developing overall technology and designing a manufacturing process to scale up our biotechnology platform to position us in our target markets. Prior to our agreement with Roquette, we generated revenues primarily from collaborative research and government grants. We expect to sell our products in the future into three target markets: fuels and chemicals; nutrition; and skin and personal care. The products that we sell and intend to sell into our target markets have significantly different selling prices, volumes and expected contribution margins. We expect our product revenues in the near term to be comprised almost entirely from the sale of products into the skin and personal care market. It is our expectation that this market will provide us with the highest gross margin of our three target markets. We intend, through Solazyme Roquette Nutritionals, to continue to sell the Golden Chlorella ® line of dietary supplements and broaden our range of commercial products sold into the nutrition market, which we believe also has attractive margins. In the longer term, we expect that a significant portion of our revenues will come from the fuels and chemicals markets, which have lower, but still attractive margins and higher volumes.

 

Through December 31, 2010, our revenues have consisted of research and development program revenues and license fees, and beginning in the first quarter of 2011, included product revenues.

 

   

Research and Development Program Revenues

 

Revenues from research and development (R&D) programs are recognized in the period during which the related costs are incurred, provided that the conditions under which the government grants and agreements were provided have been met and only perfunctory obligations are outstanding. We currently have active R&D programs with both governmental agencies and commercial partners. These R&D programs are made pursuant to grants and agreements that generally provide payment for certain types of expenditures in return for research and development activities over a contractually defined period. Revenues related to R&D programs include reimbursable expenses and payments received for full-time equivalent employee services recognized over the related performance periods for each of the contracts. We are required to perform research and development activities as specified in each respective agreement based on

 

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the terms and performance periods set forth in the agreements as outlined above. R&D program revenues represented 100% of our total revenues in 2008 and 2009, 60% and 70% of our total revenues in 2010 and the first three months of 2011, respectively. Revenues from government grants and agreements represented 82%, 44%, 43% and 26% of total R&D program revenues in 2008, 2009, 2010 and the first three months of 2011, respectively. Revenues from commercial and strategic partner joint development agreements represented 18%, 56%, 57% and 74% of total R&D program revenues in 2008, 2009, 2010 and the first three months of 2011, respectively.

 

   

License Fees

 

Recognition of license fees is dependent on the specific terms of the license agreement. To date, license fee revenue consists of up-front, one-time, non-refundable fees for licensing our technology for commercialization in Solazyme Roquette Nutritionals and these fees have been recognized when cash is received.

 

License fees comprised 40% of our total revenues in 2010. In December 2010, we received a non-refundable license fee that comprised 40% of our 2010 revenues from Solazyme Roquette Nutritionals, upon the execution of a license agreement between us and the JV. We had no license revenues in the first quarter of 2011.

 

   

Product Revenues

 

We expect product revenues to consist of revenues from products sold commercially into each of our target markets. Through December 31, 2010, we did not separately recognize product revenues as the only products we had sold commercially prior to 2011 were the Golden Chlorella ® line of dietary supplements, which represent a market development initiative and was accounted for as R&D program revenues.

 

In the first quarter of 2011, we recognized revenues from the sale of our first commercial product line, Algenist , which we distributed to the skin and personal care end market through arrangements with Sephora International, Sephora USA and QVC. We launched our Algenist product line in Europe, the United States and certain countries in the Middle East and Asia in March 2011. We may also launch the Algenist product line in additional geographies and/or through additional distribution channels. Product revenues represented 30% of our total revenues in the first quarter of 2011.

 

Revenues generated from the sale of products by Solazyme Roquette Nutritionals will be recognized by the JV; net earnings (loss) of the JV will be recorded in our income statement as “Income (Loss) from Equity Method Investments, Net.”

 

Operating Expenses

 

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

 

   

Cost of Product Revenue

 

In the first quarter of 2011, we launched our first commercial product line, Algenist . Cost of product revenue consists primarily of third-party contractor costs associated with packaging, distribution and production of Algenist , internal labor, supplies and other overhead costs associated with production of Alguronic Acid ® , a microalgae-based active ingredient used in our Algenist product line, as well as shipping costs. We expect our third-party contractor costs related to the distribution and production of Algenist , as well as our other costs of product revenue, to increase as the demand for our Algenist product line grows.

 

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Research and Development

 

Research and development expenses consist of costs incurred for government programs and internal projects as well as partner-funded collaborative research and development activities. Research and development expenses consist primarily of personnel and related costs including non-cash stock-based compensation, third-party contract manufacturing, reimbursable equipment and costs associated with government contracts, consultants, facility costs and overhead, depreciation and amortization of property and equipment used in development and laboratory supplies. We expense our research and development costs as they are incurred. Our research and development programs are undertaken to advance our overall industrial biotechnology platform that enables us to produce cost-effective tailored, high-value oils. Although governmental entities and commercial and strategic partners (“partners”) fund certain development activities, the partners benefit from advances in our technology platform as a whole, including costs funded by other development programs. Therefore, costs for such activities have not been separated as these costs have all been determined to be part of our total research and development related activity. Our research and development efforts devoted to our internal and external product and process development projects increased from three projects in 2008, to four projects in 2009 and to eight projects in 2010. Our external research and development projects include research and development activities as specified in our government grants and contracts and development agreements with industrial partners. Internal research activities and projects focus on (1) strain screening, improvement and optimization in order to provide a detailed inventory of individual strain outputs under precisely controlled conditions; (2) process development aimed at reducing the cost of oil production; and (3) scale-up of commercial scale fermentation. In the near term, we expect to hire additional employees, as well as incur significant contract-related expenses as we continue to invest in scaling our manufacturing capacity. Accordingly, we expect that our research and development expenses will continue to increase.

 

   

Sales, General and Administrative

 

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

 

Other Income (Expense), Net

 

Interest and Other Income

 

Interest and other income consists primarily of interest income earned on investments, cash balances and miscellaneous income. Our interest income will vary for each reporting period depending on our average investment balances during the period and market interest rates.

 

Interest Expense

 

Interest expense consists primarily of interest related to our debt. As of December 31, 2010 and March 31, 2011, our debt outstanding was approximately $0.2 million.

 

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Loss from Change in Fair Value of Warrant Liabilities

 

Loss from change in fair value of warrant liabilities consists primarily of the change in the fair value of our redeemable convertible preferred stock warrants. Our outstanding redeemable convertible preferred warrants are classified as a liability and the change in the fair value of these warrants will vary based on multiple factors, but will generally increase if the fair value of underlying stock increases. We will continue to record adjustments to the fair value of the warrants until they are exercised, expire or are converted into warrants to purchase common stock (which will occur upon the completion of this offering), at which time the warrants will no longer be remeasured at each balance sheet date and the then-current aggregate fair value of these warrants will be reclassified from liabilities to equity and we will cease to record any related periodic fair value adjustments.

 

Income (Loss) from Equity Method Investments, Net

 

Revenues generated from the sale of products by Solazyme Roquette Nutritionals will be recognized by the JV; net earnings (loss) of the JV will be recorded in our income statement as “Income (Loss) from Equity Method Investments, Net.” We will not record any JV income (loss) until the JV generates positive net income.

 

Income Taxes

 

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

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates, assumptions and judgments on an ongoing basis.

 

We believe the following critical accounting policies involve significant areas of management’s judgments and estimates in the preparation of our consolidated financial statements.

 

Revenue Recognition

 

We currently recognize revenues from R&D program revenues that consist of government programs and collaborative research and development agreements with commercial and strategic partners and from commercial sales of our skin care products. Revenues are recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectability is reasonably assured.

 

If collaborative research and development or sales agreements contain multiple elements, we evaluate whether the components of each arrangement represent separate units of accounting. We have determined that all of our revenue arrangements should be accounted for as a single unit of accounting. Application of revenue recognition standards requires subjective determination and requires management to make judgments about the fair values of each individual element and whether it is separable from other aspects of the contractual relationship.

 

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For each source of revenue, we apply the above revenue recognition criteria in the following manner:

 

Government Program Revenues

 

Revenues from government programs are recognized in the period during which the related costs are incurred, provided that the conditions under which the government program activities were provided have been met and only perfunctory obligations are outstanding.

 

Collaborative Research and Development Revenues

 

Revenues from collaborative research and development are recognized as the services are performed consistent with the performance requirements of the contract. In cases where the planned levels of research and development fluctuate over the research term, we recognize revenues using the proportionate performance method based upon actual efforts to date relative to the amount of expected effort to be incurred by us. When up-front payments are received and the planned levels of research and development do not fluctuate over the research term, revenues are recorded on a ratable basis over the arrangement term, up to the amount of cash received. When up-front payments are received and the planned levels of research and development fluctuate over the research term, revenues are recorded using the proportionate performance method, up to the amount of cash received. Where arrangements include milestones that are determined to be substantive and at risk at the inception of the arrangement, revenues are recognized upon achievement of the milestone and are limited to those amounts for which collectability is reasonably assured. If these conditions are not met, we defer the milestone payment and recognize it as revenue over the estimated period of performance under the contract as we complete our performance obligations.

 

License Fees

 

Recognition of license fees is dependent on the specific terms of the license agreement. To date, up-front one-time non-refundable fees for licensing our technology for commercialization in a joint venture have been recognized when cash is received.

 

Product Revenue

 

Product revenue is recognized when all of the following criteria are satisfied: persuasive evidence of an arrangement exists; risk of loss and title transfers to the customer; the price is fixed or determinable; and collectability is reasonably assured. Algenist products are sold with a right of return for expired, discontinued, damaged or non-compliant products. In addition, one customer has a right of return for excess inventory beyond 120 days of consumer demand. Algenist products have a three year shelf life from their manufacture date. We give credit for returns, either by issuing a credit memo at the time of product return or, in certain cases, by allowing a customer to decrease the amount of subsequent payments to us for the amount of the return. We reserve for estimated returns of products at the time revenues are recognized. To estimate our return reserve, we obtain data from our customers regarding their historical return rates of well-established similar products to other manufacturers, and also use other known factors, such as our customers’ return policies to their end consumers, which is typically 30 to 90 days. Actual returns of Algenist may differ from these estimates that we used to calculate such reserves. We monitor our actual performance to estimated rates, and will adjust the estimated return rates as necessary.

 

Through May 23, 2011, we have collected $1.7 million of the $2.3 million in product sales that we recorded in the three months ended March 31, 2011. We continually evaluate collectability of our accounts receivable and expect full collection of this accounts receivable balance.

 

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Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out basis. Inventory cost consists of third-party contractor costs associated with packaging, distribution and production of Algenist , supplies, shipping costs and other overhead costs associated with manufacturing. If inventory costs exceed expected market value due to obsolescence or lack of demand, inventory write-downs may be recorded as deemed necessary by management for the difference between the cost and the market value in the period that impairment is first recognized.

