TerraVia Holdings, Inc. - FORM 10-Q - November 6, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from              to             
Commission File Number: 001-35189
 
Solazyme, Inc.
(Exact name of Registrant as specified in its charter)
 
 
Delaware
33-1077078
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
Solazyme, Inc.
225 Gateway Boulevard
South San Francisco, CA 94080
(650) 780-4777
(Address and telephone number principal executive offices)
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuance to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date
Class
 
Outstanding at October 31, 2014
Common Stock, $0.001 par value per share
 
79,299,230 shares
 



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


2


PART I: FINANCIAL INFORMATION
Item 1. Financial Statements.
SOLAZYME, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
In thousands, except share and per share amounts
Unaudited
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
60,305

 
$
54,977

Marketable securities
189,876

 
112,544

Accounts receivable, net
7,614

 
10,452

Unbilled revenues
5,684

 
1,101

Inventories
15,408

 
9,836

Prepaid expenses and other current assets
3,807

 
2,907

Total current assets
282,694

 
191,817

Property, plant and equipment, net
38,034

 
40,089

Investment in unconsolidated joint venture
41,896

 
22,532

Other assets
1,692

 
4,267

Total assets
$
364,316

 
$
258,705

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
9,631

 
$
7,949

Accrued liabilities
21,677

 
15,005

Current portion of long-term debt
22

 
65

Deferred revenue
1,912

 
2,275

Total current liabilities
33,242

 
25,294

Deferred revenue
300

 
—

Warrant liability
—

 
688

Long-term debt
—

 
10,374

Convertible debt, inclusive of derivative liabilities of $1,660 and $5,914 at September 30, 2014 and December 31, 2013, respectively; and net of unamortized debt discounts of $11,693 and $4,610 at September 30, 2014 and December 31, 2013, respectively.
201,100

 
83,083

Other liabilities
1,051

 
318

Total liabilities
235,693

 
119,757

Commitments and contingencies (Note 12)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.001—5,000,000 shares authorized; 0 shares issued and outstanding
—

 
—

Common stock, par value $0.001—150,000,000 shares authorized; 79,289,677 and 68,744,534 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
79

 
69

Additional paid-in capital
558,805

 
448,990

Accumulated other comprehensive loss
(6,669
)
 
(3,794
)
Accumulated deficit
(423,592
)
 
(306,317
)
Total stockholders’ equity
128,623

 
138,948

Total liabilities and stockholders’ equity
$
364,316

 
$
258,705

See accompanying notes to the unaudited condensed consolidated financial statements.

3


SOLAZYME, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except share and per share amounts
Unaudited
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Research and development programs
$
5,936

 
$
5,824

 
$
17,896

 
$
14,764

Product revenues
11,623

 
4,797

 
27,993

 
13,712

Total revenues
17,559

 
10,621

 
45,889

 
28,476

Costs and operating expenses:
 
 
 
 
 
 
 
Cost of product revenues
6,598

 
1,450

 
14,458

 
4,400

Research and development
20,571

 
17,556

 
63,470

 
46,191

Sales, general and administrative
25,883

 
15,708

 
68,127

 
46,010

Total costs and operating expenses
53,052

 
34,714

 
146,055

 
96,601

Loss from operations
(35,493
)
 
(24,093
)
 
(100,166
)
 
(68,125
)
Other income (expense):
 
 
 
 
 
 
 
Interest and other income, net
365

 
347

 
993

 
1,066

Interest expense
(3,553
)
 
(1,961
)
 
(9,955
)
 
(5,642
)
Loss from equity method investments
(7,201
)
 
(2,360
)
 
(15,313
)
 
(5,541
)
Gain (loss) from change in fair value of warrant liability
—

 
200

 
688

 
(425
)
Gain (loss) from change in fair value of derivative liabilities
6,205

 
(2,836
)
 
6,478

 
(4,386
)
Total other income (expense)
(4,184
)
 
(6,610
)
 
(17,109
)
 
(14,928
)
Net loss
$
(39,677
)
 
$
(30,703
)
 
$
(117,275
)
 
$
(83,053
)
Net loss per share, basic and diluted
(0.50
)
 
(0.47
)
 
(1.57
)
 
(1.32
)
Weighted average number of common shares used in loss per share computation, basic and diluted
78,866,597

 
64,811,632

 
74,716,284

 
62,782,668

See accompanying notes to the unaudited condensed consolidated financial statements.


4


SOLAZYME, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
In thousands
Unaudited
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(39,677
)
 
$
(30,703
)
 
$
(117,275
)
 
$
(83,053
)
Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Change in unrealized gain/loss on available-for-sale securities
(154
)
 
98

 
(206
)
 
(235
)
Foreign currency translation adjustment
(4,878
)
 
(75
)
 
(2,668
)
 
(492
)
Other comprehensive income (loss)
(5,032
)
 
23

 
(2,874
)
 
(727
)
Total comprehensive loss
$
(44,709
)
 
$
(30,680
)
 
$
(120,149
)
 
$
(83,780
)
See accompanying notes to the unaudited condensed consolidated financial statements.


5

SOLAZYME, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Unaudited


 
Nine Months Ended September 30,
 
2014
 
2013
Operating activities:
 
 
 
Net loss
$
(117,275
)
 
$
(83,053
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
4,686

 
3,592

Gain on sale of available for sale securities
(8
)
 
—

Net amortization of premiums on marketable securities
1,169

 
1,332

Amortization of debt discount
1,405

 
941

Amortization of loan fees
189

 
307

Warrant expense related to vesting of ADM Warrant
478

 
—

Debt conversion expense
1,766

 
—

Stock-based compensation expense
18,693

 
14,452

Loss from equity method investments
15,677

 
5,541

Revaluation of warrant liability
(688
)
 
425

Revaluation of derivative liabilities
(6,478
)
 
4,386

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(3,631
)
 
(6,925
)
Unbilled revenue
(4,581
)
 
595

Inventories
(5,572
)
 
(1,591
)
Prepaid expenses and other current assets
(918
)
 
469

Other assets
3,582

 
—

Accounts payable
4,674

 
(850
)
Accrued liabilities
6,712

 
1,795

Deferred revenue
(63
)
 
2,154

Other current and long-term liabilities
736

 
(487
)
Net cash used in operating activities
(79,447
)
 
(56,917
)
Investing activities:
 
 
 
Purchases of property, plant and equipment
(5,638
)
 
(6,528
)
Purchases of marketable securities
(169,789
)
 
(115,110
)
Maturities of marketable securities
84,605

 
94,801

Proceeds from sales of marketable securities
6,551

 
9,419

Capital contributions in unconsolidated joint venture
(30,550
)
 
(7,431
)
Capitalized interest related to unconsolidated joint venture
(620
)
 
(831
)
Restricted cash
(732
)
 
—

Net cash used in investing activities
(116,173
)
 
(25,680
)
Financing activities:
 
 
 
Repayments under loan agreements
(10,417
)
 
(14,902
)
Proceeds from the issuance of senior subordinated convertible notes, net of debt discount
143,894

 
119,750

Proceeds from the issuance of common stock
7,427

 
3,260

Proceeds from issuance of common stock, pursuant to ESPP
1,441

 
1,039

Proceeds from issuance of common stock in a public offering, net of underwriting discounts and commission
59,259

 
—

Early exercise of stock options subject to repurchase
(4
)
 
(26
)
Proceeds from borrowings under loan agreements
—

 
10,369

Payment for loan costs and fees
(465
)
 
(541
)
Cash settlement of vested restricted stock units
(68
)
 
—

Net cash provided by financing activities
201,067

 
118,949

Effect of exchange rate changes on cash and cash equivalents
(119
)
 
10

Net increase of cash and cash equivalents
5,328

 
36,362

Cash and cash equivalents — beginning of period
54,977

 
30,818

Cash and cash equivalents — end of period
$
60,305

 
$
67,180

Supplemental disclosures of cash flow information:
 
 
 
Interest paid in cash, net of capitalized interest
$
3,838

 
$
3,480

Income taxes paid in cash
$
—

 
$
—

Supplemental disclosure of noncash investing and financing activities:
 
 
 
Capital assets in accounts payable and accrued liabilities
$
432

 
$
1,115

Change in unrealized (loss) gain on marketable securities
$
(206
)
 
$
(235
)
Foreign currency translation adjustment related to unconsolidated joint venture
$
(2,629
)
 
$
—

Capital contribution to unconsolidated joint venture settled with reduction of receivable from unconsolidated joint venture
$
6,500

 
$
—

Common stock issued in lieu of cash bonus
$
—

 
$
121

Common stock issued in connection with use and operation of the Clinton Facility
$
—

 
$
2,655

Conversion of Senior Convertible Notes to common stock
$
2,461

 
$
40,616

Early conversion payment on Senior Convertible Notes settled in common stock
$
217

 
$
3,602

Conversion of Senior Convertible Notes pursuant to inducement settled in common stock
$
18,125

 
$
—

See accompanying notes to the unaudited condensed consolidated financial statements.

6


SOLAZYME, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Solazyme, Inc. (the “Company”) was incorporated in the State of Delaware on March 31, 2003. The Company’s proprietary technology uses highly optimized microalgae in an industrial fermentation process to transform a growing range of abundant plant-based sugars into high-value triglyceride oils and other bioproducts. The Company’s renewable products can replace or enhance products derived from the world’s three existing oil sources: petroleum, plants, and animal fats. The Company has the ability to tailor the composition of its oils and other bioproducts to address specific customer requirements, offering superior performance characteristics and value. The Company has pioneered an industrial biotechnology platform that harnesses the oil-producing characteristics of microalgae. The Company uses standard industrial fermentation equipment to efficiently scale and accelerate microalgae’s natural oil production time to a few days. By feeding plant-based sugars to the Company’s proprietary oil-producing microalgae in dark fermentation tanks, the Company is in effect utilizing “indirect photosynthesis.” The Company’s technology platform is feedstock flexible and can utilize a wide variety of renewable plant-based sugars, including 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 future. Beyond triglyceride oils and other bioproducts, the Company’s technology platform allows it to also produce and sell specialty algal meal products for a range of product applications that utilize the protein, fiber and other compounds found in the cell wall and algal body of the microalgae. In January 2014, the Company commenced commercial operations at both Archer Daniels Midland Company's Clinton, Iowa facility, and the downstream companion facility operated by American Natural Processors, Inc. in Galva, Iowa ("Clinton/Galva Facilities"). In May 2014, the Company's joint venture with Bunge Global Innovation, LLC (together with its affiliates, "Bunge") produced its first commercially saleable products at the Solazyme Bunge Renewable Oils plant in Brazil ("Solazyme Bunge JV Plant").
The Company expects ongoing losses as it continues to scale-up its manufacturing, continues with its research and development activities and supports commercialization activities for its products. The Company plans to meet its capital requirements primarily through equity financing, collaborative agreements and the issuance of debt securities.
The industry in which the Company is involved is highly competitive and is characterized by the risks of changing technologies, market conditions, and regulatory requirements. Penetration into markets requires investment of considerable resources and continuous development efforts. The Company’s future success depends upon several factors, including the technological quality, price, and performance of its products and services relative to those of its competitors, scaling up of production for commercial sale, ability to secure adequate project financing at appropriate terms, and the nature of regulation in its target markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
Basis of Presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s condensed consolidated financial position, results of operations and cash flows for the periods presented. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Solazyme Brazil Renewable Oils and Bioproducts Limitada (“Solazyme Brazil”), the operations of which began in the first quarter of 2011, and Solazyme Manufacturing 1, L.L.C, which was formed to own the Peoria, Illinois facility assets and related promissory note in the second quarter of 2011. All intercompany accounts and transactions have been eliminated in consolidation.
The Company has an interest in an active joint venture entity that is a variable interest entity (“VIE”). Determining whether to consolidate a VIE in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, requires judgment in assessing (i) whether an entity is a VIE entity and (ii) if the Company is the entity’s primary beneficiary and thus required to consolidate the entity. To determine if the Company is the primary beneficiary of a VIE, the Company evaluates whether it has (i) the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.
On November 3, 2010, the Company entered into a joint venture, Solazyme Roquette Nutritionals, LLC (“SRN”), with Roquette Frères, S.A. (“Roquette”), 50% owned by the Company and 50% owned by Roquette. The Company determined that this joint venture was a VIE and the Company was not required to consolidate its 50% ownership in this joint venture. Therefore, this joint venture was accounted for under the equity method of accounting. In June 2013, the Company and Roquette agreed to dissolve SRN and on July 18, 2013, SRN was dissolved (see Note 8).

7


On April 2, 2012, the Company entered into a joint venture agreement ("Joint Venture Agreement") with 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 was not required to consolidate the 50.1% ownership in this joint venture and therefore accounts for this joint venture under the equity method of accounting (see Note 8).
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company’s interim financial information. The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, or for other interim periods or future years.
These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the United States Securities and Exchange Commission (“SEC”) on March 14, 2014. The December 31, 2013 unaudited interim condensed consolidated balance sheet included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes required by GAAP for complete financial statements.
Significant Accounting Policies – Except as described below, there have been no changes to the Company’s significant accounting policies since the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Inventories - Beginning in 2014, inventories also include manufacturing and related third party contract costs associated with the production of the Company's intermediate/ingredient products that met applicable regulatory requirements. Prior to products' meeting any applicable regulatory requirements, and during scale-up of the manufacturing process to nameplate capacity, a portion of the manufacturing and related production costs are charged to research and development expenses.
Product Revenue - Product revenue is recognized from the sale of the Company's branded consumer products, which currently includes its Algenist® and EverDeep® skin care lines, and from the sale of the Company's intermediate/ingredient products including its Tailored™ oil products and blended fuel sales, the latter of which is part of the Company's fuels marketing and development programs.
Recent Accounting Pronouncements – In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently assessing the impact of the adoption of ASU 2014-09 on its consolidated financial statements.
3. BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per share is computed by dividing the Company’s net loss by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by giving effect to all potentially dilutive securities, including stock options, restricted stock units and common stock warrants. Basic and diluted net loss per share was the same for all periods presented as the inclusion of all potentially dilutive securities outstanding was anti-dilutive.

