TerraVia Holdings, Inc. - FORM 10-Q - August 7, 2015

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EX-31.1 - EXHIBIT 31.1 - TerraVia Holdings, Inc.szym2015-06x30exx311.htm
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EX-32.1 - EXHIBIT 32.1 - TerraVia Holdings, Inc.szym2015-06x30exx321.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
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
x
Accelerated filer
¨
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 July 31, 2015
Common Stock, $0.001 par value per share
 
80,191,307 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
 
June 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
35,653

 
$
42,689

Marketable securities
111,373

 
164,619

Accounts receivable, net
3,276

 
4,598

Unbilled revenues
1,185

 
3,002

Inventories
14,790

 
15,334

Prepaid expenses and other current assets
3,493

 
3,685

Total current assets
169,770

 
233,927

Property, plant and equipment, net
33,197

 
36,080

Investment in unconsolidated joint venture
39,304

 
40,934

Other assets
1,426

 
1,648

Total assets
$
243,697

 
$
312,589

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,954

 
$
8,319

Accrued liabilities
10,831

 
14,079

Current portion of long-term debt
—

 
6

Deferred revenue
825

 
1,050

Total current liabilities
16,610

 
23,454

Deferred revenue
—

 
150

Convertible debt, inclusive of derivative liabilities of $232 and $83 at June 30, 2015 and December 31, 2014, respectively; and net of unamortized debt discounts of $9,957 and $11,124 at June 30, 2015 and December 31, 2014, respectively.
201,408

 
200,091

Other liabilities
5,846

 
2,518

Total liabilities
223,864

 
226,213

Commitments and contingencies (Note 15)

 

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; 80,176,861 and 79,388,069 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively
80

 
79

Additional paid-in capital
575,126

 
565,769

Accumulated other comprehensive loss
(15,079
)
 
(11,014
)
Accumulated deficit
(540,294
)
 
(468,458
)
Total stockholders’ equity
19,833

 
86,376

Total liabilities and stockholders’ equity
$
243,697

 
$
312,589

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Product revenues
$
8,307

 
$
9,022

 
17,128

 
16,370

Research and development programs
3,433

 
6,917

 
7,217

 
11,960

Total revenues
11,740

 
15,939

 
24,345

 
28,330

Costs and operating expenses:
 
 
 
 
 
 
 
Cost of product revenues
4,361

 
4,470

 
9,031

 
7,860

Research and development
12,747

 
22,064

 
25,301

 
42,899

Sales, general and administrative
20,981

 
21,637

 
42,249

 
42,244

Restructuring charges
(31
)
 
—

 
393

 
—

Total costs and operating expenses
38,058

 
48,171

 
76,974

 
93,003

Loss from operations
(26,318
)
 
(32,232
)
 
(52,629
)
 
(64,673
)
Other income (expense):
 
 
 
 
 
 
 
Interest and other income, net
137

 
393

 
400

 
628

Interest expense
(3,547
)
 
(5,055
)
 
(7,083
)
 
(6,402
)
Loss from equity method investment
(7,309
)
 
(4,278
)
 
(12,375
)
 
(8,112
)
Gain from change in fair value of warrant liability
—

 
—

 
—

 
688

(Loss) gain from change in fair value of derivative liabilities
(134
)
 
(1,745
)
 
(149
)
 
273

Total other income (expense)
(10,853
)
 
(10,685
)
 
(19,207
)
 
(12,925
)
Net loss
$
(37,171
)
 
$
(42,917
)
 
$
(71,836
)
 
$
(77,598
)
Net loss per share, basic and diluted
(0.46
)
 
(0.56
)
 
(0.90
)
 
(1.07
)
Weighted average number of common shares used in loss per share computation, basic and diluted
80,097,866

 
75,963,290

 
79,874,952

 
72,606,733

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(37,171
)
 
$
(42,917
)
 
$
(71,836
)
 
$
(77,598
)
Other comprehensive income (loss), net:
 
 
 
 
 
 
 
Change in unrealized gain/loss on available-for-sale securities
15

 
(40
)
 
190

 
(52
)
Foreign currency translation adjustment
1,942

 
956

 
(4,255
)
 
2,210

Other comprehensive income (loss)
1,957

 
916

 
(4,065
)
 
2,158

Total comprehensive loss
$
(35,214
)
 
$
(42,001
)
 
$
(75,901
)
 
$
(75,440
)
See accompanying notes to the unaudited condensed consolidated financial statements.