 

Convertible Preferred Stock Warrants

 

Freestanding warrants to purchase shares of our convertible preferred stock are classified as liabilities on our consolidated balance sheets at fair value because the warrants may conditionally obligate us to redeem the underlying convertible preferred at some point in the future. The warrants are subject to remeasurement at each balance sheet date, and any change in fair value is recognized as a component of Other Income (Expense), in the consolidated statement of operations. We estimate the fair value of these warrants at the respective balance sheet dates utilizing an option-based model to allocate an estimated business enterprise value to the various classes of our equity stock and related warrants. The assumptions used to estimate the business enterprise value and allocation of value to the classes of equity stock and related warrants are highly judgmental and could differ significantly in the future.

 

For 2010 and the three months ended March 31, 2011, we recorded a charge of $2.6 million and $0.5 million, respectively in Other Income (Expense), to reflect the change in the fair value of the warrants. Charges recorded in Other Income (Expense) in 2008 and 2009 were immaterial. We will continue to record adjustments to the fair value of the warrants until they expire or are exercised or are converted into warrants to purchase common stock, at which time the warrants will no longer be remeasured at each balance sheet date. At that time, the then-current aggregate fair value of these warrants will be reclassified from liabilities to equity and we will cease to record any related periodic fair value adjustments.

 

Stock-Based Compensation

 

We recognize compensation expense related to stock-based compensation, including the awarding of employee and non-employee stock options, based on the grant date estimated fair value. We amortize the fair value of the employee stock options on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The options granted to non-employees are re-measured as the services are performed and the options vest, and the resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

 

Our stock-based compensation expense is as follows:

 

     Years Ended December 31,      Three Months
Ended March  31
 
     2008      2009      2010      2010      2011  
     (In thousands)  

Research and development

   $ 141       $ 182       $ 509       $ 59       $ 331   

Sales, general and administrative

     118         263         1,443         73         932   
                                            

Total stock-based compensation expense

   $ 259       $ 445       $ 1,952       $ 132       $ 1,263   
                                            

 

The stock-based compensation expense of $2.0 million and $1.3 million for the year ended December 31, 2010 and the three months ended March 31, 2011, respectively, included $0.2 million and $0.3 million of stock-based compensation expense associated with the 1.3 million stock-based awards granted on December 16, 2010. The above amounts include stock-based compensation expense for options and restricted stock granted to nonemployees which, for the years ended December 31, 2008, 2009 and 2010 and three months ended March 31, 2010 and 2011 was approximately $0.2 million, $0.2 million, $1.2 million, $17,000 and $0.7 million, respectively.

 

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Based on options granted through March 2011, our stock-based compensation expense for the years ended December 31, 2011 and 2012 is estimated to be $4.9 million and $4.1 million, respectively, including $1.1 million and $1.0 million of estimated stock-based compensation expense for the years ended December 31, 2011 and 2012, respectively, associated with the 1.3 million stock-based awards granted on December 16, 2010. These amounts are estimates only and subject to revision based on actual forfeitures and fluctuations in our common stock valuation and other valuation assumptions. In future periods, our stock-based compensation expense is expected to increase as a result of unrecognized stock-based compensation still to be recognized due to options currently outstanding and as we issue additional stock-based awards in order to attract and retain employees and nonemployee consultants.

 

The following table summarizes the options granted from January 1, 2009, through the date of this prospectus:

 

     Number of
Options
Granted
    Exercise
Price Per
Share
    Estimated
Fair Value
Per Share
 

January 2, 2009 (1)

     20,000 (1)     $ 0.86      $ 0.86   

February 10, 2009

     42,000        0.86        0.86   

April 14, 2009

     32,500        0.86        0.86   

June 9, 2009

     242,500        0.86        0.86   

June 9, 2009

     100,000        0.95 (2)       0.86   

June 11, 2009

     7,500        0.86        0.86   

December 18, 2009

     837,500        1.01        1.01   

June 14, 2010

     1,182,650        2.35        2.35   

August 6, 2010

     421,000        2.35        2.35   

September 8, 2010

     119,000        2.35        2.35   

September 15, 2010

     150,000        2.35        2.35   

October 7, 2010

     117,000        2.35        2.35   

December 16, 2010

     1,279,925        6.79        6.79   

February 22, 2011

     300,300        8.01        8.01   

March 9, 2011

     1,163,500        8.77        8.77   

March 15, 2011

     94,000        8.77        8.77   

April 28, 2011 (3)

    
171,500
  
   
13.50
  
   
13.50
  

May 19, 2011 (3)

     36,000        15.00        15.00   

 

  (1)   The grant of options on this date occurred because of a change in status and was not a new grant.
  (2)   Price is 110% of the fair market value for options granted to Jonathan S. Wolfson and Harrison F. Dillon for 50,000 shares each.
  (3)   Excluded from share information throughout this prospectus.

 

All stock options were granted with exercise prices at or above the then-current fair market value of our common stock as determined by our Board of Directors. We believe that the estimates of the value of our common stock were fair and reasonable at the time they were made. The Board of Directors utilized methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation .

 

We estimated the fair value of our stock-based compensation awards using the Black-Scholes option pricing model, which requires several inputs such as those outlined in the table below. Our expected dividend yield was assumed to be zero, as we have not paid, nor do we anticipate paying, cash dividends on our shares of common stock. Our risk-free interest rate is based on the US Treasury yield curve in effect at the time of grant for zero coupon US Treasury notes with maturities similar to the option’s expected term. We calculate our expected volatility rate from the historical volatilities of several comparable public companies within our industry over a period equal to the expected term of our options because we do not have any trading history to use for calculating the volatility of our own common stock. Due to our limited history of grant activity, we calculate our expected

 

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term utilizing the “simplified method” permitted by the SEC, which is calculated as the average of the total contractual term of the option and its vesting period. We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors.

 

The fair value of employee stock options was estimated using the following weighted-average assumptions (except for common stock valuation):

 

     Years Ended December 31,   Three Months
Ended March 31
     2008   2009   2010   2011

Expected dividend yield

   0%   0%   0%   0%

Risk-free interest rate

   1.5 – 3.3%   2.0 – 3.2%   1.4 – 2.5%   2.4 – 2.5%

Expected volatility

   56.9 – 62.7%   51.7 – 58.6%   42.4 – 62.7%   50.1 – 52.9%

Expected term (in years)

   5.6 – 6.5   3.3 – 6.1   3.3 – 6.5   6.0 – 6.1

Forfeiture rate

   3.25%   2.57% – 5.84%   2.51% – 6.12%   1.08% – 4.7%

Common stock valuation

   $0.86   $0.86 – $1.01   $2.35 – $6.79   $8.01 – $13.50

 

We will continue to use judgment in evaluating the expected term, volatility and forfeiture rate related to our stock-based compensation on a prospective basis and incorporating these factors into the Black-Scholes option pricing model.

 

Significant Factors, Assumptions and Methodologies Used in Estimating Fair Value

 

We have regularly conducted contemporaneous valuations to assist us estimate the fair value of our common stock for each stock option grant and other stock-based awards. Our board of directors was regularly apprised that each valuation was being conducted and considered the relevant objective and subjective factors deemed important by our board of directors in each valuation conducted. Our board of directors also concluded that the assumptions and inputs used in connection with such valuations reflected best estimates of our business condition, prospects and operating performance at each valuation date.

 

Our board of directors considered the results of common stock valuations performed as of the dates provided below in estimating the grant date fair value of common stock. The estimates were performed contemporaneously based upon factors that included: the absence of a public market for our common stock, progress and milestones attained in our business, projected sales and earnings for multiple future periods, and the probabilities of various financing and liquidation events, including winding up and dissolution. Using these valuations, our board of directors made the following estimates of fair value of our common stock.

 

Valuation Date

   Fair Value Per
Share
 

August 15, 2008

   $ 0.86   

September 15, 2009

     1.01   

April 30, 2010

     2.35   

December 15, 2010

     6.79   

February 10, 2011

     8.01   

March 7, 2011

     8.77   

April 19, 2011

     13.50   

 

The estimates at each valuation date considered numerous objective and subjective factors at each option grant date, including but not limited to: (1) prices of preferred stock issued by us to outside investors in arm’s-length transactions, (2) the rights, preferences and privileges of the preferred stock relative to the common stock, (3) our performance and the status of research and product development efforts, (4) our stage of development and business strategy, and (5) the likelihood of achieving a liquidity event such as an initial public offering or sale of our company, given then-prevailing market conditions.

 

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The valuation of the common stock began with estimating a business enterprise value using one or more of the three generally accepted approaches to value: the asset-based approach, the market approach and the income approach. The asset-based approach measures the value of a company based on tangible assets and calculates the fair market value of assets less the fair market value of liabilities. The market approach measures the value of a company through an analysis of recent sales or offerings of comparable investments. Finally, the income approach measures the value of the company based on the present value of expected future benefits.

 

For each valuation we prepared financial forecasts that took into account our past experience and future expectations. There is inherent uncertainty in these estimates because the assumptions used are highly subjective and subject to changes as a result of new operating data and economic and other conditions that impact our business. We balanced the uncertainty associated with achieving the forecasts through the selection of a discount rate.

 

We allocated the enterprise value to the common or various classes of the Company’s equity securities where appropriate (i.e. preferred and common stock) using either the option pricing model as applied under the Black-Scholes method or the probability-weighted expected return method (PWERM).

 

The aggregate value of the common stock derived from application of the two techniques was then divided by the number of shares of common stock outstanding to arrive at the per share value. The value per share was then adjusted for a lack of marketability discount.

 

We granted stock options with exercise prices between $0.86 and $1.01 per share during 2009, between $2.35 and $6.79 per share during 2010, and between $8.01 and $8.77 per share in 2011. The common stock valuation at each valuation date reflected a combination of facts and circumstances as described below.

 

The valuation related to the stock options granted from January 1 to July 3, 2009 considered:

 

   

The business enterprise value as of August 15, 2008 was estimated at approximately $84.6 million by applying the asset-based approach.

 

   

We used volatility of 55.4% based on data from a comparable group of companies. Applying a risk free interest rate of 2.45% and a lack of marketability discount of 27.0% to the value of common stock, we estimated a fair market value of $0.86 per common share at August 15, 2008.

 

   

The effect of a January 2009 joint development agreement with Chevron, which included the possibility of extending the agreement into subsequent phases.

 

The valuation related to the stock options granted on December 18, 2009 considered:

 

   

The business enterprise value as of September 15, 2009 was estimated at approximately $84.9 million based on the application of the income approach and assuming a discount rate applied of 30.0%.

