Solazyme, Inc.
SOLAZYME INC (Form: 10-Q, Received: 08/09/2012 15:19:10)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2012

OR

 

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

For the Transition Period from            to            

Commission File Number: 001-35189

 

 

Solazyme, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   33-1077078

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

Solazyme, Inc.

225 Gateway Boulevard

South San Francisco, CA 94080

(650) 780-4777

(Address and telephone number principal executive offices)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuance to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

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

 

Class

 

Outstanding at July 31, 2012

Common Stock, $0.001 par value per share

  60,622,906 shares

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART 1: FINANCIAL INFORMATION

  
Item 1.    Financial Statements      3   
   Condensed Consolidated Balance Sheets      3   
   Condensed Consolidated Statements of Operations      4   
   Condensed Consolidated Statements of Comprehensive Loss      5   
   Condensed Consolidated Statements of Cash Flows      6   
   Notes to the Condensed Consolidated Financial Statements      8   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      24   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      38   
Item 4.    Controls and Procedures      39   

PART II: OTHER INFORMATION

  
Item 1.    Legal Proceedings      40   
Item 1A.    Risk Factors      40   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      58   
Item 3.    Defaults Upon Senior Securities      58   
Item 4.    Mine Safety Disclosures      58   
Item 5.    Other Information      58   
Item 6.    Exhibits      59   

Signatures

     60   

 

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PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements.

SOLAZYME, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share amounts

Unaudited

 

     June 30,
2012
    December 31,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 17,456      $ 28,780   

Marketable securities

     178,023        214,944   

Accounts receivable

     7,714        4,029   

Unbilled revenues

     3,244        3,889   

Inventories

     5,057        3,129   

Prepaid expenses and other current assets

     3,374        4,122   
  

 

 

   

 

 

 

Total current assets

     214,868        258,893   

Property, plant and equipment — net

     30,447        25,985   

Investment in unconsolidated joint venture

     9,851        —     

Other assets

     336        346   
  

 

 

   

 

 

 

Total assets

   $ 255,502      $ 285,224   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 8,256      $ 11,525   

Accrued liabilities

     6,202        9,288   

Current portion of long-term debt

     7,184        5,289   

Deferred revenue

     —          3,014   

Other current liabilities

     124        96   
  

 

 

   

 

 

 

Total current liabilities

     21,766        29,212   

Other liabilities

     413        491   

Warrant liability

     2,267        —     

Long-term debt

     9,518        14,963   
  

 

 

   

 

 

 

Total liabilities

     33,964        44,666   
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Stockholders’ equity:

    

Preferred stock, par value $0.001 — 5,000,000 shares authorized at June 30, 2012 and December 31, 2011; 0 shares issued and outstanding at June 30, 2012 and December 31, 2011

     —          —     

Common stock, par value $0.001 — 150,000,000 shares authorized at June 30, 2012 and December 31, 2011; 60,545,556 and 59,908,138 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

     61        60   

Additional paid-in capital

     364,950        348,083   

Accumulated other comprehensive loss

     (658     (789

Accumulated deficit

     (142,815     (106,796
  

 

 

   

 

 

 

Total stockholders’ equity

     221,538        240,558   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 255,502      $ 285,224   
  

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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SOLAZYME, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

In thousands, except share and per share amounts

Unaudited

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Revenues:

        

Research and development programs

   $ 9,468      $ 6,092      $ 19,028      $ 11,491   

Product revenue

     4,077        1,306        8,073        3,649   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     13,545        7,398        27,101        15,140   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and operating expenses

        

Cost of product revenue

     1,330        374        2,576        1,038   

Research and development

     18,381        9,676        33,742        17,826   

Sales, general and administrative

     13,723        10,955        27,779        17,064   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and operating expenses

     33,434        21,005        64,097        35,928   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (19,889     (13,607     (36,996     (20,788

Other income (expense)

        

Interest and other income

     556        (52     1,102        338   

Interest expense

     (247     (132     (466     (147

Loss on equity method investment

     (510     —          (510     —     

Gain (loss) from change in fair value of warrant liability

     851        (3,154     851        (3,637
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     650        (3,338     977        (3,446
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (19,239     (16,945     (36,019     (24,234

Accretion of redeemable convertible preferred stock

     —          (24     —          (60
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Solazyme, Inc. common stockholders

   $ (19,239   $ (16,969   $ (36,019   $ (24,294
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to Solazyme, Inc. common stockholders, basic and diluted

   $ (0.32   $ (0.61   $ (0.60   $ (1.22
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     60,377,611        27,673,231        60,239,394        19,959,863   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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SOLAZYME, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

In Thousands

Unaudited

 

     Three Months Ended June 30,     Six Months Ended June 30,  
             2012                     2011                     2012                     2011          

Net loss

   $ (19,239   $ (16,945   $ (36,019   $ (24,234

Other comprehensive income (loss):

        

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

     (72     149        489        (43

Foreign currency translation adjustment

     (303     65        (358     63   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (375     214        131        20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

   $ (19,614   $ (16,731   $ (35,888   $ (24,214
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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SOLAZYME, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

In Thousands

Unaudited

 

     Six Months Ended
June 30,
 
     2012     2011  

Operating activities:

    

Net loss

   $ (36,019   $ (24,234

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

    

Depreciation and amortization

     1,460        673   

Loss on disposal of property and equipment

     —          5   

Accretion (amortization) of premium/discount on marketable securities

     1,455        471   

Amortization of debt discount

     76        24  

Amortization of loan fees

     —          3  

Noncash interest expense (income) — net

     —          (4

Issuance of common stock in connection with professional services rendered

     —          16   

Stock-based compensation expense

     7,815        5,022   

Loss on equity method investment

     510       —     

Revaluation of warrant liability

     (851 )     3,637   

Changes in operating assets and liabilities:

    

Accounts receivable

     (3,685     (1,134

Unbilled revenue

     645        279   

Inventories

     (1,928     (2,402

Prepaid expenses and other current assets

     711        (2,287

Other assets

     —          69   

Accounts payable

     (1,253     (1,754

Accrued liabilities

     (2,894     1,375   

Deferred revenue

     (3,014     (170

Other current and long-term liabilities

     (15     (16
  

 

 

   

 

 

 

Net cash used in operating activities

     (36,987     (20,427
  

 

 

   

 

 

 

Investing activities:

    

Purchases of property, plant and equipment

     (8,159     (10,135

Proceeds received from sale of equipment

     —          290  

Purchases of marketable securities

     (58,498     (54,995

Proceeds from sales of marketable securities

     20,047        220  

Maturities of marketable securities

     73,756        34,797   

Restricted cash

     —          (50
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     27,146        (29,873
  

 

 

   

 

 

 

Financing activities:

    

Repayments under loan agreements

     (3,617     (25

Proceeds from the issuance of common stock, net of repurchases

     1,111        344   

Proceeds from issuance of common stock pursuant to ESPP

     699        —     

Early exercise of stock options subject to repurchase

     (34     (39

Payments received on promissory notes to stockholders

     —          1,601   

Proceeds from borrowings under loan agreements

     —          15,000   

Deferred loan costs/fees

     —          (90

Proceeds from exercise of common and preferred stock warrants

     —          37   

Proceeds from issuance of common stock in initial public offering, net of underwriting discounts and commissions

     —          201,236   

Offering costs

     —          (2,917
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (1,841     215,147   
  

 

 

   

 

 

 

Effect of exchange rates on cash and cash equivalents

     358        63   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (11,324     164,910   

Cash and cash equivalents — beginning of period

     28,780        32,497   
  

 

 

   

 

 

 

Cash and cash equivalents — end of period

   $ 17,456      $ 197,407   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Interest paid in cash

   $ 363      $ 15   
  

 

 

   

 

 

 

 

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     Six Months Ended
June 30,
 
     2012      2011  

Income taxes paid in cash

   $ —        $ —    
  

 

 

    

 

 

 

Supplemental disclosure of noncash investing and financing activities:

     

Accretion of redeemable convertible preferred stock

   $ —         $ 60   
  

 

 

    

 

 

 

Capital assets in accounts payable and accrued liabilities

   $ 1,005       $ 806   
  

 

 

    

 

 

 

Accrued offering costs

   $ —         $ 1,263   
  

 

 

    

 

 

 

Conversion of convertible preferred stock to common stock upon initial public offering

   $ —         $ 128,373   
  

 

 

    

 

 

 

Reclassification of warrant liability to additional paid-in capital

   $ 4,586      $ 6,598   
  

 

 

    

 

 

 

Reclassification of deferred offering costs to additional paid-in capital upon initial public offering

   $ —         $ 4,180   
  

 

 

    

 

 

 

Addition of land, building and equipment under notes payable

   $ —         $ 5,248   
  

 

 

    

 

 

 

Change in unrealized gain (loss) on marketable securities

   $ 489       $ (43
  

 

 

    

 

 

 

Warrant issued for investment in unconsolidated joint venture

   $ 10,361       $ —     
  

 

 

    

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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SOLAZYME, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY

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

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

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation —The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s condensed consolidated financial position, results of operations and cash flows for the periods presented. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Solazyme Brazil Renewable Oils and Bioproducts Limitada (“Solazyme Brazil”), which had operations beginning in the first quarter of 2011, and Solazyme Manufacturing 1, L.L.C, which was formed to own the Peoria Facility assets (Note 6) and related promissory note in the second quarter of 2011. All intercompany accounts and transactions have been eliminated in consolidation.

On December 16, 2010, the Company entered into a joint venture agreement with Roquette Frères, S.A. (“Roquette”). The Company’s joint venture with Roquette (“Solazyme Roquette JV”) is a variable interest entity (“VIE”) and is 50% owned by the Company and 50% by Roquette. The Company has determined that it is not required to consolidate the 50% ownership in the joint venture and is therefore accounting for the joint venture under the equity method of accounting (see Note 13 in the notes to the condensed consolidated financial statements).

On April 2, 2012, the Company entered into a joint venture agreement with Bunge Global Innovation, LLC (together with its affiliates, “Bunge”). The Company’s joint venture with Bunge (“Solazyme Bunge JV”) is a VIE and is 50.1% owned by the Company and 49.9% owned by Bunge. The Company determined that it is not required to consolidate the 50.1% ownership in the joint venture and is therefore accounting for the joint venture under the equity method of accounting (see Note 13 to the condensed consolidated financial statements).

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited condensed consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company’s interim financial information. The results of operations for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012, or for other interim periods or future years.

 

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These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the United States Securities and Exchange Commission (“SEC”) on March 15, 2012. The December 31, 2011 condensed consolidated balance sheet included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including notes required by GAAP for complete financial statements.

Use of Estimates —Financial statements prepared in conformity with GAAP require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

Significant Risks and Uncertainties —The Company’s failure to generate sufficient revenues, achieve planned gross margins, control operating costs or raise sufficient additional funds may require it to modify, delay or abandon the Company’s planned future expansion or expenditures, which could have a material adverse effect on the business, operating results, financial condition and ability to achieve intended business objectives. The Company may be required to seek additional funds through collaborations, government programs or public or private debt or equity financings, and may also seek to reduce expenses related to the Company’s operations. There can be no assurance that any financing will be available or on terms acceptable to management.

Foreign Currency Translation —The assets and liabilities of our foreign subsidiary, where the local currency is the functional currency, is translated from its respective functional currency into U.S. dollars at the exchange rate in effect at the balance sheet date, with resulting foreign currency translation adjustments recorded in accumulated other comprehensive income (loss) in the condensed consolidated statements of comprehensive loss. Revenues and expense amounts are translated at average rates during the period.

Cash Equivalents —All highly liquid investments with original or remaining maturities of three months or less at the time of purchase are classified as cash equivalents. Cash equivalents primarily consist of money market funds and commercial paper.

Marketable Securities —Investments with original maturities greater than three months that mature less than one year from the condensed consolidated balance sheet date are classified as marketable securities. The Company classifies marketable securities as short-term based upon whether such assets are reasonably expected to be used in current operations. The Company invests its excess cash balances primarily in corporate bonds, United States Government and Agency securities, asset-backed securities, mortgage-backed securities, commercial paper, municipal bonds, certificates of deposit and floating rate notes. The Company classifies its marketable securities as available-for-sale. Marketable securities classified as available-for-sale are recorded at estimated fair value in the condensed consolidated balance sheets, with unrealized gains and losses, if any, reported as a component of accumulated other comprehensive income (loss) in the condensed consolidated statements of comprehensive loss. Marketable securities classified as available-for-sale are adjusted for amortization of premiums and accretion of discounts and such amortization and accretion are reported as components of interest income. Realized gains and losses and declines in value that are considered to be other-than-temporary are recognized in interest and other income. The cost of all securities sold is based on the specific identification method.

Restricted Certificates of Deposit —The Company maintained certificates of deposits in the amount of $0.3 million, classified in other long-term assets as of June 30, 2012 and December 31, 2011. These certificates of deposits were pledged as collateral for a $0.3 million letter of credit related to the Company’s facility lease.

Accounts Receivable —Accounts receivable represents amounts owed to the Company under our government programs, collaborative research and development agreements and for product revenues. The Company had no amounts reserved for doubtful accounts as of June 30, 2012 and December 31, 2011, as the Company expected full collection of its accounts receivable balances. The Company’s customer payment terms related to sales of Algenist ® products are thirty days from invoice date or thirty or forty-five days from the end of the month in which a customer is invoiced. Certain customer invoices are denominated in Euros and British Pounds. The Company reserves for estimated product returns as reductions of accounts receivable and product revenues. As of June 30, 2012, the reserve for product returns was $0.6 million. The Company monitors actual return history and reassesses its return reserve as return experience develops.

Unbilled Revenues —Unbilled revenues represent fees earned but not yet billed under certain research and development programs.

Fair Value of Financial Instruments —The Company measures certain financial assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Where available, fair value is based on, or derived from, observable market prices or other observable inputs. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

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The carrying amount of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses, accounts payable and accrued liabilities, approximates fair value due to their relatively short maturities. Based on borrowing rates which management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other market factors, the carrying value of the Company’s debt obligations approximate their fair value. The fair value of the debt obligations was determined using unobservable inputs (Level 3 inputs), as defined in ASC 820 (see Note 3).

Concentration of Credit Risk —Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents, marketable securities, accounts receivable and restricted certificates of deposit. The Company places its cash equivalents and investments with high credit quality financial institutions and by policy limits the amounts invested with any one financial institution or issuer. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

Credit risk with respect to accounts receivable exists to the full extent of amounts presented in the condensed consolidated financial statements. The Company estimates an allowance for doubtful accounts, if any, through specific identification of potentially uncollectible accounts receivable based on an analysis of its accounts receivable aging. Uncollectible accounts receivable are written off against the allowance for doubtful accounts when all efforts to collect them have been exhausted. Recoveries are recognized when they are received. Actual collection losses may differ from the Company’s estimates and could be material to the condensed consolidated balance sheet, statements of operations and cash flows. The Company had nine customers accounting for 99 % of the receivable balance as of June 30, 2012. The Company had eight customers accounting for 97% of the receivable balance as of December 31, 2011. The Company does not believe the accounts receivable from these customers represent a significant credit risk based on past collection experiences and the general creditworthiness of these customers. As of June 30, 2012, $2.9 million of the Company’s gross accounts receivable balance related to product sales.

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 ® products, 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.

Property, Plant and Equipment —Property, plant and equipment are recorded at cost, less accumulated depreciation. Depreciation is calculated on a straight-line basis over the following estimated ranges of useful lives:

 

Asset classification

   Estimated useful life

Plant equipment

   5 – 20 years

Lab equipment

   3 – 7 years

Leasehold improvements

   Shorter of useful life

or life of lease

Building and improvements

   7 – 20 years

Computer equipment and software

   3 – 7 years

Furniture and fixtures

   5 – 7 years

Automobiles

   5 years

Long-Lived Assets —The Company periodically reviews long-lived assets, including property, plant and equipment and intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset is impaired or the estimated useful lives are no longer appropriate. If indicators of impairment exist and the undiscounted projected cash flows associated with such assets are less than the carrying amount of the asset, an impairment loss is recorded to write the asset down to its estimated fair values. Fair value is estimated based on discounted future cash flows. There were no asset impairment charges incurred for the three and six months ended June 30, 2012 and 2011.

Warrant Liability —Prior to the Company’s initial public offering, outstanding warrants to purchase shares of the Company’s Series A and Series B redeemable convertible preferred stock were freestanding warrants that were exercisable into convertible preferred stock that was subject to redemption and were therefore classified as liabilities on the condensed consolidated balance sheet at fair value. The Company estimated 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 the Company’s 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 were highly judgmental. The initial liability recorded was adjusted for changes in fair value at each reporting date with an offsetting entry recorded for the loss from the change in fair value of warrant liability in the accompanying condensed consolidated statements of operations. The liability was adjusted for changes in fair value until the conversion of the underlying redeemable convertible preferred stock into common stock and common stock warrants prior to the close of Company’s initial public offering in June 2011, at which time the redeemable convertible preferred stock warrants were reclassified to additional paid-in capital.

 

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In May 2011, the Company granted to Bunge Limited a warrant to purchase 1,000,000 shares of its common stock at an exercise price of $13.50 per share (see Note 13). The warrant vests in three separate tranches, based upon Bunge Limited achieving three specific performance milestones. The first tranche of shares vested on the measurement date, April 2, 2012, and was recorded as an investment in the unconsolidated joint venture and additional paid-in capital, based on the fair value of the first tranche of warrants that vested upon the measurement date. The remaining unvested second and third tranches of the warrant (on the measurement date) were classified as a liability on the condensed consolidated balance sheet at fair value on the measurement date, due to performance-based vesting terms. The initial liability for the second vesting tranche was adjusted for changes in fair value until the performance-based milestones were met and the tranche vested on June 20, 2012, at which time the fair value of the second vested tranche was reclassified to additional paid-in-capital. The initial liability recorded for the third tranche as of the measurement date was adjusted for changes in fair value at each reporting date with an offsetting entry recorded for the gain (loss) from the change in fair value of warrant liability in the accompanying condensed consolidated statement of operations.

Segment Reporting —Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Chief Executive Officer

reviews financial information presented on a consolidated basis. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results beyond revenue goals or gross margins, or plans for levels or components below the consolidated unit level. Accordingly, the Company has a single reporting segment through June 30, 2012.

Geographic revenues are identified by the location in which the research and development program revenue and product sales were originated. Total revenues of $13.5 million and $7.4 million for the three months ended June 30, 2012 and 2011, respectively, originated in the United States. Total revenues of $27.1 million and $15.1 million for the six months ended June 30, 2012 and 2011, respectively, originated in the United States.

Revenue Recognition —Revenues are recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) transfer of technology has been completed or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. The Company’s primary sources of revenues are revenues from research and development programs and product sales. If sales arrangements contain multiple elements, the Company evaluates whether the components of each arrangement represent separate units of accounting. To date, the Company has determined that all revenue arrangements should be accounted for as a single unit of accounting.

Research and development programs consist of the following:

 

   

Government Programs —Revenues from research and development programs with governmental entities generally provide cost reimbursement for certain types of expenditures in return for research and development activities over a contractually defined period. 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 —Collaborative research and development programs with commercial and strategic partners typically provide the Company with multiple revenue streams, which may include up-front non-refundable fees for licensing and reimbursement for research and development activities; cost reimbursement fees may include reimbursement for full-time employee equivalents (“FTE”), contingent milestone payments upon achievement of contractual criteria, licensing fees and commercialization royalty fees. Such revenues are recognized as the services are performed over a performance period, as specified in the respective agreements with the non-governmental entities. To date, payments received are not refundable. The research and development period is estimated at the inception of each agreement and is periodically evaluated. Reevaluation of the research and development period may shorten or lengthen the period during which the deferred revenue is recognized. To date, upfront payments received upon execution of such agreements, including license fees, have been recorded as deferred revenue upon receipt and have not been considered a separate unit of accounting. When up-front payments are combined with funded research services in a single unit of accounting, the Company recognizes the up-front payments using the proportional performance method of revenue recognition based upon the actual amount of research and development labor hours and research expenses incurred relative to the amount of the total expected labor hours and research expenses estimated to be incurred, but not greater than the amount of the research and development program fee as specified under such agreements. The Company is required to make estimates of total labor hours and research and development expenses required to perform the Company’s obligations under each research and development program; the Company evaluates the appropriate period based on research progress attained and reevaluates the period when significant changes occur.

Product Revenue —Product revenue is recognized from the sale of Algenist ® products. 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 an approximate three year shelf life from their manufacture date. The Company gives 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 for the amount of the return. The Company reserves

 

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for estimated returns of products at the time revenues are recognized. To estimate the return reserve, the Company analyzes its own actual product return data, as well as data from its customers regarding their historical return rates of well-established similar products to other manufacturers, and also uses other known factors, such as its customers’ return policies to their end consumers, which is typically 30 to 90 days. The Company monitors its actual performance to estimated rates, and adjusts the estimated return rates as necessary. In addition, the Company estimates a reserve for products that do not meet internal quality standards. As of June 30, 2012 the Company had a product revenue reserve of $0.6 million. Actual returns of Algenist ® products may differ from the estimates used by the Company to calculate such reserves. Product revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.

Research and Development —Research and development costs associated with research performed pursuant to research and development programs with government entities and commercial and strategic partners (“partners”) are expensed as incurred, and include, but are not limited to, personnel and related expenses, laboratory supplies, and scale-up research manufacturing and consulting costs. The Company’s research and development programs are undertaken to advance its overall industrial biotechnology platform that enables the Company to produce cost-effective, tailored, high-value oils. Although the Company’s partners fund certain development activities, the partners benefit from advances in the Company’s 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 the Company’s total research and development related activities.

Advertising Costs Advertising costs are expensed as incurred. Advertising expense was $0.4 million and $0.1 million for the three months ended June 30, 2012 and 2011, respectively, and $1.2 million and $0.3 million for the six months ended June 30, 2012 and 2011, respectively.

Patent Costs —All costs related to filing and pursuing patent applications are expensed as incurred as recoverability of such expenditures is uncertain and the underlying technologies are under development. Patent-related legal costs incurred are recorded in selling, general and administrative expenses.