8


The following table summarizes the Company’s calculation of basic and diluted net loss per share (in thousands, except share and per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Numerator
 
 
 
 
 
 
 
Net loss
$
(39,677
)
 
$
(30,703
)
 
$
(117,275
)
 
$
(83,053
)
Denominator
 
 
 
 
 
 
 
Weighted-average number of common shares used in net loss per share calculation
78,866,597

 
64,823,095

 
74,716,970

 
62,802,684

Less: Weighted-average shares subject to repurchase
—

 
(11,463
)
 
(686
)
 
(20,016
)
Denominator: basic and diluted
78,866,597

 
64,811,632

 
74,716,284

 
62,782,668

Net loss per share, basic and diluted
$
(0.50
)
 
$
(0.47
)
 
$
(1.57
)
 
$
(1.32
)

The following outstanding shares of potentially dilutive securities were excluded from the calculation of diluted net loss per share for the three and nine months ended September 30, 2014 and 2013, as their effect was anti-dilutive:
 
September 30,
 
2014
 
2013
Options to purchase common stock
11,363,128

 
10,202,053

Common stock subject to repurchase
—

 
8,623

Restricted stock units
2,028,289

 
1,909,224

Warrants to purchase common stock
1,250,000

 
1,500,000

Shares of common stock to be issued upon conversion of convertible debt ("Notes")
18,790,996

 
9,905,521

Total
33,432,413

 
23,525,421

This table does not reflect (1) the series of warrants issued to Archer-Daniels-Midland Company (“ADM”) in March 2013 for payment in stock or cash, at the Company’s election, of future annual fees for use and operation of a portion of the ADM fermentation facility in Clinton, Iowa (the “Clinton Facility”) under the Strategic Collaboration Agreement (the "Collaboration Agreement") (Note 10) and (2) early conversion payment features of the Notes (see Notes 5 and 11) that may be settled, at the Company’s election, in cash or, subject to satisfaction of certain conditions, in shares of the Company’s common stock.
4. MARKETABLE SECURITIES
Marketable securities classified as available-for-sale consisted of the following (in thousands):
 
September 30, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Corporate bonds
$
69,856

 
$
33

 
$
(90
)
 
$
69,799

Asset-backed securities
56,285

 
13

 
(36
)
 
56,262

Commercial paper
30,596

 
2

 
—

 
30,598

Mortgage-backed securities
21,348

 
31

 
(81
)
 
21,298

Government and agency securities
9,208

 
7

 
(5
)
 
9,210

Municipal bonds
2,704

 
5

 
—

 
2,709

Total
$
189,997

 
$
91

 
$
(212
)
 
$
189,876

 

9


 
December 31, 2013
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Corporate bonds
$
45,414

 
$
75

 
$
(7
)
 
$
45,482

Asset-backed securities
21,222

 
12

 
(8
)
 
21,226

Mortgage-backed securities
15,110

 
33

 
(26
)
 
15,117

Commercial paper
13,890

 
2

 
—

 
13,892

Government and agency securities
12,255

 
9

 
—

 
12,264

Municipal bonds
3,817

 
—

 
(4
)
 
3,813

Certificates of deposit
750

 
—

 
—

 
750

Total
$
112,458

 
$
131

 
$
(45
)
 
$
112,544

The following table summarizes the amortized cost and fair value of the Company’s marketable securities, classified by stated maturity as of September 30, 2014 and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Marketable securities
 
 
 
 
 
 
 
Due in 1 year or less
$
62,295

 
$
62,305

 
$
59,384

 
$
59,448

Due in 1-2 years
53,133

 
53,116

 
21,628

 
21,641

Due in 2-3 years
36,349

 
36,300

 
10,063

 
10,060

Due in 3-4 years
10,958

 
10,961

 
—

 
—

Due in 4-9 years
10,404

 
10,402

 
7,587

 
7,610

Due in 9-20 years
1,350

 
1,361

 
1,629

 
1,639

Due in 20-33 years
15,508

 
15,431

 
12,167

 
12,146

 
$
189,997

 
$
189,876

 
$
112,458

 
$
112,544

Marketable securities classified as available-for-sale are carried at fair value as of September 30, 2014 and December 31, 2013. Realized gains and losses from sales and maturities of marketable securities were not significant in the periods presented.
The aggregate fair value of available-for-sale securities with unrealized losses was $95.3 million as of September 30, 2014. Gross unrealized losses on available-for-sale securities were $0.2 million as of September 30, 2014, and the Company believes the gross unrealized losses are temporary. In determining that the decline in fair value of these securities was temporary, the Company considered the length of time each security was in an unrealized loss position and the extent to which the fair value was less than cost. The aggregate fair value and unrealized loss of available-for-sale securities which had been in a continuous loss position for more than 12 months was $2.7 million and $27,000 as of September 30, 2014, respectively. In addition, the Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities before the recovery of their amortized cost basis.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Assets and liabilities recorded at fair value in the 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. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

10


The following tables present the Company’s financial instruments that were measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 by level within the fair value hierarchy (in thousands):
 
September 30, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$
20,701

 
$
6,353

 
$
—

 
$
27,054

Marketable securities
1,803

 
188,073

 
—

 
189,876

Total
$
22,504

 
$
194,426

 
$
—

 
$
216,930

Financial Liabilities
 
 
 
 
 
 
 
Derivative liabilities
$
—

 
$
—

 
$
1,660

 
$
1,660

 
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$
15,683

 
$
5,869

 
$
—

 
$
21,552

Marketable securities
—

 
112,544

 
—

 
112,544

Total
$
15,683

 
$
118,413

 
$
—

 
$
134,096

Financial Liability
 
 
 
 
 
 
 
Derivative liability
$
—

 
$
—

 
$
5,914

 
$
5,914

Warrant liability
—

 
—

 
688

 
688

Total
$
—

 
$
—

 
$
6,602

 
$
6,602

The Company had no transactions measured at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013.
Cash Equivalents and Marketable Securities – Cash equivalents and marketable securities classified within Level 2 of the fair value hierarchy are valued based on other observable inputs, including broker or dealer quotations or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes, which are based on proprietary valuation models of independent pricing services. These models generally use inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers and internal assumptions of the independent pricing services. The Company corroborates the reasonableness of non-binding quotes received from the independent pricing services by comparing them to quotes of identical or similar instruments from other pricing sources. During the three and nine months ended September 30, 2014 and 2013, the Company did not record impairment charges related to its cash equivalents and marketable securities, and the Company did not have any transfers between Level 1, Level 2 and Level 3 of the fair value hierarchy.
Derivative Liabilities – In January 2013, the Company issued 6.00% Convertible Senior Subordinated Notes due 2018 (the "2018 Notes") and, in April 2014, the Company issued 5.00% Convertible Senior Subordinated Notes due 2019 (the “2019 Notes” collectively with the 2018 Notes, the "Notes"). Each of the 2018 Notes and the 2019 Notes contain an early conversion payment feature pursuant to which a holder may convert its Notes into shares of the Company's common stock. With respect to any conversion of 2018 Notes prior to November 1, 2016 or any conversion of 2019 Notes prior to January 1, 2018 (other than conversions in connection with certain fundamental changes), in addition to the shares deliverable upon conversion, holders are entitled to receive an early conversion payment equal to $83.33 per $1,000 principal amount of Notes surrendered for conversion that may be settled, at the Company’s election, in cash or, subject to satisfaction of certain conditions, in shares of the Company’s common stock. These early conversion payment features have been identified as embedded derivatives and are separated from the host contracts, the Notes, and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. The Company has concluded that the embedded derivatives related to the early conversion payment features of the Notes meet these criteria and, as such, must be valued separate and apart from the Notes and recorded at their fair values at each reporting period. At each reporting period, the Company records these embedded derivatives at their fair values, which are included as a component of Convertible Debt on its condensed consolidated balance sheets. The fair values of the embedded derivatives are trued up on a recurring basis as Note holders early convert their Notes and receive the early conversion payment.
The Company used a Monte Carlo simulation model to estimate the fair values of the embedded derivatives related to the early conversion payment features of the Notes. Historically, using the Monte Carlo model, the value of the embedded

11


derivative was based on the assumption that the Notes will be converted early if the conversion value is greater than the holding value. Beginning in the second quarter of 2014, using the Monte Carlo model, the Company valued these embedded derivatives using a “with-and-without method,” where the value of the Notes including the embedded derivatives, is defined as the “with”, and the value of the Notes excluding the embedded derivatives, is defined as the “without.” This method estimates the value of the embedded derivatives by observing the difference between the value of the Notes with the embedded derivatives and the value of the Notes without the embedded derivatives. The Company believes the "with-and-without method" results in a measurement that is more representative of the fair value of the embedded derivatives.
The model requires the following inputs: (i) price of the Company’s common stock; (ii) conversion rate of shares of common stock per $1,000 in principal amount of Notes, subject to adjustment; (iii) conversion price per share of common stock, subject to adjustment; (iv) maturity date of the Notes and early payment feature; (v) estimated credit spread (historically the risk-free interest rate); and (vi) estimated stock volatility.
The following tables set forth the Level 3 inputs to the Monte Carlo simulation models that were used to determine the fair values of the embedded derivatives for the Notes:
Constant Inputs
2018 Notes
 
2019 Notes
Conversion rate
121.1240

 
75.7576

Conversion price
$
8.26

 
$
13.20

Maturity date of the Notes
February 1, 2018

 
October 1, 2019

Maturity date of early payment feature
November 1, 2016

 
January 1, 2018


Variable Inputs
September 30,
2014

April 1,
2014
 
December 31,
2013

Notes

2019 Notes
 
2018 Notes
Stock price
$
7.46

 
$
11.79

 
$
10.89

Risk-free interest rate
N/A


N/A

 
1.31
%
Estimated credit spread
890 basis points

 
960 basis points

 
N/A

Estimated stock volatility
55
%

53
%
 
50
%
Changes in certain inputs into the model can have a significant impact on changes in the estimated fair values of the embedded derivatives. The following table sets forth the estimated fair values of the embedded derivatives (in thousands):
 
September 30,
2014
 
April 1,
2014
 
December 31,
2013
2018 Notes
$
815

 
N/A

 
$
5,914

2019 Notes
$
845

 
$
3,903

 
N/A

The $5.1 million net decrease in the estimated fair value of the embedded derivative for the 2018 Notes between December 31, 2013 and September 30, 2014 represents an unrealized gain of $4.1 million that has been recorded as gain from change in fair value of derivative liabilities in the condensed consolidated statements of operations for the nine months ended September 30, 2014, and fair value adjustments related to conversions made in the nine months ended September 30, 2014 of $1.0 million. The $3.1 million decrease in the estimated fair value of the embedded derivative for the 2019 Notes between the issuance date of April 1, 2014 and September 30, 2014 represents an unrealized gain that has been recorded as a gain from change in fair value of derivative liabilities in the condensed consolidated statements of operations for the nine months ended September 30, 2014.
Warrant Liability – The valuation of the warrant liability above is discussed in Note 8.

12


The following table presents the change in fair values of the Company’s Level 3 financial instruments that were measured on a recurring basis using significant unobservable inputs as of September 30, 2014 (in thousands):
 
 
Fair value at December 31, 2013
$
6,602

Fair value of derivative liability for 2019 Notes recorded on measurement date
3,903

Change in fair value of derivative liabilities of the Notes recorded as a gain
(7,154
)
Adjustment to fair value of derivative liability related to early conversion of the 2018 Notes
(1,003
)
Change in fair value of warrant liability recorded as a gain
(688
)
Fair value at September 30, 2014
$
1,660

The Company has estimated the fair value of its secured and unsecured debt obligations based upon discounted cash flows with Level 3 inputs, such as the terms that management believes would currently be available to the Company for similar issues of debt, taking into account the current credit risk of the Company and other factors. As of September 30, 2014 and December 31, 2013 the carrying values of the Company’s secured and unsecured debt obligations, excluding the Notes, approximated their fair values. The Company has estimated the fair value of the Notes to be $225.5 million at September 30, 2014 based upon Level 2 inputs using the market price of the Notes derived from actual trades quoted from Bloomberg, and the fair value of the 2018 Notes to be $117.7 million at December 31, 2013 using a midmarket pricing convention (the midpoint price between bid and ask prices) quoted from Bloomberg.
6. INVENTORIES
Inventories consisted of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
Raw materials
$
1,821

 
$
1,318

Work in process
8,505

 
6,191

Finished goods
5,082

 
2,327

Total inventories
$
15,408

 
$
9,836

7. PROPERTY, PLANT AND EQUIPMENT—NET
Property, plant and equipment—net consisted of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
Plant equipment
$
29,808

 
$
25,918

Building and improvements
5,807

 
5,514

Lab equipment
7,544

 
6,445

Leasehold improvements
2,637

 
2,659

Computer equipment and software
4,071

 
3,387

Furniture and fixtures
651

 
603

Land
430

 
430

Automobiles
194

 
49

Construction in progress
2,830

 
6,378

Total
53,972

 
51,383

Less: accumulated depreciation and amortization
(15,938
)
 
(11,294
)
Property, plant and equipment—net
$
38,034

 
$
40,089

Construction in progress as of September 30, 2014 and December 31, 2013 related primarily to the Peoria and Clinton/Galva Facilities and other plant equipment not yet placed in service as of those dates.
Depreciation and amortization expense was $1.6 million and $4.7 million for the three and nine months ended September 30, 2014, respectively, and $1.3 million and $3.6 million for the three and nine months ended September 30, 2013, respectively.

13


8. INVESTMENTS IN JOINT VENTURES AND RELATED PARTY TRANSACTIONS
Solazyme Bunge Joint Venture
In April 2012, the Company and Bunge formed the Solazyme Bunge JV to build, own and operate the Solazyme Bunge JV Plant, a commercial-scale renewable algal oils production facility adjacent to Bunge’s Moema sugarcane mill in Brazil. The Company expects this production facility to have annual production capacity of 100,000 MT of oil. Construction of the Solazyme Bunge JV Plant commenced in the second quarter of 2012. In May 2014, the Solazyme Bunge JV Plant produced its first commercially saleable products on full-scale production lines, including 625,000 liter fermentation tanks. Both oil and Encapso™ lubricant products have been manufactured; production is continuing and is expected to ramp toward nameplate capacity as the Company works to increase efficiency in unit operations, and balances production volumes with operating costs as it focuses on higher value products. The Company expects that additional capital expenditures may be required to reach nameplate capacity depending on the product mix produced at the plant. The Solazyme Bunge JV Plant leverages the Company’s technology and Bunge’s sugarcane milling and natural oil processing capabilities to produce microalgae-based products. The Solazyme Bunge JV is 50.1% owned by the Company and 49.9% by Bunge and is governed by a four member board of directors, two from each investor. The capital contributions for this venture are being provided jointly by Solazyme and Bunge, and the agreement includes a value sharing mechanism that provides additional compensation to the Company for its technology contributions. The Company committed to make an initial capital contribution of up to $36.3 million in fiscal 2012 and, additional capital contributions of up to an additional $36.3 million beginning after December 31, 2012, primarily to fund the construction of the Solazyme Bunge JV Plant. The Company and Bunge each contributed capital in the amount of $59.3 million through September 30, 2014, comprised of $37.0 million, $12.3 million and $10.0 million during the nine months ended September 30, 2014 and during the years ended December 31, 2013 and 2012, respectively, to the Solazyme Bunge JV. In August 2014, the Company contributed $6.5 million to the Solazyme Bunge JV through a reduction in the Company’s receivables due from the Solazyme Bunge JV of $6.5 million. The Company and Bunge each contributed capital in the amount of $1.0 million in October 2014. The Company’s capital contributions paid in cash were recorded as an increase to investment in unconsolidated joint venture and a corresponding decrease to cash and cash equivalents.
The Company has determined that the Solazyme Bunge JV is a VIE based on the insufficiency of each party’s equity investment at risk to absorb losses and the Company’s share of the respective expected losses of the Solazyme Bunge JV. Currently, the construction of the Solazyme Bunge JV Plant is the activity of the Solazyme Bunge JV that most significantly impacts its economic performance. Although the Company has the obligation to absorb losses and the right to receive benefits of the Solazyme Bunge JV that could potentially be significant to the Solazyme Bunge JV, each of the Company and Bunge has equally shared decision–making powers over certain significant activities of the Solazyme Bunge JV, including those related to the construction of the Solazyme Bunge JV Plant. Therefore, the Company does not consider itself to be the Solazyme Bunge JV’s primary beneficiary at this time, and as such has not consolidated the financial results of the Solazyme Bunge JV since the inception of this joint venture. The Company accounts for its interests in the Solazyme Bunge JV under the equity method of accounting. This consolidation status could change in the future due to changes in events and circumstances impacting the power to direct the activities that most significantly affect the Solazyme Bunge JV’s economic performance. The Company will continue to reassess its potential designation as the primary beneficiary of the Solazyme Bunge JV. During the three and nine months ended September 30, 2014 the Company recognized $7.2 million and $15.7 million of losses, respectively, related to its equity method investment in the Solazyme Bunge JV. During the three and nine months ended September 30, 2013 the Company recognized $2.3 million and $4.1 million of losses, respectively, related to its equity method investment in the Solazyme Bunge JV.
In anticipation of the Solazyme Bunge JV’s formation, in May 2011, the Company granted Bunge a warrant (the "Bunge Warrant”) to purchase 1,000,000 shares of its common stock at an exercise price of $13.50 per share. The Bunge Warrant was to vest (i) 25% on the date that Solazyme and Bunge entered into a joint venture agreement to construct and operate a commercial-scale renewable oil production facility ("first tranche"); (ii) 50% upon the commencement of construction of the Solazyme Bunge JV Plant ("second tranche"); and (iii) 25% on the date upon which the aggregate output of triglyceride oil at the Solazyme Bunge JV Plant reached 1,000 MT ("third tranche"). The number of warrant shares issuable was subject to adjustment for failure to achieve the performance milestones on a timely basis, as well as certain changes to the capital structure of Solazyme Bunge JV and corporate transactions. The Bunge Warrant expires in May 2021.
The Company accounts for the Bunge Warrant pursuant to ASC 505-50, Equity-Based Payments to Non-Employees, which establishes that share-based payment transactions with nonemployees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued (whichever is more reliably measurable), and the measurement date of such instruments shall be the earlier of the date at which a commitment for performance by the counterparty is reached or the date at which 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