 

   

Multiple rounds of Series C preferred stock financing involving the issuance of 10,835,607 shares of Series C preferred stock at an original issuance price of $5.04 per share for aggregate proceeds of approximately $58 million from September 2008 to February 2009.

 

   

We used volatility of 65.8% based data from a comparable group of companies. We estimated a time until liquidity event of two years, applying a risk free interest rate of 0.96% and a lack of marketability discount of 20.0% to the common stock value, we estimated a fair market value of $1.01 per common share at September 15, 2009.

 

   

A grant awarded in August 2009 by the California Energy Commission’s Public Interest Energy Research (PIER) program for approximately $800,000.

 

   

A research and development agreement entered into in September 2009 with DoD for $8.6 million to develop marine diesel biofuels for the US Navy.

 

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The valuation related to the stock options granted from June 14, 2010 to October 7, 2010 considered:

 

   

The business enterprise value as of April 30, 2010 was estimated at approximately $187.7 million based on the income approach and assuming a discount rate of 30.0%.

 

   

We used volatility of 71.2% based on data from a comparable group of companies. We estimated a time until liquidity event of 2 years, and applying a risk free interest rate of 0.96% and a lack of marketability discount of 20.0% to the common stock value, we estimated a fair market value of $2.35 per common share at April 30, 2010.

 

   

An approximately $22 million grant awarded in December 2009 by DOE to partially fund the building, operating and optimization of an integrated biorefinery.

 

   

Multiple rounds of Series D preferred stock financing involving the issuance of 6,775,660 shares of Series D preferred stock at an original issuance price of $8.86 per share for aggregate proceeds of approximately $60.0 million that occurred between May and August 2010. (The valuation of Series D preferred stock was set as of the term sheet signed by the parties on April 15, 2010. The first close of Series D was completed on May 19, 2010 and was the basis of the market-comparable analysis for the April 30, 2010 valuation report.)

 

   

An extension of a partnership with Ecopetrol in May 2010 to evaluate the production of microalgae-based renewable oil and products in Colombia.

 

The valuation related to the stock options granted on December 16, 2010 considered:

 

   

The business enterprise value as of December 15, 2010 was estimated at approximately $431.8 million based on methods described under the market approach and the income approach.

 

   

The market approach estimated our business enterprise value based on the issuance of our Series D preferred stock at a price of $8.86 from May to August 2010, while the income approach analysis assumed a discount rate of 25.0%.

 

   

We used volatility of 60.0% based on data from comparable group of companies. We estimated a time until liquidity event of 1.31 years, and applying a risk free interest rate of 0.45% and a lack of marketability discount of 16.0% to the common stock value, we estimated a fair market value of $6.79 per common share at December 15, 2010.

 

   

The impact of agreements that closed in November and December 2010:

 

   

The joint venture agreement with Roquette to commercialize products in the nutrition market and associated significant capital commitments.

 

   

An additional research and development agreement with Chevron.

 

   

Distribution agreements with Sephora International and Therabotanics.

 

   

The value indicated by a contemplated private sale of shares of common stock from one stockholder to another stockholder.

 

The valuations related to the stock options granted on February 22, 2011 considered:

 

   

The business enterprise value as of February 10, 2011 was estimated at approximately $492.3 million based on the application of methods under the market approach and the income approach.

 

   

The market approach estimated our business enterprise value based on the issuance of our Series D preferred stock at a price of $8.86 from May to August 2010, while the income approach applied a discount rate of 24.0%.

 

   

We used volatility of 60.0% based on data from a comparable group of companies. We estimated a time until liquidity event of 0.82 years, and applying a risk free interest rate of 0.27% and a lack of marketability discount of 15.0% to the common stock value, we estimated a fair market value of $8.01 per common share at February 10, 2010.

 

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The value indicated by a private sale of shares of common stock from one stockholder to another stockholder that had occurred in December 2010.

 

   

The impact of entering into:

 

   

a distribution arrangement with Sephora USA in January 2011.

 

   

a joint development agreement and non-binding letter of intent with Dow in February 2011.

 

   

non-binding letters of intent with Quantas in January 2011 and Bunge Limited, one of the largest sugarcane processing companies in Brazil, in December 2010.

 

The valuations related to the stock options granted on March 9, 2011 and March 15, 2011 considered:

 

   

The enterprise value as of March 7, 2011 was estimated at approximately $507.7 million based on the application of methods under the market approach and the income approach.

 

   

The market approach estimated our business enterprise value based on the issuance of our Series D preferred stock at a price of $8.87 from May to August 2010, while the income approach applied a discount rate of 22.0%.

 

   

We used volatility of 65.0% based on data from a comparable group of companies. We estimated a time until liquidity event of 0.80 years, and applying a risk free interest rate of 0.25% and a lack of marketability discount of 10.0% to the common stock value, we estimated a fair market value of $8.77 per common share at March 9, 2011.

 

   

The value indicated by a private sale of shares of common stock from one stockholder to another stockholder that had occurred in February 2011.

 

   

The impact of entering into:

 

   

a distribution arrangement with QVC.

 

   

an agreement to purchase the Peoria Facility.

 

The valuations related to the stock options granted on April 28, 2011 considered:

 

   

The enterprise value as of April 19, 2011 was estimated at approximately $792.1 million based on the application of methods under the market approach and the income approach.

 

   

We used volatility of 60.0% based on data from a comparable group of companies. We estimated a time until liquidity event of 0.10 years, applying a risk free interest rate of 0.35% and a lack of marketability discount of 5.0% to the common stock value, we estimated a fair market value of $13.50 per common share at April 19, 2011.

 

   

The impact of entering into an extension of an existing Joint Development Agreement with Unilever through Q1 2011.

 

   

Progress in negotiations relating to a joint development and manufacturing joint venture relationship with Bunge Limited, the third largest sugarcane producer in Brazil. This progress was evidenced by our entry into a joint development agreement with Bunge on May 3, 2011 and an agreement to grant Bunge a milestone-based warrant to purchase our common stock that contemplates Bunge funding and building a manufacturing facility to be operational by 2013.

 

The valuations related to the stock options granted on May 19, 2011 considered:

 

   

The enterprise value as of April 19, 2011 was estimated at approximately $792.1 million based on the application of methods under the market approach and the income approach.

 

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The impact of entering into a joint development agreement with Bunge Limited and an agreement to grant Bunge a milestone-based warrant to purchase our common stock that contemplates Bunge funding and building a manufacturing facility to be operational by 2013.

 

   

The anticipated price range set forth on the cover page of this prospectus and the risk that this offering will not be successfully consummated.

 

Income Taxes

 

We are subject to income taxes in both the U.S. and foreign jurisdictions, and we use estimates in determining our provisions for income taxes. We use the liability method of accounting for income taxes, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income.

 

Recognition of deferred tax assets is appropriate when realization of such assets is more likely than not. We record a valuation allowance against our net deferred tax assets if it is more likely than not that some portion of the deferred tax assets will not be fully realizable. This assessment requires judgment as to the likelihood and amounts of future taxable income by tax jurisdiction. At December 31, 2010, we had a full valuation allowance against all of our deferred tax assets.

 

Effective January 1, 2007, we adopted ASC 740-10 to account for uncertain tax positions. As of December 31, 2008, 2009 and 2010, we had no significant uncertain tax positions requiring recognition in our consolidated financial statements. We do not expect the total amount of unrecognized income tax benefits will significantly increase or decrease in the next 12 months.

 

We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (1) the factors underlying the sustainability assertion have changed and (2) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available.

 

Results of Operations

 

Comparison of Three Months Ended March 31, 2010 and 2011

 

Revenues

 

The following table shows our revenues for the periods presented, showing period-over-period changes.

 

     Three Months ended March 31,  
     2010      2011      $ Change  
     (In thousands)  

Revenues:

        

Research and development programs

   $ 5,758       $ 5,399       $ (359

License Revenue

                       

Net Product Revenue

             2,343         2,343   
                          

Total revenues

   $ 5,758       $ 7,742       $ 1,984   
                          

 

Our total revenues increased by $2.0 million in the three months ended March 31, 2011 compared to the three months ended March 31, 2010, due primarily to a $2.3 million increase in product revenue from our Algenist launch, partially offset by a $0.4 million decrease to revenues from our R&D programs.

 

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The $0.4 million decrease in R&D program revenues was due primarily to a $2.6 million decrease in government program revenues partially offset by a $2.3 million increase in collaborative research and market development revenues. Our government program revenues decreased in the first three months of 2011 compared to the same period in 2010, due to the timing of our Naval marine diesel fuel manufacturing activities associated with our contracts with the DoD, partially offset by revenue from the grant awarded by the DOE in the second quarter of 2010, to fund 80% of the build-out, equipment costs and certain research and development costs associated with our integrated biorefinery program. The increase of $2.3 million in our collaborative research was due primarily to R&D work completed related to the collaborative R&D agreement with Unilever, which was extended in the first quarter of 2011, as well as R&D work performed on the Phase 2 agreement with Chevron.

 

Operating Expenses

 

The following table shows our operating expenses for the periods presented, showing period-over-period changes.

 

     Three Months Ended March 31,  
     2010      2011      $ Change  
     (In thousands)  

Operating expenses:

        

Cost of product revenue

   $       $ 664       $ 664   

Research and development

     5,896         8,150         2,254   

Sales, general and administrative

     3,130         6,109         2,979   
                          

Total operating expenses

   $ 9,026       $ 14,923       $ 5,897   
                          

 

Cost of Product revenue

 

Our cost of product revenue in the first quarter of 2011 consists of third-party contractor costs associated with packaging and distribution of Algenist and the production of Alguronic Acid ® , as well as packaging materials and internal labor including overhead costs associated with Alguronic Acid ® production.

 

Research and Development Expenses

 

Our research and development expenses increased by $2.3 million in the three months ended March 31, 2011, due to an increase in personnel-related expenses of $1.4 million associated with headcount growth, program and third party contractor costs of approximately $0.5 million primarily associated with the DOE grant and the DoD agreement, as well as facilities costs of $0.4 million. Program and third party contractor expenses were higher in the three months ended March 31, 2011 due primarily to reimbursable equipment, design and engineering costs associated with construction of the integrated biorefinery project related to the DOE grant. Research and development expenses include non-cash stock-based compensation expense of $0.3 million in the three months ended March 31, 2011 compared to $59,000 in the same period in 2010. We plan to continue to make significant investments in research and development for the foreseeable future as we continue to develop our algal strain screening and optimization process, scale up our industrial fermentation manufacturing processes, and continue to pursue process development improvements.