Income Taxes —The Company accounts for income taxes under the asset and liability method, which requires, among other things, that deferred income taxes be provided for temporary differences between the tax basis of the Company’s assets and liabilities and their financial statement reported amounts. A valuation allowance is provided against deferred tax assets when it is more likely than not that they will not be realized.

The Company provides for reserves necessary for uncertain tax positions taken or expected to be taken on tax filings. First, the Company determines if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit. Second, based on the largest amount of benefit that is more likely than not to be realized on ultimate settlement, the Company recognizes any such differences as a liability. Because the Company’s unrecognized tax benefits offset deferred tax assets for which the Company has not realized benefit in the financial statements, none of the unrecognized tax benefits through June 30, 2012, if recognized, would affect the Company’s effective tax rate.

Stock-Based Compensation —The Company recognizes stock-based compensation for awards to employees based on the estimated fair value of the awards granted. The fair value method requires the Company to estimate the fair value of stock-based awards on the date of grant using an option pricing model. The Company uses the Black-Scholes option-pricing model to estimate the fair value of awards granted to employees, and the requisite fair value is recognized as expense on a straight-line basis over the service period of the award.

The Company estimates the fair value of stock-based compensation awards using the Black-Scholes option pricing model, which requires the following inputs: expected life, expected volatility, risk-free interest rate, expected dividend yield rate, exercise price and closing price of the Company’s common stock on the date of grant. Due to the Company’s limited history of grant activity, the Company calculates its expected term utilizing the “simplified method” permitted by the SEC, which is the average of the total contractual term of the option and its vesting period. The Company calculates its expected volatility rate from the historical volatilities of selected comparable public companies within its industry, due to a lack of historical information regarding the volatility of the Company’s stock price. The Company will continue to analyze the historical stock price volatility assumption as more historical data for its common stock becomes available. The 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. The expected dividend yield was assumed to be zero, as the Company has not paid, nor does it anticipate paying, cash dividends on shares of its common stock. The Company estimates its forfeiture rate based on an analysis of its 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 Company accounts for restricted stock units and restricted stock awards based on the quoted market price of the Company’s common stock on the date of grant that are expensed on a straight-line basis over the service period.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of awards granted to nonemployees. The Company accounts for restricted stock awards issued to nonemployees based on the estimated fair value of the Company’s common stock.

 

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The measurement of stock-based compensation for nonemployees is subject to periodic adjustments as the underlying equity instruments vest, and the resulting change in value, if any, is recognized in the Company’s condensed consolidated statements of operations during the period the related services are rendered.

Net Loss per Share Attributable to Solazyme, Inc. Common Stockholders Basic net loss per share attributable to Solazyme, Inc. common stockholders is computed by dividing the Company’s net loss attributable to Solazyme, Inc. common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to Solazyme, Inc. common stockholders is computed by giving effect to all potentially dilutive securities, including stock options, common stock issuable pursuant to the 2011 Employee Stock Purchase Plan, restricted stock, restricted stock units, warrants and convertible preferred stock. Basic and diluted net loss per share attributable to Solazyme, Inc. common stockholders was the same for all periods presented as the inclusion of all potentially dilutive securities outstanding was anti-dilutive.

The following table summarizes the Company’s calculation of basic and diluted net loss per share attributable to Solazyme, Inc. common stockholders (in thousands, except share and per share amounts):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Actual

        

Numerator

        

Net loss attributable to Solazyme, Inc. common stockholders

   $ (19,239   $ (16,969   $ (36,019   $ (24,294
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

        

Weighted-average number of common shares outstanding

     60,444,733        27,833,578        60,316,581        20,186,430   

Less: Weighted average shares subject to repurchase

     (67,122     (160,347     (77,187     (226,567
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator: Basic and diluted

     60,377,611        27,673,231        60,239,394        19,959,863   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to Solazyme, Inc. common stockholders, basic and diluted

   $ (0.32   $ (0.61   $ (0.60   $ (1.22
  

 

 

   

 

 

   

 

 

   

 

 

 

The following outstanding shares of potentially dilutive securities were excluded from the calculation of diluted net loss per share attributable to Solazyme, Inc. common stockholders for the periods presented as the effect was anti-dilutive:

 

     June 30,  
     2012      2011  

Options to purchase common stock

     9,273,839         7,065,098   

Common stock subject to repurchase

     59,283         163,943   

Restricted stock units

     123,668         —     

Warrants to purchase common stock

     1,000,000         1,000,000   
  

 

 

    

 

 

 

Total

     10,456,790         8,229,041   
  

 

 

    

 

 

 

Recent Accounting Pronouncements —In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) of Fair Value Measurement—Topic 820 . ASU No. 2011-04 is intended to provide a consistent definition of fair value and improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments include those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements, as well as those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The update is effective for annual periods beginning after December 15, 2011. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income as amended by ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. Rather, it gives an entity the choice to present the components of net income and other comprehensive income in either a single continuous statement or two separate but consecutive statements. Companies will continue to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements. The components of comprehensive income and timing of reclassification of an item to net income do not change with this update. ASU No. 2011-05 requires retrospective application and is

 

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effective for annual and interim periods beginning after December 15, 2011. Early adoption is permitted. The Company adopted this standard in the first quarter of 2012 by including a separate statement of comprehensive income to its condensed consolidated financial statements. The adoption did not have a material impact on the Company’s condensed consolidated financial statements.

3. MARKETABLE SECURITIES

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

 

     June 30, 2012  

Available-for-sale securities

   Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Fair Value  

Corporate bonds

   $ 69,784       $ 110       $ —        $ 69,894   

Government and agency securities

     33,626            (66     33,560   

Asset-backed securities

     35,802         68           35,870   

Mortgage-backed securities

     17,802         41           17,843   

Commercial paper

     10,688         1           10,689   

Municipal bonds

     6,783         14           6,797   

Certificates of deposit

     2,011         1           2,012   

Floating rate notes

     1,354         4           1,358   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 177,850       $ 239       $ (66   $ 178,023   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2011  

Available-for-sale securities

   Amortized
Cost
     Gross
Unrealized
Gain
     Gross
Unrealized
Loss
    Fair Value  

Corporate bonds

   $ 68,196       $ —         $ (209   $ 67,987   

Government and agency securities

     60,602            (64     60,538   

Asset-backed securities

     37,130            (33     37,097   

Commercial paper

     22,266         5           22,271   

Mortgage-backed securities

     17,448            (24     17,424   

Municipal bonds

     7,200         14           7,214   

Certificates of deposit

     2,019            (3     2,016   

Floating rate notes

     327            (2     325   

Collateralized mortgage obligations

     72              72   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 215,260       $ 19       $ (335   $ 214,944   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

     June 30, 2012      December 31, 2011  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Marketable securities

           

Due in 1 year or less

   $ 60,614       $ 60,646       $ 70,871       $ 70,794   

Due in 1—2 years

     7,913         7,919         64,902         64,754   

Due in 2—3 years

     80,689         80,765         37,493         37,500   

Due in 3—4 years

     4,793         4,798         14,459         14,387   

Due in 4—9 years

     8,630         8,640         12,759         12,748   

Due in 9—20 years

     2,410         2,424         2,957         2,958   

Due in 20—32 years

     12,801         12,831         11,819         11,803   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 177,850       $ 178,023       $ 215,260       $ 214,944   
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized gains and losses from sales and maturities of marketable securities were not significant in the periods presented.

 

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The aggregate fair value of available-for-sale securities with unrealized losses as of June 30, 2012 was $54.8 million. Gross unrealized losses on available-for-sale securities as of June 30, 2012 were insignificant and the Company believes the unrealized losses are temporary. In determining that the decline in fair value of these securities was temporary, the Company considered the length of time each security was in an unrealized loss position and the extent to which the fair value was less than cost. The aggregate fair value and unrealized loss of available-for securities which had been in a continuous loss position for more than 12 months was $1.0 million and $4,000, respectively, as of June 30, 2012. In addition, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.

Marketable securities classified as available-for-sale are carried at fair value as of June 30, 2012 and December 31, 2011.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

   

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

 

   

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

 

   

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Cash equivalents and marketable securities classified within Level 2 of the fair value hierarchy are valued based on other observable inputs, including broker or dealer quotations or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes, which are based on proprietary valuation models of independent pricing services. These models generally use inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers and internal assumptions of the independent pricing services. The Company corroborates the reasonableness of non-binding quotes received from the independent pricing services by comparing them to quotes of identical or similar instruments from other pricing sources. During the three and six months ended June 30, 2012 and 2011, the Company did not record impairment charges related to its cash equivalents and marketable securities, and the Company did not have any transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy.

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

 

     June 30, 2012  
     Level 1      Level 2      Level 3      Total  

Financial Assets

           

Cash equivalents

   $ 4,629       $ 4,949       $ —         $ 9,578   

Marketable securities—available-for-sale

     2,994         175,029         —           178,023   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,623       $ 179,978       $ —         $ 187,601   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liability

           

Warrant liability

   $ —         $ —         $ 2,267       $ 2,267   
  

 

 

    

 

 

    

 

 

    

 

 

 

The change in the value of the warrant liability is summarized below (in thousands):

 

Fair value at December 31, 2011

   $ —     

Fair value of warrant on measurement date

     7,704   

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

     (851

Reclassification to additional paid-in capital upon vesting of warrants

     (4,586
  

 

 

 

Fair value at June 30, 2012

   $ 2,267   
  

 

 

 

The valuation of the warrant liability above is discussed in Note 13.

The following table presents the Company’s financial instruments that were measured at fair value on a recurring basis as of December 31, 2011 by level within the fair value hierarchy (in thousands):

 

     December 31, 2011  
     Level 1      Level 2      Level 3      Total  

Financial Assets

           

Cash equivalents

   $ 17,160       $ 6,145       $ —         $ 23,305   

Marketable securities—available-for-sale

     7,023         207,921         —           214,944   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,183       $ 214,066       $ —         $ 238,249   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Company had no transactions measured at fair value on a nonrecurring basis as of December 31, 2011.

5. INVENTORIES

Inventories consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Raw materials

   $ 963       $ 512   

Work in process

     3,664         2,439   

Finished goods

     430         178   
  

 

 

    

 

 

 

Total inventories

   $ 5,057       $ 3,129   
  

 

 

    

 

 

 

6. PROPERTY, PLANT AND EQUIPMENT—NET

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

 

     June 30,
2012
    December 31,
2011
 

Plant equipment

   $ 14,623      $ 4,439   

Building and improvements

     5,091        1,692   

Lab equipment

     4,574        3,887   

Leasehold improvements

     2,403        2,332   

Computer equipment and software

     2,362        1,425   

Furniture and fixtures

     464        300   

Land

     430        430   

Automobiles

     49        49   

Construction in progress

     4,666        14,207   
  

 

 

   

 

 

 
     34,662        28,761   

Less accumulated depreciation and amortization

     (4,215     (2,776
  

 

 

   

 

 

 

Property, plant and equipment—net

   $ 30,447      $ 25,985   
  

 

 

   

 

 

 

Construction in progress as of June 30, 2012 and December 31, 2011 related primarily to the Peoria manufacturing facility and plant equipment not yet placed in service as of those dates.

Depreciation and amortization expense was $0.8 million and $0.4 million for the three months ended June 30, 2012 and 2011, respectively. Depreciation and amortization expense was $1.5 million and $0.7 million for the six months ended June 30, 2012 and 2011, respectively.

7. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Accrued compensation and related liabilities

   $ 4,941       $ 6,481   

Accrued professional fees

     773         1,864   

Accrued contract manufacturing expense

     —           162   

Other accrued liabilities

     488         781   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 6,202       $ 9,288   
  

 

 

    

 

 

 

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

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

 

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

Unilever —Effective November 2009, the Company entered into a collaborative research and development agreement with Conopco, Inc. (doing business as Unilever) to develop oil for use in soap and other products. The Company completed the research and development under this agreement in the year ended December 31, 2010. In the first quarter of 2011, the Company and Unilever agreed to extend their research and development agreement through June 30, 2011. The Company received an initial payment of $750,000 in March 2011 related to work performed on this contract. The second payment of $750,000, against the total contract extension of $1.5 million, was received from Unilever in July 2011.

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

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

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

With respect to Phase 1 of the current DoD contract, the Company recognized $0 and $0.9 million of revenues in the three months ended June 30, 2012 and 2011, respectively, and $0 and $1.1 million of revenues in the six months ended June 30, 2012 and 2011, respectively. The Company had no unbilled revenue or deferred revenue balances related to Phase 1 of the agreement as of June 30, 2012 and December 31, 2011.

With respect to Phase 2 of the current DoD contract, the Company recognized $0.7 million and $0 of revenues in the three months ended June 30, 2012 and 2011, respectively, and $0.7 million and $0 of revenues in the six months ended June 30, 2012 and 2011, respectively. Unbilled revenues were $0 million and $2.2 million as of June 30, 2012 and December 31, 2011, respectively. The Company had no deferred revenue balances related to Phase 2 of the agreement as of June 30, 2012 and December 31, 2011.

Department of Energy —In December 2009, the U.S. Department of Energy (“DOE”) awarded the Company approximately $21.8 million to partially fund the construction, operation, and optimization of an integrated biorefinery. The project term is January 2010 through March 2014. The payments received are not refundable and are based on a contractual reimbursement of costs incurred. During the three months ended June 30, 2012 and 2011, the Company recognized revenues of $4.0 million and $1.8 million, respectively. During the six months ended June 30, 2012 and 2011, the Company recognized revenues of $5.9 million and $3.0 million, respectively. The Company had no deferred revenue balance related to this award as of June 30, 2012 and December 31, 2011. Unbilled revenues related to this award were $3.2 million and $1.7 million as of June 30, 2012 and December 31, 2011, respectively.

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

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

 

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Dow —In February 2011, the Company entered into a joint development agreement with The Dow Chemical Company (“Dow”) to jointly develop microalgae-based oils for use in dielectric insulating fluids. This initial research program was completed in September 30, 2011. In March 2012, the Company entered into a multi-year extension of this joint development agreement including accelerated commercialization time lines based on the Company’s progress in the production of tailored algal oils. The extended agreement enables additional application development work to be conducted by Dow, due to the Company’s accelerated ability to scale up its tailored algal oil feedstocks. In conjunction with entry into the expanded development agreement, the parties entered into a contingent offtake agreement in which Dow agreed to purchase from the Company all of its requirement of non-vegetable microbe-derived oils for use in dielectric fluid applications through 2015, contingent upon the Company’s ability to supply such oils within agreed specifications and certain terms and conditions of the sale. Provision of the Company’s algal oil feedstocks is expected to start in the second half of 2013. The offtake agreement contemplates that final pricing for the oil will be linked to certain items including the Company’s sugar-based feedstock costs.

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

In April 2012, the Company and Bunge entered into a Joint Venture Agreement forming a joint venture to build, own and operate a commercial-scale renewable tailored oils production facility adjacent to Bunge’s Moema sugarcane mill in Brazil (see Note 13).

9. DEBT

In June 2010, the Company entered into a secured promissory note agreement with the lessor of its headquarters under which $265,000 was borrowed to purchase equipment owned by the lessor. The loan is payable in monthly installments of principal and interest with final payment due in January 2015. Interest accrues at 9.0% and the promissory note is collateralized by the purchased equipment. As of June 30, 2012 and December 31, 2011, a principal amount of $157,000 and $179,000, respectively, was outstanding under this note agreement.

On May 11, 2011, the Company 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 was eligible to 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 the Company breaches financial covenants that require the Company to maintain a minimum of $30.0 million in unrestricted cash and investments, of which at least $25.0 million are to be maintained in accounts with the bank and its affiliates. This minimum balance requirement is considered a compensating balance arrangement, and is classified in the condensed consolidated balance sheet as cash and cash equivalents and/or marketable securities as this minimum balance is not restricted as to withdrawal. Interest is charged under the 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 payable 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 loan and (ii) May 10, 2013 for the revolving loans. The Company has the option to prepay all, but not less than all, of the amounts advanced under the term loan, provided that the Company provides written notice to the bank at least ten days prior to such prepayment, and pays 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, the Company is subject to financial covenants and customary affirmative and negative covenants and events of default under the facility including certain restrictions on borrowing. If an event of default occurs and continues, the bank may declare all outstanding obligations under the facility to become immediately due and payable. The outstanding obligations would become immediately due if the Company becomes insolvent. On May 11, 2011, the Company borrowed $15.0 million under the facility. As of June 30, 2012 and December 31, 2011, $13.0 million and $14.7 million, respectively, were outstanding under this facility.

In March 2011, the Company entered into an agreement to purchase a development and commercial production facility with multiple 128,000-liter fermenters, and an annual oil production capacity of over 2,000,000 liters (1,820 metric tons) located in Peoria, Illinois for $11.5 million. This transaction closed in May 2011, and the Company paid for the aggregate purchase price with available cash and borrowed $5.5 million under a promissory note, mortgage and security agreement from the seller. The Company began initial

 

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fermentation operations in the facility in the fourth quarter of 2011and commissioned its first integrated biorefinery in June 2012 under its DOE program. The principal is payable in two lump sum payments, the first of which was paid on March 1, 2012 and the second payment is due on March 1, 2013. The note is interest-free and secured by the real and personal property acquired from the seller. The assets acquired and the related note payable were recorded based upon the present value of the future payments assuming an imputed interest rate of 3.25%, resulting in a discount of $0.3 million. The $0.3 million loan discount is being recognized as interest expense over the loan term utilizing the effective interest method.

The weighted average interest rate for total debt outstanding was 4.7% and 4.6% as of June 30, 2012 and December 31, 2011, respectively.

A summary of debt follows (in thousands):

 

     June 30,
2012
    December 31,
2011
 

Peoria Facility note, due 2013

   $ 3,548      $ 5,357   

Equipment note, due 2015

     157        179   

Silicon Valley Bank note, due 2015

     12,997        14,716   
  

 

 

   

 

 

 

Subtotal

     16,702        20,252   

Less: current portion of debt

     (7,184     (5,289
  

 

 

   

 

 

 

Total long-term debt

   $ 9,518      $ 14,963   
  

 

 

   

 

 

 

A summary of debt maturity follows (in thousands):

 

     June 30,
2012
    December 31,
2011
 

Principal due in 2012

   $ 1,797      $ 5,413   

Principal due in 2013

     7,350        7,350   

Principal due in 2014

     3,921        3,921   

Principal due in 2015

     3,711        3,711   
  

 

 

   

 

 

 

Subtotal

     16,779        20,395   

Less: imputed interest discount

     (77     (143
  

 

 

   

 

 

 

Total debt

   $ 16,702      $ 20,252   
  

 

 

   

 

 

 

10. COMMITMENTS AND CONTINGENCIES

Operating Lease Agreements

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

The Company records rent expense under its sublease agreements on a straight-line basis. Differences between actual lease payments and rent expense recognized under these subleases resulted in a deferred liability of $473,000 and $488,000 as of June 30, 2012 and December 31, 2011, respectively.

The Company also leases office and laboratory space in Brazil. The term of the lease is five years, which commenced on April 1, 2011 and expires on April 1, 2016. The rent is 29,500 Brazilian Real per month and is subject to an annual inflation adjustment. The Company pays its proportionate share of operating expenses. The Company may cancel this lease agreement at any time, but would be subject to paying the lessor the maximum of a three month rent penalty. This cancelable lease is excluded from the future minimum lease payments table below. Effective April 2012, the rent increased from 29,500 Brazilian Real per month to 30,500 Brazilian Real per month as a result of the annual inflation adjustment.

The Company entered into an auto lease agreement in the six months ended June 30, 2012. This lease agreement contains an early cancellation penalty equal to 50% of the remaining lease value. The remaining lease value as of June 30, 2012 was 450,000 Brazilian Real . This cancelable lease is excluded from the future minimum lease payments table below.

Future minimum lease payments under a noncancelable operating lease are as follows as of June 30, 2012 (in thousands):

 

Years Ending December 31,       

Remainder of 2012

   $ 1,264   

2013

     2,601   

2014

     2,681   

2015

     224   

2016 and thereafter

     —     
  

 

 

 

Total minimum lease payments

   $ 6,770   
  

 

 

 

 

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Rent expense was $0.7 million and $0.5 million for the three months ended June 30, 2012 and 2011, respectively, and $1.4 million and $1.0 million for the six months ended June 30, 2012 and 2011, respectively.

Contractual Obligations —As of June 30, 2012, the Company had non-cancelable purchase obligations of $65,000.

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

Guarantees and Indemnifications —The Company makes certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to certain transactions. The Company, as permitted under Delaware law and in accordance with its amended and restated certificate of incorporation and amended and restated bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The duration of these indemnifications, commitments, and guarantees varies and, in certain cases, is indefinite. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover all or a portion of any future amounts paid. The Company believes the fair value of these indemnification agreements is minimal. The Company has not recorded any liability for these indemnities in the accompanying condensed consolidated balance sheets. However, the Company accrues for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable. No such losses have been recorded to date.

Other Matters —The Company may be involved, from time to time, in legal proceedings and claims arising in the ordinary course of its business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. The Company accrues amounts, to the extent they can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss that is reasonably estimable. As of June 30, 2012, the Company was not involved in any material legal proceedings. While there can be no assurances as to the ultimate outcome of any legal proceeding or other loss contingencies involving the Company, management does not believe any pending matters will be resolved in a manner that would have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

11. STOCK-BASED COMPENSATION PLANS

Second Amended and Restated 2004 Equity Incentive Plan —The Company’s Second Amended and Restated Equity Incentive Plan (the “2004 EIP”) was adopted by the Board of Directors in February 2008 (termination date of January 4, 2014). Pursuant to the 2004 EIP, the Company may grant options, restricted stock and stock purchase rights to employees, directors, or consultants of the Company. Options granted may be either incentive stock options or nonstatutory stock options. Incentive stock options may be granted to employees (including offices and directors, who are also employees). Nonstatutory stock options may be granted to employees, directors or consultants. On May 25, 2011, in conjunction with the Company’s initial public offering, the 2004 EIP terminated so that no further awards may be granted under the 2004 EIP. Although the 2004 EIP terminated, all outstanding awards will continue to be governed by their existing terms.