14


large disincentives for nonperformance. The measurement date of the Bunge Warrant was April 2, 2012, the formation date of Solazyme Bunge JV, as it was determined that the future performance to earn the Bunge Warrant shares was probable.
On April 2, 2012, the Company recorded an investment in the Solazyme Bunge JV of $10.4 million, equal to the fair value of the Bunge Warrant, and recorded a corresponding $2.7 million of additional paid-in capital for the vested first tranche of the Bunge Warrant shares and $7.7 million of warrant liability for the unvested Bunge Warrant shares as of that date. The fair value of the Bunge Warrant was determined using the Black-Scholes option pricing model. The warrant liability is remeasured to fair value at each balance sheet date and/or upon vesting, and the warrant liability is reclassified to additional paid-in capital upon vesting. On June 20, 2012, the second tranche of the Bunge Warrant shares vested, resulting in a reclassification of $4.6 million, which represented the fair value as of that date, to additional paid-in capital. The Company had a $0.7 million warrant liability associated with the unvested third tranche of the Bunge Warrant shares as of December 31, 2013. The fair value of the warrant liability was determined using the Black-Scholes option pricing model based upon the following assumptions as of December 31, 2013: volatility of 50%, risk-free interest rate of 2.45%, exercise price of $13.50 and an expected life of 7.34 years. As of June 30, 2014, the Company had no warrant liability associated with the Bunge Warrant shares as the third tranche could no longer vest. The Company recorded a net unrealized gain related to the change in the fair value of the warrant liability of $0 and $0.7 million during the three and nine months ended September 30, 2014, respectively, and a net unrealized gain of $0.2 million and a net unrealized loss of $0.4 million during the three and nine months ended September 30, 2013, respectively. As of September 30, 2014, 750,000 of the Bunge Warrant shares had vested.
In addition to forming the Solazyme Bunge JV in April 2012, the Company entered into a Development Agreement with the Solazyme Bunge JV to continue to conduct research and development activities that are intended to benefit the Solazyme Bunge JV, including activities in the areas of strain development, molecular biology and process development. The Development Agreement provides that the Solazyme Bunge JV will pay the Company a technology maintenance fee in recognition of the Company’s ongoing research investment in technology that would benefit the Solazyme Bunge JV. The Company also entered into a Technology Service Agreement with the Solazyme Bunge JV under which the Solazyme Bunge JV will pay the Company for technical services related to the operations of the production facility. In the third quarter of 2013, the Solazyme Bunge JV also agreed to pay the Company to support the Solazyme Bunge JV’s commercial activities, including, but not limited to, facilitating supply agreements on behalf of the Solazyme Bunge JV and providing regulatory support.
In November 2012, the Company entered into a joint venture expansion framework agreement with Bunge. This framework agreement sets forth the intent of the partners to expand joint venture-owned oil production capacity from the current 100,000 MT under construction in Brazil to 300,000 MT by 2016 at select Bunge owned and operated processing facilities worldwide. In addition, the Company and Bunge amended the Joint Venture Agreement in October 2013 to expand the field and product portfolio of the Solazyme Bunge JV. The Company and Bunge intend to work together through joint market development to bring new, healthy and nutritious edible oils to the Brazilian market.
In February 2013, the Solazyme Bunge JV entered into a loan agreement with the Brazilian Development Bank (“BNDES” or “BNDES Loan”) under which it may borrow up to R$245.7 million (approximately USD $100.8 million based on the exchange rate as of September 30, 2014). As a condition of the Solazyme Bunge JV drawing funds under the loan, the Company may be required to provide a bank guarantee equal to 14.39% of the total amount available under the BNDES Loan and a corporate guarantee equal to 35.71% of the total amount available under the BNDES Loan (an amount not to exceed the Company’s ownership percentage in the Solazyme Bunge JV). The BNDES funding supports the construction of the Solazyme Bunge JV’s first commercial-scale production facility in Brazil, which will reduce the capital requirements funded directly by the Company and Bunge. The term of the BNDES Loan is eight years and the loan has an average interest rate of approximately 4.0% per annum. As of September 30, 2014, the Company’s bank guarantee was in place and the corporate guarantee was not in place. The fees incurred on the cancelable bank guarantee were not material during the three and nine months ended September 30, 2014.
The following table summarizes the carrying amounts of the assets and the fair value of the liabilities included in the Company’s condensed consolidated balance sheet and the maximum loss exposure related to the Company’s interest in its unconsolidated VIE (the Solazyme Bunge JV) as of September 30, 2014 (in thousands):
 
Assets
 
Liabilities
 
 
VIE
Accounts
Receivable
 
Unbilled
Revenues
 
Investment in
Unconsolidated
Joint Ventures
 
Loan
Guarantee
 
Maximum
Exposure
to Loss (1)
Solazyme Bunge JV
$
4,083

 
$
5,287

 
$
41,896

 
$
—

 
$
66,847

 
(1)
Includes maximum exposure to loss attributable to the Company’s bank guarantee required to be provided for the Solazyme Bunge JV of R$35.4 million (approximately $14.5 million based on the exchange rate at September 30, 2014)

15


and non-cancelable purchase obligations of R$2.6 million (approximately $1.1 million based on the exchange rate at September 30, 2014).
The Company may be required to contribute additional capital to the VIE (for which the Company does not consider itself to be the primary beneficiary) in the future, which would increase the Company’s maximum exposure to loss. These future contribution amounts cannot be quantified at this time.
Summarized information on the Solazyme Bunge JV’s balance sheets and income statements as of June 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013, respectively, was as follows (in thousands):
 
September 30,
2014
 
December 31,
2013
Current assets
$
3,974

 
$
9,872

Noncurrent assets
197,746

 
127,346

Total assets
$
201,720

 
$
137,218

Current liabilities
40,853

 
20,798

Noncurrent liabilities
90,737

 
90,933

JV's partners' capital, net
70,130

 
25,487

Total liabilities and partners' capital, net
$
201,720

 
$
137,218

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net sales
$
540

 
$
—

 
$
540

 
$
—

Net losses
$
10,992

 
$
4,289

 
$
23,822

 
$
7,350

Solazyme Roquette Joint Venture
In November 2010, the Company entered into a joint venture agreement with Roquette. The purpose of the joint venture, Solazyme Roquette Nutritionals, LLC (“SRN”), was to engage in manufacturing, distribution, sales, marketing and support of products and services related to the use of microalgae to which the Company has not applied its targeted recombinant technology, in a fermentation production process to produce materials for use in the following fields: (i) human foods and beverages, (ii) animal feed and (iii) nutraceuticals. In June 2013, the Company and Roquette agreed to dissolve SRN and on July 18, 2013, SRN was dissolved. After assessing the recoverability of SRN amounts capitalized on the Company’s balance sheet, the Company recorded charges to Loss From Equity Method Investments in its condensed consolidated statement of operations of $0.7 million for unrecoverable receivables due from SRN, and $0.7 million for unrecoverable capital contributions made to SRN during the nine months ended September 30, 2013.
The Company had determined that SRN was a VIE based on the insufficiency of each party’s equity investment at risk to absorb losses and the Company’s share of the respective expected losses of SRN. Prior to SRN’s dissolution, the Phase 1 plant operations and market development activities were the activities of SRN that most significantly impacted its economic performance. The Company did not have the obligation to absorb the losses of SRN that could potentially be significant to SRN, and the Company and Roquette had equally shared decision-making powers over certain significant activities of SRN. Therefore, the Company did not consider itself to be SRN’s primary beneficiary since inception of this joint venture and as such had never consolidated the financial results of SRN. The Company accounted for its interests in SRN under the equity method of accounting.
Related Party Transactions
The Company recognized revenues related to its research and development arrangements with the Solazyme Bunge JV of $3.3 million and $10.2 million during the three and nine months ended September 30, 2014, respectively, and $3.4 million and $5.1 million in the three and nine months ended September 30, 2013, respectively. The Company also recognized product revenues from sales to the Solazyme Bunge JV of $1.3 million and $2.7 million during the three and nine months ended September 30, 2014, respectively, and $0 in the three and nine months ended September 30, 2013. At September 30, 2014 and December 31, 2013, the Company had receivables of $4.1 million and $6.9 million, respectively, due from the Solazyme Bunge JV. At September 30, 2014 and December 31, 2013, the Company had unbilled revenues of $5.3 million and $1.1 million, respectively, related to the Solazyme Bunge JV.

16


9. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
Accrued compensation and related liabilities
$
8,252

 
$
7,959

Accrued interest
4,439

 
2,166

Accrued professional fees
698

 
350

Accrued litigation settlement
4,750

 
—

Accrued costs under the Collaboration Agreement
1,732

 
2,629

Other accrued liabilities
1,806

 
1,901

Total accrued liabilities
$
21,677

 
$
15,005

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

Unilever—Effective November 2009, the Company entered into a collaborative research and development agreement with Conopco, Inc. (doing business as Unilever) to develop oil for use in soap and other products. The Company completed the research and development under this agreement in the year ended December 31, 2010. In the first quarter of 2011, the Company and Unilever agreed to extend their research and development agreement through June 30, 2011.
In October 2011, the Company entered into a joint development agreement with Unilever (the Company’s fourth agreement with Unilever), which expanded its current research and development efforts. In September 2013 the Company and Unilever entered into a commercial supply agreement for at least 10,000 MT of the Company's algal oil, and in September 2014, the Company and Unilever agreed to extend the joint development agreement through September 30, 2015.
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 commenced in 2010 and is near completion. The payments received are not refundable and are based on a contractual reimbursement of costs incurred.
During the three and nine months ended September 30, 2014 and 2013, the Company recognized no revenues from the DOE. The Company had no unbilled revenue and no deferred revenue balances related to this award as of September 30, 2014 and December 31, 2013.
Algenist® Distribution Partners—The Company entered into a 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 Sephora Americas stores (which currently includes locations in the United States and Canada). Under both arrangements, the Company pays the majority of the costs associated with marketing the products, although both Sephora EMEA and Sephora Americas contribute in the areas of public relations, training and marketing to support the brand. Sephora EMEA creates the marketing material, but the Company has an approval right over the materials and ultimately the Company has control over the marketing budget. With Sephora Americas, the Company is responsible for creating certain marketing and training materials. The Company is obligated to fund minimum marketing expenditures under the agreement with Sephora EMEA. The Company has also granted a license to Sephora Americas and Sephora EMEA to use the Algenist® trademarks and logos to advertise and promote the product line. In March 2011, the Company entered into an agreement with QVC, Inc. (“QVC”) and launched the sale of its Algenist® product line through QVC’s multimedia platform. In July 2014, the Company entered into an agreement with ULTA Beauty to sell the Algenist® line in its retail stores throughout the United States.
Bunge —In May 2011, the Company entered into a joint development agreement (“JDA”) with Bunge, a global agribusiness and food company, that extended through May 2013. In September 2013, the Company and Bunge agreed to extend the JDA, effective from May 2013 through September 2014. Pursuant to the JDA, the Company and Bunge will jointly develop microbe-derived oils, and explore the production of such oils from Brazilian sugarcane feedstock. The JDA also provides for Bunge to provide research funding to the Company through September 2014, 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, Research and Development Arrangements, and records the payments for

17


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 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 algal oils production facility adjacent to Bunge’s Moema sugarcane mill in Brazil (see Note 8).
ADM—In November 2012, the Company and ADM entered into the Collaboration Agreement, establishing a collaboration for the production of algal triglyceride oil products at the Clinton Facility. In January 2014, the Company began commercial scale production of its products at the Clinton Facility using the Company's proprietary microbe-based catalysis technology. Feedstock for the facility is provided by ADM’s adjacent wet mill. Under the terms of the Collaboration Agreement, the Company pays ADM annual fees for use and operation of a portion of the Clinton Facility, a portion of which may be paid in Company common stock. In March 2013, the Company issued a series of warrants to ADM for payment in stock, in lieu of cash, at its election, of future annual fees for use and operation of a portion of the Clinton Facility. Downstream processing of products produced at the Clinton Facility is being done at a facility in Galva, Iowa ("Galva Facility") operated by a wholly owned subsidiary of American Natural Processors, Inc. The initial target nameplate capacity of the Clinton Facility is expected to be 20,000 MT per year of algal triglyceride oil products. Solazyme has an option to expand the capacity to 40,000 MT per year with the potential to further expand production to 100,000 MT per year. The parties are also working together to develop markets for the products produced at the Clinton Facility.
In January 2013, the Company granted to ADM a warrant (“ADM Warrant”) to purchase 500,000 shares of the Company’s common stock, which vests in equal monthly installments over five years, commencing in November 2013. In addition, the Company shall grant to ADM a warrant (“ADM Extension Warrant”) covering an additional 500,000 shares of the Company’s common stock upon the extension of the Collaboration Agreement for each further five year term, which shall vest in equal monthly installments over the applicable five year extension term. The measurement date of the ADM Warrant was established in July 2013 when the Company agreed that vesting of the ADM Warrant would commence in November 2013; therefore, it was determined that the future performance to earn the ADM Warrant shares was probable. The Company recognizes on a straight-line basis, the fair value of the ADM Warrant to rent expense beginning on the measurement date and over the lease term.
During the three and nine months ended September 30, 2014, the Company recorded rent expense related to the ADM Warrant of $0.1 million and $0.5 million, respectively, equal to the estimated fair value of the ADM Warrant shares that had vested over the lease term since the measurement date. The estimated fair value of the ADM Warrant shares that had vested was determined using the Black-Scholes option pricing model based upon the following assumptions during the nine months ended September 30, 2014: average volatility of 54%, average risk-free interest rate of 1.63%, exercise price of $7.17, stock price range of $9.32 to $12.97 and range of expected remaining life of 4.4 to 5.0 years. As of September 30, 2014, 91,666 of the ADM Warrant shares had vested.
Mitsui—In February 2013, the Company entered into a $20.0 million multi-year agreement with Mitsui & Co., Ltd. (“Mitsui”) to jointly develop a suite of triglyceride oils for use primarily in the oleochemical industry. Product development is expected to span a multi-year period, with periodic product introductions throughout the term of the joint development alliance. End use application may include renewable, high-performance polymer additives for plastic applications, aviation lubricants and toiletry and household products. Milestones within the Mitsui joint development agreement that are determined to be substantive and at risk at the inception of the arrangement are recognized as revenue upon achievement of the milestone, and are limited to those amounts for which collectability is reasonably assured. If these conditions are not met, the milestone payments are deferred and recognized as revenue over the estimated period of performance under the contract as completion of performance obligations occur. The Company recognized $0 and $1.5 million of revenue related to substantive milestones achieved under the Mitsui joint development agreement during the three and nine months ended September 30, 2014, respectively, and $0 and $4.0 million of revenue related to substantive milestones achieved under the Mitsui joint development agreement during the three and nine months ended September 30, 2013, respectively.