 

Sales, General and Administrative Expenses

 

Our sales, general and administrative expenses increased by $3.0 million in the three months ended March 31, 2011, primarily due to increased personnel-related costs of $2.4 million associated with headcount growth, increased Marketing and promotional costs of $0.3 million related to Algenist launch, and increased legal and consulting expenses of $0.2 million. Sales, general and administrative expenses included non-cash stock-based compensation of $0.9 million in the three months ended March 31, 2011 compared to $73,000 in the same period in 2010. We expect our general and administrative expenses to increase in the near future as we add personnel to support the anticipated growth of our business, and incur additional expense as a result of becoming a publicly-traded company.

 

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Other Income (Expense), Net

 

The following table shows our other income (expense), net for the periods presented, showing period-over-period changes.

 

     Three Months Ended March 31,  
     2010     2011     $ Change  
     (In thousands)  

Other income (expense):

      

Interest and other income

   $ 33      $ 390      $ 357   

Interest expense

     (79     (15     (64

Loss from change in fair value of warrant liabilities

     (638     (483     (155
                        

Total other income (expense), net

   $ (684   $ (108   $ (576
                        

 

Interest and Other Income

 

Interest and other income increased by $0.4 million in the three months ended March 31, 2011, primarily due to interest income earned as a result of higher average investment balances. We expect interest income to increase in 2011 as a result of higher cash and investment balances due to the Series D financing and the expected proceeds from this offering.

 

Loss from Change in Fair Value of Warrant Liabilities

 

Loss from the change in fair value of warrant liabilities decreased by $0.2 million in the three months ended March 31, 2011 primarily due to lower non-cash expense associated with the change in fair value of the warrants issued in connection with our redeemable convertible preferred stock. Our outstanding redeemable convertible preferred stock warrants are classified as a liability and the change in the fair value of these warrants will vary based on multiple factors, but will generally increase if the fair value of underlying stock increases. The increase in the fair value of the underlying stock in the first quarter of 2010 was greater than in the three months ended March 31, 2011.

 

Comparison of Years Ended December 31, 2009 and 2010

 

Revenues

 

The following table shows our revenues for the periods presented, showing period-over-period changes.

 

     Year Ended December 31,  
       2009      2010      $ Change  
     (In thousands)  

Revenues:

        

Research and development programs

   $ 9,161       $ 22,970       $ 13,809   

License fees

             15,000         15,000   
                          

Total revenues

   $ 9,161       $ 37,970       $ 28,809   
                          

 

Our total revenues increased by $28.8 million in 2010 due to a license payment related to an up-front non-refundable fee for licensing our technology to Solazyme Roquette Nutritionals, a $12.2 million increase in government program revenues and a $1.6 million increase in collaborative research and market development revenues.

 

Our government program revenues increased due to our research and development contracts with the DoD to supply over 80,000 liters of diesel and jet fuels to the US Navy for application testing in 2010 and a grant awarded by the DOE to fund 80% of the build-out, equipment costs and certain research and development costs associated with our integrated biorefinery program.

 

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The increase of $1.6 million in our collaborative research agreements was due primarily to new contracts with Ecopetrol and Unilever, as well as execution of the Phase 2 agreement with Chevron.

 

Operating Expenses

 

The following table shows our costs and operating expenses for the periods presented, showing period-over-period changes.

 

     Year Ended December 31,  
       2009      2010      $ Change  
     (In thousands)  

Operating expenses:

        

Research and development

   $ 12,580       $ 34,227       $ 21,647   

Sales, general and administrative

     9,890         17,422         7,532   
                          

Total operating expenses

   $ 22,470       $ 51,649       $ 29,179   
                          

 

Research and Development Expenses

 

Our research and development expenses increased by $21.6 million in 2010, primarily due to increased manufacturing, consulting and program costs associated with the DoD contract and the DOE cooperative agreement of approximately $13.3 million, personnel-related expenses associated with headcount growth of $4.7 million, facilities costs of $2.6 million, depreciation and other overhead costs of $1.0 million. Manufacturing expenses were higher in 2010, as we began working with the DoD in August 2009 to supply diesel and jet fuels to the US Navy for application testing in 2010. We initiated work on the DOE contract in the first quarter of 2010, which consisted of work on site selection, design and engineering of the integrated biorefinery. Research and development expenses included non-cash stock-based compensation expense of $0.5 million in 2010 compared to $0.2 million in 2009. We plan to continue to make significant investments in research and development for the foreseeable future as we continue to develop our algal strain screening and optimization process, scale up our industrial fermentation manufacturing processes, and continue to pursue process development improvements.

 

Sales, General and Administrative Expenses

 

Our sales, general and administrative expenses increased by $7.5 million in 2010, primarily due to increased personnel-related costs of $4.6 million associated with headcount growth, increased legal and consulting expenses of $1.4 million and increased facility and overhead costs of $1.5 million. Sales, general and administrative expenses included non-cash stock-based compensation of $1.4 million in 2010 compared to $0.3 million in 2009. We expect our general and administrative expenses to increase in the near future as we add personnel and incur additional expense as a result of becoming a publicly-traded company.

 

Other Income (Expense), Net

 

The following table shows our other income (expense), net for the periods presented, showing period-over-period changes.

 

     Year Ended December 31,  
       2009     2010     $ Change  
     (In thousands)  

Other income (expense):

      

Interest and other income

   $ 195      $ 265      $ 70   

Interest expense

     (549     (228     321   

Loss from change in fair value of warrant liabilities

     (7     (2,638     (2,631
                        

Total other income (expense), net

   $ (361   $ (2,601   $ (2,240
                        

 

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Interest and Other Income

 

Interest and other income increased by $0.1 million in 2010, primarily due to interest income earned as a result of higher average investment balances. We expect interest income to increase in 2011 as a result of higher cash and investment balances due to the Series D financing and the expected proceeds from this offering.

 

Interest Expense

 

Interest expense decreased by $0.3 million in 2010 primarily due to the pay down of a portion of our debt in 2010.

 

Loss from Change in Fair Value of Warrant Liabilities

 

Loss from the change in fair value of warrant liabilities increased by $2.6 million in 2010 primarily due to higher non-cash expense related to the fair value increase of the warrants issued in connection with our redeemable convertible preferred stock.

 

Comparison of Years Ended December 31, 2008 and 2009

 

Revenues

 

The following table shows our revenues for the periods presented, showing period-over-period changes.

 

     Year Ended December 31,  
       2008      2009      $ Change  
     (In thousands)  

Revenues:

        

Research and development programs

   $ 923       $ 9,161       $ 8,238   

 

Our total revenues increased by $8.2 million in 2009, primarily due to the $5.0 million increase in revenues from collaborative research and development agreements and the $3.2 million increase in government program revenues. Collaborative research and marketing development revenues in 2009 increased primarily due to our Phase 1 agreement with Chevron. Government program revenues increased in 2009 primarily due to our contract with the DoD, which was executed in the third quarter of 2009.

 

Operating Expenses

 

The following table shows our operating expenses for the periods presented, showing period-over-period changes.

 

     Year Ended December 31,  
       2008      2009      $ Change  
     (In thousands)  

Operating expenses:

        

Research and development

   $ 7,506       $ 12,580       $ 5,074   

Sales, general and administrative

     7,029         9,890         2,861   
                          

Total operating expenses

   $ 14,535       $ 22,470       $ 7,935   
                          

 

Research and Development Expenses

 

Our research and development expenses increased by $5.1 million in 2009, primarily due to $2.2 million in expenses related to headcount growth, increased contract manufacturing services of $2.6 million and facilities and related expenses of $0.3 million related to the research and development programs initiated for the Chevron

 

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and DoD contracts in 2009. Research and development expenses included non-cash stock-based compensation expense of $0.1 million and $0.2 million during 2008 and 2009, respectively.

 

Sales, General and Administrative Expenses

 

Our sales, general and administrative expenses increased by $2.9 million in 2009, primarily due to professional and outside services expenses of $1.4 million, increased facilities and administrative expenses of $0.6 million, increased personnel-related expenses of $0.6 million and increased public relation and marketing fees of $0.3 million. This increase in expenses was primarily due to additional infrastructure and consulting required to support our growth with increased collaboration agreements and government program activities. Sales, general and administrative expenses included non-cash stock-based compensation expense of $0.1 million and $0.3 million during 2008 and 2009, respectively.

 

Other Income (Expense), net

 

The following table shows our other income (expense), net for the periods presented, showing period-over-period changes.

 

     Year Ended December 31,  
       2008     2009     $ Change  
     (In thousands)  

Other income (expense):

      

Interest and other income

   $ 321      $ 195      $ (126

Interest expense

     (1,396     (549     847   

Loss from change in fair value of warrant liabilities

     (106     (7     99   
                        

Total other income (expense), net

   $ (1,181   $ (361   $ 820   
                        

 

Interest and Other Income

 

Interest and other income decreased by $0.1 million in 2009, primarily due to interest earned on lower average investment balances and lower interest rates.

 

Interest Expense

 

Interest expense decreased by $0.8 million in 2009, primarily due to long-term debt payments during the year.

 

Loss from Change in Fair Value of Warrant Liabilities

 

Loss from the change in fair value of warrant liabilities was largely unchanged in 2009.

 

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Liquidity and Capital Resources

 

Cash, Cash Equivalents and Short-Term Investments

 

Our cash, cash equivalents and short-term investments are held primarily in money market funds, obligations of US government agencies, asset-backed, mortgage-backed and corporate debt securities. Our short-term investments in marketable securities are all classified as available-for-sale securities and held-to-maturity, and are recorded at their fair value and amortized cost, respectively. We make our investments in accordance with our investment policy, the primary objectives of which are liquidity and capital preservation. The balances of our cash, cash equivalents and short-term investments were as follows:

 

     December 31,      March 31,  
     2009      2010      2011  
     (In thousands)  

Cash and cash equivalents

   $ 19,845       $ 32,497       $ 28,943   

Short-term investments

     15,043         49,533         38,049   

 

Cash, cash equivalents and short-term investments increased by $47.1 million in 2010, primarily due to net proceeds of $59.7 million from the sale of 6,775,660 shares of Series D preferred stock during 2010 at a price of $8.8552 per share, partially offset by cash used in operating activities of $8.3 million, purchases of property and equipment of $2.5 million and a loan repayment of $1.9 million. Cash, cash equivalents and short-term investments decreased by $15.1 million during the three months ended March 31, 2011, primarily due to cash used in operating activities of $12.9 million, purchases of property and equipment of $2.5 million, deferred offering cost payments of $0.9 million, partially offset by $1.6 million received from promissory notes to stockholders.