2011 Equity Incentive Plan —On May 26, 2011, the Company’s 2011 Equity Incentive Plan (the “2011 EIP”, and together with the 2004 EIP (the “Plans”)) became effective. The Company initially reserved 7,000,000 shares of common stock for issuance under the 2011 EIP. Starting on May 26, 2011, any shares subject to outstanding awards granted under the 2004 EIP that expire or terminate for any reason prior to the issuance of shares shall become available for issuance under the 2011 EIP. The 2011 EIP also provides for automatic annual increases in the number of shares reserved for future issuance, and during the first quarter of 2012, an additional 3,000,362 shares were reserved under the 2011 EIP as a result of this provision. As of June 30, 2012, there were 6,590,827 shares of common stock reserved for issuance under the 2011 EIP and no shares available for issuance under the 2004 EIP.

2011 Employee Stock Purchase Plan —On May 26, 2011, the Company’s 2011 Employee Stock Purchase Plan (the “2011 ESPP”) became effective. The Company initially reserved 750,000 shares of common stock for issuance under the 2011 ESPP. The purchase price of the common stock under the Employee Stock Purchase Plan is 85% of the lower of the fair market value of a share of common stock on the first day of the offering period or the last day of the purchase period. The 2011 ESPP also provides for automatic annual increases in the number of shares reserved for future issuance, and during the first quarter of 2012, an additional 600,072 shares were reserved under the 2011 ESPP as a result of this provision. As of June 30, 2012, there were 1,276,939 shares available for issuance under the 2011 ESPP.

The Company recognized stock-based compensation expense related to its 2011 ESPP of $0.1 million and $0.1 million for the three months ended June 30, 2012 and 2011, respectively. The Company recognized stock-based compensation expense related to its 2011 ESPP of $0.2 million and $0.1 million for the six months ended June 30, 2012 and 2011, respectively.

 

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Common Stock Subject to Repurchase —The Company allows employees and non-employees to exercise options prior to vesting. The Company has the right, but not the obligation, to repurchase any unvested (but issued) common shares upon termination of employment or service at the original purchase price per share. The consideration received for an exercise of an option is considered to be a deposit of the exercise price and the related dollar amount is recorded as a liability. The unvested shares and liability are reclassified to equity on a ratable basis as the award vests. There were 59,283 and 99,110 shares of common stock subject to repurchase as of June 30, 2012 and December 31, 2011, respectively. The Company’s liability related to common stock subject to repurchase was $64,000 and $99,000 as of June 30, 2012 and December 31, 2011, respectively, and was recorded in other liabilities.

Restricted Stock Awards —The Company issued 0 and 32,000 restricted stock awards during the six months ended June 30, 2012 and 2011, respectively.

Restricted Stock Units —The Company awarded 140,000 restricted stock units to an employee in July 2011. The restricted stock units have a vesting term of 30 months. As of June 30, 2012 and December 31, 2011, 51,332 and 23,332 shares, respectively, of these restricted stock units were vested. Stock-based compensation expense related to these restricted stock units was $0.3 million and $0 for the three months ended June 30, 2012 and 2011, respectively, and $0.7 million and $0 for the six months ended June 30, 2012 and 2011, respectively.

Performance-Based Restricted Stock Units —In July 2011, the Company granted 60,000 performance-based restricted stock units to an employee that vest contingent upon the achievement of pre-determined performance-based milestones. If these performance-based milestones are not met, the restricted stock units will not vest, in which case, any stock-based compensation expense recognized to date will be reversed. As of June 30, 2012 and December 31, 2011, 25,000 and 0 shares, respectively, of these restricted stock units were vested. Stock-based compensation expense related to performance-based restricted stock units was $0.2 million and $0 during the three months ended June 30, 2012 and 2011, respectively, and $0.5 million and $0 for the six months ended June 30, 2012 and 2011, respectively.

Common Stock Warrants

In June 2010, the Company entered into a transaction with an executive placement group to provide recruiting services. As partial compensation for services rendered, the Company granted a warrant to purchase 5,000 shares of the Company’s common stock at an exercise price of $2.35 per share, the estimated fair value of the Company’s common stock at the time the warrant was granted. Prior to our initial public offering, this warrant was fully exercised in May 2011.

In May 2011, the Company granted Bunge Limited a warrant to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $13.50 per share. During the three months ended June 30, 2012, 750,000 of the warrant shares had vested. Refer to Note 8 and Note 13 for a description of the vesting terms and a discussion of the accounting for the warrant.

Stock-based Compensation Expense

Stock-based compensation expense related to stock-based awards granted to employees and nonemployees was allocated to research and development and sales, general and administrative expense as follows (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Research and development

   $ 1,013       $ 705       $ 1,938       $ 1,036   

Sales, general and administrative

     2,812         3,071         5,877         4,003   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,825       $ 3,776       $ 7,815       $ 5,039   
  

 

 

    

 

 

    

 

 

    

 

 

 

12. EMPLOYEE BENEFIT PLAN

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

13. INVESTMENTS IN JOINT VENTURES AND RELATED PARTY TRANSACTIONS

Solazyme Bunge Joint Venture

In April 2012, the Company and Bunge entered into a Joint Venture Agreement forming a joint venture (“Solazyme Bunge JV”) to build, own and operate a commercial-scale renewable tailored oils production facility (“the Plant”) adjacent to Bunge’s Moema sugarcane

 

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mill in Brazil. The Company expects this production facility to have annual production capacity of 100,000 metric tons of oil. Construction of the Plant commenced in the second quarter of 2012, with a targeted start-up in the fourth quarter of 2013. The Plant, which will leverage the Company’s technology and Bunge’s sugarcane milling and natural oil processing capabilities, will produce tailored triglyceride oils primarily for chemical applications. The capital contributions for this venture are being provided jointly by Solazyme and Bunge, and the agreement includes a value sharing mechanism that provides additional compensation to the Company for its technology contributions. The Company committed to make an initial capital contribution of $36.3 million in fiscal 2012 and, additional capital contributions of up to $36.3 million beginning after December 31, 2012, primarily to fund the construction of the Plant. As of June 30, 2012, the Company had not made any cash contribution to Solazyme Bunge JV. In July 2012, the Company contributed capital of $10.0 million to the Solazyme Bunge JV.

The Company has determined that Solazyme Bunge JV is a VIE based on the sufficiency of each party’s equity investment at risk to absorb losses and the Company’s share of the respective expected losses of Solazyme Bunge JV. However, the Company determined that it is not the primary beneficiary of Solazyme Bunge JV and therefore will not consolidate the financial results of Solazyme Bunge JV. The Company accounts for its interests in Solazyme Bunge JV under the equity method of accounting. This consolidation status could change in the future due to changes in events and circumstances impacting the power to direct the activities that most significantly affect Solazyme Bunge JV’s economic performance. The Company will continue to reassess its potential designation as the primary beneficiary of Solazyme Bunge JV. During the three and six months ended June 30, 2012, the Company recognized $0.5 million of losses on its equity method investment in Solazyme Bunge JV.

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

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

On April 2, 2012, the Company recorded an investment in the Solazyme Bunge JV of $10.4 million, equal to the fair value of the Warrant, and recorded a corresponding $2.6 million of additional paid-in-capital for the vested Warrant shares and $7.7 million of warrant liability for the unvested Warrant shares as of that date. The fair value of the Warrant was determined using the Black-Scholes option pricing model. The warrant liability is remeasured to fair value at each balance sheet date and/or upon vesting, and the warrant liability is reclassified to additional-paid in capital upon vesting. On June 20, 2012, the second tranche of the Warrant shares vested, resulting in a reclassification of $4.6 million, which represented the fair value as of that date, to additional paid-in capital. The Company had a $2.3 million warrant liability associated with the unvested Warrant shares as of June 30, 2012. The fair value of the warrant liability was determined using the Black-Scholes option pricing model based upon the following assumptions: volatility of 70%, risk-free interest rate of 1.45%, exercise price of $13.50 and an expected life of 8.8 years. In both the three and six months ended June 30, 2012, the Company recorded an unrealized gain of $0.9 million related to the change in the fair value of the warrant liability. As of June 30, 2012, 750,000 of the Warrant shares were vested.

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

Solazyme Roquette Joint Venture

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

 

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

The Company’s initial contribution is the licensing of certain intellectual property (the “IP”) to the Solazyme Roquette JV. Roquette is required to provide funds to Solazyme Roquette Nutritionals for working capital, lend additional funds to the Solazyme Roquette JV to provide working capital during Phase 1 and Phase 2 and lend additional funds to the Solazyme Roquette JV to provide working capital during Phase 3. Roquette has also agreed to provide funds to Solazyme Roquette Nutritionals to be used as equity in construction of the Phase 3 facility and to provide debt financing to Solazyme Roquette Nutritionals for construction of the Phase 3 facility, subject to the approval to proceed with construction.

In November 2011, the Company and Roquette amended the joint venture agreement to provide that Roquette would make available to the Solazyme Roquette JV during Phase 1 and Phase 2, additional working capital in the form of debt financing (“Roquette Loan”). The Company agreed to guarantee repayment of a portion, up to a maximum amount, of 50% of the aggregate draw-downs from the Roquette Loan, if and when drawn, plus a portion of the associated fees, interest and expenses. The Solazyme Roquette JV did not draw down on the loan as of June 30, 2012.

Related Party Transactions

During the three and six months ended June 30, 2012, the Company recognized revenue of $0.6 million and $0.6 million, respectively, related to its research and development arrangements with its joint venture companies. At June 30, 2012 and December 31, 2012, the Company had receivables of $1.6 million and $0.9 million, respectively, due from the joint venture companies.

 

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

Forward-Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. For example, statements regarding our expectations as to future financial 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 in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (SEC).

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 and value. Our oils can address the major markets served by conventional oils, which represented an opportunity of over $3 trillion in 2011. Initially, we are commercializing our products into three target markets: (1) chemicals and fuels, (2) nutrition and (3) skin and personal care.

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

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

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

Since 2007, we have been operating in commercially-sized standard industrial fermentation equipment (75,000-liter scale) with multiple contract manufacturing partners. In addition, in April 2012, we entered into a Joint Venture Agreement with Bunge Global Innovation, LLC and certain of its affiliates (collectively, Bunge), one of the largest sugarcane processing companies in Brazil, establishing a joint venture (Solazyme Bunge JV) to construct and operate an oil production facility adjacent to Bunge’s sugarcane mill in Moema, Brazil, with an annual expected name plate capacity of 100,000 metric tons.

To date, we have generated revenues from research and development programs, license fees and product sales. Through June 30, 2012, our revenues were primarily generated from key agreements with government agencies and 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 EMEA) and domestically with Sephora USA, Inc. (Sephora Americas).

 

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As we scale up our manufacturing capacity, we expect a large portion of our sales to be from products sold into the chemicals and fuels markets. Our revenues have increased in each of the last three fiscal years, growing from $9.2 million in 2009, to $38.0 million in 2010 to $39.0 million in 2011. In the six months ended June 30, 2012, our revenues increased $12.0 million to $27.1 million from $15.1 million in the first half of 2011. We incurred net losses attributable to our common stockholders of $13.8 million, $16.4 million and $54.0 million in 2009, 2010 and 2011, respectively, and our net loss was $36.0 million for the six months ended June 30, 2012.

We anticipate that we will continue to incur net losses as we continue our scale-up activities at our market development and commercial production facility located in Peoria, Illinois (Peoria Facility), expand our research and development activities and support commercialization activities for our products. In addition, as we enter into agreements with other companies to scale capacity, we will incur additional net losses associated with the build-out of those production facilities.

Through a combination of partnerships and internal development, we plan to scale rapidly. In 2012, we expect to utilize contract manufacturing to supplement our manufacturing capacity, which is comprised of the 2,000,000 liter annual capacity of our Peoria Facility that we acquired in May 2011, and the manufacturing capacity of Solazyme Roquette Nutritionals, LLC (Solazyme Roquette Nutritionals, or the Solazyme Roquette JV), one of our joint venture entities. We plan to launch a commercial chemicals and fuels production facility in 2013 in connection with the Solazyme Bunge JV and additional commercial capacity in 2014 and 2015. We are currently negotiating supply agreements with multiple potential feedstock partners in Latin America and the United States.

In May 2011, we entered into a Joint Development Agreement with Bunge. This Joint Development Agreement advances our work on Brazilian sugarcane feedstocks and extends through May 2013. Also in May 2011, we granted to Bunge Limited a performance-based warrant to purchase 1,000,000 shares of our common stock at an exercise price of $13.50 per share. Pursuant to the terms of the warrant, the warrant shares vest upon the successful completion of milestones that ultimately target the construction of a commercial facility with 100,000 metric tons of annual oil production capacity. In August 2011, we entered into a Joint Venture Framework Agreement with Bunge to accelerate entry into a joint venture with Bunge to construct this commercial production facility, and pursuant to that agreement jointly commenced engineering on the facility. In April 2012, we and Bunge entered into a definitive agreement forming a joint venture to build, own and operate a commercial-scale renewable tailored oils production facility adjacent to Bunge’s Moema sugarcane mill in Brazil. We expect this production facility to have annual production capacity of 100,000 metric tons of oil. In the second quarter of 2012, 750,000 of the warrant shares had vested.

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 and/or secure access to feedstock. Downstream, we expect partners to provide expanded distribution channels, product application testing, marketing expertise and/or long-term purchase 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 that extends through May 2013. Pursuant to the JDA, we and Bunge are jointly developing microbe-derived oils, and exploring the production of such oils from Brazilian sugarcane feedstock. The JDA also provides that Bunge will provide research funding to us through May 2013, payable quarterly in advance throughout the research term.

In April 2012, we and Bunge formed a joint venture (the Solazyme Bunge JV) to build, own and operate a commercial-scale renewable tailored oils production facility (the Plant) adjacent to Bunge’s Moema sugarcane mill in Brazil. The Plant, which will leverage our technology and Bunge’s sugarcane milling and natural oil processing capabilities, will produce our tailored triglyceride oils primarily for chemical applications. In addition, the Plant has been designed to be expanded for further production in line with market demand. We expect this production facility to have annual production capacity of 100,000 metric tons of oil. Construction of the Plant, which will be jointly financed by us and Bunge, commenced in the second quarter of 2012, and is targeted for start-up in the fourth quarter of 2013.

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

 

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In anticipation of Solazyme Bunge JV’s formation, in May 2011, we granted Bunge Limited a warrant (“the Warrant”) to purchase 1,000,000 shares of our common stock at an exercise price of $13.50 per share. The Warrant vests as follows: (i) 25% of the warrant shares vest on such date that we and Bunge Limited (or one of its affiliates) enter into a joint venture agreement to construct and operate a commercial-scale renewable oil production facility sited at a sugar mill of Bunge Limited or its affiliate (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 first tranche of the Warrant shares (25%) vested in April 2012 (see below). The second tranche of the Warrant shares (50%) vested in June 2012. The Warrant expires in May 2021.

Refer to Note 8 and Note 13 in the accompanying notes to our condensed consolidated financial statements for further discussion of the Bunge JDA, Joint Venture Agreement and Warrant.

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

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

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. This initial research program was completed in September 30, 2011. In March 2012, we entered into a multi-year extension of this joint development agreement, including accelerated commercialization time lines based on our progress in the production of tailored algal oils. The extended agreement enables additional application development work to be conducted by Dow, due to our accelerated ability to scale up our tailored algal oil feedstocks. In conjunction with entry into the expanded development agreement, the parties entered into a contingent offtake agreement in which Dow agreed to purchase from us all of its requirement of non-vegetable microbe-derived oils for use in dielectric fluid applications through 2015, contingent upon our ability to supply such oils within agreed specifications and certain terms and conditions of the sale. Provision of our algal oil feedstocks is expected to start in the second half of 2013. The offtake agreement contemplates that final pricing for the oil will be linked to certain items including our sugar-based feedstock costs.

Roquette . In November 2010, we entered into a joint venture agreement with Roquette. The purpose of the Solazyme Roquette Nutritionals joint venture (the Solazyme Roquette JV) is to engage in manufacturing, distribution, sales, marketing and support of products and services related to the use of microalgae to which we have not applied our targeted recombinant technology in a fermentation production process to produce materials for use in the following fields: (1) human foods and beverages; (2) animal feed; and (3) nutraceuticals. Solazyme Roquette Nutritionals is 50% owned by us and 50% by Roquette. While the Solazyme Roquette JV will establish a manufacturing platform for the products, Roquette has committed to provide expertise and resources with respect to manufacturing, including such volumes of corn-based dextrose feedstock as the Solazyme Roquette JV may request subject to the terms of a manufacturing agreement. Roquette has also agreed to provide (1) a full capital commitment for two Solazyme Roquette JV-dedicated, Roquette-owned facilities that are expected to have aggregate capacity of approximately 5,000 metric tons per year, (2) subject

 

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to the approval of the board of directors of the Solazyme Roquette JV, debt and equity financing for a larger Solazyme Roquette JV-owned facility that is expected to have capacity of approximately 50,000 metric tons per year, and (3) working capital financing during various scale-up phases. In October 2011, the Solazyme Roquette JV determined that its first committed manufacturing facility would be located at Roquette’s commercial production plant in Lestrem, France, and production began on its microalgae-derived food ingredients in the first quarter of 2012. In addition, we anticipate the Phase 2, 5,000 metric ton facility to be expanded from the Phase 1 facility in Lestrem in 2012. In November 2011, we and Roquette amended the joint venture agreement to provide that Roquette would make available to the Solazyme Roquette JV during Phase 1 and Phase 2 additional working capital in the form of debt financing (Roquette Loan). We agreed to guarantee payment of a portion, up to a maximum amount, of 50% of the aggregate draw-downs from the additional Roquette Loan, if and when drawn, plus a portion of the associated fees, interest and expenses.

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

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

Financial Operations Overview

Revenues

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

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

 

   

Research and Development Program Revenues

Revenues from research and development (R&D) programs are recognized in the period during which the related costs are incurred, provided that the conditions under which the government grants and agreements were provided have been met and only perfunctory obligations are outstanding. We currently have active R&D programs with governmental agencies and commercial partners. These R&D programs are entered into pursuant to grants and agreements that generally provide payment for certain types of expenditures in return for research and development activities over a contractually defined period. Revenues related to R&D programs include reimbursable expenses and payments received for full-time equivalent employee services recognized over the related performance periods for each of the contracts. We are required to perform research and development activities as specified in each respective agreement based on the terms and performance periods set forth in the agreements as outlined above. R&D program revenues represented 70% and 70% of our total revenues for the three and six months ended June 30, 2012, respectively, as compared to 82% and 76% of our total revenues for the three and six months ended June 30, 2011, respectively. Revenues from government grants and agreements represented 51% and 55% of total R&D program revenues in the three and six months ended June 30, 2012, respectively, as compared to 47% and 37% of total R&D program revenues in the three and six months ended June 30, 2011, respectively. Revenues from commercial and strategic partner development agreements represented 49% and 45% of total R&D program revenues in the three and six months ended June 30, 2012, respectively, and 53% and 63% of total R&D program revenues in the three and six months ended June 30, 2011, respectively.

 

   

Product Revenues

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

Starting in 2011, we recognized revenues from the sale of our first commercial product line, Algenist ® , which we distributed to the skin and personal care end market through arrangements with Sephora EMEA, Sephora Americas, QVC, The Shopping Channel, Space NK and Sephora inside jcpenney locations. We launched our Algenist ® product line in certain countries in Europe

 

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and the United States in the first quarter of 2011, through The Shopping Channel in Canada in the second quarter of 2011, and through Space NK in the United Kingdom and Sephora inside jcpenney locations in the third quarter of 2011. We may also launch the Algenist ® product line in additional geographies and/or through additional distribution channels. Product revenues represented 30% and 30% of our total revenues in the three and six months ended June 30, 2012, respectively. Product revenues represented 18% and 24% of our total revenues in the three and six months ended June 30, 2011, respectively.

Costs and Operating Expenses

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

 

   

Cost of Product Revenue

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 ® products, 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.

 

   

Research and Development

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

 

   

Sales, General and Administrative

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

 

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Other Income (Expense), Net

Interest and Other Income

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

Interest Expense

Interest expense consists primarily of interest related to our debt. As of June 30, 2012 and December 31, 2011, our outstanding debt was approximately $16.7 million and $20.3 million, respectively. We expect interest expense to fluctuate with changes in our debt obligations.

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

Loss from change in fair value of warrant liability consists primarily of the change in the fair value of redeemable convertible preferred stock warrants and a common stock warrant issued to Bunge Limited. The warrant liability is remeasured to fair value at each balance sheet date and/or upon vesting, and the change in the then-current aggregate fair value of the warrants is recorded as a gain or loss in the change in the fair value in the condensed consolidated statement of operations. The warrant liability is reclassified to additional-paid in capital upon conversion of redeemable preferred stock, or vesting of common warrant shares. The redeemable convertible stock warrants were converted into common stock or common stock warrants upon the close of our initial public offering in June 2011, and the related preferred stock warrant liability of $6.6 million was reclassified to additional paid-in capital and was no longer adjusted to fair value.

Income (Loss) from Equity Method Investments, Net

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

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

Income Taxes

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

Critical Accounting Policies and Estimates

Critical accounting policies are those accounting policies that management believes are important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s 2011 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to revenue recognition, inventories, convertible preferred stock warrants, stock-based compensation and income taxes. There have been no material changes to the Company’s critical accounting policies described in the Company’s 2011 Annual Report on Form 10-K.

 

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Results of Operations

Comparison of Three Months Ended June 30, 2012 and 2011

Revenues

 

     Three Months ended June 30,  
     2012      2011      $ Change  
     (In thousands)  

Revenues:

        

Research and development programs

   $ 9,468       $ 6,092       $ 3,376   

Net product revenue

     4,077         1,306         2,771   
  

 

 

    

 

 

    

 

 

 

Total revenues

   $ 13,545       $ 7,398       $ 6,147   
  

 

 

    

 

 

    

 

 

 

Our total revenues increased by $6.1 million in the second quarter of 2012 compared to the same period in 2011, due primarily to a $3.4 million increase in R&D program revenue and a $2.8 million increase in Algenist ® product revenue (which launched in March 2011). Net Algenist ® product sales increased due to increased consumer demand, as well as additional product offerings.