5

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


 
Six Months Ended June 30,
 
2015
 
2014
Operating activities:
 
 
 
Net loss
$
(71,836
)
 
$
(77,598
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
2,861

 
3,104

Gain on sale of available for sale securities
(2
)
 
(7
)
Net amortization of premiums on marketable securities
704

 
688

Amortization of debt discount
1,167

 
840

Amortization of loan fees
89

 
146

Warrant expense related to vesting of ADM Warrant
51

 
342

Debt conversion expense
—

 
1,766

Restructuring charges
393

 
—

Stock-based compensation expense
8,788

 
12,405

Loss from equity method investments
11,980

 
8,500

Revaluation of warrant liability
—

 
(688
)
Revaluation of derivative liabilities
149

 
(273
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(2,387
)
 
(3,938
)
Unbilled revenues
1,817

 
(2,505
)
Inventories
544

 
(4,973
)
Prepaid expenses and other current assets
125

 
159

Other assets
(48
)
 
2,937

Accounts payable
(3,447
)
 
6,141

Accrued liabilities
(2,926
)
 
1,608

Deferred revenue
(375
)
 
902

Other current and long-term liabilities
3,327

 
(95
)
Net cash used in operating activities
(49,026
)
 
(50,539
)
Investing activities:
 
 
 
Purchases of property, plant and equipment
(703
)
 
(4,531
)
Proceeds from the sale of equipment
121

 
—

Purchases of marketable securities
(19,250
)
 
(152,836
)
Maturities of marketable securities
69,506

 
53,834

Proceeds from sales of marketable securities
2,425

 
6,148

Capital contributions in unconsolidated joint venture
(10,287
)
 
(26,050
)
Capitalized interest related to unconsolidated joint venture
—

 
(620
)
Restricted certificates of deposit
181

 
—

Net cash provided by (used in) investing activities
41,993

 
(124,055
)
Financing activities:
 
 
 
Repayments under loan agreements
(6
)
 
(10,401
)
Proceeds from the issuance of Senior Convertible Notes, net of discount
—

 
143,894

Proceeds from the issuance of common stock
114

 
6,989

Proceeds from issuance of common stock, pursuant to ESPP
313

 
709

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
)
Payment for loan costs and fees
—

 
(448
)
Cash settlement of vested restricted stock units
(32
)
 
(68
)
Net cash provided by financing activities
389

 
199,930

Effect of exchange rate changes on cash and cash equivalents
(392
)
 
51

Net (decrease) increase of cash and cash equivalents
(7,036
)
 
25,387

Cash and cash equivalents — beginning of period
42,689

 
54,977

Cash and cash equivalents — end of period
$
35,653

 
$
80,364

Supplemental disclosures of cash flow information:
 
 
 
Interest paid in cash, net of capitalized interest
$
5,585

 
$
1,996

Income taxes paid in cash
$
—

 
$
—

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 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 via a renewable pathway. The Company has pioneered an industrial biotechnology platform that harnesses the oil-producing characteristics of microalgae. The Company uses standard industrial fermentation equipment to convert sugars into the desired end product. Fermentation helps accelerate microalgae’s natural biological process, allowing the Company to produce large amounts of a desired product in a matter of days. By feeding plant-based sugars to the Company’s proprietary oil-producing microalgae in enclosed 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. The Company currently uses sugarcane-based sucrose and corn-based dextrose as its two primary feedstock sources. The Company's technology can also support 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 ("ADM") Clinton, Iowa facility, and the downstream companion facility operated by American Natural Processors, Inc. ("ANP") 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 products at the Solazyme Bunge Renewable Oils plant in Brazil ("Solazyme Bunge JV Plant"), and manufacturing operations and processes continue to be optimized as the Solazyme Bunge JV Plant is ramped up.
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 unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Solazyme Brazil Renewable Oils and Bioproducts Limitada (“Solazyme Brazil”), the operations of which began in the first quarter of 2011, and Solazyme Manufacturing 1, L.L.C, which was formed in the second quarter of 2011 to own the commercial production facility assets located in Peoria, Illinois ("Peoria Facility") and related promissory note. 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 April 2, 2012, the Company entered into a joint venture agreement ("Joint Venture Agreement") with Bunge. In connection with the Company’s joint venture with Bunge (“Solazyme Bunge JV”), Solazyme Bunge Produtos Renováveis Ltda. was formed, which 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 11).