 

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

 

     Year Ended December 31,     Three Months
Ended March  31,
 
     2008     2009     2010     2010     2011  
     (In thousands)  

Net cash used in operating activities

   $ (10,251   $ (13,293   $ (8,309   $ (4,849   $ (12,888

Net cash (used by) provided by investing activities

   $ (21,079   $ 3,147      $ (37,687   $ (5,916   $ 8,585   

Net cash provided by (used in) financing activities

   $ 51,156      $ 945      $ 58,648      $ (88   $ 751   

 

Sources and Uses of Capital

 

Since our inception, we have financed our operations primarily from an aggregate of $129.3 million raised from private placements of equity securities, $18.3 million from government program revenues, $15.0 million of license fee revenues, $16.2 million of collaborative research and development funding, $2.3 million of product revenues and $12.9 million of borrowings under various financing arrangements.

 

Gross proceeds from sales of our convertible preferred stock since inception were as follows:

 

Dates

   Amount      Financing  
     (In thousands)  

December 2005 – June 2006

   $ 3,021         Series A   

February 2007 – April 2007

     8,663         Series B   

July 2008 – February 2009

     57,585         Series C   

May 2010 – August 2010

     60,000         Series D   
           

Total

   $ 129,269      
           

 

Our primary uses of capital resources to date have been to fund operating activities, including research and development, manufacturing expenses and spending on capital items.

 

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Since our inception, we have incurred significant net losses, and, as of March 31, 2011, we had an accumulated deficit of $60.2 million. We anticipate that we will continue to incur net losses as we continue our scale-up activities, expand our research and development activities and support commercialization activities for our products. In addition, we may acquire additional manufacturing facilities and/or expand or build-out our current pilot manufacturing facility. We are unable to predict the extent of any future losses or when we will become profitable, if at all. We expect to continue making significant investments in research and development and manufacturing, and expect selling, general and administrative expenses to increase as a result of becoming a publicly-traded company. As a result, we will need to generate significant product sales, collaborative research and development funding, government programs revenues, license fees and other revenues to achieve profitability.

 

In May 2011, we purchased the Peoria Facility. We expect to begin fermentation operations at the Peoria Facility in 2011 and integrated production of microbial oil in the first half of 2012 funded in part by the DOE grant described below. In connection with the closing of the Peoria Facility acquisition, we entered into a promissory note, mortgage and security agreement with the seller in the initial amount of $5.5 million. The promissory note will be interest free and will be paid in two lump sum payments, one on March 1, 2012 and the second on March 1, 2013. The note is secured by the real and personal property to be acquired from the seller. The purchase agreements do not contain financial ratio covenants, nor any affirmative or negative financial covenants, other than a prohibition on creating any liens against the collateral as defined in the agreement.

 

Similar to our Roquette joint venture, we expect to scale up additional manufacturing capacity in a capital-efficient manner by signing agreements whereby our partners will invest capital and operational resources in building manufacturing capacity, while also providing access to feedstock. We are currently negotiating with multiple potential feedstock partners in Latin America and the United States to co-locate oil production at their mills. Depending on the specifics of each partner discussion, we may choose to deploy some portion of the equity capital required to construct our production facility, as such capital contribution may influence the scope and timing of our relationship. We expect to evaluate the optimal amount of capital expenditures that we agree to fund on a case-by-case basis. As such, we believe that having, or having access to, capital to fund capital expenditures will better position us to achieve our business objectives. These events may require us to access additional capital through equity or debt offerings. If we are unable to access additional capital, our growth may be limited due to the inability to build out additional manufacturing capacity.

 

In January 2010, we obtained a grant from the DOE to receive up to $21.8 million for reimbursement of expenses incurred towards building, operating, and optimizing a pilot-scale integrated biorefinery at our Peoria Facility. Under the terms of the grant, we are responsible for funding an additional $5.4 million.

 

We believe that our current cash, cash equivalents and short-term investments, cash commitments from partners 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.

 

On May 11, 2011, we entered into a loan and security agreement with Silicon Valley Bank (the bank) that provided for a $20.0 million credit facility (the facility) consisting of (i) a $15.0 million term loan (the term loan) that may be borrowed in one or more increments prior to November 30, 2011 and (ii) a $5.0 million revolving facility (the revolving facility). A portion of the revolving facility is available for letters of credit and foreign exchange contracts with the bank. The facility will be used for working capital and other general corporate purposes. The facility is unsecured unless we breach financial covenants that require us to maintain a minimum of $30.0 million in unrestricted cash and investments, of which at least $25.0 million of the $30.0 minimum unrestricted cash and investments are to be maintained in accounts with the bank and its affiliates. This minimum balance requirement is considered a compensating balance arrangement, and would be classified in the consolidated balance sheet as cash and cash equivalents and/or short-term investments as this minimum balance

 

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is not restricted as to withdrawal. Interest is charged under the credit facility at (i) a fixed rate of 5.0% per annum with respect to the term loan and (ii) a floating rate per annum equal to the most recently quoted “Prime Rate” in the Wall Street Journal Western Edition with respect to revolving loans. Upon the event of default or financial covenant default, outstanding obligations under the facility shall bear interest at a rate up to three percentage points (3.00%) above the rates described in (i) and (ii) above. The term loan is due in 48 equal monthly payments of principal and interest, with the first payment due on December 1, 2011. The maturity date is (i) November 1, 2015 for the term loans and (ii) May 10, 2013 for the revolving loans. We have the option to prepay all, but not less than all, of the amounts advanced under the term loan, provided that we provide written notice to the bank at least ten days prior to such prepayment, and pay all outstanding principal and accrued interest, plus all other sums, if any, that shall have become due and payable, on the date of such prepayment. In addition to the financial covenant referenced above, we are subject to financial covenants and customary affirmative and negative covenants and events of default under the facility. If an event of default occurs and continues, the bank may declare all outstanding obligations under the facility to become immediately due and payable. The outstanding obligations would become immediately due if we become insolvent. On May 11, 2011, we borrowed $15.0 million under the facility.

 

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

 

Three Months Ended March 31, 2010 and 2011

 

Cash Flows from Operating Activities

 

Cash used in operating activities of $12.9 million in the three months ended March 31, 2011 reflect a loss of $7.3 million, a net change of $7.9 million in our net operating assets and liabilities, partially offset by aggregate non-cash charges of $2.3 million. The net change in our operating assets and liabilities was primarily a result of a $3.5 million increase in accounts receivable and unbilled revenues, a $1.0 million increase in inventories and decreases in accrued expenses and accounts payable of $1.7 million and $1.4 million, respectively. Non-cash charges primarily included $1.3 million of stock-based compensation, $0.5 million related to the change in fair value of our warrant liability and $0.3 million of depreciation and amortization. The increase in accounts receivable and unbilled revenues was due to sales of Algenist and revenues earned on research and development programs during the three months ended March 31, 2011. The decrease in accrued liabilities and accounts payable was due to vendor and employee bonus payments, partially offset by deferred offering costs incurred during the three months ended March 31, 2011. Inventories increased due to the production of inventory related to our launch of Algenist in the first quarter of 2011.

 

Cash used in operating activities of $4.8 million in the three months ended March 31, 2010 reflect a loss of $4.0 million, a net change of $1.9 million in our net operating assets and liabilities, partially offset by aggregate non-cash charges of $1.0 million. The net change in our operating assets and liabilities was primarily a result of a $0.9 million net increase in accounts receivable and unbilled revenues, a $0.6 million increase in accrued liabilities and a $0.5 million increase in deferred revenue. Non-cash charges primarily included $0.7 million related to the change in fair value of our warrant liability and $0.2 million of depreciation and amortization. The net increase in accounts receivable and unbilled revenues was due to revenues earned on government research programs during the three months ended March 31, 2010. Accrued liabilities decreased primarily due to employee bonuses paid during the three months ended March 31, 2010. Deferred revenue decreased primarily due to research and development program revenues earned during the three months ended March 31, 2010.

 

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Cash Flows from Investing Activities

 

In the three months ended March 31, 2011, cash provided by investing activities was $8.6 million, as a result of $11.1 million of net short-term investment maturities, partially offset by $2.5 million of capital expenditures.

 

In the three months ended March 31, 2010, cash used in investing activities was $5.9 million, as a result of $5.3 million of short-term investment purchases, $0.5 million of capital expenditures and a $0.2 million increase in restricted cash related to our facility lease.

 

Cash Flows from Financing Activities

 

In the three months ended March 31, 2011, cash provided by financing activities was $0.8 million, primarily as a result of $1.6 million received on promissory notes to stockholders, partially offset by $0.9 million of deferred offering costs.

 

In the three months ended March 31, 2010, cash used in financing activities was $0.1 million, primarily as a result of $0.3 million of loan repayments, partially offset by $0.2 million of proceeds received from the issuance of common stock from stock option exercises.

 

Years Ended December 31, 2008, 2009 and 2010

 

Cash Flows from Operating Activities

 

Our primary uses of cash from operating activities are for personnel-related expenditures offset by cash received from government programs, collaboration research and development arrangements and license fee revenues. Cash used in operating activities was $10.3 million, $13.3 million and $8.3 million for 2008, 2009 and 2010, respectively.

 

Cash used in operating activities of $8.3 million in 2010 reflected a net loss of $16.3 million, partially offset by aggregate non-cash charges of $6.0 million and a net change of $2.0 million in our net operating assets and liabilities. Non-cash charges primarily included $2.6 million of a non-cash related expense related to the change in fair value of our warrant liability, $2.0 million of stock-based compensation, $0.8 million of depreciation and amortization and $0.6 million of net accretion of premiums on short-term investments. The net change in our operating assets and liabilities was primarily a result of the $4.2 million increase in accounts payable and accrued expenses, net against the $1.1 million decrease in deferred revenues, a $1.0 million increase in prepaid expenses and other current assets and a $0.6 million increase in accounts receivable and unbilled revenues. The increase in accounts payable and accrued liabilities was due to the increase in research and development program activities in the fourth quarter of 2010 and increased headcount in 2010. Deferred revenues decreased in 2010 due to revenues earned on research and development programs in 2010. The increase in prepaid expenses was due to deposits for inventory related to our launch of Algenist in March 2011, increase in prepaid rent related to our new lease in South San Francisco and other prepayments incurred in the ordinary course of our business. The increase in accounts receivable and unbilled revenues was due to revenue earned on our research and development programs in the fourth quarter of 2010.

 

Cash used in operating activities of $13.3 million in 2009 reflected a net loss of $13.7 million, partially offset by aggregate non-cash charges of $1.0 million, and net change of $0.6 million in our net operating assets and liabilities. Non-cash charges primarily included $0.5 million of depreciation and amortization, and $0.4 million of stock-based compensation. The net change in our operating assets and liabilities was primarily a result of the increase in accounts receivable of $3.4 million and increase in prepaid expenses of $0.5 million, offset by the increase in accounts payable of $1.8 million, increase in accrued liabilities of $1.0 million and increased deferred revenues of $0.4 million. Overall research and development program revenues increased in 2009, resulting in an increase in accounts receivable. The increase in accounts payable was due to increased research

 

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and development program activities during the fourth quarter of 2009. The increase in accrued liabilities was due primarily to increased headcount in 2009 and increased research and development program activities in the fourth quarter of 2009.