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11. DEBT
A summary of the Company’s debt as of September 30, 2014 and December 31, 2013 is as follows (in thousands):
 
September 30,
2014
 
December 31,
2013
Secured and unsecured debt
 
 
 
Equipment note
$
22

 
$
70

HSBC facility
—

 
10,369

Total secured and unsecured debt
22

 
10,439

Convertible senior subordinated notes
211,133

 
81,779

Total debt
211,155

 
92,218

Add:
 
 
 
Fair value of embedded derivative
1,660

 
5,914

Less:
 
 
 
Unamortized debt discount
(11,693
)
 
(4,610
)
Current portion of debt
(22
)
 
(65
)
Long-term portion of debt
$
201,100

 
$
93,457

Total interest costs incurred related to the Company’s total debt were $2.8 million and $7.2 million for the three and nine months ended September 30, 2014, respectively, and $1.3 million and $4.8 million for the three and nine months ended September 30, 2013, respectively. Total interest costs capitalized during the three and nine months ended September 30, 2014 were $0 and $0.6 million, respectively, and $0.2 million and $0.8 million during the three and nine months ended September 30, 2013, respectively, related to the Company’s investment in the Solazyme Bunge JV, accounted for under the equity method, which had activities in progress necessary to commence its planned principal operations through May 2014. The Company was in compliance with all debt covenants as of September 30, 2014 and December 31, 2013.
Equipment Note—In June 2010, the Company entered into a secured promissory note agreement with the lessor of its headquarters under which $265,000 was borrowed to purchase equipment owned by the lessor. The loan is payable in monthly installments of principal and interest with final payment due in January 2015. Interest accrues at 9.0% and the promissory note is collateralized by the purchased equipment.
Silicon Valley Bank Term Loan—On May 11, 2011, the Company entered into a loan and security agreement with Silicon Valley Bank (“SVB”) that provided for a $20.0 million credit facility (the “SVB facility”) consisting of (i) a $15.0 million term loan that was eligible to be borrowed in one or more increments prior to November 30, 2011 and (ii) a $5.0 million revolving facility (the “SVB revolving facility”). As of December 31, 2012, $11.2 million was outstanding under the SVB facility. On March 26, 2013, the SVB facility was terminated when the Company paid in full the outstanding principal and interest on this term loan using proceeds from the revolving facility with HSBC, USA, National Association, described in “HSBC Facility” below.
Peoria Facility Note—In March 2011, the Company entered into an agreement to purchase a development and commercial production facility with multiple 128,000-liter fermenters, and an annual oil production capacity of over 2,000,000 liters (1,820 MT) located in Peoria, Illinois ("Peoria Facility") for $11.5 million. This transaction closed in May 2011, and the Company paid for the aggregate purchase price with available cash and borrowed $5.5 million under a promissory note, mortgage and security agreement from the seller. The Company began initial fermentation operations in the facility in the fourth quarter of 2011 and commissioned its first integrated biorefinery in June 2012 under its DOE program. The principal was paid in two lump sum payments in March 2012 and February 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 was recognized as interest expense over the loan term utilizing the effective interest method.
HSBC Facility—In March 2013, the Company entered into a loan and security agreement with HSBC Bank, USA, National Association (“HSBC”) that provides for a $30.0 million revolving facility (the “HSBC facility”) for working capital, letters of credit denominated in U.S. dollars or a foreign currency and other general corporate purposes, and in May 2013 the Company entered into an amendment to the HSBC facility, increasing the HSBC facility amount to $35.0 million. On March 26, 2013, the Company drew down approximately $10.4 million under the HSBC facility to repay all outstanding loans plus accrued interest under the SVB facility (as defined above). The Company incurred debt issuance costs of approximately $0.2 million related to this draw down, that was recorded in other long-term assets and is being amortized to interest expense

19


using the effective interest method over the contractual term of the loan. On June 27, 2014, the remaining outstanding balance of the HSBC facility was paid in full. A portion of the HSBC facility also supports the bank guarantee issued to BNDES in May 2013 (see Note 8). Therefore, approximately $20.5 million of the HSBC facility remained available as of September 30, 2014.
The HSBC facility is unsecured unless (i) the Company takes action that could cause or permit obligations under the HSBC facility not to constitute Senior Debt (as defined in the indenture), (ii) the Company breaches financial covenants that require the Company and its subsidiaries to maintain cash and unrestricted cash equivalents at all times of not less than $35.0 million plus 110% of the aggregate dollar equivalent amount of outstanding advances and letters of credit under the HSBC facility, or (iii) there is a payment default under the facility or bankruptcy or insolvency events relating to the Company.
Advances under the HSBC facility will bear interest at a variable interest rate based on, at the Company’s option at the time an advance is requested, either (i) the Base Rate (as defined in the HSBC facility) plus the applicable Base Rate Margin (as defined in the HSBC facility), or (ii) the Eurodollar Rate (as defined in the HSBC facility) plus the applicable Eurodollar Rate Margin (as defined in the HSBC facility). The Company will pay HSBC an annual fee of two and one-half percent (2.50%) per annum with respect to letters of credit issued. Upon an event of default, outstanding obligations under the HSBC facility will bear interest at a rate of two percent (2.00%) per annum above the rates described in (i) and (ii) above. The interest rate for total debt outstanding under the HSBC facility was 2.7% as of June 27, 2014. The original maturity date of the facility was March 26, 2015, which was extended to May 31, 2016 effective in March 2014. If on the maturity date (or earlier termination date of the HSBC facility), there are any outstanding letters of credit, the Company will be required to provide HSBC with cash collateral in the amount of (i) for letters of credit denominated in U.S. dollars, up to one hundred five percent (105%), and (ii) for letters of credit denominated in a foreign currency, up to one hundred ten percent (110%), of the dollar equivalent of the face amount of all such letters of credit plus all interest, fees and costs.
In addition to the financial covenants and covenants related to the indenture referenced above, the Company is subject to customary affirmative and negative covenants and events of default under the HSBC facility including certain restrictions on borrowing. If an event of default occurs and continues, HSBC may declare all outstanding obligations under the HSBC facility immediately due and payable, with all obligations being immediately due and payable without any action by HSBC upon the occurrence of certain events of default or if the Company becomes insolvent.
Convertible Senior Subordinated Notes—On January 24, 2013 the Company issued $125.0 million aggregate principal amount of 2018 Notes, which amount includes the exercise in full of the over-allotment option granted to the initial purchaser of the 2018 Notes, in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The 2018 Notes bear interest at a fixed rate of 6.00% per year, payable semiannually in arrears on August 1 and February 1 of each year, beginning on August 1, 2013. The 2018 Notes are convertible into the Company’s common stock and may be settled as described below. The 2018 Notes will mature on February 1, 2018, unless earlier repurchased or converted. The Company may not redeem the 2018 Notes prior to maturity.
The 2018 Notes are convertible at the option of the holders at any time prior to the close of business on the scheduled trading day immediately preceding February 1, 2018 into shares of the Company’s common stock at the then-applicable conversion rate. The conversion rate is initially 121.1240 shares of common stock per $1,000 principal amount of 2018 Notes (equivalent to an initial conversion price of approximately $8.26 per share of common stock). With respect to any conversion prior to November 1, 2016 (other than conversions in connection with certain fundamental changes where the Company may be required to increase the conversion rate as described below), in addition to the shares deliverable upon conversion, holders are entitled to receive an early conversion payment equal to $83.33 per $1,000 principal amount of 2018 Notes surrendered for conversion that may be settled, at the Company’s election, in cash or, subject to satisfaction of certain conditions, in shares of the Company’s common stock.
On June 19, 2014, the Company entered into note exchange agreements (the “Exchange Agreements”) with certain holders of the 2018 Notes pursuant to which such holders agreed to exchange approximately $17.5 million in aggregate principal amount of their 2018 Notes, together with accrued interest thereon through the settlement date of the Exchange Agreements, with the Company for 2,409,964 shares of the Company's common stock. The Exchange Agreements settled on June 30, 2014. As the Exchange Agreements were considered induced conversions under the applicable accounting guidance, the Company recognized $1.8 million of debt conversion expense reflected in interest expense in the condensed consolidated statements of operations during the nine month ended September 30, 2014, representing the fair value of the securities transferred in excess of the fair value of the securities issuable upon the original conversion terms of the 2018 Notes. As of September 30, 2014, $63.4 million of the 2018 Notes had been converted into the Company’s common stock and were reclassified from long-term debt to stockholders’ equity in the condensed consolidated balance sheets. During the three and nine months ended September 30, 2014, the Company issued nil and 2,743,475 shares of its common stock, respectively, to settle both the 2018 Note conversions and early conversion payments, including the settlements under the Exchange Agreements. The Company had $61.6 million aggregate principal amount of 2018 Notes outstanding as of September 30, 2014.

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On April 1, 2014, the Company issued $149.5 million aggregate principal amount of 5.00% Convertible Senior Subordinated 2019 Notes, which amount includes the exercise in full of the over-allotment option granted to the underwriters, in a public offering pursuant to an effective shelf registration statement. The 2019 Notes bear interest at a fixed rate of 5.00% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. The 2019 Notes are convertible into the Company's common stock and may be settled early as described below. The 2019 Notes will mature on October 1, 2019, unless earlier repurchased or converted. The Company may not redeem the 2019 Notes prior to maturity.
The 2019 Notes are convertible at the option of the holders on any day prior to and including the scheduled trading day prior to October 1, 2019. The 2019 Notes will initially be convertible at a conversion rate of 75.7576 shares of Common Stock per $1,000 principal amount of 2019 Notes (equivalent to an initial conversion price of $13.20 per share of Common Stock), subject to adjustment upon the occurrence of certain events. With respect to any conversion prior to January 1, 2018 (other than conversions in connection with certain fundamental changes where the Company may be required to increase the conversion rate as described below), in addition to the shares deliverable upon conversion, holders are entitled to receive an early conversion payment equal to $83.33 per $1,000 principal amount of 2019 Notes surrendered for conversion that may be settled, at the Company’s election, in cash or shares of Common Stock. The Company had $149.5 million aggregate principal amount of 2019 Notes outstanding as of September 30, 2014.
The net proceeds from both Note offerings were approximately $262.6 million, after deducting discounts to the initial purchaser of $10.9 million and debt issue costs of $1.0 million. Debt discounts incurred with the issuance of the Notes were recorded on the condensed consolidated balance sheets as a reduction to the associated Note balances. The Company amortizes the debt discounts to interest expense over the contractual or expected term of the Notes using the effective interest method. Debt issuance costs were recorded in other long-term assets and are being amortized to interest expense over the contractual or expected term of the Notes using the effective interest method. The Company is currently using the net proceeds of the offering to fund project related costs and capital expenditures and for general corporate purposes.
The Company issued the Notes pursuant to indenture agreements by and between the Company and Wells Fargo Bank, National Association, as trustee. The indentures provide for customary events of default, including cross acceleration to certain other indebtedness of the Company and its significant subsidiaries.
If the Company undergoes a fundamental change, holders may require the Company to repurchase for cash all or part of their Notes at a purchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if certain fundamental changes occur, the Company may be required in certain circumstances to increase the conversion rate for any Notes converted in connection with such fundamental changes by a specified number of shares of its common stock.
The Company evaluated the embedded derivatives resulting from the early conversion payment features within the indenture for bifurcation from the Notes. The early conversion payment features were not deemed clearly and closely related to the Notes and were bifurcated as embedded derivatives. The Company recorded these embedded derivatives (derivative liabilities) at fair value, which are included as a component of Convertible Debt on its condensed consolidated balance sheets with corresponding debt discounts that are netted against the principal amount of the Notes. The derivative liabilities are remeasured to fair value at each balance sheet date, with a resulting non-cash gain or loss related to the change in the fair value of the derivative liabilities being recorded in other income and expense. The Company determined the fair value of the embedded derivatives using a Monte Carlo simulation model. See Note 5.
The Notes are the general unsecured obligations of the Company and will be subordinated in right of payment to any senior debt outstanding. The Notes will be equal or senior in right of payment to any of the Company’s indebtedness other than senior debt. The Notes will effectively rank junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness and be structurally junior to all indebtedness and other liabilities of the Company’s subsidiaries, including trade payables.
12. COMMITMENTS AND CONTINGENCIES
Operating Lease Agreements
The Company records rent expense under its lease agreements on a straight-line basis. Differences between actual lease payments and rent expense recognized under these leases results in a deferred rent asset or a deferred rent liability at each reporting period. The Company had a deferred rent liability of $1.1 million as of September 30, 2014, and a deferred rent asset of $3.6 million and a deferred rent liability of $0.3 million as of December 31, 2013.
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 current lease will end in February 2015.

21


In July 2014, the Company entered into a new lease agreement for the SSF properties, under which it will lease approximately 10,000 additional square feet of office and laboratory space for a total of 106,000 square feet. The term of the new lease commences in February 2015 and ends in January 2018. This lease agreement includes scheduled rent increases over the lease term, and the Company was required to provide the landlord with letters of credit amounting to $0.7 million, which was recorded to restricted cash in the condensed consolidated balance sheets as of September 30, 2014. In addition, the landlord will reimburse the Company up to $1.6 million of improvements to the leased property, subject to certain requirements. This reimbursement is considered a lease incentive and shall be recognized as a deferred lease incentive liability and recognized as a reduction of rent expense by the Company on a straight-line basis over the term of the lease.
In September 2014, the Company entered into a new lease agreement for approximately 5,000 square feet of office space located in Glendale, California. The term of the new lease commences in November 2014 and ends in October 2017.
The Company also leases office and laboratory space in Brazil. The term of the lease is five years, and the lease commenced on April 1, 2011 and expires on April 1, 2016. The rent is currently 35,300 Brazilian Real (approximately $14,500 based on the exchange rate at September 30, 2014) 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.
The Company entered into several auto lease agreements during the years ended December 31, 2012 and 2013. These lease agreements contain early cancellation penalties ranging from 50% - 80% of their remaining lease values. The remaining value of the leases as of September 30, 2014 was 0.3 million Brazilian Real (approximately $0.1 million based on the exchange rate at September 30, 2014).
The Company entered into a Strategic Collaboration Agreement with ADM in November 2012 (See Note 10). The Company pays ADM annual fees for the use and operation of a portion of the Clinton Facility, a portion which may be paid in the Company’s common stock. During the year ended December 31, 2013, the Company made two payments to ADM in both cash and by issuing 770,761 shares of its common stock, which was recorded to deferred rent asset and equity. The common stock and cash payments made under the Strategic Collaboration Agreement are accounted for as an operating lease. In January 2013, the Company granted to ADM a warrant (“ADM Warrant”) to purchase 500,000 shares of the Company’s common stock, which vests in equal monthly installments over five years, commencing in November 2013. In addition, the Company shall grant to ADM a warrant (“ADM Extension Warrant”) covering an additional 500,000 shares of the Company’s common stock upon the extension of the Collaboration Agreement for each further five year term, which shall vest in equal monthly installments over the applicable five year extension term. The exercise price of the ADM Warrant is $7.17 per share and expires in January 2019. In July 2013, the measurement date for the ADM Warrant was established (See Note 10).
Downstream processing of products produced at the Clinton Facility is performed at the Galva Facility. The Company entered into a Manufacturing Services and Facility Licensing Agreement (“Manufacturing and Facility Agreement”) in June 2013 with a wholly owned subsidiary of American Natural Processors, Inc. for the use and operation of the Galva Facility, a portion of which may be paid in the Company’s common stock. As of September 30, 2014, no payments under the Manufacturing and Facility Agreement had been made in common stock. The cash payments under the Manufacturing and Facility Agreement are accounted for as an operating lease.
Rent expense was $2.6 million and $7.9 million for the three and nine months ended September 30, 2014, respectively, and $2.1 million and $4.5 million for the three and nine months ended September 30, 2013, respectively.
Contractual Obligations—As of September 30, 2014 the Company had non-cancelable purchase obligations of $0.9 million.
The Company has various manufacturing, research, and other contracts with vendors in the conduct of the normal course of its business. All contracts are terminable with varying provisions regarding termination. If a contract with a specific vendor were to be terminated, the Company would only be obligated for the products or services that the Company had received at the time the termination became effective.
Guarantees and Indemnifications—The Company makes certain indemnities, commitments, and guarantees under which it may be required to make payments in relation to certain transactions. The Company, as permitted under Delaware law and in accordance with its amended and restated certificate of incorporation and amended and restated bylaws, indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The duration of these indemnifications, commitments, and guarantees varies and, in certain cases, is indefinite. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer insurance policy that may enable it to recover all or a portion of any future amounts paid. The Company believes the fair value of these indemnification agreements is minimal. The Company has not recorded any liability for these

22


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.
In February 2013, the Solazyme Bunge JV entered into a loan agreement with BNDES under which it may borrow up to R$245.7 million (approximately USD $100.8 million based on the exchange rate as of September 30, 2014), which will support the production facility in Brazil, including a portion of the construction costs of the facility. As a condition of the Solazyme Bunge JV drawing funds under the BNDES Loan, the Company may be required to provide a bank guarantee and a corporate guarantee for a portion of the BNDES Loan (in an amount not to exceed its ownership percentage in the Solazyme Bunge JV). As of September 30, 2014 the bank guarantee was in place and the corporate guarantee was not. See also Note 8.
On December 17, 2013, the Solazyme Bunge JV entered into a Loan Facility Agreement with Bunge Alimentos S.A. (the “Loan Facility”). The Company agreed to guarantee repayment of 50% of the portion of the Loan Facility to be utilized for operational expenses, up to maximum aggregate advances of $5.0 million. As of March 31, 2014, a total of $10.0 million (of which the Company is the guarantor of $5.0 million) had been drawn down under the Loan Facility. Outstanding advances guaranteed by the Company were paid off in full by the Solazyme Bunge JV on April 8, 2014.
Legal 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.
In July 2012, a complaint was filed in the Los Angeles Superior Court by Therabotanics, LLC and Solabotanics, LLC against the Company, Sephora USA, Inc. and the Company's Senior Vice President Frederic Stoeckel alleging various causes of action in connection with the Company’s joint venture with Therabotanics. The Plaintiffs alleged that the Company misappropriated assets of the joint venture and failed to produce an infomercial with the joint venture. The Plaintiffs claimed unspecified damages and injunctive relief. In June 2013, the Company filed an Answer in which it denied each and every allegation made by the Plaintiffs in their Complaint and filed a Cross-Complaint against Therabotanics and certain named individuals. In January 2014, the Plaintiffs filed a Third Amended Complaint in which the Company's Chief Executive Officer, Jonathan Wolfson, and Sephora, S.A. were added as additional defendants. In September 2014 the parties agreed to settle the litigation in exchange for a settlement payment from the Company to Therabotanics of $4.8 million, which was paid in October 2014. As of September 30, 2014, the $4.8 million litigation settlement amount was accrued in the condensed consolidated balance sheets, and the Company recorded $3.9 million and $4.8 million of litigation expense to sales, general and administrative expenses in its condensed consolidated statements of operations in the three and nine months ended September 30, 2014, respectively. As part of the settlement the Company denied all claims made by the Plaintiffs and all parties granted releases to all other parties. The Company maintains corporate insurance and the insurer has confirmed that it will reimburse a portion of both the litigation settlement and external legal fees that is estimated at $0.3 million ($0.2 million for portion of the litigation settlement and $0.1 million for external legal fees).
While there can be no assurances as to the ultimate outcome of any legal proceeding or other loss contingencies involving the Company, management does not believe any pending matters individually and in the aggregate will be resolved in a manner that would have a material effect on the Company’s condensed consolidated financial position, results of operations or cash flows.
13. STOCK-BASED COMPENSATION AND COMMON STOCK
The Company’s stock-based compensation plans include the Second Amended and Restated Equity Incentive Plan (the “2004 EIP”), the 2011 Equity Incentive Plan (the “2011 EIP”) and the Employee Stock Purchase Plan (the “2011 ESPP”). On May 25, 2011, in conjunction with the Company’s initial public offering, the 2004 EIP terminated so that no further awards may be granted under the 2004 EIP. Although the 2004 EIP terminated, all outstanding awards will continue to be governed by their existing terms. The plans are administered by the Board of Directors, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award. The Board of Directors has delegated certain authority to the Compensation Committee with respect to administration of the plans. See Note 14 to the Company’s Consolidated Financial Statements, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, for additional information related to these stock-based compensation plans.