7


The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company’s interim financial information. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015, 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, 2014, as filed with the United States Securities and Exchange Commission (“SEC”) on March 6, 2015. The December 31, 2014 unaudited interim condensed consolidated balance sheet included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes required by GAAP for complete financial statements.
Significant Accounting Policies – There have been no changes to the Company’s significant accounting policies since the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
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 FASB ASC 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. On April 29, 2015 the FASB issued a proposed ASU to defer for one year the effective date of ASU 2014-09. The proposed ASU would defer the effective date of ASU 2014-09 for the Company to beginning after December 15, 2017. Early adoption would be permitted as of the original effective date in ASU 2014-09 (i.e., annual reporting periods beginning after December 15, 2016). On July 9, 2015, the FASB approved the deferral of the effective date of ASU 2014-09 by one year. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management of a company to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. This ASU is effective for the annual reporting period ending after December 15, 2016, and for interim and annual reporting periods thereafter, with early adoption permitted. The Company is currently assessing the potential impact on its consolidated financial statements from adopting this new guidance.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 amends the analysis performed to determine whether a reporting entity should consolidate certain types of legal entities. ASU 2015-02 will be effective retrospectively for the Company beginning after December 15, 2015, with early adoption permitted. The Company is currently assessing the impact adoption of this guidance will have on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 requires retrospective adoption and will be effective for the Company beginning after December 15, 2015, and early adoption is permitted. The Company is currently assessing the potential impact on its consolidated financial statements from adopting this new guidance.
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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Numerator
 
 
 
 
 
 
 
Net loss
$
(37,171
)
 
$
(42,917
)
 
$
(71,836
)
 
$
(77,598
)
Denominator
 
 
 
 
 
 
 
Weighted-average number of common shares used in net loss per share calculation
80,097,866

 
75,963,579

 
79,874,952

 
72,607,768

Less: Weighted-average shares subject to repurchase
—

 
(289
)
 
—

 
(1,035
)
Denominator: basic and diluted
80,097,866

 
75,963,290

 
79,874,952

 
72,606,733

Net loss per share, basic and diluted
$
(0.46
)
 
$
(0.56
)
 
$
(0.90
)
 
$
(1.07
)

The following outstanding shares of potentially dilutive securities were excluded from the calculation of diluted net loss per share for the three and six months ended June 30, 2015 and 2014, as their effect was anti-dilutive:
 
June 30,
 
2015
 
2014
Options to purchase common stock
10,603,967

 
11,259,064

Restricted stock units
1,791,457

 
2,406,795

Warrants to purchase common stock
1,250,000

 
1,250,000

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

 
18,790,996

Total
32,436,420

 
33,706,855

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") (see Note 13) and (2) early conversion payment features of the Notes (see Notes 8 and 14) that may be settled, at the Company’s election, in cash or, subject to satisfaction of certain conditions, in shares of the Company’s common stock.
4. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
Changes in accumulated other comprehensive loss, by component, are as follows (in thousands):
 
Foreign Currency Translation Adjustments
 
Change in Unrealized Gain/Loss on Available-For-Sale Securities
 
Total Accumulated Other Comprehensive Loss
Balance at December 31, 2014
$
(10,788
)
 
$
(226
)
 
$
(11,014
)
Other comprehensive loss
(4,255
)
 