 

Cash used in operating activities of $10.3 million in 2008 reflected a net loss of $14.8 million, partially offset by aggregate non-cash charges of $1.6 million and a net change of $2.9 million in our net operating assets and liabilities. Non-cash charges primarily included $0.7 million related to a beneficial conversion feature related to conversion of convertible bridge notes into convertible preferred shares, $0.3 million of stock-based compensation, $0.3 million of depreciation and amortization, $0.1 million related to the revaluation of our preferred stock warrant liability and $0.1 million of a loss on disposal of property and equipment. The net change in our operating assets and liabilities was primarily a result of $1.9 million increase in deferred revenues, $0.6 million increase in accounts payable, $0.6 million increase in accrued liabilities, offset by an increase in prepaid expenses and other current assets of $0.2 million. The increase in deferred revenues reflected an advance payment received from a research and development program. The increase in accounts payable reflected increased research and development program activity in 2008. The increase in accrued liabilities reflected the accrual of costs related to headcount growth and increased activities related to our research and development programs in 2009.

 

Cash Flows from Investing Activities

 

Our investing activities consist primarily of net investment purchases, maturities and sales and capital expenditures.

 

In 2010, cash used in investing activities was $37.7 million as a result of $35.0 million in net short-term investment purchases, $2.5 million of capital expenditures and a $0.2 million decrease in restricted cash.

 

In 2009, cash provided by investing activities was $3.1 million as a result of $4.9 million of net short-term investment maturities, partially offset by $1.7 million of capital expenditures and a $0.1 million decrease in restricted cash.

 

In 2008, cash used in investing activities was $21.1 million as a result of $19.9 million in net short-term investments purchases and $1.2 million of capital expenditures.

 

Cash Flows from Financing Activities

 

In 2010, cash provided by financing activities was $58.6 million, primarily as a result of the net receipt of $59.7 million from our sale of Series D preferred stock and $0.6 million of proceeds received from the issuance of common stock from stock option exercises, partially offset by $1.9 million of loan repayments.

 

In 2009, cash provided by financing activities was $0.9 million, primarily as a result of the net receipt of $3.0 million from our sale of Series C preferred stock, the receipt of $0.1 million from our sale of common stock, offset by loan repayments of $2.2 million.

 

In 2008, cash provided by financing activities was $51.2 million, primarily as a result of the net receipt of $47.2 million from our sale of Series B and C preferred stock and the receipt of $6.2 million from convertible bridge notes, partially offset by $1.5 million of promissory note receivables issued to stockholders and $0.9 million of loan repayments.

 

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Contractual Obligations and Commitments

 

The following is a summary of our contractual obligations and commitments as of December 31, 2010:

 

     Total      2011      2012      2013      2014      2015 and
beyond
 
     (In thousands)  
                 

Principal payments on long term debt

   $ 229       $ 50       $ 49       $ 59       $ 65       $     6   

Interest payments on long-term debt, fixed rate

     44         17         14         9         4           

Operating leases

     8,043         1,878         1,937         1,997         2,059         172   

Purchase obligations

     1,768         1,768                                   
                                                     

Total

   $ 10,084       $ 3,713       $ 2,000       $ 2,065       $ 2,128       $     178   
                                                     

 

There have been no material changes to our contractual obligations and commitments outside the ordinary course of our business as of March 31, 2011, except that our purchase obligations were $3.0 million as of March 31, 2011, and due within the remainder of 2011.

 

We have also committed to provide funding for marketing to promote the sale of our branded skin care products, but such amounts were not estimable as of December 31, 2010. As of March 31, 2011, we committed to provide $0.8 million of funding for marketing of our branded skin care products.

 

This table does not reflect (1) the redemption amounts of redeemable convertible preferred stock and warrants, (2) that portion of the expenses that we expect to incur up to $4.6 million from 2011 through 2013 in connection with research activities under the DoD and DOE programs for which we will not be reimbursed and (3) a lease agreement entered into in May 2011 for facility space in Brazil; the lease term is five years, commencing on April 1, 2011 and expiring on April 1, 2016; the rent is 29,500 Brazilian Real per month and is subject to an annual inflation adjustment; this lease is cancelable at any time, subject to a maximum three month rent penalty. We have the right to be reimbursed for up to $27.4 million of a total of up to $35.9 million of expenses for research activities that we undertake under these government programs. The total amount of actual program expenses and timing were not estimable as of March 31, 2011.

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our consolidated balance sheets.

 

Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to financial market risks, primarily changes in interest rates, currency exchange rates and commodity prices. All of the potential changes noted below are based on sensitivity analyses performed on our financial positions as of March 31, 2011. Actual results may differ materially.

 

Interest Rate Risk

 

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We generally invest our cash in investments with short maturities or with frequent interest reset terms. Accordingly, our interest income fluctuates with short-term market conditions. As of March 31, 2011, our investment portfolio consisted primarily of money market funds, corporate debt obligations, asset-backed and mortgaged-backed securities, US government-sponsored enterprise securities, US Treasury securities and US government agency securities, 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 short-term investments were comprised of fixed-term securities as of March 31, 2011. Due to the short-term nature of these instruments, we do not believe that we would have a significant negative impact to our consolidated financial position or results of operations.

 

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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 through our JV with Roquette, into Europe. We have also launched the Algenist™ product line in Europe in March 2011 and expect to commence operations in Brazil or elsewhere in Latin America. 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, expanding our operations in Brazil or elsewhere in Latin America or increasing Euro denominated product sales to European distributors, will result in our use of currencies other than the US dollar. As a result, our expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. In periods when the US dollar declines in value as compared to the foreign currencies in which we incur expenses, our foreign-currency based expenses increase when translated into US dollars. We have not hedged our foreign currency since the exposure has not been material to our historical operating results. Although substantially all of our sales are currently denominated in US dollars, future fluctuations in the value of the US dollar may affect the price competitiveness of our products outside the United States. We may consider hedging our foreign currency risk as we continue to expand internationally.

 

Commodity Price Risk

 

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

 

Recent Accounting Pronouncements

 

In June 2009, the FASB amended its guidance to FASB ASC 810, Consolidation , surrounding a company’s analysis to determine whether any of its variable interest entities constitute controlling financial interests in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as an enterprise that has both of the following characteristics: (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. The new guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. The guidance is effective for the first annual reporting period that begins after November 15, 2009. The adoption did not have a material impact on our consolidated financial statements.

 

In October 2009, the FASB issued Accounting Standards Update (ASU), 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements – (a consensus of the FASB Emerging Issues Task Force). ASU 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU 2009-13 requires expanded disclosures. This ASU will become effective for revenue arrangements materially modified after January 1, 2011. Earlier application is permitted with required transition disclosures based on the period of adoption. We early adopted this standard prospectively on January 1, 2009 and had no transition disclosures because the adoption of this guidance did not impact prior year reporting as we had not historically entered into multiple deliverable arrangements.

 

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In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures—Improving Disclosures above Fair Value Measurements , that requires entities to make new disclosures about recurring or nonrecurring fair-value measurements and provides clarification of existing disclosure requirements. This amendment requires disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This amendment is effective for periods beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements, which will be effective for fiscal years beginning after December 15, 2010. The adoption did not have a material impact on our consolidated financial statements.

 

In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events—Amendments to Certain Recognition and Disclosure Requirements , that amends guidance on subsequent events. This amendment removes the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events. However, the date-disclosure exemption does not relieve management of an SEC filer from its responsibility to evaluate subsequent events through the date on which financial statements are issued. All of the amendments in this ASU are effective upon issuance of the final ASU, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

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BUSINESS

 

Our Company

 

We make oil. Our proprietary technology transforms a range of low-cost plant-based sugars into high-value oils. Our renewable products can replace or enhance oils derived from the world’s three existing sources—petroleum, plants, and animal fats. We tailor the composition of our oils to address specific customer requirements, offering superior performance characteristics at a competitive cost to conventional oils. Our oils can address the major markets served by conventional oils, which represented an opportunity of over $3.1 trillion in 2010. Initially, we are focused on commercializing our products into three target markets: (1) fuels and chemicals, (2) nutrition and (3) skin and personal care.

 

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

 

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

 

The production cost profile we have already achieved can provide attractive margins utilizing partner and contract manufacturing today for the nutrition, and skin and personal care markets. Based on the technology milestones we have demonstrated, we believe that we can profitably enter the fuels and chemicals markets when we commence production in larger-scale, built-for-purpose commercial manufacturing facilities utilizing sugarcane feedstock. For example, our lead microalgae strains producing oil for the fuels and chemicals markets have achieved key performance metrics that we believe would allow us to manufacture oils today at a cost below $1,000 per metric ton if produced in a built-for-purpose commercial plant. This cost includes the anticipated cost of financing and facility depreciation. The following chart on the left illustrates the decrease in our production costs since 2007, when we began producing oil from our lead microalgae strains. The following chart on the right depicts our initial target markets, our expected average selling prices (ASPs) and our estimated production cost profile for oils and bioproducts in those markets.

 

LOGO

 

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We are actively scaling up our manufacturing capacity to sell our oils and bioproducts in the following three target markets:

 

Fuels and Chemicals. Our renewable oils can be refined and sold as drop-in replacements for marine, motor vehicle and jet fuels, as well as replacements for chemicals that are traditionally derived from petroleum or other conventional oils. In the fuels market, we can either manufacture the end product by contracting with refiners to produce fuels of targeted specifications, or sell our unrefined oils to refiners. In the chemicals market, we expect to sell our oils to chemical companies that either use our oils directly as a functional fluid or as a raw material to convert into replacements and enhancements for their existing petrochemical and oleochemical products. We tailor our oils to meet industry specifications and customer demands and believe that we can achieve premium pricing as a result of the higher value products we can deliver without affecting our production costs.

 

Nutrition. We have developed microalgae-based food ingredients including oils and powders that enhance the nutritional profile and functionality of food products while reducing costs for consumer packaged goods (CPG) companies. In addition to greater health benefits, including reduced calories, saturated fat and cholesterol, these nutrition products offer a variety of functional benefits such as enhanced taste and texture for low-fat formulations and lower cost handling and processing requirements as the result of being shelf-stable powdered alternatives to traditional liquid or refrigerated ingredients.