R&D program revenues increased by $3.4 million, due to a $2.0 million increase in government program revenues and a $1.4 million increase in revenues from development agreements with strategic partners. Our government program revenues increased in the second quarter of 2012 compared to the same period in 2011, primarily due to increased construction activities associated with our DOE grant. The grant awarded by the DOE is funding up to $21.8 million of the build-out, equipment costs and certain research and development costs associated with our integrated biorefinery program in our Peoria Facility. Revenue from our DOE grant will be dependent on the timing of activities associated with the construction and operations of the integrated biorefinery. We successfully commissioned the integrated biorefinery in our Peoria Facility in the second quarter of 2012 and anticipate that the remaining objectives under the program will be completed as outlined in the program. Our revenues from development agreements with strategic partners increased due to timing of agreements entered into with Unilever and Bunge in November 2011 and May 2011, respectively. We also successfully completed the second phase of our 2011 DoD fuels testing and certification contract in June 2012, with the delivery of 283,906 liters of HRF-76 marine diesel to the US Navy. In general, we expect that our R&D program revenues will continue as work with our strategic partners in our existing and new R&D agreements enables important market development activities. In the near term, we expect government programs to decrease substantially. As we enter into new agreements with strategic partners or government programs, we expect the quarterly trends may fluctuate based on the timing of program activities.

Cost of Product Revenues

 

     Three Months ended June 30,  
     2012     2011     $ Change  
     (In thousands)  

Cost of revenue:

      

Product

   $ 1,330      $ 374      $ 956   
  

 

 

   

 

 

   

 

 

 

Gross profit:

      

Product

   $ 2,747      $ 932      $ 1,815   
  

 

 

   

 

 

   

 

 

 

Product gross margin %

     67     71  

Cost of product revenue increased in the second quarter of 2012 compared to the same period in 2011 primarily due to increased sales of Algenist ® products, which launched in March 2011. Gross margins decreased in 2012 due primarily to customer sales mix in the second quarter of 2012 compared to the same period in 2011.

 

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Operating Expenses

 

     Three Months Ended June 30,  
     2012      2011      $ Change  
     (In thousands)  

Operating expenses:

        

Research and development

   $ 18,381       $ 9,676       $ 8,705   

Sales, general and administrative

     13,723         10,955         2,768   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 32,104       $ 20,631       $ 11,473   
  

 

 

    

 

 

    

 

 

 

Research and Development Expenses

Our research and development expenses increased by $8.7 million in the second quarter of 2012 compared to the same period in 2011, due primarily to increased program and third-party contractor costs of approximately $4.8 million, and increased personnel-related and facilities-related costs of $2.7 million and $1.1 million, respectively. Program and third-party contractor costs increased primarily due increased costs related to the construction of the integrated biorefinery pursuant to the DOE grant and retrofitting costs related to the Peoria Facility. Personnel-related and facilities-related costs increased as a result of headcount growth to support growth in collaborative research activities. Personnel-related costs include non-cash stock-based compensation expense of $1.0 million in the second quarter of 2012 compared to $0.7 million in the same period in 2011. 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, pursue process development improvements and continue to maximize production efficiencies at our Peoria Facility and other manufacturing facilities.

Sales, General and Administrative Expenses

Our sales, general and administrative expenses increased by $2.8 million in the second quarter of 2012 compared to the same period in 2011, primarily due to $1.9 million of increased marketing and promotional costs and $0.8 million of increased personnel-related costs associated with headcount growth. Personnel-related cost includes non-cash stock-based compensation of $2.8 million in the second quarter of 2012 compared to $3.1 million in the same period in 2011. We expect our sales, general and administrative expenses to increase as we add personnel to support the anticipated growth of our business domestically and in Brazil, as well as incur additional costs related to our operation as a publicly-traded company.

Other Income (Expense), Net

 

     Three Months Ended June 30,  
     2012     2011     $ Change  
     (In thousands)  

Other income (expense):

      

Interest and other income

   $ 556      $ (52   $ 608   

Interest expense

     (247     (132     115   

Loss on equity method investment

     (510     —        $ 510   

Gain (loss) from change in fair value of warrant liabilities

     851        (3,154   $ (4,005
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ 650      $ (3,338   $ (3,988
  

 

 

   

 

 

   

 

 

 

Interest and Other Income

Interest and other income increased by $0.6 million in the second quarter of 2012 compared to the same period in 2011, primarily due to interest income earned as a result of higher average investment balances resulting from the proceeds we received upon the closing of our initial public offering in June 2011 and the $15.0 million term loan drawn down from our Silicon Valley Bank credit facility.

 

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Interest Expense

Interest expense increased by $0.1 million in the first half of 2012 compared to the same period in 2011, primarily due to interest expense recognized under our $15.0 million term loan outstanding with Silicon Valley Bank since May 2011. We expect interest expense to fluctuate with changes in our debt obligations.

Loss on Equity Method Investment

Loss on equity method investment increased by $0.5 million, primarily consisting of our proportionate share of the net loss from Solazyme Bunge JV.

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

Loss from the change in fair value of warrant liability decreased by $4.0 million in the second quarter of 2012 compared to the same period in 2011 primary due to the conversion of warrants to purchase shares of our redeemable convertible preferred stock. Upon the close of our initial public offering in June 2011, all outstanding warrants to purchase shares of preferred stock were converted into shares of our common stock or common stock warrants. We recorded a non-cash loss in the second quarter of 2011 (as of the closing date of our initial public offering), resulting from the change in fair value of the warrants. In the second quarter of 2011, we granted Bunge Limited a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $13.50 per share. The warrant vests in three separate tranches, each contingent upon the achievement of specific performance-based milestones related to the formation and operations of Solazyme Bunge JV. The unvested warrant shares are classified as a liability on our consolidated balance sheet, remeasured to fair value at each balance sheet date and reclassified to additional paid-in capital upon vesting. In the second quarter of 2012, 750,000 warrant shares vested, and we recorded an unrealized gain of $0.9 million related to the change in the fair value of the warrant liability. We expect that the gain (loss) from the change in the fair value of the warrant liability will fluctuate with the change in our stock price.

Results of Operations

Comparison of Six Months Ended June 30, 2012 and 2011

Revenues

 

     Six Months ended June 30,  
     2012      2011      $ Change  
     (In thousands)  

Revenues:

        

Research and development programs

   $ 19,028       $ 11,491       $ 7,537   

Net product revenue

     8,073         3,649         4,424   
  

 

 

    

 

 

    

 

 

 

Total revenues

   $ 27,101       $ 15,140       $ 11,961   
  

 

 

    

 

 

    

 

 

 

Our total revenues increased by $12.0 million in the first half of 2012 compared to the same period in 2011, due primarily to a $7.5 million increase in R&D program revenue and a $4.4 million increase in Algenist ® product revenue (which launched in March 2011). Net Algenist ® product sales increased due to increased consumer demand, as well as additional product offerings.

R&D program revenues increased by $7.5 million, primarily due to a $6.2 million increase in government program revenues, and a $1.3 million increase in revenues from development agreements with strategic partners. Our government program revenues increased in the first half of 2012 compared to the same period in 2011, primarily due to the delivery of our commitment of algal oil under the Dynamic subcontract in the first quarter of 2012, the delivery of 283,906 liters of HRF-76 marine diesel under the second phase of the DOD contract in June 2012 and increased construction activities associated with our DOE grant and California Energy Commission (CEC) funding. The grant awarded by the DOE is funding up to $21.8 million of the build-out, equipment costs and certain research and development costs associated with our integrated biorefinery program in our Peoria Facility. Revenue from our DOE grant will be dependent on the timing of activities associated with the construction and operations of the integrated biorefinery. In October 2011, the CEC agreed to fund up to $1.5 million for continuing research and development at our South San Francisco pilot plant facility through early 2015. The integrated biorefinery in our Peoria Facility came on-line in June of 2012 with the production of crude oil, and we anticipate that the remaining objectives under the program will be completed as outlined in the program. In general, we expect that our R&D program revenues will continue as work with our strategic partners in our existing and new R&D agreements enable important market development activities. In the near term, we expect government programs to decrease substantially. As we enter into new agreements with strategic partners or government programs, we expect the year-to-date trends may fluctuate based on the timing of program activities.

 

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Cost of Product Revenues

 

     Six Months ended June 30,  
     2012     2011     $ Change  
     (In thousands)  

Cost of revenue:

      

Product

   $ 2,576      $ 1,038      $ 1,538   
  

 

 

   

 

 

   

 

 

 

Gross profit:

      

Product

   $ 5,497      $ 2,611      $ 2,886   
  

 

 

   

 

 

   

 

 

 

Product gross margin %

     68     72  

Cost of product revenue increased in the first half of 2012 compared to the same period in 2011 primarily due to increased sales of Algenist ® products, which launched in March 2011. Gross margins decreased in 2012 due primarily to customer sales mix in the first half of 2012 compared to the same period in 2011.

Operating Expenses

 

     Six Months Ended June 30,  
     2012      2011      $ Change  
     (In thousands)  

Operating expenses:

        

Research and development

   $ 33,742       $ 17,826       $ 15,916   

Sales, general and administrative

     27,779         17,064         10,715   
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 61,521       $ 34,890       $ 26,631   
  

 

 

    

 

 

    

 

 

 

Research and Development Expenses

Our research and development expenses increased by $15.9 million in the first half of 2012 compared to the same period in 2011, due primarily to increased program and third-party contractor costs of approximately $9.0 million, and increased personnel-related and facilities-related costs of $5.0 million and $1.6 million, respectively. Program and third-party contractor costs increased primarily due to increased manufacturing costs related to our government contracts, increased costs related to the construction of the integrated biorefinery pursuant to the DOE grant and retrofitting costs related to the Peoria Facility. Personnel-related and facilities-related costs increased as a result of headcount growth to support growth in collaborative research activities. Personnel-related costs include non-cash stock-based compensation expense of $1.9 million in the first half of 2012 compared to $1.0 million in the same period in 2011. 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, pursue process development improvements and continue maximize production efficiencies at our Peoria Facility and other manufacturing facilities.

Sales, General and Administrative Expenses

Our sales, general and administrative expenses increased by $10.7 million in the first half of 2012 compared to the same period in 2011, primarily due to increased personnel-related and facilities-related costs of $4.8 million and $0.6 million, respectively, associated with headcount growth, increased marketing and promotional costs of $3.7 million and $1.4 million of increased consulting, legal and audit costs. Personnel-related cost includes non-cash stock-based compensation of $5.9 million in the first half of 2012 compared to $4.0 million in the same period in 2011. We expect our sales, general and administrative expenses to increase in the near future as we add personnel to support the anticipated growth of our business domestically and in Brazil, as well as incur additional costs as a result of becoming a publicly-traded company.

 

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Other Income (Expense), Net

 

     Six Months Ended June 30,  
     2012     2011     $ Change  
     (In thousands)  

Other income (expense):

      

Interest and other income

   $ 1,102      $ 338      $ 764   

Interest expense

     (466     (147     319   

Loss on equity method investment

     (510     —        $ 510   

Gain (loss) from change in fair value of warrant liabilities

     851        (3,637   $ (4,488
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ 977      $ (3,446   $ (4,423
  

 

 

   

 

 

   

 

 

 

Interest and Other Income

Interest and other income increased by $0.8 million in the first half of 2012 compared to the same period in 2011, primarily due to interest income earned as a result of higher average investment balances resulting from the proceeds we received upon the closing of our initial public offering in June 2011 and the $15.0 million term loan drawn down from our Silicon Valley Bank credit facility.

Interest Expense

Interest expense increased by $0.3 million in the first half of 2012 compared to the same period in 2011, primarily due to interest expense recognized under our $15.0 million term loan outstanding with Silicon Valley Bank since May 2011. We expect interest expense to fluctuate with changes in our debt obligations.

Loss on Equity Method Investment

Loss on equity method investment increased by $0.5 million the first half of 2012, primarily consisting of our proportionate share of the net loss from Solazyme Bunge JV.

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

Loss from the change in fair value of warrant liability decreased by $4.5 million in the first half of 2012 compared to the same period in 2011 primary due to the conversion of warrants to purchase shares of our redeemable convertible preferred stock. Upon the close of our initial public offering in June 2011, all outstanding warrants to purchase shares of preferred stock were converted into shares of our common stock or common stock warrants. We recorded a non-cash loss in the first half of 2011 (as of the closing date of our initial public offering), resulting from the change in fair value of the warrants. In the second quarter of 2011, we granted Bunge Limited a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $13.50 per share. The warrant vests in three separate tranches, each contingent upon the achievement of specific performance-based milestones related to the formation and operations of Solazyme Bunge JV. The unvested warrant shares are classified as a liability on our consolidated balance sheet, remeasured to fair value at each balance sheet date and reclassified to additional paid-in capital upon vesting. In the first half of 2012, 750,000 warrant shares vested, and we recorded an unrealized gain of $0.9 million related to the change in the fair value of the warrant liability. We expect that gain (loss) from the change in fair value of the warrent liability will fluctuate with the change in our stock price.

 

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Liquidity and Capital Resources

 

     June 30,
2012
     December 31,
2011
 
     (In thousands)  

Cash and cash equivalents

   $ 17,456       $ 28,780   

Marketable securities

   $ 178,023       $ 214,944   

Cash, cash equivalents and marketable securities decreased by $48.2 million in the six months ended June 30, 2012, primarily due to cash used in operating activities of $37.0 million, $8.2 million of property and equipment purchases and $3.6 million of repayments under loan agreements, partially offset by $1.8 million of proceeds received from the issuance of common stock pursuant to our equity plans.

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

 

     Six Months Ended June 30,  
             2012                     2011          
     (In thousands)  

Net cash used in operating activities

   $ (36,987   $ (20,427

Net cash provided by (used in) investing activities

   $ 27,146      $ (29,873

Net cash provided by (used in) financing activities

   $ (1,841   $ 215,147   

Sources and Uses of Capital

Since our inception, we have incurred significant net losses, and, as of June 30, 2012, we had an accumulated deficit of $142.8 million. We anticipate that we will continue to incur net losses as we continue our scale-up activities, support commercialization activities for our products and expand our research and development activities. In addition, we may acquire additional manufacturing facilities, expand or build-out our current manufacturing facilities and/or build additional manufacturing facilities. We are unable to predict the extent of any future losses or when we will become profitable, if at all. We expect to continue making significant investments in research and development and manufacturing, and expect selling, general and administrative expenses to increase as a result of operating as a publicly-traded company. As a result, we will need to generate significant revenues from product sales, collaborative research and development funding and government program activities, licensing activities fees and other revenue arrangements to achieve profitability.

In January 2010, we obtained a grant from the DOE to receive up to $21.8 million for reimbursement of expenses incurred towards building, operating, and optimizing a pilot-scale integrated biorefinery, which has allowed us to develop integrated US-based production capabilities for renewable fuels derived from microalgae at the Peoria Facility. Under the terms of the grant, we are responsible for funding an additional $6.3 million.

We purchased the Peoria Facility in May 2011. We began fermentation operations in the fourth quarter of 2011 and successfully commissioned our integrated biorefinery in June 2012, funded in part by the DOE grant described above. In connection with the closing of the Peoria Facility acquisition, we entered into a promissory note, mortgage and security agreement with the seller in the initial amount of $5.5 million. The promissory note is interest free with two lump sum payments, the first of which was paid in March 2012, and the second payment is due on March 1, 2013. The note is secured by the real and personal property acquired from the seller. The purchase agreement does 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.

In April 2012, we entered into the Solazyme Bunge JV, which will be jointly capitalized by us and Bunge to construct and operate an oil production facility in Brazil that will utilize our proprietary technology to produce tailored oils from sugar feedstock provided by Bunge. In July 2012, we contributed $10.0 million in capital to the Solazyme Bunge JV, and we expect our total capital contributions to this project will not exceed $72.5 million. We expect the Solazyme Bunge JV will seek debt financing to fund a significant portion of the capital to construct a production facility, which would reduce the capital requirements funded directly by us and Bunge. We expect to scale up additional manufacturing capacity in a capital-efficient manner by signing additional agreements whereby our partners will invest capital and operational resources in building manufacturing capacity, while also providing access to feedstock. We are currently negotiating with additional potential feedstock partners in Latin America and the United States to co-locate oil production at their mills. Depending on the specifics of each partner discussion, we may choose to deploy some portion of the equity capital required to construct additional production facilities, as such capital contribution may influence the scope and timing of our relationship. We expect to evaluate the optimal amount of capital expenditures that we agree to fund on a case-by-case basis. These events may require us to access additional capital through equity or debt offerings. If we are unable to access additional capital, our growth may be limited due to the inability to build out additional manufacturing capacity.

 

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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 was accessible 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 are to be maintained in accounts with the bank and its affiliates. This minimum balance requirement is considered a compensating balance arrangement, and is classified in the condensed consolidated balance sheet as cash and cash equivalents and/or marketable securities as this minimum balance is not restricted as to withdrawal. Interest is charged under the 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 an 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 payable 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 loan 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 including certain restrictions on borrowing. If an event of default occurs and continues, the bank may declare all outstanding obligations under the facility 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 term loan portion of the facility and in December 2011 we began to repay principal payments on this loan.

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

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

Cash Flows from Operating Activities

Cash used in operating activities of $37.0 million in the six months ended June 30, 2012 reflect a loss of $36.0 million, and a net change of $11.4 million in our net operating assets and liabilities, partially offset by aggregate non-cash charges of $10.5 million. Non-cash charges primarily included $7.8 million of stock-based compensation, $1.5 million of net amortization of premiums on marketable securities and $1.5 million of depreciation and amortization. The net change used in our operating assets and liabilities was primarily a result of increases in our net accounts receivables and unbilled revenue of $3.0 million, increases in inventories of $1.9 million, decreased deferred revenue of $3.0 million and decreases in accounts payable and accrued liabilities of $4.1 million, partially offset by decreases in prepaid expenses and other current assets of $0.7 million. Accounts receivables and unbilled revenues increased primarily due to increased sales of Algenist ® product and increased R&D program revenues. Inventories increased due to increased production of Algenist ® product to meet higher customer demand. Deferred revenue decreased primarily due to timing of payments received on R&D programs. Accounts payable and accrued liabilities decreased primarily to payments made to third-party contract manufacturers and employee bonus payments. Prepaid expense and other current assets decreased due primarily due to settlement of receivables from our Solazyme Roquette JV and decreased interest receivable on a lower average cash, cash equivalents and marketable securities balances.

Cash used in operating activities of $20.4 million in the six months ended June 30, 2011 reflect a loss of $24.2 million, a net change of $6.0 million in our net operating assets and liabilities, partially offset by aggregate non-cash charges of $9.8 million. The net change used in our operating assets and liabilities was primarily a result of increases in our inventories of $2.4 million primarily due to production of Algenist ® product and increases in our prepaid and other assets of $2.3 million primarily from our receivable from our JV. Accounts receivable increased by $1.1 million due to revenues earned from research and development programs and sales of Algenist ® products while our accounts payable balance decreased by $1.8 million as we paid some third party contractors in the six months ended June 30, 2011. These changes were partially offset by increases in accrued expenses of $1.4 million related to suppliers and contractors. Non-cash charges primarily included $5.0 million of stock-based compensation, $3.6 million related to the change in fair value of our warrant liability and $0.7 million of depreciation and amortization.

 

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Cash Flows from Investing Activities

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

In the six months ended June 30, 2011, cash used in investing activities was $29.9 million, as a result of $20.0 million of net marketable securities purchases, and $10.1 million of capital expenditures related primarily to the purchase of the Peoria Facility.

Cash Flows from Financing Activities

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

In the six months ended June 30, 2011, cash provided by financing activities was $215.1 million, primarily due to the net proceeds of $198.3 million received from our initial public offering, after deducting underwriting discounts and commissions and other offering costs paid during the six months ended June 30, 2011, $1.6 million received on promissory notes to stockholders and a $15.0 million term loan received from Silicon Valley Bank.

Contractual Obligations and Commitments

The following is a summary of our contractual obligations and commitments as of June 30, 2012:

 

     Total      2012      2013      2014      2015      2016 and
beyond
 
     (In thousands)  

Principal payments on long term debt

   $ 16,779       $ 1,797       $ 7,350       $ 3,921       $ 3,711       $ —     

Interest payments on long-term debt, fixed rate

     1,207         320         493         299         95         —     

Operating leases

     6,770         1,264         2,601         2,681         224         —     

Purchase obligations

     65         65         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 24,821       $ 3,446       $ 10,444       $ 6,901       $ 4,030       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

This table does not reflect (1) a lease agreement entered into in May 2011 for facility space in Brazil; the lease term is five years, commencing on April 1, 2011 and expiring on April 1, 2016; the rent is 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, (2) that portion of the expenses that we expect to incur, up to $1.0 million from April 2012 through 2013, in connection with research activities under the DOE program for which we will not be reimbursed and (3) our agreement to guarantee repayment of a portion, up to a maximum amount, of 50% of the aggregate draw-downs from the Roquette Loan, if and when drawn down, plus a portion of the associated fees, interest and expenses.

We currently lease approximately 96,000 square feet of office and laboratory space in South San Francisco, California.

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 condensed consolidated balance sheets.

Recent Accounting Pronouncements

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

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to financial market risks, primarily changes in interest rates, currency exchange rates and commodity prices. All of the potential changes noted below are based on sensitivity analyses performed on our financial positions as of June 30, 2012. Actual results may differ materially.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our outstanding debt obligations. We generally invest our cash in investments with short maturities or with frequent interest reset terms. Accordingly, our interest income fluctuates with short-term market conditions. As of June 30, 2012, our investment portfolio consisted primarily of corporate debt obligations, US government agency securities, asset-backed and mortgaged-backed securities, commercial paper and money market funds, which are held for working capital purposes. We believe we do not have material exposure to changes in fair value as a result of changes in interest rates. Our marketable securities were comprised of fixed-term securities as of June 30, 2012. Due to the short-term nature of these instruments, we do not believe that there would be a significant negative impact to our condensed consolidated financial position or results of operations as a result of interest rate fluctuations in the financial markets. Our outstanding debt as of June 30, 2012 consists of fixed-rate debt, and therefore is not subject to fluctuations in market interest rates.