190

 
(4,065
)
Balance at June 30, 2015
$
(15,043
)
 
$
(36
)
 
$
(15,079
)
 
Foreign Currency Translation Adjustments
 
Change in Unrealized Gain/Loss on Available-For-Sale Securities
 
Total Accumulated Other Comprehensive Loss
Balance at December 31, 2013
$
(3,880
)
 
$
86

 
$
(3,794
)
Other comprehensive loss
2,210

 
(52
)
 
2,158

Balance at June 30, 2014
$
(1,670
)
 
$
34

 
$
(1,636
)

5. SEGMENT INFORMATION
The Company has two operating segments which are reportable segments for financial statement reporting purposes: Algenist® and Intermediates/Ingredients & Other. The change in reportable segments for financial reporting purposes that occurred in the fourth quarter of 2014 has been retrospectively applied to the prior period disclosure below.

9


The following table shows gross margin for the Company's reportable segments for the three and six months ended June 30, 2015 and 2014, reconciled to the Company’s total product revenue and cost of product revenue as shown in its condensed consolidated statements of operations (in thousands):
Three months ended June 30, 2015
Algenist®
 
Intermediates/
Ingredients & Other
 
Total
Product revenues
$
5,191

 
$
3,116

 
$
8,307

Cost of product revenues
1,347

 
3,014

 
4,361

Segment gross profit
$
3,844

 
$
102

 
$
3,946

Six months ended June 30, 2015
 
 
 
 
 
Product revenues
$
11,402

 
$
5,726

 
$
17,128

Cost of product revenues
3,667

 
5,364

 
9,031

Segment gross profit
$
7,735

 
$
362

 
$
8,097

 
 
 
 
 
 
Three months ended June 30, 2014
 
 
 
 
 
Product revenues
$
5,960

 
$
3,062

 
$
9,022

Cost of product revenues
1,890

 
2,580

 
4,470

Segment gross profit
$
4,070

 
$
482

 
$
4,552

Six months ended June 30, 2014
 
 
 
 
 
Product revenues
$
10,901

 
$
5,469

 
$
16,370

Cost of product revenues
3,377

 
4,483

 
7,860

Segment gross profit
$
7,524

 
$
986

 
$
8,510

A reconciliation of total segment gross profit to operating loss is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Gross profit
$
3,946

 
$
4,552

 
$
8,097

 
$
8,510

Research and development programs revenue
3,433

 
6,917

 
7,217

 
11,960

Research and development expense
(12,747
)
 
(22,064
)
 
(25,301
)
 
(42,899
)
Sales, general and administrative expense
(20,981
)
 
(21,637
)
 
(42,249
)
 
(42,244
)
Restructuring charges
31

 
—

 
(393
)
 
—

Loss from operations
$
(26,318
)
 
$
(32,232
)
 
$
(52,629
)
 
$
(64,673
)
The Company does not allocate its assets to its reportable segments.
6. RESTRUCTURING CHARGES
On December 18, 2014, the Company took steps to decrease operating expenses through a reduction in workforce and other cost-cutting measures (“2014 Restructuring Plan”). These targeted reductions are designed to enable the Company to achieve sustainable cash flow in the future.

10


A summary of the costs, which were recorded in Restructuring Charges in the condensed consolidated statements of operations, and remaining costs associated with the 2014 Restructuring Plan are as follows (in thousands):
 
Total 2014 Restructuring Plan
 
Year Ended December 31, 2014
 
Six Months Ended June 30, 2015
 
Remaining Costs to be Recognized
Employee termination costs
$
1,970

 
$
1,962

 
$
(1
)
 
$
9

Facility closure costs
12

 
—

 
12

 
—

Asset impairment
1,552

 
1,552

 
—

 
—

Accelerated depreciation
374

 
—

 
374

 
—

Other exit costs
8

 
—

 
8

 
—

Total
$
3,916

 
$
3,514

 
$
393

 
$
9

A summary of restructuring activity associated with the 2014 Restructuring Plan at June 30, 2015, and changes from the liability balance as of December 31, 2014, is as follows (in thousands):
 
Balance at December 31, 2014
 
Additions/Adjustments
 
Payments
 
Balance at June 30, 2015
Employee termination costs
$
1,348

 
$
(1
)
 
$
(1,312
)
 
$
35

Facility closure costs
—

 
12

 
—

 
12

Total(1)
$
1,348

 
$
11

 
$
(1,312
)
 
$
47

(1) The remaining accrued costs as of June 30, 2015 are recorded as current liabilities in the condensed consolidated balance sheets under “Accrued liabilities,” as they are expected to be paid out by the end of 2015.