 

Skin and Personal Care. We have developed a portfolio of innovative and branded microalgae-based products. Our first major ingredient is Alguronic Acid ® , which we have formulated into a full range of skin care products with significant anti-aging benefits. We are also developing algal oils as replacements for the essential oils currently used in skin and personal care products.

 

We are actively commercializing our technology. We prioritize our market entry based on unit economics, capital requirements and value chain dynamics. In 2010, we launched our first products, the Golden Chlorella ® line of dietary supplements, as a market development initiative, with products incorporating Golden Chlorella ® currently being sold at retailers including Whole Foods Market, Inc. (Whole Foods) and General Nutrition Centers, Inc. (GNC). In March 2011, we launched our Algenist brand for the luxury skin care market through marketing and distribution arrangements with Sephora S.A. (Sephora International), Sephora USA, Inc. (Sephora USA), and QVC, Inc. (QVC). Distribution of our Algenist line of skin care products is expected to reach more than 850 retail stores worldwide by year end. In addition, we are currently engaged in development activities with multiple partners, including Bunge Limited, Chevron U.S.A. Inc., through its division Chevron Technology Ventures (Chevron), The Dow Chemical Company (Dow), Qantas Airways Limited (Qantas) Ecopetrol, S.A. (Ecopetrol) and Conopoco, Inc. d/b/a (Unilever).

 

We are pursuing capital efficient access to manufacturing capacity. Since 2007, we have been operating in commercially-sized standard industrial fermentation equipment (75,000-liter scale) with multiple contract manufacturing partners. In March 2011, we entered into an agreement to purchase a development and commercial production facility with multiple 128,000-liter fermenters, and an annual oil production capacity of over 2,000,000 liters (1,820 metric tons) located in Peoria, Illinois (the Peoria Facility). In the skin and personal care market, we expect to continue to use contract manufacturing and/or capacity at the Peoria Facility. We expect further capital efficient scale up in the fuels and chemicals and nutrition markets through partnerships whereby our partners will invest capital and operational resources in building manufacturing capacity, while providing access to feedstock. By working with us, we expect that partners can improve the return they realize on their feedstock while diversifying their businesses beyond current product portfolios. This should enable our partners to obtain potentially higher margins and reduced commodity price volatility. For example, in the nutrition market, we recently entered into a 50/50 joint venture with Roquette Frères, S.A. (Roquette), one of the largest global starch and starch-derivatives companies, with the goal of jointly developing, producing and marketing nutrition products worldwide. Roquette has agreed to provide all capital expenditures and working capital required to produce nutrition products for the

 

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joint venture (Solazyme Roquette Nutritionals, or the JV). Subject to approval of the board of directors of the JV, Roquette has also agreed to fund an approximately 50,000 metric ton per year facility that is expected to be sited at a Roquette wet mill and owned by the JV. In the fuels and chemicals markets, we plan to launch a commercial facility in 2013 and additional commercial facilities in 2014 and 2015. We are currently negotiating with multiple potential feedstock and manufacturing partners in the United States and Latin America. For example, in December 2010, we signed a non-binding letter of intent with Bunge Limited, one of the largest sugarcane processing companies in Brazil, to form a joint venture and co-locate oil production at one or more of their sugarcane mills which will provide up to 8 million metric tons of annual sugarcane crush. We believe this amount of crush would be sufficient to support manufacturing capacity of over 400,000 metric tons of oil per year. In addition, we have signed a development agreement with Ecopetrol, the largest company in Colombia and one of the four major oil companies in Latin America, to evaluate manufacturing options based on Colombian feedstock. Subsequently, we entered into two separate agreements with Bunge in May of 2011. The first is a joint development agreement that advances our work on Brazilian sugarcane feedstocks and extends through May 2013. The second is a Warrant Agreement that vests upon the successful completion of milestones that ultimately target the construction of a commercial facility with 100,000 metric tons of annual output oil coming online in 2013.

 

We believe that we have produced more non-ethanol, microbial-based fuels and oils than any other company in the advanced biofuels industry. From January 2010 through February 2011, we produced well over 500,000 liters (455 metric tons) of oil. To satisfy the testing and certification requirements of the US Navy, we partnered with UOP LLC, a Honeywell company (Honeywell UOP), to refine a portion of this oil into over 200,000 liters (182 metric tons) of military specification marine diesel and jet fuel.

 

Industry Overview

 

The Vital Role of Oil

 

Oil is essential to our lives. Oil is the basis for everything from transportation fuels, such as diesel and jet, to chemical-based products, including hydraulic fluids and paints, to many food and personal care products. While petroleum is extracted from the earth, other conventional oils are found in plants, such as soy, palm and coconut, and are also rendered from animal fats.

 

The following chart outlines the current global market sizes of the three conventional sources of oil and representative sources in each market. At year-end 2010, the combined market size of these three sources of oil exceeded $3.1 trillion.

 

LOGO

 

Source: Energy Information Administration; Oil World (ISTA Mielke GmbH, Hamburg, Germany); Wood Mackenzie

 

Petroleum is the basis for transportation fuels and most chemicals and is the largest value-added component in these markets. According to Wood Mackenzie, global crude oil demand in 2010 was 87 million barrels per day, which equates to a market size of $2.9 trillion at the 2010 year-end price of $91 per barrel ($632 per metric ton). Crude oil is refined into a variety of products, including gasoline, diesel fuel, jet fuel, petrochemicals and other products.

 

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Plant oils and animal fats are used in a broad range of food applications, industrial applications, such as detergents and lubricants, and fuel applications including biodiesel. For example, palm oil is a common ingredient in processed foods, soaps and personal care products. Other plant oils like rapeseed, palm kernel, and coconut are used extensively for biodiesel, oleochemical applications and food products. The global demand for plant oils and animal fats represented 170 million metric tons in 2010, or approximately $236 billion at year-end as shown in the table below.

 

2010 Conventional Plant and Animal Oils Market Size

 

     Oil Price as of
12/29/2010
($ / Metric Ton)
     World Volume in
2010
(Metric Tons, ‘000)
     Market Size
($,Bn)
 

Palm Kernel Oil

   $ 1,980         5,383       $ 10.7   

Coconut Oil

     1,870         3,638         6.8   

Sunflower Oil

     1,490         11,994         17.9   

Rapeseed Oil

     1,471         23,189         34.1   

Palm Oil

     1,280         46,689         59.8   

Soybean Oil

     1,276         39,462         50.4   

Other Plant and Animal Oils

             39,931         56.0   
                          

Total Conventional Plant and Animal Oils

   $         170,286       $ 235.7   
                          

 

Source: Oil World ( ISTA Mielke GmbH, Hamburg, Germany)

 

The Need for Oil Alternatives

 

Rapidly growing demand coupled with limited supply, energy security concerns and environmental considerations are driving the need to find alternative sources of oil. In addition to global population growth of over 80 million people per year, developing economies such as India and China are expanding rapidly. The resulting higher industrial output, rapid urbanization, higher living standards, and changing diets are driving increasing demand for food, transportation, personal care items, plastics and other oil-based products. While demand for oil is rapidly growing, global petroleum reserves are finite, and new sources of petroleum oil often contain heavier, lower quality oil. Similarly, due to climate constraints, the supply of plant oils is limited as the vast majority of global arable land is better suited to cultivation of high-density, carbohydrate-based crops such as corn and sugarcane. The ability to grow and convert such carbohydrate-rich plants into oil offers a potential solution to the insatiable global demand for oil.

 

Price increases and volatility in the markets for petroleum and other conventional oils create significant economic risk to global business and trade. According to the Energy Information Administration (EIA), worldwide petroleum prices have fluctuated substantially and have risen more than 200% over the past decade to a price of $91 per barrel as of December 31, 2010, after reaching a peak price of $145 per barrel in July 2008. The International Energy Agency (IEA) forecasts the price of oil could reach $240 per barrel by 2035. According to Oil World, global plant oil and animal fat prices rose more than 300% over the last decade and exhibited similar volatility to that of petroleum.

 

Government mandates around the world increasingly require the blending of biofuels into transportation fuels. For example, in the U.S., legislation such as the renewable fuel standards (RFS2) under the Energy Independence and Security Act of 2007, requires the use of 36 billion gallons of renewable transportation fuel by 2022, which includes 21 billion gallons of advanced biofuels. Similarly, in the European Union, policies such as the Fuel Quality Directive require greenhouse gas (GHG) reductions for all transportation fuels of 6% by 2020.

 

Companies are aggressively seeking new sources of oils that have greater price stability than petroleum and other conventional oils. Companies are also looking for new sources of oils with improved characteristics versus

 

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conventional oils. Finally, initiatives focused on fulfillment of corporate sustainability objectives and government mandates support an increased use of renewable oils.

 

Our Solution

 

Our solution combines the most efficient and productive oil-producing organism, microalgae, for the creation of oils with scalable and cost-effective standard industrial fermentation processes in order to deliver high value, low-cost, tailored oils. We use microalgae as a biocatalyst to produce oil from a wide variety of low-cost plant-based sugar feedstocks—such as cane-based sucrose or corn-based dextrose (which are the lowest cost and most widely available today) as well as sugar from other sustainable biomass sources, including cellulosics. Our microalgae are grown in the dark and use “indirect photosynthesis,” receiving their energy from the photosynthetic plant sugars fed to them in large steel tanks. The controlled environment of the standard industrial fermentation tanks prevents contamination and allows us to tightly regulate acidity, temperature and other key parameters. Our core competency is the ability to (1) identify, isolate and further optimize strains of microalgae to achieve high cell densities, high yield converting sugar to product and high productivity rates compared to other alternatives and (2) tailor the oil outputs to meet specific market needs. Our technology offers a renewable alternative source of oil that is environmentally sustainable. Life Cycle Associates (an independent GHG measurement firm) determined that when used for transportation, our biofuels reduce lifecycle GHG emissions by 66-93% compared to conventional petroleum based fuels, depending on the plant sugar source, type of fuel and regional measurement methodology.

 

We believe that the following advantages of our platform position us to offer a new source of renewable oils to address the major markets served by conventional oils:

 

   

Large and diverse market opportunities. Because we make oil, we can access the vast markets currently served by petroleum, plant oils and animal fats. In addition, we leverage our proprietary biotechnology platform to tailor oils that address specific customer requirements by offering superior performance characteristics at a competitive price compared to conventional oils.

 

   

Cost-competitive at commercial scale. We harness the oil-producing characteristics of microalgae through a proven industrial fermentation process in a controlled environment to produce large volumes of oil in a cost-effective, scalable and predictable manner.

 

   

Compatible with existing equipment and infrastructure. We use standard industrial fermentation and downstream processing equipment that needs little or no modification. Our oils are compatible with existing production, refining, finishing and distribution infrastructure, logistics channels, and technical specifications, which enables them to be a drop-in replacement for conventional oils. For example, in the renewable diesel market both Soladiesel BD and Soladiesel RD (end-use fuels refined from our oils) are compatible with existing infrastructure, meet current US and European fuel specifications, and can be used with factory-standard diesel engines with no modifications.