Foreign Currency Risk

Our operations include manufacturing and sales activities primarily in the United States, as well as research activities primarily in the United States. We are actively expanding outside the United States, in particular through our Solazyme Roquette JV with Roquette, into Europe. We also launched the Algenist ® product line in Europe in March 2011 and conduct operations in Brazil through our wholly-owned subsidiary and our ownership in the Solazyme Bunge JV. As we expand internationally, our results of operations and cash flows will become increasingly subject to fluctuations due to changes in foreign currency exchange rates. For example, our operations in Brazil and / or potential expansion elsewhere in Latin America or increasing Euro-denominated product sales to European distributors, will result in our use of currencies other than the 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.

 

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Item 4. Controls and Procedures.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired objectives. In reaching a reasonable level of assurance, management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2012 at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

PART II: OTHER INFORMATION

 

Item 1. Legal Proceedings.

From time to time, we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any material legal proceedings. We may, however, be involved in material legal proceedings in the future. Such matters are subject to uncertainty and there can be no assurance that such legal proceedings will not have a material adverse effect on our business, results of operations, financial position or cash flows.

 

Item 1A. Risk Factors.

You should carefully consider the risks described below before investing in our publicly-traded securities. Additional risks not presently known to us or that 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 Report, including our condensed 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 chemicals and fuels markets, only a small portion of our revenues to date has been generated from market development activities. We have not yet commercialized any of our oils in the chemicals market.

We have incurred substantial net losses since our inception, including net loss attributable to our common stockholders of $36.0 million during the six months ended June 30, 2012. 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 June 30, 2012, we had an accumulated deficit of $142.8 million. For the foreseeable future, we expect to incur additional costs and expenses related to the continued development and expansion of our business, including research and development, the build-out and operation of our Peoria Facility, the construction and operation of the Solazyme Bunge JV production facility (described below) 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 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:

 

   

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

 

   

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

 

   

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

 

   

our ability to establish and maintain successful relationships with 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;

 

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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 (other than as described below), such as sugarcane-based sucrose and corn-based dextrose, for the production of our products at prevailing market prices. We are currently in discussions with multiple potential feedstock partners.

Except for the supply of feedstock to Solazyme Roquette Nutritionals, LLC (Solazyme Roquette Nutritionals, or the Solazyme Roquette JV) for nutrition products by our partner, Roquette Frères, S.A. (Roquette) and to Solazyme Bunge Produtos Renováveis Ltda. (Solazyme Bunge Renewable Oils or the Solazyme Bunge JV) for triglyceride oil products for sale and use in Brazil by our partner, Bunge Global Innovation, LLC and certain of its affiliates (Bunge), pursuant to joint venture arrangements, 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 chemicals and fuels markets will require large volumes of feedstock and we may not be able to contract with feedstock producers to secure sufficient quantities of feedstock at reasonable costs or at all. If we cannot access feedstock in the quantities and at prices we need, we may not be able to successfully commercialize our chemicals and fuels products and our business will suffer. We are currently negotiating with multiple potential feedstock partners in Latin America and the United States. We cannot be sure that we will successfully execute additional long-term feedstock contracts on terms favorable to us, or at all. If we do not succeed in entering into long-term supply contracts or otherwise procure feedstock as and when needed, our revenues and profit margins may fluctuate from period to period as we will remain subject to prevailing market prices.

Although our plan is to enter into partnerships, such as the Solazyme Bunge JV, 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 or falling commodities and equities markets, and availability of credit to producers. Crop yields and sugar content depend on weather conditions such as rainfall and temperature. Variable weather conditions have historically caused volatility in feedstock crop prices due to crop failures or reduced harvests. For example, excessive rainfall can adversely affect the supply of feedstock available for the production of our products by reducing the sucrose content of feedstock and limiting growers’ ability to harvest. Crop disease and pestilence can also occur from time to time and can adversely affect feedstock crop growth, potentially rendering useless or unusable all or a substantial portion of affected harvests. The limited amount of time during which feedstock crops keep their sugar content after harvest poses a risk of spoilage. Also, the fact that many feedstock crops are not themselves traded commodities limits our ability to substitute supply in the event of such an occurrence. If our ability to obtain feedstock crops is adversely affected by these or other conditions, our ability to produce our products will be impaired, and our business will be adversely affected.

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

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

In April 2012, we entered into a Joint Venture Agreement with Bunge, forming Solazyme Bunge Produtos Renováveis Ltda., a Brazilian company doing business as Solazyme Bunge Renewable Oils (the Solazyme Bunge JV). The Solazyme Bunge JV intends to produce triglyceride oils in Brazil for sale into the Brazilian market using our proprietary technology and sugarcane feedstock provided by Bunge. The Solazyme Bunge JV production facility will be located adjacent to a sugarcane processing mill in Brazil that is owned by Bunge. Construction of the Solazyme Bunge JV’s production facility began in June 2012 and is expected to be completed in 2013. In addition, in May 2011, we entered a joint development agreement with Bunge that advances our work on Brazilian sugarcane feedstocks and extends through May 2013. In May

 

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2011, we entered a Warrant Agreement, amended in August 2011, with Bunge Limited that vests upon the successful completion of milestones that ultimately target the completion of construction of the Solazyme Bunge JV facility with 100,000 metric tons of output oil in 2013. We intend to continue to expand our manufacturing capacity by entering into additional agreements with feedstock producers that require them to invest some or all of the capital needed to build new production facilities to produce our oils. In return, we expect to share in profits anticipated to be realized from the sale of these products. We are currently negotiating with additional potential feedstock partners in Latin America and the United States. In 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.

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

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

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

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

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

Two of the significant drivers of our production costs are the level of productivity and conversion yield of our microalgae strains. Productivity is principally a function of the amount of oil that can be obtained from a given volume over a particular time period. Conversion yield refers to the amount of the desired oil that can be produced from a fixed amount of feedstock. We may not be able to 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 do not have experience constructing or managing large, commercial-scale manufacturing facilities. We may not have identified all of the factors that could affect our manufacturing processes. Our technology may not perform as expected when applied at large commercial scale, or we may encounter operational challenges for which we are unable to identify a workable solution. For example, contamination in the production process, problems with plant utilities, human error, issues arising from process modifications to reduce costs and adjust product specifications, and other similar challenges could decrease process efficiency, create delays and increase our costs. To date we have employed our technology using fermenters with a capacity of up to 128,000 liters, but will need to reproduce our commercial productivity and yields using fermenters with a capacity of approximately 625,000 liters. We may not be able to scale up our production in a timely manner, on commercially reasonable terms, or at all. If we are unable to manufacture products at a large commercial scale, our ability to commercialize our technology will be adversely affected, and, with respect to any products that we do bring to market, we may not be able to achieve and maintain an acceptable production cost profile, which would adversely affect our ability to reach, maintain and increase the profitability of our business.

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

Other than our Peoria Facility, we do not own facilities that can produce and process our products other than at small scale. As such, we rely, and we expect to continue to rely, at least partially, on third parties (including partners and contract manufacturers) for the production and processing of our products. To date, we have entered two manufacturing arrangements: the manufacture of nutrition products for Solazyme

 

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Roquette Nutritionals by our partner, Roquette, and the future manufacture of certain triglyceride oil products by the Solazyme Bunge JV, in each case pursuant to joint venture arrangements. 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 and process our products, initially the partners will be unfamiliar with our technology and production processes. We cannot be sure that the partners will have or develop the operational expertise needed to run the additional equipment and processes required to manufacture our products. Further, we may have limited control over the amount or timing of resources that any partner is able or willing to devote to production and processing of our products.

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

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

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. The Solazyme Bunge JV is currently constructing and intends to operate an oil production facility adjacent to Bunge’s Moema sugarcane mill in Brazil. We expect construction to be complete in 2013. The initial production facility is expected to have a name plate capacity of 100,000 MT/year of oil. We expect our Solazyme Roquette Nutritionals joint venture will have access to commercial plants that Roquette has agreed to construct. We will need to construct, or otherwise secure access to, additional capacity significantly greater than what we are in the process of building as we continue to commercialize our products.

We aim to commence production of oils for the chemicals and fuels markets at the Solazyme Bunge JV facility in 2013, and we expect to bring online 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 target markets is fundamental to the success of our business. We currently have joint venture 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.

 

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In the chemicals and fuels markets, we have entered into a joint venture arrangement with Bunge that will focus on the production of triglyceride oils in Brazil for sale in the Brazilian market, and development agreements with Bunge, Chevron U.S.A. Inc., through its division Chevron Technology Ventures (Chevron), Unilever and The Dow Chemical Company (Dow). We have entered into a joint venture with Roquette in connection with our nutrition business. In the skin and personal care market, we have entered into arrangements with Sephora S.A. (Sephora EMEA), Sephora USA, Inc. (Sephora Americas), Sephora Canada, QVC, Inc. (QVC), J.C. Penney Corporation, Inc., The Shopping Channel and Space NK. There can be no guarantee that we can successfully manage these strategic collaborations. Under our agreement with Sephora EMEA, 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 undergoes a change of control or were to otherwise assign the rights or obligations under any of our agreements to a competitor of ours or to a third party who is not willing to work with us on the same terms or commit the same resources as the current partner.

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

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

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

 

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

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

Our ability to generate value from the Solazyme Roquette JV will depend on, among other things, our ability to work cooperatively with Roquette and Solazyme Roquette Nutritionals for the commercialization of the Solazyme Roquette JV’s products. We may not be able to do so. For example, under the joint venture, Roquette personnel and facilities will be used to produce nutrition products using our licensed technology. Roquette does not have previous experience working with our technology, and we cannot be sure that the Solazyme Roquette JV will be successful in 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 Solazyme Roquette JV’s products or cause the dissolution of the Solazyme Roquette JV. For example, the joint venture agreement contemplates that Roquette will construct and own two Solazyme Roquette JV-dedicated facilities that are expected to have aggregate capacity of approximately 5,000 metric tons per year. In addition, subject to approval of the board of directors of the Solazyme Roquette JV to enter into Phase 3, Roquette has committed to fund a Solazyme Roquette JV-owned facility in Phase 3 that is expected to have capacity of approximately 50,000 metric tons per year. However, because the four-person board of directors of the Solazyme Roquette JV includes two Roquette designees, the decision to proceed with Phase 3 will functionally require Roquette’s approval. If we are unable to obtain the approval of the board of directors of the Solazyme Roquette JV, our ability to commercialize the Solazyme Roquette JV’s nutrition products and the financial performance of the Solazyme Roquette JV will suffer.

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

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

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

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

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

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

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

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

We expect that our customers will include large companies that sell skin and personal care products, food products and chemical products, as well as large users of oils for fuels. Because we have only recently begun to commercialize our skin and personal care products and, through Solazyme Roquette Nutritionals, nutrition products, and are still in the process of developing our products for the chemicals and fuels markets, we have limited experience operating in our customers’ industries and interacting with the customers that we intend to target. Developing the necessary expertise may take longer than we expect and will require that we expand and improve our

 

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

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

Although we often seek to limit our product liability in our contracts, such limits may not be enforceable or may be subject to exceptions. Our current product liability and umbrella insurance for our business may be inadequate to cover all potential liability claims. Insurance coverage is expensive and may be difficult to obtain. Also, insurance coverage may not be available in the future on acceptable terms and may not be sufficient to cover potential claims. We cannot be sure that our contract manufacturers or manufacturing partners who produce our ultimate products will have adequate insurance coverage to cover against potential claims. If we experience a large insured loss, it 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.

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

 

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difficulties and costs of staffing and managing foreign operations.

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

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

We currently incur some costs and expenses in Euros and Brazilian Reais and expect in the future to incur additional expenses in these and other foreign currencies, and also derive a portion of our revenues in the local currencies of customers throughout the world. As a result, our revenues and results of operations are subject to foreign exchange fluctuations, which we may not be able to manage successfully. During the past few decades, the Brazilian currency in particular has faced frequent and substantial exchange rate fluctuations in relation to the US dollar and other foreign currencies. 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 appreciated 25% against the US dollar. In 2010, the Real appreciated 5% against the US dollar, and in 2011, the Real depreciated 11% against the US dollar. As a result of the European sovereign debt crisis, the Euro depreciated 7% against the US dollar in 2010 and 3% against the US dollar in 2011. There can be no assurance that the Real or the Euro will not significantly appreciate or depreciate against the US dollar in the future.

We bear the risk that the rate of inflation in the foreign countries where we incur costs and expenses or the decline in value of the US dollar compared to those foreign currencies will increase our costs as expressed in US dollars. Future measures by foreign governments to control inflation, including interest rate adjustments, intervention in the foreign exchange market and changes to the fixed value of their currencies, may trigger increases in inflation. We may not be able to adjust the prices of our products to offset the effects of inflation on our cost structure, which could increase our costs and reduce our net operating margins. If we do not successfully manage these risks through hedging or other mechanisms, our revenues and results of operations could be adversely affected.

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

Our ability to 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

 

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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.

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

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

Our chemical products may be subject to government regulation in our target markets. In the United States, the EPA administers the Toxic Substances Control Act (TSCA), which regulates the commercial registration, distribution, and use of chemicals. TSCA will require us to obtain and comply with the Microbial Commercial Activity Notice (MCAN) process to manufacture and distribute products made from our microalgae strains. To date, we have filed an MCAN for one of 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 (PMN) must be filed with the EPA for a review period of up to 90 days including extensions. We filed a PMN for oil derived from one of our microalgae strains, the review of which was completed by the EPA in July 2012. 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 chemicals we would like to make on the TSCA registry, resulting in delays or significant increases in testing requirements. A similar program exists in the European Union, called REACH (Registration, Evaluation, Authorization, and Restriction of Chemical Substances). We are required to register some of our products with the European Commission, and this process could cause delays or significant costs. We have determined that some of our algal oils are exempt from REACH registration requirements. To the extent that other geographies, such as Brazil, may rely on the TSCA or REACH for chemical registration in their geographies, delays with the US or European authorities may subsequently delay entry into these markets as well. Furthermore, other geographies may have their own chemical inventory requirements, which may delay entry into these markets, irrespective of US or European approval.

Our nutrition products are subject to regulation by various government agencies, including the US Food and Drug Administration (FDA), state and local agencies and similar agencies outside the United States. Food ingredients and ingredients used in animal feed are regulated either as food additives or as substances generally recognized as safe, or GRAS. A substance can be listed or affirmed as GRAS by the FDA or self-affirmed by its manufacturer upon determination that independent qualified experts would generally agree that the substance is GRAS for a particular use. We have submitted to the FDA our GRAS Notice of Determination for algal oil and received notification from the FDA in June 2012 that it had no further questions. Our GRAS Notice of Determination for algal flour has been submitted to the FDA. We do not expect any objections upon their review. However, there can be no assurance that we will not receive any objections from the FDA 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 costs, delays, capital expenditures and other financial obligations that could adversely affect our business or financial results.

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

 

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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 United States 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 send hazardous materials, may result in liability for us under environmental laws and regulations.

Our business and operations will be affected by other new environmental, health and safety laws and regulations, which may affect our research and development 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 United States and in a number of other countries, these regulations and policies have been modified in the past and may be modified again in the future. The elimination of, or any reduction in, mandated requirements for fuel alternatives and additives to gasoline may cause demand for biofuels to decline and deter investment in the research and development of renewable fuels. In addition, the US Congress has passed legislation that extends tax credits to blenders of certain renewable fuel products. However, there is no assurance that this or any other favorable legislation will remain in place. For example, the biodiesel tax credit expired in December 2009, and its extension was not approved until March 2010. Any reduction in, phasing out or elimination of existing tax credits, subsidies and other incentives in the United States and foreign markets for renewable fuels, or any inability of our customers to access such credits, subsidies and incentives, may adversely affect demand for our products and increase the overall cost of commercialization of our renewable fuels, which would adversely affect our business. In addition, market uncertainty regarding future policies may also affect our ability to develop new renewable products or to license our technologies to third parties and to sell products to end customers. Any inability to address these requirements and any regulatory or policy changes could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

 

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

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

We expect to encounter regulations of microorganisms designed using targeted recombinant technology in most if not all of the countries in which we may seek to establish manufacturing operations, and the scope and nature of these regulations will likely be different from country to country. For example, in the United States, 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 chemicals and fuels 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.

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

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

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

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

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

 

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

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

We expect that our nutrition products will compete with providers in both the specialty and mass food ingredient markets. Many of these companies, such as 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 (which was recently 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. We will need to continue to devote substantial resources to the marketing of our products and there can be no assurance that we will be successful.

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

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

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

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

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

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

 

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Risks Related to Our Intellectual Property

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

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

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

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 effect 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 microbe strains. If our proprietary microbe strains were stolen,

 

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misappropriated or reverse engineered, they could be used by other parties who may be able to use our strains for their own commercial gain. It is difficult to prevent misappropriation and subsequent reverse engineering. In the event that our proprietary microbe strains are misappropriated, it could be difficult for us to challenge the misappropriation and prevent reverse engineering, especially in countries with limited legal and intellectual property protection.

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

In addition to patents, we rely on confidentiality agreements to protect our technical know-how and other proprietary information. Confidentiality agreements are used, for example, when we talk to potential strategic partners. In addition, each of our employees signed a confidentiality agreement upon joining our company. Nevertheless, there can be no guarantee that an employee or an outside party will not make an unauthorized disclosure 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 sure 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 that are infringed by our products, manufacturing processes or other aspects of our business.

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

If a 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 third party. In addition, we may be required to pay substantial damage awards to the third party, including treble or enhanced damages if we are found to have willfully infringed the third party’s intellectual property rights. We may also be required to obtain a license from the third party in order to continue manufacturing and/or marketing the products that were found to infringe. It is possible that the necessary license will not be available to us on commercially acceptable terms, or at all. This could limit our ability to competitively commercialize some or all of our products.

 

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

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

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

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

Risks Related to Our Finances and Capital Requirements

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

increases in price or decreases in availability of feedstocks;

 

   

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

 

   

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

 

   

fluctuations in foreign currency exchange rates;

 

   

seasonal production and sale of our products;

 

   

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

 

   

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

 

   

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

 

   

departure of key employees;

 

   

business interruptions, such as earthquakes and other natural disasters;

 

   

our ability to integrate businesses that we may acquire;

 

   

risks associated with the international aspects of our business; and

 

   

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

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

 

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

To date, we have financed our operations primarily through our initial public offering, completed in June 2011, private placements of our equity securities, government grants and funding from strategic partners. In 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 for new production facilities. Some of our previous funding has come from government grants; however, our future ability to obtain government grants is uncertain due to the competitive bid process and other factors.

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

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

We have been awarded an approximately $21.8 million “Integrated Bio-Refinery” grant from the US Department of Energy (DOE). The terms of this grant make the funds available to us to develop US-based production capabilities for renewable fuels derived from microalgae 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 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 NASDAQ 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

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 Quarterly Report on Form 10-Q.

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

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

As of June 30, 2012 our executive officers, directors and beneficial holders of 5% or more of our outstanding stock beneficially owned approximately 45.2% of our common stock, including shares subject to repurchase. As a result, these stockholders, acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions. The interests of this group of stockholders may not always coincide with the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders.

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

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

 

   

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

 

   

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

 

   

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

 

   

prohibiting stockholder action by written consent;

 

   

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

 

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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 increases our expenses and administrative burden.

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

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

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

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

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

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

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

 

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

 

(a) Sales of Unregistered Securities

None.

 

(b) Use of Proceeds from Public Offering of Common Stock

On June 2, 2011, we closed our initial public offering. We sold 12,621,250 shares of common stock at a price to the public of $18.00 per share, which included 600,000 shares offered by selling stockholders and 1,646,250 shares that the underwriters had the option to purchase to cover over-allotments. This offer and sale of our common stock in the initial public offering were registered under the Securities Act pursuant to a registration statement on Form S-1 (File No. 333-172790), which was declared effective by the SEC on May 26, 2011. There have been no material differences between the actual use of proceeds and intended use of proceeds as originally described in our final prospectus filed with the SEC pursuant to Rule 424(b).

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Mine Safety Disclosures.

None.

 

Item 5. Other Information.

None.

 

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Item 6. Exhibits.

 

Exhibit

Number

  

Description

        Previously Filed            
      Form    File No.    Filing Date    Exhibit    Filed
Herewith
 
10.1*    Joint Venture Agreement entered into as of March 30, 2012 by and among Bunge Global Innovation, LLC, Solazyme, Inc. and certain other parties                  X   
10.2*    Solazyme Development Agreement entered into as of March 30, 2012 by and among Solazyme Bunge Renováveis Ltda., Solazyme, Inc. and certain other parties                  X   
31.1    Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002                  X   
31.2    Certification of Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002                  X   
32.1§    Certification of the Chief Executive Officer and Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002                  X   
101†    The following materials from Solazyme, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows, (iv) Condensed Consolidated Statements of Comprehensive Loss and (v) Notes to the Condensed Consolidated Financial Statements                  X   

 

* Confidential treatment has been granted or requested with respect to portions of the exhibit. A complete copy of the agreement, including the redacted items, has been filed with the SEC.
§ This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act of 1934, as amended.
Pursuant to Rule 406T of Regulation S-T, the interactive files on Exhibit 101 hereto are deemed not “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURES

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

Solazyme, Inc.