7. MARKETABLE SECURITIES
Marketable securities classified as available-for-sale consisted of the following (in thousands):
 
June 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Corporate bonds
$
53,664

 
$
22

 
$
(51
)
 
$
53,635

Asset-backed securities
29,726

 
6

 
(13
)
 
29,719

Government and agency securities
12,428

 
38

 
(5
)
 
12,461

Mortgage-backed securities
11,546

 
13

 
(48
)
 
11,511

Commercial paper
—

 
—

 
—

 
—

Municipal bonds
4,045

 
3

 
(1
)
 
4,047

Total
$
111,409

 
$
82

 
$
(118
)
 
$
111,373

 
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair Value
Corporate bonds
$
62,208

 
$
16

 
$
(134
)
 
$
62,090

Asset-backed securities
49,343

 
5

 
(38
)
 
49,310

Mortgage-backed securities
19,280

 
25

 
(114
)
 
19,191

Commercial paper
18,698

 
2

 
—

 
18,700

Government and agency securities
11,868

 
14

 
(4
)
 
11,878

Municipal bonds
3,448

 
3

 
(1
)
 
3,450

Total
$
164,845

 
$
65

 
$
(291
)
 
$
164,619


11


The following table summarizes the amortized cost and fair value of the Company’s marketable securities, classified by maturity as of June 30, 2015 and December 31, 2014 (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Marketable securities
 
 
 
 
 
 
 
Due in 1 year or less
$
38,195

 
$
38,201

 
$
46,759

 
$
46,754

Due in 1-2 years
42,696

 
42,701

 
53,698

 
53,639

Due in 2-3 years
11,657

 
11,645

 
30,558

 
30,505

Due in 3-4 years
5,398

 
5,402

 
11,277

 
11,275

Due in 4-9 years
4,654

 
4,655

 
7,280

 
7,275

Due in 9-20 years
1,353

 
1,356

 
1,257

 
1,266

Due in 20-35 years
7,456

 
7,413

 
14,016

 
13,905

 
$
111,409

 
$
111,373

 
$
164,845

 
$
164,619

Marketable securities classified as available-for-sale are carried at fair value as of June 30, 2015 and December 31, 2014. 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 $62.8 million as of June 30, 2015. Gross unrealized losses on available-for-sale securities were $0.1 million as of June 30, 2015, 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 $7.0 million and $27,000 as of June 30, 2015, 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.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Assets and liabilities recorded at fair value in the unaudited interim 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.
The following tables present the Company’s financial instruments that were measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 by level within the fair value hierarchy (in thousands):
 
June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$
6,610

 
$
920

 
$
—

 
$
7,530

Marketable securities
5,799

 
105,574

 
—

 
111,373

Total
$
12,409

 
$
106,494

 
$
—

 
$
118,903

Financial Liabilities
 
 
 
 
 
 
 
Derivative liabilities
$
—

 
$
—

 
$
232

 
$
232


12


 
 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets
 
 
 
 
 
 
 
Cash equivalents
$
1,880

 
$
7,828

 
$
—

 
$
9,708

Marketable securities
4,897

 
159,722

 
—

 
164,619

Total
$
6,777

 
$
167,550

 
$
—

 
$
174,327

Financial Liabilities
 
 
 
 
 
 
 
Derivative liabilities
$
—

 
$
—

 
$
83

 
$
83

Other than assets impaired as of December 31, 2014 as a result of the 2014 Restructuring Plan, the Company had no transactions measured at fair value on a nonrecurring basis as of June 30, 2015 and December 31, 2014.
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 six months ended June 30, 2015 and 2014, 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 contains an early conversion payment feature pursuant to which a holder may convert its Notes into shares of the Company's common stock (See Note 14). 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.