23


The following table summarizes the components and classification of stock-based compensation expense related to stock options, restricted stock units and awards (“RSUs” and “RSAs”), performance-based restricted stock units (“PSUs”) and the 2011 ESPP for the three and nine months ended September 30, 2014 and 2013 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Stock options
$
3,340

 
$
3,073

 
$
11,670

 
$
9,601

RSUs/RSAs
2,748

 
1,728

 
6,665

 
4,114

PSUs
—

 
264

 
—

 
334

ESPP
200

 
166

 
358

 
403

Stock-based compensation expense
$
6,288

 
$
5,231

 
$
18,693

 
$
14,452

Research and development
1,941

 
$
1,544

 
$
5,671

 
$
4,111

Sales, general and administrative
4,347

 
3,687

 
13,022

 
10,341

Stock-based compensation expense
$
6,288

 
$
5,231

 
$
18,693

 
$
14,452

Common Stock Warrants—In May 2011, the Company granted Bunge a warrant to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $13.50 per share. As of September 30, 2014, 750,000 of the warrant shares had vested and the remaining 250,000 warrant shares can no longer vest. Refer to Note 8 for a description of the vesting terms and a discussion of the accounting for the Bunge Warrant.
In January 2013, the Company granted ADM a warrant to purchase 500,000 shares of the Company’s common stock at an exercise price of $7.17 per share. The warrant vests in equal monthly installments over five years, commencing in November 2013 and the warrant expires in January 2019. As of September 30, 2014, 91,666 of the warrant shares had vested. In addition, in March 2013 the Company issued a series of warrants to ADM for payment in stock or cash, at its election, of future annual fees for use and operation of the Clinton Facility. In November 2013, the Company issued 423,278 shares of its common stock to ADM upon the exercise by ADM of one of the series of warrants to receive a payment in cash, stock or combination thereof, for the use and operation of a portion of the Clinton Facility. See Note 10 and Note 12.
Performance-Based Restricted Stock Units—As of December 31, 2013, 100,000 shares of PSUs were unvested. During the three months ended March 31, 2014, 100,000 shares of unvested PSUs were canceled, and there were no shares of unvested PSUs as of March 31, 2014. No additional PSUs were granted during the nine months ended September 30, 2014.
Common Stock Offering—On April 1, 2014, the Company issued 5,750,000 shares of its common stock, par value $0.001 per share, at $11.00 per share (the "Common Stock Offering"). The net proceeds from the Common Stock Offering were approximately $59.3 million, after deducting underwriter discounts and commissions and estimated offering expenses payable by the Company.
14. EMPLOYEE BENEFIT PLAN
In January 2007, the Company adopted a 401(k) plan for its employees whereby eligible employees may contribute up to 90% of their compensation, on a pretax basis, subject to the maximum amount permitted by the Internal Revenue Code. The Company has not contributed to, nor is it required to contribute to, the 401(k) plan since its inception.

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

Forward-Looking Statements
The following discussion and analysis should be read together with our condensed consolidated financial statements and the other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations and involves risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. For example, statements regarding our expectations as to future financial and operating performance, future selling prices and margins for our products, attributes and performance of our products, manufacturing capacity, 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, 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 renewable oils and other bioproducts. Our proprietary technology uses highly optimized microalgae in an industrial fermentation process to transform a growing range of abundant plant-based sugars into high-value triglyceride oils and other bioproducts.
We have the ability to tailor the composition of our oils and bioproducts to address specific customer requirements, offering superior performance characteristics and value, compared with conventionally sourced products. We anticipate that the average selling prices (ASPs) of our products will capture the enhanced value that results from tailoring compositions of oils that enable heightened performance. As such, we expect our products to generate attractive margins in our target markets. In the skin and personal care market, we are currently selling two consumer branded product offerings, our Algenist® and EverDeep® skin care lines. In the first quarter of 2014, we began manufacturing at commercial production scale, and we began selling oil-based intermediate and ingredient products. We expect to sell these oil-based intermediate and ingredients products broadly to customers in the fuels and chemicals, oil field services and nutrition markets. We expect the average margins on these intermediate and ingredient products will be lower than those of our branded consumer products; however, we believe the sales volumes for the intermediate and ingredient products will be higher as we expand our large scale production. We have entered into sales agreements and partnership agreements to advance commercialization efforts. In addition to development agreements to fund development work and new product application testing, we expect that our partners will enter into long-term purchase agreements with us. We are currently engaged in development activities with multiple partners.
The inherent flexibility of our technology platform and the broad usage of triglyceride oils and functional fluids across multiple industries allow us to approach a wide range of customers across a number of end markets. We have many oils in various stages of development that can address multiple end industrial markets.
We are also developing food oils and powders targeted at nutritional markets. Our food oils are formulated to offer a variety of functional benefits such as enhanced structuring capabilities and stability while providing robust formulation and process flexibility. In addition, we have developed novel methods of preparing powdered food ingredients, which we are commercializing under our brand name, AlgaViaTM, namely AlgaViaTM Whole Algal Flour and AlgaViaTM Whole Algal Protein. These powdered ingredients are composed of whole algal cells, which include the cell wall, oil and other valuable cellular products held within the cell.  
Our process is compatible with commercial-scale and widely-available fermentation equipment. We operate our lab and pilot fermentation and recovery equipment as scaled-down versions of our large commercial engineering designs. This allows us to more easily scale up to larger fermentation vessels. We have scaled up our technology platform and have successfully operated at lab (5-15 liter), pilot (600-1,000 liter), demonstration (120,000 liter) and commercial (approximately 500,000 liter and above) fermenter scale. The fermentation equipment used to achieve commercial scale at Archer-Daniels-Midland Company’s (ADM) Clinton Facility is comparable to the fermentation equipment at the Solazyme Bunge Renewable Oils facility in Brazil. Our existing manufacturing operations are as follows:

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

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•
In 2012, we announced successful commissioning of our first fully integrated biorefinery (IBR) at our Peoria, Illinois facility, to produce algal oil. The IBR was partially funded with a federal grant that we received from the U.S. Department of Energy (DOE) in December 2009 to demonstrate integrated commercial-scale production of renewable algae-derived fuels. The Peoria Facility has a nameplate capacity of two million liters of oil annually and provides an important platform for continued work on feedstock flexibility and scaling of new algal oils into the marketplace. We have also modified our Peoria Facility to produce food ingredients in conjunction with market development activity.

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In April 2012, we executed a joint venture agreement with Bunge Global Innovation, LLC and certain of its affiliates (collectively, Bunge) (Joint Venture Agreement), one of the largest sugarcane processing companies in Brazil, establishing a joint venture (Solazyme Bunge JV) to construct and operate a 100,000 MT purpose-built production facility (the Solazyme Bunge JV Plant) adjacent to Bunge’s sugarcane mill in Moema, Brazil. In May 2014, the Solazyme Bunge JV produced its first commercially saleable products on full-scale production lines, including 625,000 liter fermentation tanks. Both oil and Encapso™ lubricant products have been manufactured; production is continuing and is expected to ramp toward nameplate capacity as we work to increase efficiency in unit operations, and balance production volumes with operating costs as we focus on higher value products. We expect that additional capital expenditures may be required to reach nameplate capacity depending on the product mix produced at the plant. See “Significant Partner Agreements.”

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In November 2012, we executed a strategic collaboration agreement with ADM to produce algal triglyceride oil products at ADM’s facility in Clinton, Iowa (the Clinton Facility). In January 2014, we began commercial scale production of our products at the Clinton Facility. See “Significant Partner Agreements.”

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In January 2014, we commenced commercial operations at both the Clinton Facility and the downstream companion facility operated by American Natural Processors, Inc. (ANP). We, along with ADM and ANP, have manufactured four distinct products at the facilities, and products are being sold and distributed. Production at the ADM and ANP facilities is expected to ramp towards nameplate capacity of 20,000 MT/year as we refocus the Clinton Facility on higher margin products such as Encapso™ lubricant and otherwise balance production with operating expenses.

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We utilize contract manufacturing to assist in the production of our Algenist® and EverDeep® products and we closely monitor and advise these contract manufacturers to help ensure that our products meet stringent quality standards. We also produce some active ingredients for Solazyme Consumer Products at our Peoria Facility.
Through fiscal year 2013, our revenues have been generated from research and development programs and commercial sale of our consumer products, and starting in the first quarter of 2014, our product revenues expanded to include intermediate and ingredient products. Our research and development programs have been conducted primarily under key agreements with government agencies and strategic partners to fund development work and perform application testing. We focus our innovation efforts on creating a broad suite of algal products that meet defined market needs. We intend to continue to work closely with our partners and customers to understand their requirements and design products to specifically address their needs.
Within our consumer products business, we have developed a portfolio of innovative and branded microalgae-based consumer products. Our first major ingredient was Alguronic Acid®, which was formulated into a full range of skin care products. Since its launch in March 2011, we have commercialized Algenist®, which is an anti-aging skin care line marketed to date primarily through Sephora S.A. and its affiliates (Sephora) and QVC. In April 2014, our Algenist® line launched at Nordstrom, our first high-end department store retail channel. In July 2014, our Algenist® line launched at ULTA Beauty retail stores throughout the United States. We have also expanded our international distribution and are currently selling in over 2,000 retail stores in 17 countries including member countries of the EU, Mexico, Canada and China. In 2013, we further leveraged our innovative ingredient research and expertise by broadening the Algenist® line to include products that use microalgae oil as a replacement for the essential oils currently used in skin care products.
In November 2013, we launched our second branded skin care line, EverDeep®. EverDeep® uses a new proprietary ingredient, Algasome™ complex, and is sold online and via telephone driven by direct-to-consumer “infomercial” broadcasts. The skin care line utilizes a continuity program and auto-delivery options to strengthen the link with customers to drive repeat sales.
In the first quarter of 2014, we began selling our oil-based intermediate and ingredient products more broadly to customers in the oil field services market with the launch of our Encapso™ lubricant. Our initial commercial use for Encapso™ is as a biodegradable lubricant mud additive in oil and gas drilling.

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Significant Partner Agreements
We currently have joint venture, joint development, supply and distribution arrangements with various strategic partners. We expect to enter into additional partnerships in each of our target markets to advance commercialization of our products and to expand our upstream and downstream capabilities. Upstream, we expect partners to provide research and development funding, capital for commercial manufacturing capacity and/or secure access to feedstock. Downstream, we expect partners to provide expanded distribution channels, product application testing, marketing expertise and/or long-term purchase commitments. Our current principal partnership and strategic arrangements include:
Bunge. In May 2011, we entered into a Joint Development Agreement (the JDA) with Bunge that has been extended through September 2014. Pursuant to the JDA, we and Bunge are jointly developing microbe-derived oils, and exploring the production of such oils from Brazilian sugarcane feedstock.
In anticipation of the Solazyme Bunge JV’s formation, in May 2011, we granted Bunge Limited a warrant (the Bunge Warrant) to purchase 1,000,000 shares of our common stock at an exercise price of $13.50 per share. The Bunge Warrant vested based on a number of milestones connected with the construction and initial operation of the Solazyme Bunge JV Plant. As of June 30, 2014, the Bunge Warrant was vested as to 75% of the shares underlying the Bunge Warrant and the remaining 25% of the shares underlying the Bunge Warrant could no longer vest. The Warrant expires in May 2021.
In April 2012, we and Bunge formed the Solazyme Bunge JV to build, own and operate a commercial-scale renewable algal oil production facility (the Solazyme Bunge JV Plant) adjacent to Bunge’s Moema sugarcane mill in Brazil. The Solazyme Bunge JV Plant leverages our technology and Bunge’s sugarcane milling and natural oil processing capabilities to produce microalgae-based products. In addition, the Solazyme Bunge JV Plant has been designed to be expanded for further production in line with market demand. We expect this production facility to have an annual nameplate production capacity of 100,000 MT of oil. Construction of the Solazyme Bunge JV Plant commenced in the second quarter of 2012 and was financed with equal equity contributions by both Bunge and Solazyme and over $100 million of project financing from the Brazilian Development Bank. In May 2014, the Solazyme Bunge JV Plant produced its first commercially saleable products on full-scale production lines, including 625,000 liter fermentation tanks. Both oil and Encapso™ lubricant products have been manufactured; production is continuing and is expected to ramp toward nameplate capacity as we work to increase efficiency in unit operations, and balance production volumes with operating costs as we focus on higher value products. We expect that additional capital expenditures may be required to reach nameplate capacity depending on the product mix produced at the plant. As a condition of the Solazyme Bunge JV drawing funds under the loan in excess of amounts supported by bank guarantees, we may be required to provide a corporate guarantee of a portion of the loan in an amount that, when added to the amount supported by our bank guarantee, does not exceed our ownership percentage in the Solazyme Bunge JV.
In addition to forming the Solazyme Bunge JV in April 2012, we entered into a Development Agreement with the Solazyme Bunge JV to continue research and development activities that are intended to benefit the Solazyme Bunge JV, including activities in the areas of strain development, molecular biology and process development. The Development Agreement provides that the Solazyme Bunge JV will pay us a technology maintenance fee in recognition of our ongoing research investment in technology that would benefit the Solazyme Bunge JV. We also entered into a Technology Service Agreement with the Solazyme Bunge JV under which the Solazyme Bunge JV will pay us for technical services related to the operations of the plant, including, but not limited to, engineering support for plant operations, operation procedure consultation, product analysis and microbe performance monitoring and assessment. In the third quarter of 2013, the Solazyme Bunge JV also agreed to pay us to support its commercial activities, including, but not limited to, facilitating supply agreements on behalf of the Solazyme Bunge JV and providing regulatory support.
In November 2012, we entered into a joint venture expansion framework agreement with Bunge. This framework agreement sets forth the intent of the partners to expand joint venture-owned oil production capacity from the current 100,000 MT nameplate capacity under construction in Brazil to 300,000 MT by 2016 at select Bunge owned and operated processing facilities worldwide. In addition, we and Bunge amended the Joint Venture Agreement in October 2013 to expand the field and product portfolio of the Solazyme Bunge JV. We and Bunge intend to work together through joint market development to bring new, healthy, edible oils to the Brazilian market.
Refer to Note 8 and Note 10 in the accompanying notes to our condensed consolidated financial statements for further discussion of the Bunge JDA, Joint Venture Agreement and Warrant.
ADM. In November 2012, we entered into a strategic collaboration agreement with ADM, establishing a collaboration for the production of algal triglyceride oil products at the Clinton Facility. The Clinton Facility is producing algal triglyceride oil products using our proprietary microbe-based catalysis technology. Feedstock for the facility is provided by ADM’s adjacent wet mill. Under the terms of the strategic collaboration agreement, we pay ADM annual fees for use and operation of a portion of the Clinton Facility, a portion of which may be paid in our common stock. In addition, in January 2013 we granted to ADM a