 

By:

 

/s/    T YLER W. P AINTER

 

Tyler W. Painter

Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: August 9, 2012

 

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Exhibit 10.1

JOINT VENTURE AGREEMENT

This Joint Venture Agreement (“ Agreement ”) is entered into as of March 30, 2012 (the “ Effective Date ”), by and among, Bunge Global Innovation, LLC, a Delaware limited liability company, with a place of business at 50 Main Street, White Plains, NY 10606 (“ BGI ”), Bunge Coöperatief UA, a Dutch cooperative, with a principal place of business at Weena 320, 3012 NJ, Rotterdam, The Netherlands (“ Bunge Netherlands ”), and Bunge Açúcar Bioenergia Ltda., a Brazilian limitada, with a principal place of business at Av. Maria Coelho Aguiar, 215, Bloco A, 5 th floor, São Paulo/SP, Brazil (“ Bunge Brazil ”, together with BGI, Bunge Netherlands and its Affiliates, collectively, the “ Bunge Group ”); Solazyme, Inc., a Delaware company with a principal place of business at 225 Gateway Boulevard, South San Francisco, CA 94080 (“ Solazyme, Inc. ”) and Solazyme Brasil Óleos Renováveis e Bioprodutos Ltda., a Brazilian limitada with a principal place of business at Avenida Pierre Simon de Laplace, 751 – Campinas/SP, CEP 13063-32, Brazil (“ Solazyme Brazil ”, together with Solazyme, Inc. and its Affiliates, collectively, the “ Solazyme Group ”); and Solazyme Bunge Renewable Oils Coöperatief U.A., a Dutch cooperative, with a principal place of business at 225 Gateway Boulevard, South San Francisco, CA 94080 (the “ Company ”) and Solazyme Bunge Produtos Renováveis Ltda., a Brazilian limitada with a principal place of business at Fazenda Moema, without number, Zona Rural, Orindiúva, São Paulo, 15480-000, Brazil (“ SB Oils ”, together with the Company, the “ JV Companies ”), and Solazyme Bunge Renewable Oils II Coöperatief U.A., a Dutch cooperative, with a principal place of business at 225 Gateway Boulevard, South San Francisco, CA 94080 (the “ SBO Holdco ”).

W I T N E S S E T H :

WHEREAS , the Bunge Group is a global processor of soybeans, rapeseed, canola, sunflower seeds, corn, wheat, sugar cane and other agricultural commodities used to make products and ingredients with numerous applications;

WHEREAS , the Solazyme Group is engaged in the renewable oil and bioproducts business, with expertise and intellectual property in the area of the use of microbes as biocatalysts for converting carbon sources into lipids in non-photosynthetic processes;

WHEREAS , certain members of the Bunge Group have access to feedstock, such as sugar cane, that could be useful in conjunction with the Solazyme Group’s microbial biotechnology to develop and commercialize Products manufactured in the Manufacturing Territory for use in the Field in the Use Territory;

WHEREAS , Solazyme, Inc. and BGI intend to engage in joint research and development to explore the feasibility of the production of lipid rich biomass from Brazilian sugar cane feedstock;

WHEREAS , on the date hereof, certain members of the Solazyme Group and certain members of the Bunge Group shall enter into this Agreement and certain ancillary agreements to establish, through the JV Companies, a joint venture to construct a production facility (the “ Initial Plant ”), operate the Initial Plant and produce Products in the Manufacturing Territory for use in the Field in the Use Territory (the “ Joint Venture ”); and

 

1


WHEREAS , subject to the terms and conditions set forth herein, the Parties wish to enter into the Joint Venture and this Agreement to set forth certain agreements amongst the Parties in connection with the JV Companies and the operation of the Joint Venture.

NOW, THEREFORE , in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, do hereby agree as follows:

ARTICLE 1

DEFINITIONS AND INTERPRETATION

1.1 Defined Terms . Capitalized terms used in this Agreement shall have the meanings specified herein or in Exhibit A .

1.2 Interpretation . Whenever the context requires, any pronoun shall include the corresponding masculine, feminine and neuter forms. Terms defined in the singular shall have the same meanings when used in the plural and vice versa . The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” References to statutes or regulations include all statutory or regulatory provisions consolidating, amending or replacing the statute or regulation referred to herein. All references to “ Party ” and “ Parties ” shall be deemed references to parties to this Agreement. Except as specifically otherwise provided in this Agreement, a reference to an Article, Section or Exhibit is a reference to an Article, Section or Exhibit of this Agreement, and the terms “hereof,” “herein,” and other like terms refer to this Agreement as a whole, including the Exhibits. The term “or” is used in its inclusive sense (“and/or”). The terms “ Dollars ” and “ $ ” shall mean United States Dollars. The terms “ Reais ” and “ R$ ” shall mean Brazilian Reais. The term “ MT ” shall mean metric tonnes. In the event of a conflict between any provision of the articles of association of the Company and any provision of this Agreement, each Party agrees to cause the provision of the articles of association of the Company to be amended to conform to the relevant provision of this Agreement to the fullest extent permitted by Applicable Law.

1.3 Headings . The division of this Agreement into Articles and Sections and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement.

ARTICLE 2

GENERAL PROVISIONS

2.1 Formation of the Joint Venture . The Bunge Group and the Solazyme Group desire to form the Joint Venture to combine certain capital, technological expertise and Technology of the Solazyme Group with certain capital, manufacturing expertise and access to feedstock of the Bunge Group in order to develop and manufacture Products in the Manufacturing Territory for use in the Field in the Use Territory. In anticipation of the formation of the Joint Venture, the Bunge Group has obtained control of SB Oils to conduct the Brazilian operations of the Joint Venture. The Company is being formed concurrently with the establishment of the Joint Venture to (i) conduct the non-Brazil operations of the Joint Venture and (ii) own substantially all of the equity interests of SB Oils.

 

   2   

CONFIDENTIAL


2.2 Purpose of the Joint Venture . The Joint Venture is being established for the purpose of:

(a) Manufacturing Products in the Manufacturing Territory for use in the Field in the Use Territory, including the distribution, sales, marketing and support of Products in and only for use in the Field in the Use Territory (the “ Business ”); and

(b) Engaging in such other business as the equity holders of the Company may determine. The terms of any exclusive relationship or non-compete that may be applicable to any such other business shall be as mutually agreed among the equity holders of the Company at the time of their approval of entry into such other business. The Articles of Association of SB Oils shall also be amended if and when the quotaholders decide that the Company and SB Oils should engage in other businesses.

2.3 Name . The Business shall be conducted under the name “Solazyme Bunge Renewable Oils” and such other names as the Board may from time to time determine to be necessary or advisable.

2.4 Places of Business of the Joint Venture . The principal place of business of the Company shall be 225 Gateway Boulevard, South San Francisco, CA 94080, or such other place as the Board may from time to time determine. The principal place of business of SB Oils shall be the City of Orindiúva, State of São Paulo, Brazil, or such other place as SB Oils Officers may from time to time determine. The JV Companies may have such offices as their respective governing boards may from time to time deem necessary or advisable.

2.5 No Liability to Third Parties . The debts, obligations and liabilities of either JV Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of such JV Company, and no other Party shall be obligated for any such debt, obligation or liability of such JV Company solely by reason of being a party to this Agreement or an equity holder of a JV Company.

2.6 Intent . It is the intent of the Parties that the Company be operated in a manner consistent with its treatment as a partnership for U.S. federal and state income tax purposes and SB Oils be operated in a manner consistent with its treatment as a partnership or a disregarded entity for U.S. federal and state income tax purposes. The JV Companies shall each take all appropriate actions to ensure that the JV Companies and any of their subsidiaries shall be treated as partnerships or disregarded entities for U.S. federal and state income tax purposes, including the making of available tax elections. No election may be made to treat the JV Companies or any of their subsidiaries as a corporation for U.S. federal or state income tax purposes without the written consent of Solazyme, Inc. and BGI. It is also the intent of the Parties that neither JV Company be operated or treated as a “partnership” for purposes of section 303 of the United States Bankruptcy Code, or for any purposes other than tax purposes. None of the Parties, including the JV Companies, shall take any action inconsistent with the express intent of the Parties as set forth in this Section 2.6.

 

   3    CONFIDENTIAL


2.7 Title to Property . All real and personal property owned by a JV Company shall be owned by such JV Company, and no Party shall have any direct ownership interest in such property, and each Party’s respective interest in the JV Companies, if any, shall be personal property for all purposes. Except as otherwise provided in this Agreement, each JV Company shall hold all of its real and personal property in its own name and not in the name of any other Party.

ARTICLE 3

PERCENTAGE INTERESTS; TRANSFER AND INCORPORATION ACTIVITIES

3.1 Transfer of Equity Interests of SB Oils.

(a) To SBO Holdco. As soon as practicable after the Effective Date, in exchange for one (1) Real, Bunge Brazil or its Affiliate shall transfer to SBO Holdco one percent (1%) of the equity interests of SB Oils.

(b) To the Company . As soon as practicable after the Effective Date, in exchange for ninety-nine (99) Reais, Bunge Brazil or its Affiliate shall transfer to the Company ninety-nine percent (99%) of the equity interests of SB Oils.

3.2 Ownership of the Company . Immediately prior to the Effective Date, Bunge Netherlands and Solazyme, Inc. formed the Company and hereby capitalize it as set forth in Article 4. The initial percentage ownership interest of each Party in the Company (“ Percentage Interest ”) as a result of such capitalization will be as follows:

(a) Solazyme, Inc. – 50.1%; and

(b) Bunge Netherlands – 49.9%.

3.3 Ownership of SB Oils . The initial percentage ownership interests of SB Oils will be as follows (after taking into account the transfers set forth in Section 3.1):

(a) The Company – 99%; and

(b) SBO Holdco – 1%.

3.4 Ownership of SBO Holdco . The Company shall own one hundred percent (100%) of the ownership interests of SBO Holdco.

3.5 Additional Members of the Joint Venture . Other than pursuant to transfers complying with the restrictions of Article 12 or Section 20.5(a), the Joint Venture shall not be expanded to include any additional members without the prior written consent of (a) BGI, to the extent that members of the Bunge Group own, collectively, a Percentage Interest of at least ten percent (10%) at the applicable time and (b) Solazyme, Inc., to the extent that members of the Solazyme Group own, collectively, a Percentage Interest of at least ten percent (10%) at the applicable time.

 

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3.6 Transfer Activities . As soon as practicable after the Effective Date, Bunge Netherlands and Solazyme, Inc. shall perform, or cause to be performed, all acts necessary for the transfer of the quotas of SB Oils, including the following:

(a) An amendment to the Articles of Association of SB Oils in the form set forth in Attachment 1, which contemplates the transfers described in Section 3.1, and approving the adoption of such amended Articles of Association and the election of the SB Oils Officers to be elected as of such time; and

(b) The respective quotaholders shall subscribe and pay in cash for their respective quotas acquired, as described herein.

3.7 Necessary Actions . The Parties hereby undertake to execute and deliver all other instruments and documents, as well as to carry out all other necessary actions that may be required, to grant full effectiveness to all necessary acts for the incorporation of the Company and transfer of the quotas of SB Oils. Following the incorporation of the Company, the Parties shall, and shall cause the Company and SB Oils to, perform all acts reasonably deemed necessary for the achievement of the purpose of the Joint Venture as described herein.

ARTICLE 4

CAPITAL CONTRIBUTIONS AND CERTAIN FINANCIAL TERMS

4.1 Capital Contributions . The Parties hereby agree to make the following contributions, payments and commitments (collectively, “ Capital Contributions ”) to the JV Companies:

(a) In consideration of a fifty and one-tenth percent (50.1%) initial Percentage Interest in the Company to be issued to Solazyme, Inc., the Solazyme Group shall contribute the following assets to the JV Companies:

(i) Solazyme, Inc. commits to contribute to the Company Thirty-Six Million Two Hundred Fifty Thousand and One Dollars ($36,250,001) (the “ Initial Solazyme Equity Commitment ”), to be drawn-down as provided in Section 4.2;

(ii) After the Company has fully drawn the Initial Equity Commitments, Solazyme, Inc. commits to contribute to the Company fifty percent (50%) of the capital expenses incurred by the Company to fund SB Oils’ construction of the Initial Plant, up to a maximum of Thirty-Six Million Two Hundred Fifty Thousand and One Dollars ($36,250,001) (the “ Additional Solazyme Equity Commitment ”) or such further amount as shall be agreed to in writing by Solazyme, Inc., to be drawn-down as provided in Section 4.3;

(iii) Solazyme Inc. will contribute to the Company all rights, title and interest of the Solazyme Group in the FEED Engineering Technology and the Preliminary Activities Work Product, including assignment of all related contract rights held by the Solazyme Group;

 

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(iv) Solazyme Inc. will cause the applicable members of the Solazyme Group to enter into the other JV Agreements to which they are a party.

(b) In consideration of a forty-nine and nine tenths percent (49.9%) initial Percentage Interest in the Company to be issued to Bunge Netherlands, the Bunge Group shall contribute the following assets to the JV Companies:

(i) Bunge Netherlands commits to contribute to the Company Thirty-Six Million Two Hundred Forty-Nine Thousand Nine Hundred Ninety-Nine Dollars ($36,249,999) (the “ Initial Bunge Equity Commitment ”, and together with the Initial Solazyme Equity Commitment, the “ Initial Equity Commitments ”), to be drawn-down as provided in Section 4.2;

(ii) After the Company has fully drawn the Initial Equity Commitments, Bunge Netherlands commits to contribute to the Company fifty percent (50%) of the capital expenses incurred by the Company to fund SB Oils’ construction of the Initial Plant, up to a maximum of Thirty-Six Million Two Hundred Forty-Nine Thousand Nine Hundred Ninety-Nine Dollars ($36,249,999) (the “ Additional Bunge Equity Commitment ” , and together with the Initial Solazyme Equity Commitment, the “ Additional Equity Commitments ”), or such further amount as shall be agreed to in writing by Bunge Netherlands, to be drawn-down as provided in Section 4.3;

(iii) BGI will contribute to the Company all rights, title and interest of the Bunge Group in the Preliminary Activities Work Product; and

(iv) BGI will cause the applicable members of the Bunge Group to enter into the other JV Agreements to which they are a party.

4.2 Draw-Down of Initial Equity Commitments. The Company shall draw against the Initial Equity Commitments pro rata based on the amounts of the Initial Equity Commitments, from Solazyme, Inc. and Bunge Netherlands as needed to fund SB Oils’ construction of the Initial Plant. No more than the Initial Equity Commitments shall be drawn-down by the Company during 2012, with any remaining Initial Equity Commitments drawn-down in 2013 or future years. The schedule of draw-downs shall be in accordance with the project plan and initial budget set forth in Exhibit B , as such schedule may be modified from time-to-time by Solazyme, Inc. and BGI. Individual draw-downs shall be for amounts not less than One Million Dollars ($1,000,000) and Solazyme, Inc. and Bunge Netherlands shall receive written notice of the draw-downs together with payment instructions not less than five (5) Business Days in advance of the draw-down due date.

4.3 Draw-Down of Additional Equity Commitments. The Company shall initially draw against the Additional Equity Commitments equally (50%/50%) from Solazyme, Inc. and Bunge Netherlands as needed to fund SB Oils’ construction of the Initial Plant. If the Percentage Interests of the Parties change from the initial Percentage Interests set forth in Section 3.2, all draws against the Additional Equity Commitments thereafter shall be pro rata in accordance with the Percentage Interests of the Parties. None of the Additional Equity Commitments shall be drawn-down by the Company until after December 31, 2012. The

 

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schedule of draw-downs shall be in accordance with the project plan and initial budget set forth in Exhibit B , as such schedule may be modified from time-to-time by the Board. Individual draw-downs shall be for amounts not less than One Million Dollars ($1,000,000) and Solazyme, Inc. and Bunge Netherlands shall receive written notice of the draw-downs together with payment instructions not less than five (5) Business Days in advance of the draw-down due date.

4.4 SB Oils Financing; Reduction of Equity Commitments. SB Oils shall seek Third Party financing that may be secured against SB Oils’ non-Technology assets in order to fund a portion of the costs of construction of the Initial Plant. Members of the Bunge Group shall not unreasonably withhold support for such Third Party financing (including through their nominees to the Board), including that they shall not withhold support for such Third Party financing on the basis of interest rate or customary lending terms offered by BNDES (including reasonable parental guarantees; provided, however , that the aggregate amount of guarantees to be made by the Bunge Group to BNDES, together with equity commitments to the Company by members of the Bunge Group, shall not exceed the aggregate commitments made by the Bunge Group in Section 4.1(b)(i) and (ii)). To the extent that SB Oils obtains such financing, the Initial Equity Commitments and Additional Equity Commitments will be reduced, pro rata, for each of Solazyme, Inc. and Bunge Netherlands, by the amount of such financing.

4.5 Failure to Fund Equity Commitments . If a Party does not fund all or any portion of a call for equity (a “ Capital Call ”) by the due date specified in a draw-down notice properly delivered in accordance with either Section 4.2, 4.3 or 8.5, the non-funding Party (either Bunge Netherlands or Solazyme, Inc.) shall be provided with a notice of deficiency and shall have ten (10) Business Days to fund the deficient portion of its Capital Call. If the non-funding Party fails to pay the deficient portion of the Capital Call within such ten (10) Business Day period, then the other Party (to the extent that such other Party has fully funded its Capital Call) shall have the opportunity to fund the deficient portion of the non-funding Party’s Capital Call and if it does so, the Parties’ respective Percentage Interests shall be adjusted to reflect the funding Party’s increased capital contribution. If neither Party funds the deficient portion of a Capital Call, the respective Percentage Interests of the Parties shall be adjusted to reflect the unequal Capital Contributions. The adjustment of the Percentage Interests due to the failure to make equal Capital Contributions under this Article 4 shall be made on the basis of the total cash contributions (including cash obtained from the financing described in Section 4.4) made by each Party to the Company. Exhibit C provides an example of how this adjustment is calculated.

4.6 No Interest on or Right to Withdraw Equity Contributions . No interest shall be paid on any equity contribution to a JV Company or on the balance in any capital account of a JV Company. No Party shall have the right to withdraw its equity contributions or to demand or receive a return of its equity contribution.

4.7 Working Capital Financing Commitment . The Bunge Group shall provide financing for working capital for the JV Companies substantially on the terms set forth in Exhibit F . Each of the Parties shall use reasonably commercial efforts to, as soon as practicable after the Effective Date, enter into definitive agreements relating to the provision of such working capital substantially on the terms set forth in Exhibit F .

 

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4.8 Cash Distributions and SB Oils Allocations .

(a) Cash distributions from SB Oils related to distributions of profits or return of capital, and allocations of profits and losses of SB Oils shall be made solely to the Company. Unless determined otherwise by the quotaholders of SB Oils, cash distributions for a Fiscal Year shall be made in arrears in an amount equal to Free Cash Flow for such Fiscal Year less Reasonable Reserves; provided, however , that no such distributions will be made at any time that any amounts are outstanding under the Startup Facility contemplated in Exhibit F , except for distributions from SB Oils to the Company for the sole purpose of making repayments under Facility B contemplated in Exhibit F. Such distributions shall be made within ten (10) Business Days of the finalization of SB Oils financial statements for such Fiscal Year.

(b) Cash distributions from the Company related to distributions of profits or return of capital shall be made in accordance with the Percentage Interests of the Parties except as otherwise provided in this Section 4.8. Unless determined otherwise by the Board, cash distributions for a Fiscal Year shall be made in arrears in an amount equal to Free Cash Flow for such Fiscal Year less Reasonable Reserves; provided, however , that no such distributions will be made at any time that any amounts are outstanding under the Facility B contemplated in Exhibit F . Such distributions shall be made within ten (10) Business Days of the finalization of the Company’s financial statements for such Fiscal Year.

(c) Free Cash Flow from the Company (on a consolidated basis including the operations of SB Oils) shall be split in accordance with Percentage Interests of the Parties for distributions up to * per year. Until *, to the extent that the Free Cash Flow from the Company (on a consolidated basis including the operations of SB Oils) is greater than * per year (such year running from April 1 to March 31), the excess above * shall be distributed * to Solazyme, Inc. (or to any Affiliate that is its successor) and * to Bunge Netherlands (or to any Affiliate that is its successor). After *, all Free Cash Flow from the Company shall be split in accordance with the Percentage Interests of the Parties.

(d) If the Percentage Interests of the Parties at the time of distribution pursuant to Section 4.8(c) has changed from the Percentage Interests of the Parties on the Effective Date, the * split provided in Section 4.8(c) shall be adjusted as set forth in Exhibit C .

(e) Notwithstanding Sections 4.8(a) and (b), within forty-five (45) calendar days after the end of each of the first three (3) quarters of each Tax Year, SB Oils shall distribute to the Company, and the Company shall then distribute to each Member (the “ Estimated Tax Distributions ”), an amount of cash equal to the highest Estimated Tax Distribution Amount of any Member for such quarter. Within ninety (90) calendar days after the end of each Tax Year, SB Oils shall distribute to the Company, and the Company shall then distribute to each Member (the “ Annual Tax Distribution ” and together with the Estimated Tax Distributions, the “ Tax Distributions ”) an amount of cash equal to the greatest number for any Member calculated as follows: (i) such Member’s Annual Tax Distribution Amount for such Tax Year minus (ii) the sum of such Member’s Estimated Tax Distributions for such Tax Year. Tax Distributions to a Member shall be treated as an advance of, and shall reduce the amount of, the distributions otherwise payable to such Member pursuant to Section 4.8(a) and (b).

 

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* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.


(f) The Company is authorized to withhold from distributions (or with respect to allocations) to the Members and to pay over to any U.S. federal, state, local or Dutch or foreign government any amounts that it reasonably determines may be required to be so withheld pursuant to the Code or any provisions of any other U.S. federal, state, local or Dutch or foreign law. All amounts withheld pursuant to the Code or any provision of any state, local or Dutch or foreign tax law with respect to any allocation or distribution to any Member shall be treated as amounts distributed to such Member for all purposes under this Agreement.

4.9 Financial Consolidation . It is the intention of the Parties that Solazyme consolidate the financial results of the Company and SB Oils with the financial results of Solazyme. The Parties each agree to provide reasonable accommodations to enable Solazyme to consolidate the financial results of the Company and SB Oils with the financial results of Solazyme to the extent allowable under United States generally accepted accounting principles (“ U.S. GAAP ”).

ARTICLE 5

TAX MATTERS

5.1 Capital Accounts .

(a) The Company shall maintain a separate Capital Account for the Members according to the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Determinations regarding the fair market value of property contributed to or distributed by the Company shall, solely for purposes of maintaining Capital Accounts, be made by the Tax Matters Partner. In the event the Tax Matters Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with Regulations under Code Section 704, the Tax Matters Partner may make such modification as appropriate.

(b) For purposes of computing the amount of any item of Company income, gain, loss or deduction to be allocated to the Capital Accounts pursuant to this Article 5, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for U.S. federal income tax purposes (including any method of depreciation, cost recovery or amortization used for this purpose), provided that:

(i) The computation of all items of income, gain, loss and deduction shall include those items described in Code Section 705(a)(1)(B) or Code Section 705(a)(2)(B) and Treasury Regulation Section 1.704-1(b)(2)(iv) (i) , without regard to the fact that such items are not includable in gross income or are not deductible for U.S. federal income tax purposes.