13


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. 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
June 30,
2015
 
June 30,
2015

December 31,
2014
 
December 31,
2014

2018 Notes
 
2019 Notes

2018 Notes
 
2019 Notes
Stock price
$
3.14

 
$
3.14

 
$
2.58

 
$
2.58

Estimated credit spread
2,983 basis points

 
2,410 basis points

 
2,450 basis points

 
2,900 basis points

Estimated stock volatility
55
%
 
55
%

55
%
 
55
%
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):
 
June 30,
2015
 
December 31,
2014
2018 Notes
$
92

 
$
35

2019 Notes
$
140

 
$
48

The total net increase in the estimated fair value of the embedded derivative for the Notes between December 31, 2014 and June 30, 2015 represents an unrealized loss that has been recorded as a loss from change in fair value of derivative liabilities in the condensed consolidated statements of operations for the six months ended June 30, 2015.
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 June 30, 2015 (in thousands):
 
 
Fair value at December 31, 2014
$
83

Change in fair value of derivative liabilities of the Notes recorded as a loss
149

Fair value at June 30, 2015
$
232

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 June 30, 2015 and December 31, 2014 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 $129.0 million and $127.1 million at June 30, 2015 and December 31, 2014, respectively, based upon Level 2 inputs using the market price of the Notes derived from actual trades quoted from Bloomberg.

14


9. INVENTORIES
Inventories consisted of the following (in thousands):
 
June 30,
2015
 
December 31,
2014
Raw materials
$
1,862

 
$
1,555

Work in process
8,757

 
8,544

Finished goods
4,171

 
5,235

Total inventories
$
14,790

 
$
15,334

10. PROPERTY, PLANT AND EQUIPMENT—NET
Property, plant and equipment—net consisted of the following (in thousands):
 
June 30,
2015
 
December 31,
2014
Plant equipment
$
30,596

 
$
30,213

Building and improvements
5,807

 
5,807

Lab equipment
7,363

 
7,904

Leasehold improvements
1,893

 
1,935

Computer equipment and software
3,930

 
3,936

Furniture and fixtures
639

 
638

Land
430

 
430

Automobiles
194

 
194

Construction in progress
1,780

 
1,926

Total
52,632

 
52,983

Less: accumulated depreciation and amortization
(19,435
)
 
(16,903
)
Property, plant and equipment—net
$
33,197

 
$
36,080

Construction in progress as of June 30, 2015 and December 31, 2014 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 $1.4 million and $2.9 million for the three and six months ended June 30, 2015, respectively, and $1.6 million and $3.1 million for the three and six months ended June 30, 2014, respectively.
11. 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. 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 products on full-scale production lines, including 625,000 liter fermentation tanks, and manufacturing operations at the facility are in the process of being optimized and ramped up. Both oil and Encapso™ products have been manufactured; production is continuing and is expected to ramp toward targeted 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. 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 six member board of directors, three 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 and Bunge each contributed capital in the amount of $84.2 million through June 30, 2015, comprised of $14.1 million, $47.9 million, $12.3 million and $10.0 million during the six months ended June 30, 2015 and during the years ended December 31, 2014, 2013 and 2012, respectively, to the Solazyme Bunge JV. During the six months ended June 30, 2015, the Company contributed $3.8 million to the Solazyme Bunge JV through a reduction in the Company’s receivables due from the Solazyme Bunge JV of $3.8 million.