27


warrant to purchase 500,000 shares of our common stock, which vests in equal monthly installments over five years, commencing in November 2013. In addition, in March 2013 we issued a series of warrants to ADM for payment in stock, in lieu of cash, at our election, of future annual fees for use and operation of a portion of the Clinton Facility. This facility uses corn sugars as a feedstock and currently has an initial target nameplate capacity of 20,000 MT per year of algal triglyceride oil products, which we are targeting to attain as we refocus the Clinton Facility on higher margin products such as Encapso™ lubricant and otherwise balance production with operating expenses. We have an option to expand the nameplate capacity to 40,000 MT per year with the potential to further expand production to 100,000 MT per year. We are also working together with ADM to develop markets for the products produced at the Clinton Facility. Since the third quarter of 2013, downstream processing has been performed at a finishing facility in Galva, Iowa (Galva Facility), which is operated by our long-term partner, a wholly owned subsidiary of American Natural Processors, Inc. In January 2014, we began commercial scale production of our oils at the Clinton/Galva Facilities.
Mitsui. In February 2013, we entered into a multi-year agreement with Mitsui & Co., Ltd. (Mitsui) to jointly develop triglyceride oils for use primarily in the oleochemical industry. The agreement includes further development of our myristic oil, a valuable raw material in the oleochemical industry, and additional oils that we are developing for the oleochemical and industrial sectors. End use applications may include renewable, high-performance polymer additives for plastic applications, lubricants and toiletry and household products.
Roquette. In November 2010, we entered into a joint venture agreement with Roquette, forming SRN. The purpose of SRN was to engage in manufacturing, distribution, sales, marketing and support of products and services related to the use of microalgae to which we have not applied our targeted recombinant technology in a fermentation production process to produce materials for use in the following fields: (1) human foods and beverages; (2) animal feed; and (3) nutraceuticals. In June 2013, we and Roquette agreed to dissolve SRN and on July 18, 2013, SRN was dissolved.
Algenist® Distribution Partners. In December 2010, we entered into a distribution contract with Sephora EMEA to distribute our Algenist® product line in Sephora EMEA stores in certain countries in Europe and select countries in the Middle East and Asia. In January 2011, we also made arrangements with Sephora Americas to sell our Algenist® product line in Sephora Americas stores (which currently includes locations in the United States and Canada). In October 2011, we launched our Algenist® product line at Sephora inside jcpenney stores in the United States. In March 2011, we entered into an agreement with QVC, Inc. (QVC) and launched the sale of our Algenist® product line through QVC’s multimedia platform. In July 2014, we entered into an agreement with ULTA Beauty to sell our Algenist® line in over 700 of its retail stores throughout the United States.
Unilever. In October 2011, we entered into a joint development agreement with Unilever (our fourth agreement altogether) which expanded our current research and development efforts. In September 2014, we and Unilever extended this joint development agreement through September 30, 2015. In September 2013, we and Unilever entered into a commercial supply agreement for at least 10,000 MT of our algal oil. In May 2014, Unilever announced the initial introduction of our sustainable algal oil into one of its biggest soap brands, Lux.
AkzoNobel. In May 2013 we entered into a joint development agreement with AkzoNobel, a leading global paints and coatings company and a major producer of specialty chemicals, targeting the development and commercial sales of triglyceride oils for use by AkzoNobel in its surface chemistry and decorative paints businesses. Product development efforts began in the second half of 2013, and in July 2014 we entered into a research and development plan with AkzoNobel which extends through June 2017.
Financial Operations Overview
Revenues
We are commercializing our products as intermediate/ingredient products and consumer products. Intermediate/ingredient products encompass a portfolio of ingredient products targeted at customers in the fuels and chemicals, nutrition and oil field services markets. Within consumer products, we are currently selling consumer brands into the skin and personal care market with two branded skin and personal care offerings, our Algenist® and EverDeep® lines. Prior to commercialization of Algenist® in 2011, our revenues were primarily from collaborative research and government grants. Through the end of 2013, our product revenues were entirely from the sale of branded products into the skin and personal care market, providing us with the highest gross margin within our target markets. In the first quarter of 2014, we began to sell intermediate and ingredient products more broadly into the fuels and chemicals and oil field services markets as we began to commercially produce and distribute products from our Clinton/Galva Facilities.
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Research and Development Program Revenues

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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 commercial partners and governmental agencies. These R&D programs are entered into pursuant to agreements and grants 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 34% and 39% of our total revenues for the three and nine months ended September 30, 2014, respectively, as compared to 55% and 52% of our total revenues for the three and nine months ended September 30, 2013, respectively. Revenues from commercial and strategic partner development agreements represented almost 100% of total R&D revenues for both the three and nine months ended September 30, 2014 and 2013.
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Product Revenues
Product revenues consist of revenues from products sold commercially into each of our target markets.
We began our commercialization in the skin and personal care markets within Solazyme Consumer Products. Starting in 2011, we recognized revenues from the sale of our first commercial product line, Algenist®, which we distributed to the skin and personal care end market through arrangements with Sephora S.A. and its affiliates (Sephora), QVC and Space NK in 17 countries including the U.S., member countries of the EU, Mexico, Canada and China, as well as direct-to-consumer sales via the Internet. In the first quarter of 2014, we launched our Encapso™ lubricant, a biodegradable lubricant for drilling fluids in the oil field services market, Tailored™ oil products to customers that use our oil-based intermediate products in the chemicals market, as well as fuel blend sales as part of our effort to build our fuels marketing and commercial development programs; preliminary program efforts include the sale and transfer of blended fuels to private (non-government) customers. We expect our product revenues to increase as the demand for our consumer product lines grow and as we commercialize our portfolio of Tailored™ oil products targeted at customers in the chemicals markets, our advanced biofuel blends in the fuels markets, Encapso™ lubricant in the oil field services market as well as our food products in nutrition markets.
Product revenues represented 66% and 61% of our total revenues for the three and nine months ended September 30, 2014, respectively. Product revenues represented 45% and 48% of our total revenues for the three and nine months ended September 30, 2013, 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, costs associated with our strategic collaboration agreements as well as other third-party contractors and contract manufacturers, reimbursable equipment and costs associated with government contracts, consultants and facility costs, comprise the significant components of these expenses.  
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Cost of Product Revenue
Through the end of 2013, cost of product revenue consisted primarily of third-party contractor costs associated with packaging, distribution and production of Algenist® products, internal labor, shipping, supplies and other overhead costs associated with production of Alguronic Acid®, a microalgae-based active ingredient, and microalgae oil used in our Algenist® product line. Beginning in the first quarter of 2014, cost of product revenue also includes manufacturing and related third party contract costs associated with the production of our oil-based intermediate/ingredient products, such as Encapso™ lubricant, Tailored™ oils and fuels. Prior to our products' meeting any applicable regulatory requirements, all manufacturing and related production costs are recorded as research and development expenses. In the first quarter of 2014, our Encapso™ lubricant and one of our Tailored™ oils met applicable regulatory requirements, and we began capitalizing certain production costs to inventory. From time to time, certain process development costs related to the manufacturing scale up to nameplate capacity may also be expensed to research and development expense. We expect our total cost of product revenue to increase in correlation with increased product sales as the demand for our consumer product lines grows and as we commercialize our portfolio of oil-based intermediate/ingredient products targeted at customers in the fuels and chemicals, oil field services and nutrition markets.
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Research and Development

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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 and JV entities (partners). Research and development expenses consist primarily of personnel and related costs including non-cash stock-based compensation, costs associated with our strategic collaboration agreements as well as other third-party contract manufacturers, reimbursable equipment and costs associated with government contracts. In addition, research and development expenses include certain costs associated with contract manufacturers' facilities, feedstock and supplies, depreciation and amortization of property and equipment used in the development of our algal oil products as well as manufacturing process as we scale up our manufacturing facilities to commercial scale production.
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 high-value algal 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 directed at (1) identifying, isolating and further optimizing strains of microalgae to achieve high cell densities, high yield converting sugar to product and high productivity rates compared to other alternatives; (2) tailoring the oil outputs to meet specific market needs; (3) product and process development projects aimed at reducing the cost of oil production; and (4) scale-up of commercial scale production at the Clinton/Galva Facilities as well as product and process development activities in our Peoria Facility. Our research and development projects also include activities as specified in our government grants and contracts and development agreements with commercial and strategic partners. We expect to continue to use our Peoria Facility for joint development activities, to provide samples for market development as well as for commercial production for products such as our AlgaViaTM brand of whole algal powders and flours.  
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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 services and 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 accounting, legal and investor relations fees associated with operating as a publicly-traded company. 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.
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 expense related to our debt and debt conversion expense incurred to induce 2018 Note holders to exchange their 2018 Notes. As of September 30, 2014 and December 31, 2013, our outstanding debt, net of debt discounts, was approximately $201.1 million and $93.5 million, respectively. We expect interest expense to increase primarily as a result of issuing $149.5 million of 5.00% Convertible Senior Subordinated Notes due 2019 (the 2019 Notes) in April 2014, and to fluctuate with changes in our debt obligations.
Gain (Loss) from Change in Fair Value of Warrant Liability
Gain (loss) from change in fair value of warrant liability consisted primarily of the change in the fair value of a common stock warrant issued to Bunge Limited. The warrant liability was 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 was recorded as a gain or loss from the change in the fair value in our condensed consolidated statement of operations. The warrant liability was reclassified to additional paid-in capital upon conversion of redeemable preferred stock, or vesting of common warrant shares. In April 2012, the first and second tranches of the common stock warrant issued to Bunge Limited had vested, and the related warrant liability of $4.6 million was reclassified to additional paid-in capital and was no longer adjusted to fair value. In the first quarter of

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2014, the warrant liability associated with the third tranche of the common stock warrant issued to Bunge Limited was adjusted to $0, as the third tranche could no longer vest.
Gain (Loss) from Change in Fair Value of Derivative Liabilities    
Gain (loss) from change in fair value of derivative liabilities consists of the changes in the fair value of the embedded derivatives related to the early conversion payment features of the 6.00% Convertible Senior Subordinated Notes due 2018 (the 2018 Notes) and the 2019 Notes (collectively with the 2018 Notes, the Notes) issued in January 2013 and April 2014, respectively.
Income (Loss) from Equity Method Investments
Income (loss) from our equity method investment in the Solazyme Bunge JV is recorded in our income statement as “Income (Loss) from Equity Method Investments”. In the nine months ended September 30, 2013, we recorded a loss of $1.4 million to Income (loss) from equity method investments, net related to the dissolution of SRN.
Income Taxes
Since inception, we have incurred net losses and have not recorded any U.S. federal, state or non-U.S. income tax provisions. We have recorded a full valuation allowance against deferred tax assets as it is more likely than not that they will not be realized.
Critical Accounting Policies and Estimates
Critical accounting policies are those accounting policies that management believes are important to the portrayal of our financial condition and results and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our 2013 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to revenue recognition, inventories, stock-based compensation and income taxes. There have been no material changes to the Company’s critical accounting policies described in the Company’s 2013 Annual Report on Form 10-K, except as described below:
Inventories - Beginning in 2014, inventories included manufacturing and related third party contract costs associated with the production of our intermediate/ingredient products that met applicable regulatory requirements. Prior to our products' meeting applicable regulatory requirements, the manufacturing and related production costs of such products are charged to research and development expenses.
Product Revenue - Product revenue is recognized from the sale of our branded consumer products, which currently includes our Algenist® and EverDeep® skin care lines, and from the sale of intermediate/ingredient products including our Tailored™ oil products and fuel blend sales, the latter of which is part of our effort to build fuels marketing and commercial development programs.
Results of Operations
Comparison of Three Months Ended September 30, 2014 and 2013
Revenues
 
Three Months Ended September 30,
 
2014
 
2013
 
$ Change
 
(In thousands)
Revenues:
 
 
 
 
 
Research and development programs
$
5,936

 
$
5,824

 
$
112

Product revenues
11,623

 
4,797

 
6,826

Total revenues
$
17,559

 
$
10,621

 
$
6,938

Our total revenues increased by $6.9 million in the third quarter of 2014 compared to the same period in 2013, due to $6.8 million of increased product sales and $0.1 million of increased R&D program revenues in the third quarter of 2014 compared to the same period in 2013. The increase in product revenues was due to commercial sales into the fuels and chemicals and oil field services markets of $4.8 million, which includes $1.3 million of product revenue from the Solazyme Bunge JV in the third quarter of 2014 and a $2.0 million increase in skin care product sales primarily due to new retail customers and increased consumer demand. We began to sell more broadly into the fuels and chemicals and oil field services markets starting in the first quarter of 2014. These sales included our commercial launch of Encapso™ lubricant and Tailored™

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oils as well as fuel blend sales as part of our effort to build fuels marketing and commercial development programs, which preliminarily includes the sale and transfer of blended fuels to private (non-government) customers.
We expect product revenues in the fuels and chemicals and oil field services markets to increase as a percentage of total net product revenues as we continue to expand our large-scale production.
R&D program revenues increased by $0.1 million, due primarily to an increase in revenues from development agreements with strategic partners, offset by a decrease in revenues from development agreements with the Solazyme Bunge JV.
Our revenues from development agreements with strategic partners and the Solazyme Bunge JV fluctuate due to timing of the development work performed and achievement of contract milestones defined in these agreements. We are currently engaged in development activities with multiple strategic partners and the Solazyme Bunge JV and expect that our R&D program revenues will continue, as we continue this work and add new strategic partners. In the near term, we don’t expect government program revenues to increase. As we enter into new agreements with strategic partners or government programs, we expect that quarterly trends may fluctuate based on the timing of program activities and achievement of milestones with strategic partners.
The inherent flexibility of our technology platform and the broad usage of triglyceride oils across multiple industries allow us to approach a wide range of customers across myriad end markets. We expect our product revenues to increase as we commercialize our intermediate/ingredient products encompassing a portfolio of product revenues to total revenues as we expand our manufacturing capacity and related oil product offerings in the fuels and chemicals, oil field services and nutrition markets.
Cost of Product Revenue
 
Three Months Ended September 30,
 
2014
 
2013
 
Change
 
(In thousands)
Cost of revenue:
 
 
 
 
 
Product
$
6,598

 
$
1,450

 
$
5,148

Gross profit:
 
 
 
 
 
Product
$
5,025

 
$
3,347

 
$
1,678

Gross margin:
 
 
 
 
 
Product
43
%
 
70
%
 
(27
)%
Beginning in early 2014, cost of product revenue includes 2014 production costs associated with our Encapso™ lubricant and Tailored™ oil, as well as renewable fuels purchased in connection with our fuels marketing and commercial development programs, as we began to sell more broadly to customers in the oil field services market and fuels and chemicals market. Prior to meeting applicable regulatory requirements for these products and during scale-up of the manufacturing process to nameplate capacity, certain Encapso™ lubricant and Tailored™ oil manufacturing and related production costs were charged to research and development expenses in 2013 and throughout the scale-up period. Certain inventories manufactured prior to regulatory approval are charged to research and development expense in periods prior to when those inventories are sold.
Cost of product revenue increased $5.1 million in the third quarter of 2014 compared to the same period in 2013 due to sales of Tailored™ oil and blended fuel sales that began in early 2014 and increased Algenist® product sales. Gross margins decreased from 70% in the third quarter of 2013 to 43% in the third quarter of 2014 primarily due to the higher mix of lower gross margin intermediate and ingredient product sales of fuels, Encapso™ lubricant and Tailored™ oils. The gross margin related to Algenist® products was 69% in the third quarter of 2014 compared to 70% in the same period in 2013, impacted by changes in customer and product mix. The gross margin for our products sold in the fuels, chemicals and oil field services was 7% in the third quarter of 2014, which excludes certain production costs related to the scale-up of plant operations which are recorded to research and development expense. The gross margins for our intermediate and ingredient products are expected to be lower than our historical margins, which were based on our branded skin and personal care products. We will continue to sell our highest gross margin branded skin and personal care products and we expect to ramp up our production and sales of intermediate and ingredient products. We expect our overall gross margin to decline as our product mix shifts more to intermediate and ingredient product sales into the fuels and chemicals, nutrition and oil field services markets.
We expect our total cost of production for products manufactured at the Clinton/Galva Facilities will increase as we continue commercial production for the fuels and chemicals, oil field services and nutrition markets and as our production

32


volume ramps up as we refocus the Clinton Facility on higher margin products such as Encapso™ lubricant and otherwise balance production volumes with operating expenses. We also expect that our cost of production as a percentage of revenue may be higher in the early stages of production, depending on mix of products and as we ramp toward nameplate capacity. As production volume increases our cost per MT produced is expected to decrease.
Operating Expenses
 
Three Months Ended September 30,
 
2014
 
2013
 
$ Change
 
(In thousands)
Operating expenses:
 