(ii) If the Book Value of any Company asset is adjusted pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv) (e) or (f) , the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset.

 

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(iii) Items of income, gain, loss or deduction attributable to the disposition of any Company asset having a Book Value that differs from its adjusted basis for tax purposes shall be computed by reference to the Book Value of such asset.

(iv) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Sections 732(d), 734(b) or 743(b) is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)( m ), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis).

(v) If Company assets are distributed to the Members in kind, such distributions shall be treated as sales of such assets for cash at their respective fair market values.

(vi) If the Book Value of any Company asset differs from its adjusted basis for tax purposes as of the beginning of any Fiscal Year or other period, then in lieu of the depreciation, amortization and other cost recovery deductions taken into account with respect to such asset in computing the Company’s taxable income or loss for such Fiscal Year or other period, there shall be taken into account with respect to such asset an amount that bears the same ratio to such beginning Book Value as the U.S. federal income tax depreciation, amortization or other cost recovery deduction for such Fiscal Year or other period bears to such beginning adjusted tax basis (unless the adjusted tax basis is equal to zero, in which event the amount of depreciation, amortization or other cost recovery that will be taken into account shall be determined under any reasonable method selected by the Tax Matters Partner).

(c) Upon a transfer of interests in the Company, the transferee shall succeed to the Capital Account and other rights to distributions of the transferor.

5.2 Adjustment of Book Value of Company Assets . The Company may (at the discretion of the Tax Matters Partner) adjust the Book Value of each of the Company’s assets to equal such asset’s gross fair market value (as determined by the Tax Matters Partner) upon the occurrence of any of the events described in Treasury Regulation Section 1.704-1(b)(2)(iv) (f) .

5.3 Allocations . Except as otherwise provided in this Section 5.3 and in Section 5.4, items of Company income, gain, loss or deduction for any Fiscal Year shall be allocated among the Members in such a manner that, as of the end of such Fiscal Year, the Capital Account of each Member (increased by the amount of partnership minimum gain and partner nonrecourse debt minimum gain that would be charged back to such Member as determined pursuant to Treasury Regulation Section 1.704-2 in connection with the deemed asset sale described below) shall as nearly as possible be equal to the amount that would be distributed to such Member if the Company were to (i) liquidate the assets of the Company for an amount equal to their Book Value, (ii) satisfy all of the debts, liabilities and obligations of the Company for their book value and (i) distribute the remaining proceeds in accordance with Section 18.1.

 

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5.4 Special Allocations .

(a) Notwithstanding any other provision of this Article 5, if there is a net decrease in “partnership minimum gain” or “partner nonrecourse debt minimum gain” (as defined in applicable Regulations under Code Section 704) for any Fiscal Year, then items of income and gain for such year (and, if necessary, subsequent years) shall be specially allocated among the Members in accordance with requirements of Treasury Regulation Sections 1.704-2(f) and (i). This Section is intended to comply with the “minimum gain chargeback” requirements of such Regulations and shall be interpreted consistently therewith.

(b) If any Member unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation Section 1.704-1(b)(2)(ii) (d)(4) , (5)  or (6) , items of income and gain shall be specially allocated to such Member in accordance with the requirements of Treasury Regulation Section 1.704-1(b)(2)(ii) (d) . This Section is intended to comply with the “qualified income offset” provision of such Regulations and shall be interpreted consistent therewith.

(c) If and to the extent that the allocation of any “nonrecourse deductions” (within the meaning of Treasury Regulation Section 1.704-2(b)(1)) for any Fiscal Year would not otherwise satisfy the requirements of Treasury Regulation Section 1.704-2(e), then such nonrecourse deductions shall be specially allocated among the Members in proportion to their Percentage Interests or as otherwise required by Regulations under Code Section 704.

(d) The allocations set forth in this Section 5.4 (the “ Regulatory Allocations ”) are intended to comply with certain requirements of Treasury Regulation Section 1.704-1(b). The Regulatory Allocations may not be consistent with the manner in which the Members intend to allocate income, gains, losses and deductions of the Company or make Company distributions. Accordingly, notwithstanding the other provisions of this Article 5, but subject to the Regulatory Allocations, income, gains, losses and deductions shall be allocated among the Members so as to eliminate the effect of the Regulatory Allocations and thereby cause the respective Capital Accounts of the Members to be in the amounts (or as close thereto as possible) they would have been if income, gains, losses and deductions had been allocated without reference to the Regulatory Allocations.

5.5 Tax Allocations .

(a) Except as provided in Sections 5.5(b) and (c), the income, gains, losses and deductions of the Company will be allocated, for U.S. federal, state and local income tax purposes, among the Members in accordance with the allocation of such income, gains, losses and deductions among the Members for computing their Capital Accounts.

(b) Items of Company taxable income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall be allocated among the Members in accordance with Code Section 704(c) so as to take account of any variation between the adjusted basis of such property to the Company for U.S. federal income tax purposes and its Book Value. Any elections or other decisions relating to such allocation shall be made by the Tax Matters Partner.

 

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(c) If the Book Value of any Company asset is adjusted pursuant to the requirements of Treasury Regulation Section 1.704-1(b)(2)(iv) (e) or (f) , subsequent allocations of items of taxable income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for U.S. federal income tax purposes and its Book Value in the same manner as under Code Section 704(c). Any elections or other decisions relating to such allocation shall be made by the Tax Matters Partner.

(d) Allocations of tax credits, tax credit recapture and any items related thereto shall be allocated to the Members according to their interests in such items as determined by the Tax Matters Partner taking into account the principles of Treasury Regulation Section 1.704-1(b)(4)(ii).

(e) Allocations pursuant to Section 5.5 are solely for purposes of U.S. federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Member’s Capital Account or share of distributions or other Company items pursuant to any provision of this Agreement.

5.6 No Obligation to Restore . Notwithstanding anything to the contrary in this Agreement, no Member shall have any obligation to make any capital contributions for the purpose of eliminating or diminishing a negative Capital Account balance and a negative Capital Account balance shall not be considered a liability owed by such Member to the Company or to any other person for any purpose whatsoever.

ARTICLE 6

MANAGEMENT OF THE JOINT VENTURE

6.1 Management . The management and control of the business and affairs of SB Oils shall be vested with the four officers of SB Oils specifically named in Section 6.8 (the “ SB Oils Officers ”). The management and control of the business and affairs of the Company shall be vested with its managing directors (the “ Board ”), who shall also monitor and manage the Joint Venture, whether directly, or through its influence with personnel associated with the Company and SB Oils.

6.2 The Board. The Board shall initially be comprised of four managing directors, of which two will be nominated by BGI and two will be nominated by Solazyme, Inc. Each managing director may be removed at any time by the Party nominating such managing director, after which such Party shall nominate a new managing director. Solazyme, Inc. and Bunge Netherlands agree to cause the Company to appoint (and remove) managing directors as set forth above. The BGI nominees (and any one of them if only one of them is participating in a vote of the Board) may vote an interest equal to the aggregate Percentage Interests held by the Bunge Group at the time of any vote of the Board. The Solazyme, Inc. nominees (and any one of them if only one of them is participating in a vote of the Board) may vote an interest equal to the aggregate Percentage Interests held by the Solazyme Group at the time of any vote of the Board. Any other nominee on the Board may vote an interest equal to the aggregate Percentage Interests held by the Person that appointed such nominee to serve on the Board at the time of any vote of the Board.

 

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6.3 Meetings of the Board . The Board shall meet at least quarterly, or more frequently as mutually agreed by BGI and Solazyme, Inc. at locations agreed by BGI and Solazyme, Inc. Upon advance written consent of BGI and Solazyme, Inc., other representatives of a Party may attend Board meetings as non-voting observers. Managing directors and a Party’s non-voting observers may participate in any such meeting in person, by telephone, or by video conference. The Parties shall agree upon which Party will prepare the minutes of a particular meeting at such meeting. The assigned Party shall prepare minutes for such meeting in advance of the next Board meeting and the Board shall review, revise if necessary, and approve such minutes at such next Board meeting.

6.4 Decision Making . Subject to Section 6.5, decisions of the Board shall be made only by an aggregate vote of at least fifty-one percent (51%) of all outstanding Percentage Interests, as voted at a meeting of the Board; provided, however , that at least one (1) nominee of BGI and at least one (1) nominee of Solazyme, Inc. must be present at such meeting to constitute a quorum at a meeting at which action may be taken or resolved. Any action required or permitted to be taken at any meeting of the Board may be taken without a meeting if at least one (1) representative appointed by BGI and at least one (1) representative appointed by Solazyme, Inc. consent thereto in writing, and such writing is filed with the minutes of the proceedings of the Board. In the event the Board is unable to resolve an issue, it may be referred by any Party to the senior most executive for the relevant business unit of Solazyme, Inc. and BGI, who shall meet to discuss and attempt to resolve the matter within thirty (30) days of the referral. If such executives cannot resolve the matter within the thirty (30) day period (as it may be extended upon mutual consent of the executives), the matter shall be resolved in accordance with Article 19. To the extent a decision is not reached as a result of the discussions and mediation contemplated by Article 19, the Board will be deemed not to have authorized the matter that was subject to the dispute resolution in Article 19 and the Company and its Affiliates shall not take the actions that were proposed to be approved by the dispute resolution pursuant to Article 19.

6.5 Actions Requiring Supermajority Approvals . The actions listed in Subsections (a) or (b) of this Section 6.5 will require approval or authorization at a quotaholders meeting in which the Company exercises its voting rights as a quotaholder based on a decision of the Board as contemplated by Section 6.4 and the rest of this Section 6.5. The Company shall not take, or approve SB Oils taking, any of the following actions without the affirmative prior approval of at least the following aggregate supermajorities of all outstanding Percentage Interests, as voted either (i) in a written consent signed by all managing directors then in office, (ii) at a meeting of the equity holders of the Company or (iii) at a meeting of the Board:

(a) An affirmative vote of seventy-five percent (75%) of all outstanding Percentage Interests:

(i) attempt to amend, restate or revoke the Deed of Incorporation of the Company or the Articles of Association of SB Oils;

(ii) carry on any business other than as provided in Sections 2.2(a) and 2.2(b);

 

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(iii) enter into, amend or renew any agreement with a Party or any of its Affiliates, including any Project Plan (as provided in the Development Agreements) or Statement of Work (as provided in the Administrative Services Agreements);

(iv) issue any Capital Call (including pursuant to Section 8.5(c)(iii)), other than a Capital Call scheduled in the project plan and initial budget set forth in Exhibit B , as it may be adjusted from time-to-time by the mutual consent of Solazyme, Inc. and BGI;

(v) make any contribution of capital or assets to any other Person or purchase or acquire a beneficial interest in any other Person;

(vi) sell or agree to sell, mortgage, pledge, encumber, transfer, or dispose of any asset or group of assets of the Company or SB Oils (other than products or byproducts manufactured by a Plant), whether in a single transaction or series of related transactions, where the total value of the asset or group of assets exceeds Five Hundred Thousand Dollars ($500,000), as calculated at the time of the proposed approval;

(vii) effect any merger, merger of shares, consolidation, demerger, split-up, spin-off, capital reduction, share/quotas exchange or similar transaction involving any of the JV Companies;

(viii) purchase or otherwise acquire, or agree to purchase or otherwise acquire, all or substantially all of the assets of any other Person;

(ix) except among the Parties pursuant to the JV Agreements, sell or assign any JV Company Technology, or grant any license to any JV Company Technology, other than to conduct research or development on behalf of a JV Company, or licenses coincident with sales or licenses of Products;

(x) issue any additional equity interest in a JV Company, reclassify any existing equity interest in a JV Company, recapitalize a JV Company, issue options, warrants or other rights to purchase any equity interest in a JV Company, or amend or vary any rights attached to any equity interest in a JV Company;

(xi) authorize the transfer of any equity interest in a JV Company, other than in accordance with Section 8.3, 9.1 or Article 12;

(xii) adopt any plan of liquidation or dissolution or file a petition in bankruptcy, judicial reorganization ( recuperação judicial ) or out-of-court reorganization ( recuperação extra judicial ) under Applicable Law that relates to the arrangement and administration of the rights of creditors, or admit or fail to deny any material allegations of a petition in bankruptcy or consent to or acquiesce in the relief therein requested; or

(xiii) take any action in violation of the terms of this Agreement, or amend or waive compliance with any provision of this Agreement.

 

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(b) An affirmative vote of sixty percent (60%) of all outstanding Percentage Interests:

(i) adopt or amend the Business Plan or an Annual Budget;

(ii) determine the amount or timing of any dividends or distributions from either JV Company, other than as set forth in Section 4.8 and Article 5;

(iii) create, incur, assume or permit to exist any indebtedness except indebtedness incurred (i) in the ordinary course of business or (ii) to the extent consistent with this Agreement, the Business Plan or applicable Annual Budget for the current Fiscal Year;

(iv) create, incur, assume or permit to exist, directly or indirectly, any lien or other encumbrance upon any property, now owned or hereafter acquired, other than incidental liens or liens to secure indebtedness authorized pursuant to Section 6.5(b)(iii) or 4.4;

(v) guarantee or otherwise in any way become or be responsible for obligations or indebtedness of any other Person, whether by agreement to purchase the indebtedness of any other Person, by agreement for the furnishing of funds to any other Person for the purchase of goods, supplies or services, or by way of stock purchase, capital contribution, advance or loan for the purpose of paying or discharging indebtedness of any other Person, in all cases except to either of the JV Companies by the other JV Company;

(vi) make or permit to exist any loan to any Person (except to either of the JV Companies by the other JV Company), other than advances for travel and the like made to officers and employees in the ordinary course of business;

(vii) incorporate, liquidate, acquire or transfer any legal entity;

(viii) purchase or otherwise acquire, or agree to purchase or otherwise acquire, any asset or group of assets, in a single transaction or series of related transactions, the total aggregate value of which asset or group of assets exceeds Two Hundred Fifty Thousand Dollars ($250,000), as calculated at the time of the proposed approval (except in accordance with the then-current Business Plan or Annual Budget, and except for purchases of feedstock or other raw materials needed for the production of Products at a Plant);

(ix) purchase, sell or lease (as lessor or lessee), any real property other than incidental leases in the ordinary course of business;

(x) enter into any joint venture, strategic alliance, development agreement or other similar transaction with any other Person;

(xi) enter into any contract except in accordance with the then-current Business Plan or Annual Budget (or the project plan and initial budget set forth in Exhibit

 

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B ) and except for contracts requiring payments to be made by a JV Company (or two or more related contracts if, when aggregated together, requiring payments to be made) in any twelve (12) month period of less than One Million Dollars ($1,000,000), as calculated at the time of the proposed approval;

(xii) adopt or change a significant non-U.S. tax or accounting practice or principle of a JV Company, or make any significant non-U.S. tax or accounting election by a JV Company;

(xiii) select an external auditor, attorney, accountant or financial advisor;

(xiv) institute any legal action in the name of a JV Company that (i) involves a claim or claims for monetary damages in excess of One Hundred Thousand Dollars ($100,000), as calculated at the time of the proposed approval, (ii) involves a claim or claims against any governmental entity in excess of One Hundred Thousand Dollars ($100,000), as calculated at the time of the proposed approval, (iii) involves any claims raising antitrust issues, or (iv) involves a request for injunctive relief other than in the ordinary course of business; or

(xv) settle or abandon, on the part of a JV Company, any legal action that is in the name of a JV Company or directly affects a JV Company that (i) involves a claim or claims for monetary damages in excess of One Hundred Thousand Dollars ($100,000), as calculated at the time of the proposed approval, (ii) involves a claim or claims by or against any governmental entity in excess of One Hundred Thousand Dollars ($100,000), as calculated at the time of the proposed approval, (iii) involves any claims raising antitrust issues, or (iv) involves a request for injunctive relief other than in the ordinary course of business.

6.6 Committees . The Board shall have the power to set up committees as it deems necessary or useful in order to facilitate the conduct of the Business by the JV Companies; provided, however , that any action of any such committee shall comply with the provisions of this Agreement that relate to actions of the Board.

6.7 Deadlock . In the event that any vote of the Board results in a Deadlock, except as otherwise expressly provided in this Agreement, such Deadlock shall be resolved pursuant to the dispute resolution procedures set forth in Article 19.

6.8 SB Oils Officers .

(a) Number and Designation . SB Oils shall have four (4) natural Persons, resident in Brazil, exercising the functions of the positions of General Manager, Chief Financial Officer, Commercial Manager and Plant Manager. The General Manager may appoint such other officers or agents as s/he deems necessary for the operation and management of SB Oils, with such powers, rights, duties and responsibilities as may be determined by the General Manager, subject to the approval of the quotaholders of SB Oils. Any natural Person so appointed shall comply with all Brazilian requirements including meeting the necessary visa and residency requirements.

 

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(b) General Manager . The General Manager of SB Oils shall be the principal executive officer of SB Oils and the Company, and shall have the responsibilities, duties, powers, authority and obligations ordinarily exercised by the chief executive officer of a company. The General Manager shall report directly to the Board. So long as Solazyme, Inc. has a Percentage Interest of at least 50.1%, Solazyme, Inc. shall have the right to cause the Company to cause SB Oils to appoint the General Manager identified by Solazyme, Inc., subject to prior written approval from BGI, such approval not to be unreasonably withheld or conditioned. The General Manager of the Company shall otherwise be appointed by the Board. The General Manager of SB Oils shall otherwise be appointed by the Company, by means of a decision of the Board, which shall cause the Company to approve this appointment at a quotaholders’ meeting of SB Oils.

(c) Chief Financial Officer . The Chief Financial Officer of SB Oils shall be the principal financial officer of SB Oils and the Company, and shall have the responsibilities, duties, powers, authority and obligations ordinarily exercised by the chief financial officer of a company. The Chief Financial Officer shall report directly to the General Manager. So long as Bunge Netherlands has a Percentage Interest of at least 49.9%, Bunge Netherlands shall have the right to cause the Company to cause SB Oils to appoint the Chief Financial Officer identified by BGI, subject to prior written approval from Solazyme, Inc., such approval not to be unreasonably withheld or conditioned. The Chief Financial Officer of the Company shall otherwise be appointed by the Board. The Chief Financial Officer of SB Oils shall otherwise be appointed by the Company, by means of a decision of the Board, which shall cause the Company to approve this appointment at a quotaholders’ meeting of SB Oils.

(d) Commercial Manager . The Commercial Manager of SB Oils shall be the principal sales and marketing officer of SB Oils and the Company, and shall have the responsibilities, duties, powers, authority and obligations ordinarily exercised by the chief sales and marketing officer of a company. The Commercial Manager shall report directly to the General Manager. So long as Solazyme, Inc. has a Percentage Interest of at least 50.1%, Solazyme, Inc. shall have the right to cause the Company to cause SB Oils to appoint the Commercial Manager identified by Solazyme, Inc., subject to prior written approval from BGI, such approval not to be unreasonably withheld or conditioned. The Commercial Manager shall otherwise be appointed pursuant to the following process: the General Manager shall select a panel of three (3) final candidates and shall present such candidates to the Board, which shall then have the right to select and appoint the final Commercial Manager from such panel and shall cause the Company to approve this election at a quotaholders’ meeting of SB Oils.

(e) Plant Manager . The Plant Manager of SB Oils shall be the manager of the Initial Plant, and shall have the responsibilities, duties, powers, authority and obligations ordinarily exercised by a plant manager. The Plant Manager shall report directly to the General Manager. So long as Bunge Netherlands has a Percentage Interest of at least 49.9%, Bunge Netherlands shall have the right to cause the Company to cause SB Oils to appoint the Plant Manager identified by BGI, subject to prior written approval from Solazyme, Inc., such approval not to be unreasonably withheld or conditioned. The Plant Manager shall otherwise be appointed pursuant to the following process: the General Manager shall select a panel of three (3) final candidates and shall present such candidates to the Board, which shall then have the right to select and appoint the final Plant Manager from such panel and shall cause the Company to approve this election at a quotaholders’ meeting of SB Oils.

 

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(f) Authority and Duties . Unless prohibited by the Board, an officer may delegate some or all of the duties and powers of his or her position to other Persons. An officer who delegates the duties or powers of his or her office remains subject to the standard of conduct for an officer with respect to the discharge of all duties and powers so delegated. In all cases, the officers of the JV Companies shall report to, and be supervised by, the General Manager, or, with the approval of the General Manager, another officer.

(g) Removal . Subject to the terms of any applicable employment agreement, the Party that caused the Company to cause SB Oils to appoint the General Manager, the Chief Financial Officer, the Commercial Manager or the Plant Manager (as applicable) may cause the Company to cause SB Oils to remove such SB Oils Officer at any time, with or without cause. In any case an SB Oils Officer may also be removed for willful misconduct, for gross negligence or for a knowing violation of law, as determined by the Company.

6.9 Employees . The JV Companies shall hire such employees as the officers of SB Oils determine for SB Oils and the Board determines for the Company. Solazyme, Inc. and BGI are expected and encouraged to make recommendations through their respective Board members for key management positions of the JV Companies (“ Key Managers ”). Key Managers shall work full-time for the JV Companies and shall report, directly or indirectly, to the General Manager of the respective entity. Key Managers drawn from the Solazyme Group or the Bunge Group shall either (i) cease their employment with such Party and be employed directly by the Company or SB Oils, or (ii) be seconded for one hundred percent (100%) of their business time by such Party to the Company or SB Oils; provided, however , that during the start-up phase of the Company, SB Oils or the Initial Plant, or in such other special cases as may be determined by the Board in its discretion, individuals may be seconded to the Company or SB Oils by a Party for less than one hundred percent (100%) of their business time. Key Managers who are seconded to a JV Company by a Party (“ Secondees ”) shall continue to be compensated by the seconding Party and shall retain, to the extent practicable, all employment benefits from such Party (including applicable insurance coverage, retirement payments and stock options); provided, however , that the seconding Party shall be reimbursed by the Company or SB Oils for the Direct Employee Costs of such Secondees, proportional to the business time such Key Managers have devoted to the JV Companies.