 

   

Rapid time to market. Our tailored-to-specification oils can be quickly adopted by our customers because they mirror existing conventional oils.

 

Our Competitive Strengths

 

We harness the power of microalgae to yield substantial volumes of oil and bioproducts. Our key competitive advantages are:

 

   

Low production cost enables broad market access. The production cost profile we have already achieved provides attractive margins when utilizing partner and contract manufacturing for the nutrition, and skin and personal care markets in which we currently sell our products. Based on the technology milestones we have demonstrated, we believe that we can profitably enter the fuels and chemicals markets when we commence production in larger-scale, built-for-purpose commercial

 

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manufacturing facilities utilizing sugarcane feedstock. For example, our lead strains producing oil for the fuels and chemicals markets have achieved key performance metrics that we believe would allow us to manufacture oils today at a cost below $1,000 per metric ton if produced in a built-for-purpose commercial plant. This cost includes the anticipated cost of financing and facility depreciation.

 

   

Premium pricing for tailored oils. While our cost structure allows us to access existing markets at prevailing prices, we also believe that the enhanced value of our tailored oils as compared to conventional oils should garner premium pricing. For example, we believe that our tailored palm kernel oil (PKO+) with a substantially increased concentration of desired components versus conventional PKO would garner a price of over $2,600 per metric ton, as compared to $1,980 per metric ton for conventional PKO (year-end 2010 price per Oil World).

 

   

Technology proven at scale. We believe that we have produced more non-ethanol, microbial-based fuels and oils than any other company in the advanced biofuels industry. Since 2007, we have been operating in commercially-sized standard industrial fermentation equipment (75,000-liter scale) with contract manufacturing partners in Pennsylvania and California. From January 2010 through February 2011, we produced well over 500,000 liters (455 metric tons) of oil. To satisfy the testing and certification requirements of the US Navy, we partnered with Honeywell UOP to refine a portion of this oil into over 200,000 liters (182 metric tons) of military specification marine diesel and jet fuel.

 

   

Capital efficient access to manufacturing capacity. We believe our technology will enable us and our partners to generate attractive returns versus other available options. Further, we believe that the anticipated returns and product portfolio diversification will be a compelling driver for partners to invest capital and operational resources in building manufacturing capacity. For example, through our Solazyme Roquette Nutritional joint venture, Roquette has agreed to provide: (1) a full capital commitment for two JV-dedicated, Roquette-owned facilities that are expected to have aggregate capacity of approximately 5,000 metric tons per year; (2) subject to approval of the board of directors of the JV, debt and equity financing for a larger JV-owned facility that is expected to have capacity of approximately 50,000 metric tons per year; and (3) working capital financing during various scale-up phases.

 

   

Commercial products today. In 2010, we launched our first product, the Golden Chlorella ® line of dietary supplements, as a market development initiative, with products incorporating Golden Chlorella ® currently being sold at retailers including Whole Foods and GNC. In March 2011, we launched our Algenist brand for the luxury skin care market through marketing and distribution arrangements with Sephora International, Sephora USA and QVC. Distribution of our Algenist line of skin care products is expected to reach more than 850 retail stores worldwide by year end.

 

   

Feedstock and target market flexibility. Our technology platform provides us with the flexibility to choose from among multiple feedstocks on the input side and multiple specific products (and markets) on the output side, while using the same standard industrial fermentation equipment. A manufacturing facility utilizing a given plant-based sugar feedstock can produce oils with many different oil compositions. Conversely, we can produce the same oil compositions by processing a wide variety of plant-based sugar feedstock. This flexibility enables us to choose the optimal feedstocks for any particular geography, while also enabling us to produce a wide variety of oils from the same manufacturing facility.

 

   

Proprietary and innovative technology. Our technology platform creates a new paradigm that enables us to produce novel tailored oils that cannot be achieved through blending of existing oils alone. This technology platform is protected by intellectual property and know-how related to our targeted recombinant strain optimization, product development and manufacturing capabilities. As of May 9, 2011, we owned or held exclusive license rights to three patents and over 125 patent applications, some of which are foreign counterparts.

 

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Our Strategy

 

We intend to be the global market leader in the design and production of renewable oils and bioproducts. Our oils supplement, replace or enhance conventional oils from petroleum, plant or animal sources. The principal elements of our strategy are:

 

   

Execute on our customer-driven approach to technology and product development. We focus our innovation efforts on creating a broad suite of tailored oils that meet defined market needs. We intend to continue to work closely with our partners and customers to understand their requirements and design products to specifically address their needs.

 

   

Execute on our capital efficient strategy to access feedstock and manufacturing capacity . We expect to further scale up in a capital efficient manner by signing agreements whereby our partners will invest capital and operational resources in building manufacturing capacity, while providing access to feedstock. By working with us, we expect that partners can improve the return they realize on their feedstock and diversify their business beyond their current product portfolios, enabling potentially higher margins and reduced price volatility. In December 2010, we signed a non-binding letter of intent with Bunge Limited, one of the largest sugarcane processing companies in Brazil, to form a joint venture and co-locate oil production at one or more of their sugarcane mills and utilize up to 8 million metric tons of their annual sugarcane crush. We believe this sugarcane crush would be sufficient to supply manufacturing capacity for over 400,000 metric tons of oil per year. We are also actively evaluating other geographies and feedstocks, such as sugarcane in Hawaii and the southern U.S., sugar beets in the northern plains of the U.S., and cellulosic based feedstocks globally.

 

   

Prioritize market entry based on unit economics and capital requirements. Subsequent to our current commercialization efforts in the nutrition and skin and personal care markets, we plan to sell into the fuels and chemicals markets, which have higher capital requirements, higher volumes and attractive but lower ASPs.

 

   

Enter into offtake and additional partnership agreements to advance commercialization efforts. In addition to funding development work and performing application testing, we expect that our partners will enter into long-term purchase agreements (offtakes) with us. We are currently engaged in development activities with multiple partners, including Chevron, Dow, Ecopetrol, Qantas and Unilever, any of which could represent attractive future offtake opportunities. We expect future partnerships to provide access to distribution, merchandising, sales and marketing, customer relationship management and product development knowledge and resources. In conjunction with these development activities, we have entered into non-binding letters of intent with Dow and Qantas for the purchase of our products (offtakes). Subject to certain conditions, including entry into a supply agreement, Dow will purchase up to 20 million gallons (76 million liters) of our oils in 2013 rising to up to 60 million gallons (227 million liters) by 2015 and Qantas will purchase a minimum of 200 to 400 million liters of our jet fuel per year.

 

Existing Manufacturing Operations

 

Our process is compatible with commercial-scale and widely-available fermentation equipment. We operate our lab and pilot fermentation and process development equipment as scaled-down versions of our large commercial engineering designs, such as those we are using to supply large quantities of oil and fuel for our testing and certification programs with the US Department of Defense (DoD). This allows us to more easily scale up to larger fermentation vessels. We have scaled up our technology platform and have successfully operated at lab (5-15 liter), pilot (600-1,000 liter), demonstration (20,000 liter) and commercial (75,000 liter) fermenter scale.

 

   

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

 

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Since 2007, we have operated in commercially-sized standard industrial fermentation equipment (75,000 liter) accessed through manufacturing partners in Pennsylvania and California.

 

   

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

 

We have already demonstrated large-scale oil manufacturing. From January 2010 through February 2011, we produced well over 500,000 liters (455 metric tons) of oil. To satisfy the testing and certification requirements of the US Navy, we partnered with Honeywell UOP to refine a portion of this oil into over 200,000 liters (182 metric tons) of military specification marine diesel and jet fuel. The Navy then blended our fuel 50/50 with petroleum derived fuel, and successfully tested it in unmodified engines, including the test performed on our HRF-76 marine diesel in the Riverine Command Boat Experimental in November 2010.

 

In May 2011, we purchased the Peoria Facility which contains multiple 128,000-liter fermenters. We expect to begin fermentation operations at the Peoria Facility in 2011 and integrated production of microbial oil in the first half of 2012. We intend to use the manufacturing capacity of the Peoria Facility for our integrated biorefinery and to produce limited quantities of our oils and bioproducts for market research, military and commercial partnership development contracts, scale-up demonstration in fuels and chemicals and for commercial sales in our higher value end markets.

 

Manufacturing Capacity Scale Up

 

We currently rely on contract manufacturing to produce our products, including: (1) oils for fuels and chemicals; (2) algal flour, Golden Chlorella ® and oil for nutritional applications; and (3) consumer products made with Alguronic Acid ® for skin and personal care applications. We closely monitor and advise these contract manufacturers to ensure that our products meet stringent quality standards.

 

We have formulated specific production and feedstock strategies for each of our target markets as follows:

 

   

Fuels and Chemicals. We plan to bring online a commercial facility in 2013 and additional capacity in 2014 and 2015. We are currently negotiating with multiple potential feedstock partners in Latin America and the United States to co-locate oil production at their mills. We believe that our ability to utilize much of the existing mill infrastructure will allow us to build capacity at a much lower cost than green field construction. For example, in December 2010, we signed a non-binding letter of intent with Bunge Limited, one of the largest sugarcane processing companies in Brazil, to form a joint venture and co-locate oil production at one or more of their sugarcane mills, which will provide up to 8 million metric tons of annual sugarcane crush. We believe this amount of sugarcane crush would be sufficient to supply manufacturing capacity for over 400,000 metric tons of oil per year. Subsequently, we entered into two separate agreements with Bunge in May of 2011. The first is a joint development agreement that advances our work on Brazilian sugarcane feedstocks and extends through May 2013. The second is a warrant that vests upon the successful completion of milestones that ultimately target the construction of a commercial facility with 100,000 metric tons of annual oil production output scheduled to be online in 2013. Additionally, we have entered into a non-exclusive and non-binding letter of intent with Hawaiian Commercial & Sugar Company (HC&S), Hawaii’s last active sugarcane mill operator. We have also signed a development agreement with Ecopetrol, the largest company in Colombia and one of the four major oil companies in Latin America, to evaluate manufacturing options based on Colombian sugarcane feedstocks. We believe that the anticipated returns and product portfolio diversification will be a compelling driver for partners to invest capital and operational resources in building manufacturing capacity.

 

        

Our current engineering designs for large commercial plants to service our fuels and chemical markets, developed in conjunction with Engineering, Procurement and Construction (EPC) firms Jacobs Engineering Group Inc. and Burns & McDonnell Engineering Co., Inc., call for fermenters with

 

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capacity