 
 
 
 
Research and development
$
20,571

 
$
17,556

 
$
3,015

Sales, general and administrative
25,883

 
15,708

 
$
10,175

Total operating expenses
$
46,454

 
$
33,264

 
$
13,190

Research and Development Expenses
Our research and development expenses increased by $3.0 million in the third quarter of 2014 compared to the same period in 2013, due primarily to $1.8 million of increased personnel-related and facilities-related costs, $1.1 million of costs related to product development of new algal products and AlgaViaTM food ingredients as well as scale-up of commercial production at the Clinton/Galva Facilities.
Personnel and facilities-related costs increased as a result of headcount growth to support the Clinton, Galva and Solazyme Bunge JV activities as well as Peoria manufacturing and collaborative research activities. Personnel-related costs include non-cash stock-based compensation expense of $1.9 million in the third quarter of 2014 compared to $1.5 million in the same period in 2013.
We plan to continue to make investments in research and development for the foreseeable future as we continue (1) to identify, isolate and further optimize strains of microalgae to achieve high cell densities, high yield converting sugar to product and high productivity rates compared to other alternatives; (2) to tailor the oil outputs to meet specific market needs; (3) to engage in product and process development projects aimed at reducing the cost of oil production; and (4) to scale-up new products at the Clinton/Galva Facilities to commercial scale, as well as product development activities. We do not expect a significant increase in our research and development expenses in the near term as we scale up to commercial production.
Sales, General and Administrative Expenses
Our sales, general and administrative expenses increased by $10.2 million in the third quarter of 2014 compared to the same period in 2013, primarily due to net expenses associated with a litigation settlement of $3.7 million, increased personnel-related costs of $2.6 million, increased marketing and promotional costs of $2.0 million and increased external legal and outside services of $1.1 million. During the third quarter of 2014, we and Therabotanics, LLC agreed to settle our litigation for $4.8 million, net of insurance reimbursements of $0.2 million, of which $0.9 million was accrued for as of June 30, 2014.
Personnel-related costs increased due to headcount growth primarily related to commercialization of our products. Personnel-related costs include non-cash stock-based compensation of $4.3 million in the third quarter of 2014 compared to $3.7 million in the same period in 2013. Marketing and promotional costs increased mainly due to Algenist® and intermediates/ingredients product launches. We expect our sales, general and administrative expenses to increase as we hire additional personnel and enhance our infrastructure to support the anticipated commercialization into the fuels and chemicals, oil field services and nutrition markets domestically and in Brazil. We also expect marketing and promotional costs to increase as we commercialize into the fuels and chemicals, oil field services and nutritional markets.

33


Other Income (Expense), Net 
 
Three Months Ended September 30,
 
2014
 
2013
 
$ Change
 
(In thousands)
Other income (expense):
 
 
 
 
 
Interest and other income, net
$
365

 
$
347

 
$
18

Interest expense
(3,553
)
 
(1,961
)
 
1,592

Loss from equity method investments
(7,201
)
 
(2,360
)
 
4,841

Gain from change in fair value of warrant liability
—

 
200

 
(200
)
Gain (loss) from change in fair value of derivative liabilities
6,205

 
(2,836
)
 
(9,041
)
Total other income (expense), net
$
(4,184
)
 
$
(6,610
)
 
$
(2,426
)
Interest expense
Interest expense increased by $1.6 million in the third quarter of 2014 compared to the same period in 2013 due to $2.3 million of increased interest expense as a result of the issuance of the 2019 Notes in April 2014 and $0.2 million of reduced capitalized interest related to the Company’s investment in the Solazyme Bunge JV, partially offset by $0.8 million of reduced interest expense resulting from early conversions of the 2018 Notes. We expect interest expense to increase primarily as a result of issuing the 2019 Notes in April 2014, and to fluctuate with changes in our debt obligations.
Loss from Equity Method Investments
Loss from equity method investment increased by $4.8 million in the third quarter of 2014 compared to the same period in 2013, primarily due to the increase in our proportionate share of the net loss from the Solazyme Bunge JV. We expect the loss from our equity method investment to increase as the Solazyme Bunge JV continues commissioning of the Solazyme Bunge JV Plant and increases commercial-scale production in Brazil.
Gain from Change in Fair Value of Warrant Liability
Gain/loss from the change in fair value of warrant liability was $0 in the third quarter of 2014 compared to a $0.2 million gain from the change in fair value of warrant liability in the same period in 2013. The change in fair value of warrant liability is related to the fair value of the unvested warrant issued to Bunge Limited. The warrant vests in three separate tranches, each contingent upon the achievement of specific performance-based milestones related to the formation and operations of the Solazyme Bunge JV. The unvested warrant shares were recorded as a liability on our condensed consolidated balance sheet beginning in the second quarter of 2012, and the unvested portion of the warrant continued to be 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 (first and second tranche) vested and were reclassified to additional paid-in capital. Beginning in the first quarter of 2014, the warrant liability associated with the third tranche of the common stock warrant issued to Bunge Limited was adjusted to $0, as the third tranche could no longer vest.
Gain (Loss) from Change in Fair Value of Derivative Liabilities
Gain from change in fair value of derivative liabilities of $6.2 million in the third quarter of 2014 was due to the change in the fair value of the embedded derivatives related to the early conversion payment features of the Notes issued in January 2013 and April 2014, compared to a $2.8 million loss in the same period in 2013. At each reporting period, we remeasure these embedded derivatives at fair value, which is included as components of convertible debt on our condensed consolidated balance sheets. We used a Monte Carlo simulation model to estimate the fair values of the embedded derivatives related to the early conversion payment features of the Notes. Changes in certain inputs into the model may have a significant impact on changes in the estimated fair values of the embedded derivatives. We expect that the gain or loss from the change in the fair values of these derivative liabilities will fluctuate with the change in our stock price, the trading price of the Notes, certain other inputs to the Monte Carlo simulation model and early conversions by Note holders.

34


Results of Operations
Comparison of Nine Months Ended September 30, 2014 and 2013
Revenues
 
Nine Months Ended September 30,
 
2014
 
2013
 
$ Change
 
(In thousands)
Revenues:
 
 
 
 
 
Research and development programs
$
17,896

 
$
14,764

 
$
3,132

Product revenues
27,993

 
13,712

 
14,281

Total revenues
$
45,889

 
$
28,476

 
$
17,413

Our total revenues increased by $17.4 million in the nine months ended September 30, 2014 compared to the same period in 2013, due to $14.3 million of increased product sales and a $3.1 million increase in R&D program revenues in the nine months ended September 30, 2014 compared to the same period in 2013. The increase in product revenues was due to new commercial sales into the fuels and chemicals and oil field services markets of $10.2 million, which includes $2.7 million of product revenue from the Solazyme Bunge JV in the nine months ended September 30, 2014, and a $4.1 million increase in skin care product sales primarily due to new retail customers, new product offerings and increased consumer demand. We began to sell more broadly into the fuels and chemicals and oil field services markets starting in the first quarter of 2014. These sales included our commercial launch of Encapso™ lubricant and Tailored™ oils as well as fuel blend sales as part of our effort to build fuels marketing and commercial development programs, which preliminarily includes the sale and transfer of blended fuels to private (non-government) customers.
We expect product revenues in the fuels and chemicals and oil field services markets to increase as a percentage of total net product revenues as we continue to expand our large-scale production.
R&D program revenues increased by $3.1 million, due primarily to an increase in revenues from development agreements with the Solazyme Bunge JV, partially offset by a lower milestone achievement recognized from a strategic partner in the nine months ended September 30, 2014 of $1.5 million as compared to a $4.0 million milestone achievement recognized during the same period in 2013.
Our revenues from development agreements with strategic partners and the Solazyme Bunge JV fluctuate due to timing of the development work performed and achievement of contract milestones defined in these agreements. We are currently engaged in development activities with multiple strategic partners and the Solazyme Bunge JV and expect that our R&D program revenues will continue, as we continue this work and add new strategic partners. In the near term, we don’t expect government program revenues to increase. As we enter into new agreements with strategic partners or government programs, we expect that quarterly trends may fluctuate based on the timing of program activities and achievement of milestones with strategic partners.
The inherent flexibility of our technology platform and the broad usage of triglyceride oils across multiple industries allow us to approach a wide range of customers across myriad end markets. We expect our product revenues to increase as we commercialize our intermediate/ingredient products encompassing a portfolio of product revenues to total revenues as we expand our manufacturing capacity and related oil product offerings in the fuels and chemicals, oil field services and nutrition markets.
Cost of Product Revenue
 
Nine Months Ended September 30,
 
2014
 
2013
 
Change
 
(In thousands)
Cost of revenue:
 
 
 
 
 
Product
$
14,458

 
$
4,400

 
$
10,058

Gross profit:
 
 
 
 
 
Product
$
13,535

 
$
9,312

 
$
4,223

Gross margin:
 
 
 
 
 
Product
48
%
 
68
%
 
(20
)%

35


Beginning in early 2014, cost of product revenue includes 2014 production costs associated with our Encapso™ lubricant and Tailored™ oil, as well as renewable fuels purchased in connection with our fuels marketing and commercial development programs, as we began to sell more broadly to customers in the oil field services market and fuels and chemicals market. Prior to meeting applicable regulatory requirements for these products and during scale-up of the manufacturing process to nameplate capacity, certain Encapso™ lubricant and Tailored™ oil manufacturing and related production costs were charged to research and development expenses. Certain inventories manufactured prior to regulatory approval are charged to research and development expense in periods prior to when those inventories are sold.
Cost of product revenue increased $10.1 million in the nine months ended September 30, 2014 compared to the same period in 2013 due to sales of Tailored™ oil and blended fuel sales that began in early 2014 and increased Algenist® product sales. Gross margins decreased from 68% during the nine months ended September 30, 2013 to 48% in the nine months ended September 30, 2014 due primarily due to the higher mix of lower gross margin intermediate and ingredient product sales of fuels, Encapso™ lubricant and Tailored™ oils. The gross margin related to Algenist® product sales was 69% in the nine months ended September 30, 2014 compared to 68% in the same period in 2013, impacted by changes in customer and product mix. The gross margin for our products sold in the fuels, chemicals and oil field services was 12% in the nine months ended September 30, 2014 impacted favorably by the sale of inventories that were expensed previously to research and development expense in 2013. In addition, the fuels, chemicals and oil field services gross margin excludes certain production costs related to the scale-up of plant operations which are recorded to research and development expense. The gross margins for our intermediate and ingredient products are expected to be lower than our historical margins, which were based on our branded skin and personal care products. We will continue to sell our highest gross margin branded skin and personal care products and we expect to ramp up our production and sales of intermediate and ingredient products. We expect our overall gross margin to decline as our product mix shifts more to intermediate and ingredient product sales into the fuels and chemicals, nutrition and oil field services markets.
We expect our total cost of production for products manufactured at the Clinton/Galva Facilities will increase as we continue commercial production for the fuels and chemicals, oil field services and nutrition markets and as our production volume ramps up as we refocus the Clinton Facility on higher margin products such as Encapso™ lubricant and otherwise balance production volumes with operating expenses. We also expect that our cost of production as a percentage of revenue may be higher in the early stages of production, depending on mix of products and as we ramp toward nameplate capacity. As production volume increases our cost per MT produced is expected to decrease.
Operating Expenses
 
Nine Months Ended September 30,
 
2014
 
2013
 
$ Change
 
(In thousands)
Operating expenses:
 
 
 
 
 
Research and development
$
63,470

 
$
46,191

 
$
17,279

Sales, general and administrative
68,127

 
46,010

 
$
22,117

Total operating expenses
$
131,597

 
$
92,201

 
$
39,396

Research and Development Expenses
Our research and development expenses increased by $17.3 million in the nine months ended September 30, 2014 compared to the same period in 2013, due primarily to $9.6 million of costs related to development of new algal oils and the scale up of commercial production at the Clinton/Galva Facilities, as well as increased personnel-related and facilities-related costs of $5.0 million and $1.7 million, respectively.
Personnel and facilities-related costs increased as a result of headcount growth to support the Clinton, Galva and Solazyme Bunge JV activities as well as Peoria manufacturing and collaborative research activities. Personnel-related costs include non-cash stock-based compensation expense of $5.7 million in the nine months ended September 30, 2014 compared to $4.1 million in the same period in 2013.
We plan to continue to make investments in research and development for the foreseeable future as we continue (1) to identify, isolate and further optimize strains of microalgae to achieve high cell densities, high yield converting sugar to product and high productivity rates compared to other alternatives; (2) to tailor the oil outputs to meet specific market needs; (3) to engage in product and process development projects aimed at reducing the cost of oil production; and (4) to scale-up new products at the Clinton/Galva Facilities to commercial scale, as well as product development activities. We do not expect a significant increase in our research and development expenses in the near term as we scale up to commercial production.

36


Sales, General and Administrative Expenses
Our sales, general and administrative expenses increased by $22.1 million in the nine months ended September 30, 2014 compared to the same period in 2013, primarily due to increased personnel-related and facilities-related costs of $9.2 million and $0.4 million, respectively, net litigation settlement of $4.5 million, increased marketing and promotional costs of $5.1 million and increased external legal costs and outside services of $2.9 million. During the third quarter of 2014, we and Therabotanics, LLC agreed to settle our litigation for $4.8 million, net of insurance reimbursements of $0.2 million.
Personnel-related and facilities-related costs increased due to headcount growth primarily related to commercialization of our products. Personnel-related costs include non-cash stock-based compensation of $13.0 million in the nine months ended September 30, 2014 compared to $10.3 million in the same period in 2013. Marketing and promotional costs increased mainly due to Algenist® product and intermediates/ingredients product launches during the nine months ended September 30, 2014 compared to the same period in 2013. We expect our sales, general and administrative expenses to increase as we hire additional personnel and enhance our infrastructure to support the anticipated commercialization into the fuels and chemicals, oil field services and nutrition markets domestically and in Brazil. We also expect marketing and promotional costs to increase as we commercialize into the fuels and chemicals, oil field services and nutritional markets.
Other Income (Expense), Net 
 
Nine Months Ended September 30,
 
2014
 
2013
 
$ Change
 
(In thousands)
Other income (expense):
 
 
 
 
 
Interest and other income, net
$
993

 
$
1,066

 
$
(73
)
Interest expense
(9,955
)
 
(5,642
)
 
4,313

Loss from equity method investments
(15,313
)
 
(5,541
)
 
9,772

Gain (loss) from change in fair value of warrant liability
688

 
(425
)
 
(1,113
)
Gain (loss) from change in fair value of derivative liabilities
6,478

 
(4,386
)
 
(10,864
)
Total other income (expense), net
$
(17,109
)
 
$
(14,928
)
 
$
2,181

Interest expense
Interest expense increased by $4.3 million in the nine months ended September 30, 2014 compared to the same period in 2013, due to $4.5 million of increased interest expense as a result of the issuance of the 2019 Notes in April 2014 and $1.8 million of debt conversion expense incurred during the nine months ended September 30, 2014, partially offset by $2.2 million of reduced interest expense resulting from early conversions of the 2018 Notes. In June 2014, we entered into note exchange agreements with certain Holders of our 2018 Notes pursuant to which such Holders agreed to exchange approximately $17.5 million in aggregate principal amount of 2018 Notes, together with accrued interest thereon through the settlement date of the Exchange, with us for a total 2.4 million shares of our common stock. Debt conversion expense represents the fair value of all common stock transferred in the Exchange in excess of the fair value of common stock issuable pursuant to the original conversion terms. The fair value of the common stock was measured as of the date the Exchange offer was accepted by the Holders.
Loss from Equity Method Investments
Loss from equity method investments increased by $9.8 million in the nine months ended September 30, 2014 compared to the same period in 2013, primarily due to a $11.4 million increase in our proportionate share of the net loss from the Solazyme Bunge JV, partially offset by a $1.3 million loss recognized in the nine months ended September 30, 2013 related to the dissolution of SRN. We expect the loss from our equity method investment to increase as the Solazyme Bunge JV continues commissioning of the Solazyme Bunge JV Plant and increases commercial-scale production in Brazil.
Gain (Loss) from Change in Fair Value of Warrant Liability
There was a $0.7 million gain from the change in fair value of warrant liability in the nine months ended September 30, 2014 compared to a $0.4 million loss from the change in fair value of warrant liability in the same period in 2013. The change in fair value of warrant liability is related to the fair value of the unvested warrant issued to Bunge Limited. The warrant vests in three separate tranches, each contingent upon the achievement of specific performance-based milestones related to the formation and operations of the Solazyme Bunge JV. The unvested warrant shares were recorded as a liability on our condensed consolidated balance sheet beginning in the second quarter of 2012, and the unvested portion of the warrant continued to be remeasured to fair value at each balance sheet date and reclassified to additional paid-in capital upon vesting. In the second