ARTICLE 7

OPERATIONS

7.1 Collaboration and Support; Administrative Services .

(a) The intent of the Parties is that the JV Companies ultimately shall be capable of functioning independently of the Parties. Notwithstanding the foregoing, however, the Parties acknowledge and agree that the success of the JV Companies may rely upon significant and collaborative support and assistance from the Parties, particularly during the start-up phase, and the Parties agree to act in good faith and to cooperate reasonably in pursuit of the success of the Joint Venture, the JV Companies and the Business.

 

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(b) In order to contain costs and leverage the infrastructure and expertise of the Bunge Group and the Solazyme Group, particularly during the start-up phase, the Parties are entering into the Administrative Services Agreements, pursuant to which members of the Bunge Group and the Solazyme Group shall make available or provide, at rates as agreed by the Parties, certain facilities (including offices and laboratories) and services (including information technology and accounting services) (collectively, “ Administrative Services ”), in each case as the Board determine to be necessary and appropriate. The Parties contemplate that such Administrative Services shall be phased out over time.

7.2 Research and Development . Either or both of the JV Companies shall define and implement a research and development (“ R&D ”) program across areas of activity identified by the Board as necessary for the development of Products and the Business. The JV Companies shall determine and direct the R&D program, and over time may develop independent R&D capabilities, facilities and teams; provided, however , that during the start-up phase, the Parties contemplate that the JV Companies shall substantially leverage and utilize the combined R&D capabilities of the Solazyme Group and the Bunge Group as described herein and in the other JV Agreements.

7.3 Marketing, Sales and Distribution . The JV Companies shall determine the approach to marketing, sales and distribution of Products in the Field in the Use Territory. The Parties currently contemplate that the JV Companies will build a direct sales force but if the JV Companies decide not to build a direct sales force, then the JV Companies may utilize the established sales forces and networks of the Bunge Group, or sales personnel of the Solazyme Group, on terms to be negotiated between such Party and the applicable JV Company; provided, however , that the ultimate decision of whether to utilize a Party’s sales force and network shall be made by the Board.

7.4 Utility Supply . BGI agrees that the Bunge Group shall provide certain inputs to the Joint Venture, pursuant to the Utility Supply Agreement and the Lease, including, but not limited to: (i) the plot of Land where the Initial Plant will be located, as described in Section 7.5, (ii) water and steam; (iii) electricity, (iv) treatment of effluents, and (v) certain administrative services in relation to the operation of the Company (as provided in Section 7.1(b)).

7.5 Manufacturing and Supply . SB Oils shall be responsible for determining and establishing an optimal manufacturing platform for Products suitable to meet the short- and long-term production needs of the Business; provided, however , that it is understood and agreed that the Solazyme Group and the Bunge Group shall be responsible for providing substantial expertise, resources and facilities to SB Oils with respect to such manufacturing efforts. The Parties contemplate and agree that the scale-up of the manufacturing platform shall begin with the construction of the Initial Plant as further described in Article 8.

 

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7.6 Land Rights.

(a) The Initial Plant will be located at a rural area as described in Attachment 2, to be detached from a larger property named Fazenda Moema, located at the Municipality of Orindiuva, registered under certificate of record No. 7,544 of the Real Estate Registry of Paulo Faria (the “ Land ”). The Land shall be acquired from Sociedade Energética Orindiuva I Ltda. by SB Oils or Bunge Group, as the case may be, by means of a commitment of purchase and sale ( Compromisso de Compra e Venda ) (“ Commitment for Purchase and Sale ”) conditioned on obtaining the necessary governmental approvals.

(b) The Parties shall use their best efforts to cause Sociedade Energética Orindiuva I Ltda. (the owner of the land) to also grant SB Oils a public deed of usufruct ( usufruto ) or surface rights ( direito de superfície ) or other in rem or contractual right agreed by the Parties over the Land in order to secure to SB Oils the possession and right to build on the Land for at least twenty (20) years during the time in which all approvals for the actual acquisition of the Land have not yet been granted (“ In Rem Right ”). The Parties shall use their best efforts to cause any such In Rem Right to be executed as soon as practicable after the Effective Date, and registered with the competent Real Estate Registry within one (1) year of the Effective Date.

(c) The Parties shall use their best efforts to negotiate and take all necessary measures to (i) have the Commitment for Purchase and Sale registered with the Real Estate Registry, including the prior georreferencing of the Land according to Law No. 10,267/2001, within six (6) months of the Effective Date; and (ii) obtain all necessary governmental approvals pursuant to Law No. 5,709/71 for the effective transfer of ownership over the Land to SB Oils by means of the competent registered public deed of purchase and sale.

7.7 Costs . For the avoidance of doubt, the costs of operating the JV Companies, including the R&D program and other costs of developing and producing Products, shall be borne solely by the JV Companies and no other Party shall be liable for any obligations of or to the JV Companies with respect to such costs except to the extent provided by this Agreement, by another JV Agreement or in another writing signed by such Party.

7.8 Power Supply . The Company, SB Oils and the other Parties, as appropriate, shall work together to duly obtain the approval of the electricity company securing the power supply necessary for the Initial Plant to operate, if necessary.

7.9 Adoption of Business Plan and Annual Budget .

(a) Initial Project Plan and Budget . The initial project plan and budget is set forth in Exhibit B . The project plan and budget provide the general operating parameters for the Company and SB Oils for the time period from and after the Effective Date through the approval of the Initial Business Plan and Annual Budget.

(b) Initial Business Plan and Annual Budget . Within ninety (90) days of the Effective Date, the Parties shall draft and approve a Business Plan (the “ Initial Business Plan ”) for the initial three (3) Fiscal Years of the Joint Venture (including 2012) and an Annual Budget (the “ Initial Annual Budget ”) for 2012.

 

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(c) Submission of Proposed Annual Plans . Commencing with respect to the Annual Budget for 2013, not less than sixty (60) days prior to the end of the preceding calendar year, management of SB Oils and the Company shall prepare and deliver to the Board a proposed Annual Budget for the immediately following calendar year. Commencing with respect to calendar year 2014, not less than sixty (60) days prior to the end of every third calendar year, management of SB Oils and the Company shall prepare and deliver to the Board a proposed Business Plan for the immediately following three (3) calendar years.

(d) Adoption of Annual Budget and Business Plan . The proposed Annual Budget and Business Plan for the Joint Venture shall be adopted, modified or rejected by the Board not less than thirty (30) days prior to the end of the calendar year preceding the applicable year of the Annual Budget, or the first calendar year of the Business Plan (as applicable), subject to extension by action of the Board, and the plans so adopted by the Board at a meeting duly called and held within such time period shall be the Annual Budget and the Business Plan for the Company for such calendar year.

(e) Failure to Adopt Annual Budget or Business Plan . In the event that the Board fails to approve an Annual Budget or Business Plan within the time period prescribed therefore (or any extension thereof approved by the Board), then:

(i) the Annual Budget for such calendar year shall be the Annual Budget for the immediately preceding calendar year, except that all items of expense shall be increased by ten percent (10%); and

(ii) with respect to the Business Plan for such calendar year, Section 6.7 shall apply.

7.10 Information Rights .

(a) Solazyme, Inc. (or a designated representative) and BGI (or a designated representative) shall be given access to the records (financial, accounting, legal or of any other nature) of the JV Companies during normal business hours and upon reasonable advance notice.

(b) Members of the Bunge Group (collectively) and the Solazyme Group (collectively) shall each be entitled, once per year and at the sole cost and expense of such group, to audit the books and records of the Company and SB Oils. Each of the Bunge Group and the Solazyme Group agree to co-ordinate such audits in order to minimize the expense and distraction of such audits to the Company, SB Oils and the other Parties.

7.11 Technology Security . The Company shall cause SB Oils to appoint a technology officer (recommended by Solazyme, Inc.) at SB Oils who shall, in consultation with Solazyme, Inc. and Bunge Brazil (subject to the consent of Bunge Brazil and Solazyme, Inc.), determine, establish, implement and audit appropriate security procedures regarding Technology used or developed by the JV Companies, including (i) rules regarding visitation to SB Oils’ facilities, (ii) confidentiality documentation requirements and (iii) Technology access procedures and policies, including regarding the transfer of Microbes used or developed by or on behalf of the JV Companies.

 

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7.12 Insurance .

(a) The JV Companies shall secure and maintain in full force and effect throughout the Term, insurance coverage commensurate with their respective businesses, including (if applicable): (i) commercial general liability, (ii) property, including business interruption, with all risks perils, or broad named risks, (iii) vehicle, (iv) crime, (v) employers’ liability, (vi) workers’ compensation insurance (or its equivalent) in the amount required by the laws of the jurisdiction in which its employees are located (or if no such insurance is otherwise required, in amounts commensurate with its business), (vii) marine and in-transit, (viii) director and officer, and (ix) such other insurance that is reasonable and customary for the business carried on by the applicable JV Company. Coverage shall provide full replacement value of the Plant(s) and all JV Company-owned and leased equipment. From time to time upon request of a Party, the applicable JV Company shall furnish to the requesting Party evidence of compliance with such insurance requirements and the payment of any related coverage premiums. On an annual basis each JV Company shall provide to Solazyme, Inc. an English version summary of its insurance.

(b) On an annual basis, or when requested by a Party, the Board shall discuss and review the current insurance coverage and/or the need for any additional insurance in respect of the assets or business of the JV Companies.

7.13 Risk Management . Within one (1) year of the Effective Date the SB Oils Officers shall prepare a risk management policy for SB Oils in regard to the purchase of Feedstock, including its policies and practices for hedging purchases. Such policy shall be reviewed by the Board and implemented by SB Oils if and as agreed by the Board.

ARTICLE 8

MANUFACTURING FOR THE JOINT VENTURE COMPANY

8.1 Initial Plant . Subject to the terms and conditions of this Agreement, the Parties shall cause the Company to fund SB Oils to build the Initial Plant.

(a) Capacity . The Initial Plant shall have an annual rated capacity to produce at least 100,000 MT of triglyceride oil, from approximately 300,000 MT of fermentable sugars from sugar cane.

(b) Ownership . The Initial Plant shall be owned by SB Oils.

(c) Initial Plant Operations . The Initial Plant will be operated by SB Oils.

8.2 Permits. The Parties agree to use commercially reasonable efforts to help SB Oils in connection with the licensing and granting of permits on behalf of SB Oils for construction and operation of the Initial Plant as promptly as possible.

 

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8.3 Construction Delay .

(a) The Parties intend that SB Oils will have the Initial Plant operational by *. If Mechanical Completion of the Initial Plant has not been accomplished by * due to an act or omission of a member of the Bunge Group, then within forty-five (45) days of *, Solazyme, Inc. may send a notice (such notice or the notice contemplated by the next sentence being a “ Section 8.3(a) Notice ”) to BGI. If Mechanical Completion of the Initial Plant has not been accomplished by * other than due to an act or omission of a member of the Bunge Group, or if a force majeure event causes the construction of the Initial Plant to be substantially halted for at least *, then within forty-five (45) days after the triggering event (either *, or * of substantial halt to construction), (i) BGI may send a Section 8.3(a) Notice to Solazyme, Inc. and if BGI does not send a timely Section 8.3(a) Notice, (ii) Solazyme, Inc. may, within thirty (30) days of the end of such 45-day notice period, send to BGI a notice (a “ Section 8.3(a)(ii) Notice ”) that it elects to terminate this Agreement and the Company will be dissolved, subject to BGI’s rights under Section 8.3(d).

(b) Within forty-five (45) days after sending or receiving a Section 8.3(a) Notice, Solazyme, Inc. may send a notice (a “ Section 8.3(b) Notice ”) to BGI that states that Solazyme, Inc. (or another member of the Solazyme Group) intends to continue to build the Initial Plant on its own (or with Third Parties). If Solazyme fails to send a Section 8.3(b) Notice within such 45-day period, then Solazyme, Inc. will have no further rights pursuant to this Section 8.3 and the Company will be dissolved, subject to BGI’s rights under Section 8.3(d).

(c) If Solazyme, Inc. timely delivers a Section 8.3(b) Notice to BGI, then for thirty (30) days after delivery of the Section 8.3(b) Notice Solazyme, Inc. and BGI shall negotiate the terms of purchase by Solazyme, Inc. (or its designee), at fair market value, of Bunge Netherlands’ Percentage Interest in the Company. If the parties reach mutual agreement on such terms, Solazyme, Inc. (or its designee) shall purchase Bunge Netherland’s Percentage Interest in the Company as agreed. If the parties do not reach agreement by the end of the 30-day negotiation period, Solazyme, Inc. shall cause an appraisal of Bunge Netherlands’ Percentage Interest in the Company to be conducted to determine its fair market value in accordance with Section 9.2. Within ten (10) days after receipt of such appraisal, Solazyme, Inc. shall give notice (a “ Section 8.3(c) Notice ”) to Bunge Netherlands as to whether it elects to continue with the buy-out or to dissolve the Company. If Solazyme, Inc. delivers a timely Section 8.3(c) Notice electing to continue with the buy-out, Solazyme, Inc. (or its designee) shall buy all of Bunge Netherlands’ Percentage Interest in the Company as soon as practicable, and in any event shall pay to Bunge Netherlands the buy-out price set forth in the appraisal within sixty (60) days of receipt of the appraiser(s)’ determination, and upon the consummation of such acquisition Subsections (i) – (v) and (vii) – (ix) of Section 9.1(d) will apply and the Bunge Development Agreement will terminate. If Solazyme, Inc. delivers a timely Section 8.3(c) Notice electing to dissolve the Company or fails to deliver a Section 8.3(c) Notice within such 10-day period, the Company will be dissolved, subject to BGI’s rights under Section 8.3(d).

(d) If Solazyme, Inc. has (i) delivered a Section 8.3(a)(ii) Notice within the 30-day period described in Section 8.3(a)(ii), (ii) failed to deliver a Section 8.3(b) Notice within the 45-day period described in the last sentence of Section 8.3(b), (iii) delivered a timely Section 8.3(c) Notice electing to dissolve the Company or (iv) failed to deliver a Section 8.3(c) Notice within the 10-day period described in the last sentence of Section 8.3(c), then within

 

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* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.


forty-five (45) days after such event BGI may send a notice (a “ Section 8.3(d) Notice ”) to Solazyme, Inc. that states that BGI will buy the assets of the JV Companies for their fair market value. For thirty (30) days after delivery of a Section 8.3(d) Notice, BGI and the Company (or its liquidator, as applicable) shall negotiate the terms of purchase by BGI (or its designee), at fair market value, of all (but not part) of the assets of the JV Companies. If the parties reach mutual agreement on such terms, BGI (or its designee) shall purchase all of the assets of the JV Companies as agreed. If the parties do not reach agreement by the end of the 30-day negotiation period, BGI shall cause an appraisal of the assets of the JV Companies to be conducted to determine their fair market value in accordance with Section 9.2; provided, however , that such appraisal will be based, in part, upon any appraisal already completed pursuant to Section 8.3(c), if applicable. Within ten (10) days after receipt of such appraisal, BGI shall give notice to the Company (or its liquidator, as applicable) as to whether it elects to continue to purchase the assets. If BGI delivers a timely notice electing to continue with the purchase, BGI (or its designee) shall buy all of the assets of the JV Companies as soon as practicable, and in any event shall pay to the Company (or its liquidator, as applicable) the buy-out price set forth in the appraisal within sixty (60) days of receipt of the appraiser(s)’ determination. Upon consummation of BGI’s purchase of the assets of the JV Companies pursuant to this Section 8.3(d), this Agreement shall terminate and the Company shall be dissolved. If BGI fails to send such a notice within such 10-day period, then BGI will have no further rights pursuant to this Section 8.3. This Agreement will terminate and the Company will be dissolved upon the date that (A) the 45-day period expires if BGI has failed to send a Section 8.3(d) Notice, (B) BGI notifies Solazyme, Inc. during such 45-day period that it will not send a Section 8.3(d) Notice, or (C) the 10-day period expires if BGI has failed to send the notice contemplated by the preceding sentence in this Section 8.3(d).

8.4 Additional Plant(s) . Subject to the confirmation of the existence of further market potential in the Field and the Use Territory and the availability of supply of fermentable sugars, the Parties contemplate approving construction of one or more additional Plant(s), funded in their entirety by the JV Companies or by such other funding mechanism as agreed amongst BGI, Solazyme, Inc. and the JV Companies and in accordance with Section 6.5, with annual rated capacity to be determined based upon market potential, availability of supply of fermentable sugars and other relevant commercial factors. BGI will cause a member of the Bunge Group to consider supplying additional Feedstock of up to 900,000 MT/yr of fermentable sugar from sugar cane if the business case supports such expansion and the JV Companies build an additional Plant or Plants adjacent to one or more Bunge Group mills, upon terms and conditions as may be mutually agreed.

8.5 Right to Expand Capacity.

(a) If the market size of the Primary Field has expanded by at least an Incremental Market Increase after the Effective Date (excluding any expansion of production by the Company), as stated in an official publication of the U.S. Department of Agriculture and/or Oil World (reported as the usage of palm kernel oil in Brazil), and SB Oils generated a Return on Equity greater than * for the preceding 12-month period, then either Notice Party may provide the Company with an “ Expansion Notice ” that requests a new Plant to be built, or an existing Plant to be expanded, with a capacity (or expanded capacity) of at least 50,000 MT/year;

 

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* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.


provided, however , that a Party may not provide an Expansion Notice until *. This right to provide an Expansion Notice shall apply once for the period between the Effective Date and *. Thereafter, this right shall apply to each Incremental Market Increase in excess of the last date that a Party gave an Expansion Notice; provided, however , that the size of the new Plant to be built (or Plant expanded) has a nominal rated capacity of at least * and the incremental increase in the size of the Primary Field is at least * the size of the nominal rated capacity of the proposed new Plant (or proposed expanded capacity).

(b) Upon receiving an Expansion Notice that accurately references the applicable U.S. Department of Agriculture and/or Oil World publication (reported as the usage of palm kernel oil in Brazil) as confirming that the market size of the Primary Field has expanded as provided above, the Board will determine within * after receiving the Expansion Notice (the “ Election Period ”) whether SB Oils should attempt to expand its production capacity a commercially reasonable amount, taking into account actual and anticipated customer demands, profitability, and other relevant commercial factors.

(c) If the Board determines within the Election Period that SB Oils will attempt to expand such capacity, then the Board will, subject to Section 6.5, make one or more of the following determinations:

(i) The JV Companies will fund the expansion in whole or in part from their own retained capital.

(ii) The JV Companies will seek Third-Party debt financing to fund all or part of the expansion.

(iii) The JV Companies will seek capital contributions from Solazyme, Inc. and Bunge Netherlands to fund that portion of the costs of the expansion not covered by the retained capital of the JV Companies and/or Third-Party financing.

(iv) If the JV Companies do not have sufficient retained capital to build-out the capacity and the JV Companies are unable to secure debt financing on reasonable terms to fund all or part of the expansion (either in full or when combined with existing retained capital), then if Bunge Netherlands refuses to make a capital contribution to cover a capital call made pursuant to the immediately preceding subsection or its Board members refuse to agree to make such a capital call then, if Solazyme, Inc. stands ready to fully fund its own capital contribution, Solazyme, Inc. may fund such capital contribution in addition to its own capital contribution and thereby dilute Bunge Netherland’s ownership in the Company accordingly. An increased capital contribution and consequent changes to Percentage Interests pursuant to this Section 8.5(c)(iv) will be deemed to have been approved by the Board.

(v) If the JV Companies do not have sufficient retained capital to build-out the capacity and the JV Companies are unable to secure debt financing on reasonable terms to fund all or part of the expansion (either in full or when combined with existing retained capital), then if Solazyme, Inc. refuses to make a capital

 

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* Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.


contribution to cover a capital call made pursuant to an Expansion Notice that it has delivered or its Board members refuse to agree to make such a capital call made pursuant to an Expansion Notice that it has delivered, then Bunge Netherlands may fund such capital contribution in addition to its own capital contribution and thereby dilute Solazyme Inc’s ownership in the Company accordingly . An increased capital contribution and consequent changes to Percentage Interests pursuant to this Section 8.5(c)(v) will be deemed to have been approved by the Board.

(d) If the Board (i) does not determine within the Election Period that SB Oils will attempt to expand such capacity even though the JV Companies are profitable and it is commercially reasonable for SB Oils to attempt to expand its capacity or (ii) does determine within the Election Period that SB Oils will attempt to expand such capacity but the Bunge Group intentionally causes SB Oils to fail to Commence Construction of the expansion within * of such determination to expand capacity, then notwithstanding Sections 6.4 and 6.5, Solazyme, Inc. may cause SB Oils to undertake the expansion at the sole expense of Solazyme, Inc. and Solazyme, Inc. funding will dilute Bunge Netherlands’ ownership in the Company accordingly. Solazyme, Inc. shall have the right to fund the expansion and dilute Bunge Netherlands’ ownership in the Company pursuant to this Section 8.5(d) only if it and its Board representatives have supported the expansion in relation to the actions described in clauses (i) and (ii) above.

(e) For the avoidance of doubt an Expansion Notice delivered by Bunge shall not be able to trigger a reduction in the ownership interest of Solazyme, Inc. in the Company.

ARTICLE 9

OPERATIONAL LOSSES

9.1 Operational Losses .

(a) If SB Oils posts operating losses (including for this purpose payments made to members of the Solazyme Group and/or Bunge Group pursuant to the Development Agreements) that either (X) continue for * after (and not including) calendar year 2013, or (Y) aggregate at least *, but in no event before the end of 2013, either BGI or Solazyme, Inc. may provide a notice (a “ * Notice ”) to the other Notice Party requesting that *. Upon receipt of a * Notice, the Parties shall work in good faith to *. If the Parties are unable to agree upon and implement such * within six (6) months after the date of the * Notice, then either Notice Party may send a notice (a “ Section 9.1(a) Notice ”) to the other Notice Party that states (i) that the sending Notice Party desires to terminate this Agreement, and (ii) upon such termination, whether the sending Notice Party elects to buy-out the receiving Notice Party’s interests in the Company. As permitted by this Section 9.1(a), either Notice Party may send a Section 9.1(a) Notice to the other Notice Party at any time after six (6) months after the date of the * Notice but before the 12-month anniversary of the date of the *