37


quarter of 2012, 750,000 warrant shares (first and second tranche) vested and were reclassified to additional paid-in capital. Beginning in the first quarter of 2014, the warrant liability associated with the third tranche of the common stock warrant issued to Bunge Limited was adjusted to $0, as the third tranche could no longer vest.
Gain (Loss) from Change in Fair Value of Derivative Liabilities
Gain from change in fair value of derivative liabilities of $6.5 million in the nine months ended September 30, 2014 was due primarily to the change in the fair value of the embedded derivatives related to the early conversion payment features of the Notes issued in January 2013 and April 2014, compared to a $4.4 million loss in the same period in 2013. At each reporting period, we remeasure these embedded derivatives at fair value, which is included as a component of convertible debt on our condensed consolidated balance sheets. We used a Monte Carlo simulation model to estimate the fair values of the embedded derivatives related to the early conversion payment features of the Notes. Changes in certain inputs into the model may have a significant impact on changes in the estimated fair values of the embedded derivatives. We expect that the gain or loss from the change in the fair values of these derivative liabilities will fluctuate with the change in our stock price, the trading price of the Notes, other certain inputs to the Monte Carlo simulation model and early conversions by Note holders.
Liquidity and Capital Resources
 
September 30,
2014
 
December 31,
2013
 
(In thousands)
Cash and cash equivalents
$
60,305

 
$
54,977

Marketable securities
189,876

 
112,544

Cash, cash equivalents and marketable securities increased by $82.7 million in the nine months ended September 30, 2014, primarily due to $202.7 million of proceeds received from our 2019 Notes and equity offering in April 2014, net of underwriting discounts and offering costs and $8.9 million of proceeds received from common stock issuances pursuant to our equity plans, partially offset by cash used in operating activities of $79.4 million, $30.6 million of capital contributed to the Solazyme Bunge JV, $10.4 million of repayments under loan agreements, $5.6 million of property and equipment purchases, $0.7 million of restricted cash, a $0.7 million letter of credit obtained for a lease agreement and $0.6 million of capitalized interest related to the Solazyme Bunge JV.
The following table shows a summary of our cash flows for the periods indicated:
 
Nine Months Ended September 30,
 
2014
 
2013
 
(In thousands)
Net cash used in operating activities
$
(79,447
)
 
$
(56,917
)
Net cash used in investing activities
(116,173
)
 
(25,680
)
Net cash provided by financing activities
201,067

 
118,949

Sources and Uses of Capital
Since our inception, we have incurred significant net losses, and as of September 30, 2014, we had an accumulated deficit of $423.6 million. We anticipate that we will continue to incur net losses as we continue the scale-up of our manufacturing activities, support commercialization activities for our products and continue to support 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 investments in research and development and manufacturing, and expect selling, general and administrative expenses to increase as we begin and ramp up commercialization. As a result, we will need to generate significant revenues from product sales, collaborative research and joint development activities, licensing fees and other revenue arrangements to achieve profitability. To date, our sources for capital are as follows:
Strategic Partners and Government
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 U.S.-based production capabilities at the Peoria Facility to make oil for algae-derived biofuel. Under the terms of the grant, we are responsible for funding an additional $8.4 million. The Company is in the process of preparing its final report and performing other similar tasks associated with is completion of this program.

38


We purchased the Peoria Facility in May 2011. We began fermentation operations in the fourth quarter of 2011 and commissioned our integrated biorefinery in June 2012, funded in part by the DOE grant described above. In connection with the closing of the Peoria Facility acquisition, we entered into a promissory note, mortgage and security agreement with the seller in the initial amount of $5.5 million. In March 2013, we paid in full the outstanding principal on this promissory note.
In April 2012, we entered into the Solazyme Bunge JV, which is jointly capitalized by us and Bunge, to construct and operate an oil production facility in Brazil that will utilize our proprietary technology to produce oil products from sugar feedstock provided by Bunge. Through October 31, 2014, we contributed approximately $60.3 million in capital to the Solazyme Bunge JV, and we may need to contribute additional capital to this project. In February 2013, the Solazyme Bunge JV entered a loan agreement with the Brazilian Development Bank (BNDES) under which it may borrow up to R$245.7 million (approximately USD $100.8 million based on the exchange rate as of September 30, 2014). As a condition of the Solazyme Bunge JV drawing funds under the loan in excess of amounts supported by bank guarantees, we may be required to provide a corporate guarantee for a portion of the loan (in an amount that when added to the amount supported by our bank guarantee does not to exceed our ownership percentage in the Solazyme Bunge JV). The BNDES funding is supporting the Solazyme Bunge JV’s first commercial-scale production facility in Brazil, which will reduce the capital requirements funded directly by us and Bunge. We expect to scale up additional manufacturing capacity in a capital-efficient manner by signing additional agreements whereby our partners will invest capital and operational resources in building manufacturing capacity, while also providing access to feedstock. We expect to evaluate the optimal amount of capital expenditures that we agree to fund on a case-by-case basis. These events may require us to access additional capital through equity or debt offerings. If we are unable to access additional capital, our growth may be limited due to the inability to build out additional manufacturing capacity.
In November 2012, we entered into a strategic collaboration agreement with ADM, whereby we have agreed to pay ADM annual fees for use and operation of a portion of its commercial scale facility in Clinton, Iowa, a portion of which may be paid in our common stock. In addition, in March 2013 we issued a series of warrants to ADM for payment in stock or cash, at our election, of future annual fees for use and operation of a portion of the Clinton Facility. During 2013, we made payments to ADM in both common stock and cash.
Commercial Banks
On May 11, 2011, we entered into a loan and security agreement with Silicon Valley Bank that provided for a $20.0 million credit facility (the SVB facility) consisting of (i) a $15.0 million term loan (the term loan) and (ii) a $5.0 million revolving facility (the SVB revolving facility). In the first quarter of 2013, the SVB facility was terminated when we paid in full the outstanding principal and interest on the term loan using proceeds from the revolving facility with HSBC Bank, USA, National Association (HSBC) we entered into in March 2013 as described below.
On March 26, 2013, we entered into a credit facility with HSBC (the HSBC facility), which provides for a $30.0 million revolving facility for working capital, letters of credit denominated in U.S. dollars or a foreign currency and other general corporate purposes, in May 2013 we entered into an amendment to increase the HSBC facility to $35.0 million, and in March 2014 we amended the HSBC facility to extend the maturity date to May 31, 2016. Also on March 26, 2013, we drew down approximately $10.4 million under the HSBC facility to repay the outstanding term loan plus accrued interest under the SVB facility. On June 27, 2014, we paid in full the outstanding principal and interest due under the HSBC facility. The HSBC facility is unsecured unless (i) we take action that could cause or permit obligations under the HSBC facility not to constitute senior debt (as defined in the indenture related to the 2018 Notes dated as of January 24, 2013 by and between us and Wells Fargo Bank, National Association, as trustee), (ii) we breach financial covenants that require us and our subsidiaries to maintain cash and unrestricted cash equivalents at all times of not less than $35.0 million plus one hundred ten percent of the aggregate dollar equivalent amount of outstanding advances and letters of credit under the HSBC facility, or (iii) there is a payment default under the HSBC facility or bankruptcy or insolvency events relating to us. A portion of the HSBC facility supports the bank guarantee issued to BNDES in May 2013. Therefore, approximately $20.5 million of the HSBC facility remained available as of September 30, 2014, and we were in compliance with all the financial covenants of the HSBC facility.
Private and Public Offerings
In January 2013, we issued $125.0 million aggregate principal amount of 2018 Notes in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The 2018 Notes bear interest at a fixed rate of 6.00% per year, payable semiannually in arrears on August 1 and February 1 of each year, beginning on August 1, 2013. The 2018 Notes are convertible into our common stock and will mature on February 1, 2018, unless earlier repurchased or converted. We may not redeem the 2018 Notes prior to maturity. The initial conversion price is approximately $8.26 per share of common stock and, under certain circumstances, the 2018 Note holders will be entitled to additional payments upon conversion. The 2018 Notes are convertible at the option of the holders at any time prior to February 1, 2018 into shares of our common stock at the then-applicable conversion rate. The conversion rate is initially 121.1240 shares of common stock per

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$1,000 principal amount of 2018 Notes. In the event the 2018 Notes are converted prior to November 1, 2016 (other than conversions in connection with certain fundamental changes described below), in addition to the shares deliverable upon conversion, the holders are entitled to receive an early conversion payment of $83.33 per $1,000 principal amount of 2018 Notes surrendered for conversion that may be settled, at our election, in cash or, subject to satisfaction of certain conditions, in shares of our common stock. If we undergo a fundamental change (as defined in the indenture entered into with the trustee), 2018 Note holders may require that we repurchase for cash all or part of their 2018 Notes at a purchase price equal to 100% of the principal amount of the 2018 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if fundamental changes occur, we may be required in certain circumstances to increase the conversion rate for any 2018 Notes converted in connection with such fundamental changes by a specified number of shares of our common stock.
On June 19, 2014, we entered into note exchange agreements (the Exchange Agreements) with certain holders of the 2018 Notes pursuant to which such holders agreed to exchange approximately $17.5 million in aggregate principal amount of their 2018 Notes, together with accrued interest thereon through the settlement date of the Exchange Agreements, with us for 2,409,964 shares of our common stock. The Exchange Agreements settled on June 30, 2014. As of September30, 2014, we had issued approximately 8.3 million shares of our common stock to settle both the 2018 Note conversions and early conversion payments, including the settlements under the Exchange Agreements. We had $61.6 million aggregate principal amount of 2018 Notes outstanding as of September 30, 2014.
On April 1, 2014, we issued $149.5 million aggregate principal amount 2019 Notes in a public offering pursuant to an effective shelf registration statement. The 2019 Notes bear interest at a fixed rate of 5.00% per year, payable semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2014. The 2019 Notes are convertible into our common stock and will mature on October 1, 2019, unless earlier repurchased or converted. We may not redeem the 2019 Notes prior to maturity. The initial conversion price of the 2019 Notes is approximately $13.20 per share of common stock) and, under certain circumstances, the 2019 Note holders will be entitled to additional payments upon conversion. The 2019 Notes are convertible at the option of the holders at any time prior to January 1, 2018 into shares of our common stock at the then-applicable conversion rate. The conversion rate is initially 75.7576 shares of common stock per $1,000 principal amount of 2019 Notes. In the event the 2019 Notes are converted prior to January 1, 2018 (other than conversions in connection with certain fundamental changes described below), in addition to the shares deliverable upon conversion, the holders are entitled to receive an early conversion payment of $83.33 per $1,000 principal amount of 2019 Notes surrendered for conversion that may be settled, at our election, in cash, or subject to satisfaction of certain conditions, in shares of our common stock. If we undergo a fundamental change (as defined in the indenture entered into with the trustee), 2019 Note holders may require that we repurchase for cash all or part of their Notes at a purchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if fundamental changes occur, we may be required in certain circumstances to increase the conversion rate for any 2019 Notes converted in connection with such fundamental changes by a specified number of shares of our common stock. We had $149.5 million aggregate principal amount of 2019 Notes outstanding as of September 30, 2014.
On April 1, 2014, the Company also issued 5,750,000 shares of its common stock, par value $0.001 per share, at $11.00 per share (the "Common Stock Offering") in a public offering pursuant to an effective shelf registration statement. The net proceeds from the Common Stock Offering were $59.3 million, after deducting underwriter discounts and commissions and offering expenses payable by the Company.
We believe that our current cash, cash equivalents, marketable securities, revenue from product sales and net proceeds from the issuance of the 2018 Notes and 2019 Notes (collectively, the Notes) and net proceeds received from the Common Stock Offering 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 $79.4 million in the nine months ended September 30, 2014 primarily reflects a loss of $117.3 million, aggregate non-cash charges of $36.9 million and a net change of $0.9 million in our net operating assets and

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liabilities. Non-cash charges included stock-based compensation, loss from equity method investments, revaluations of our warrant liability and derivative liabilities, depreciation and amortization, net amortization of premiums on marketable securities, debt conversion expense and debt discount and loan fee amortization. We expect stock-based compensation and revaluation of our derivative liability to fluctuate with the change in our stock price and other factors. We expect loss from equity method investments and depreciation expense to increase as construction and commissioning of the Solazyme Bunge JV Plant is completed and production of commercial products at the Solazyme Bunge JV Plant and the Clinton/Galva Facilities is ramped up.
The net change in our operating assets and liabilities was primarily a result of increased accounts payable and accrued liabilities of $11.4 million, decreased other assets of $3.6 million, partially offset by increased inventories of $5.6 million and increased accounts receivable and unbilled revenue of $8.2 million. Accounts payable and accrued liabilities increased due to increased scale-up activities at the Clinton/Galva Facilities, the litigation settlement with Therabotanics, LLC, additional interest expense accrued as a result of the issuance of 2019 Notes in April 2014 and increased legal related costs. Other assets decreased due to amortization of a deferred rent asset. Inventories increased due primarily to commercial launch of intermediate/ingredient products, including Encapso™ lubricant, Tailored™ oils and fuels. Accounts receivables and unbilled revenues increased due primarily to the commercial launch of Encapso™ lubricant, Tailored™ oils and fuel blends and timing of payments received under our R&D programs.
Cash used in operating activities of $56.9 million in the nine months ended September 30, 2013 reflect a loss of $83.1 million, and a net change of $4.8 million in our net operating assets and liabilities, partially offset by aggregate non-cash charges of $31.0 million. Non-cash charges primarily included $14.5 million of stock-based compensation, a $5.5 million loss on equity method investments, $4.4 million related to the revaluation of our derivative liability, $3.6 million of depreciation and amortization, $1.3 million of net amortization of premiums on marketable securities and $1.2 million of debt discount and loan fee amortization. The net change in our operating assets and liabilities was primarily a result of increased accounts receivable and unbilled revenue of $6.3 million, increased deferred revenues of $2.2 million, increased inventories of $1.6 million, and increased accounts payable and accrued liabilities of $0.9 million. Accounts receivable and unbilled revenue increased primarily due to billing related to research and development agreements entered into in the nine months ended September 30, 2013 and timing of payments received on accounts receivables from strategic partners. Deferred revenues increased due primarily to the timing of payments received under our R&D programs. Inventories increased to meet increased consumer demand and due to the expansion of our skincare line. The net decrease in accounts payable and accrued liabilities was due to payments made for employee bonuses and expenditures made to complete the buildout of the integrated biorefineries (in Peoria and in the South San Francisco pilot plant) partially funded by the DOE and CEC, partially offset by interest accrued on our Notes.
Cash Flows from Investing Activities
In the nine months ended September 30, 2014, cash used in investing activities was $116.2 million, primarily as a result of $78.6 million of net marketable securities purchases, $30.6 million of capital contributed to the Solazyme Bunge JV, $5.6 million of capital expenditures related primarily to equipment installed at the Peoria and Clinton/Galva Facilities, a $0.7 million letter of credit obtained for a lease agreement and $0.6 million of interest capitalized related to the Solazyme Bunge JV.
In the nine months ended September 30, 2013, cash used in investing activities was $25.7 million, primarily as a result of $10.9 million of net marketable securities purchases, $7.4 million of capital contributed to the Solazyme Bunge JV and SRN and $6.5 million of capital expenditures related primarily to equipment installed at the Clinton Facility.
Cash Flows from Financing Activities
In the nine months ended September 30, 2014, cash provided by financing activities was $201.1 million, primarily due to $202.7 million of proceeds received from the issuance of the 2019 Notes and Common Stock Offering, net of underwriting discounts and debt and offering issue costs and $8.9 million of proceeds received from common stock issuances pursuant to our equity plans, partially offset by $10.4 million of principal debt payments.
In the nine months ended September 30, 2013, cash provided by financing activities was $118.9 million, primarily due to $119.2 million of proceeds received from the issuance of the Notes, net of debt discounts and debt issue costs, $10.4 million of loan proceeds received from HSBC and $4.3 million received from common stock issuances pursuant to our equity plans, partially offset by $14.9 million of principal debt payments.


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Contractual Obligations and Commitments
The following is a summary of our contractual obligations and commitments as of September 30, 2014 (in thousands):
 
Total
 
Remainder of
2014
 
2015
 
2016
 
2017
 
2018
and beyond
Principal payments on long-term debt