15


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 optimization and ramping up 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, optimization and ramping up 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 interest 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 six months ended June 30, 2015, the Company recognized $7.3 million and $12.4 million of losses related to its equity method investment in the Solazyme Bunge JV, respectively. During the three and six months ended June 30, 2014, the Company recognized $4.3 million and $8.1 million of losses related to its equity method investment in the Solazyme Bunge JV, respectively.
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 Company accounted for the Bunge Warrant pursuant to FASB 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. As of June 30, 2015, the Company had no warrant liability associated with the Bunge Warrant shares as the third tranche of 250,000 shares could no longer vest. The Company recorded no gain or loss related to the change in the fair value of the warrant liability and a net unrealized gain of $0 and $0.7 million during the three month and six months ended June 30, 2014, respectively. As of June 30, 2015, 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 pays 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 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 $77.8 million based on the exchange rate as of June 30, 2015). 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 (not to exceed the Company’s ownership percentage in the Solazyme Bunge JV). The BNDES funding has supported the construction of the Solazyme Bunge JV’s first commercial-scale production facility in Brazil, reducing 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 June 30, 2015, the Company’s bank guarantee was in place and the corporate guarantee was not in place. The fees incurred on the cancelable bank guarantee were not material during the three and six months ended June 30, 2015.

16


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 June 30, 2015 (in thousands):
 
Assets
 
Liabilities
 
 
VIE
Accounts
Receivable
 
Unbilled
Revenues
 
Investment in
Unconsolidated
Joint Venture
 
Loan
Guarantee
 
Maximum
Exposure
to Loss (1)
Solazyme Bunge JV
$
12

 
$
839

 
$
39,304

 
$
—

 
$
51,889

 
(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 $11.2 million based on the exchange rate at June 30, 2015) and non-cancelable purchase obligations of R$1.7 million (approximately $0.5 million based on the exchange rate at June 30, 2015).
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, 2015 and December 31, 2014 and for the three month and six months ended June 30, 2015 and 2014, respectively, was as follows (in thousands):
 
June 30,
2015
 
December 31,
2014
Current assets
$
8,868

 
$
4,339

Noncurrent assets
138,951

 
161,751

Total assets
$
147,819

 
$
166,090

Current liabilities
34,933

 
24,881

Noncurrent liabilities
57,579

 
78,666

JV's partners' capital, net
55,307

 
62,543

Total liabilities and partners' capital, net
$
147,819

 
$
166,090

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
401

 
$
—

 
$
658

 
$
—

Net losses
$
(13,407
)
 
$
(7,229
)
 
$
(23,175
)
 
$
(12,830
)
Related Party Transactions
The Company recognized revenues related to its research and development arrangements with the Solazyme Bunge JV of $1.1 million and $2.0 million in the three and six months ended June 30, 2015, respectively, and $3.4 million and $6.9 million in the three and six months ended June 30, 2014, respectively. The Company also recognized product revenues from sales to the Solazyme Bunge JV of $1.2 million during the three and six months ended June 30, 2015 and $1.3 million during the three and six months ended June 30, 2014. As of June 30, 2015 and December 31, 2014, the Company had receivables of $12,000 and $0.4 million, respectively, due from the Solazyme Bunge JV. As of June 30, 2015 and December 31, 2014, the Company had unbilled revenues of $0.8 million and $2.4 million, respectively, related to the Solazyme Bunge JV.

17


12. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
 
June 30,
2015
 
December 31,
2014
Accrued compensation and related liabilities
$
5,891

 
$
6,956

Accrued interest
3,494

 
3,495

Accrued professional fees
400

 
417

Accrued restructuring costs
47

 
1,348

Accrued costs under the Collaboration Agreement
451

 
476

Other accrued liabilities
548

 
1,387

Total accrued liabilities
$
10,831

 
$
14,079

13. 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.
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 jointly developed microbe-derived oils and explored the production of such oils from Brazilian sugarcane feedstock. The JDA also provided for Bunge to provide research funding to the Company through September 2014, payable quarterly in advance throughout the research term. The Company accounted for the JDA as an obligation to perform research and development services for others in accordance with FASB ASC 730-20, Research and Development Arrangements, and recorded the payments for the performance of these services as revenue in its condensed consolidated statement of operations. The Company recognized 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 was limited by the amounts the Company was contractually obligated to receive as cash reimbursements. In March 2015, the Company entered into an additional JDA with Bunge to jointly develop a unique food ingredient. The additional JDA also stipulates that Bunge will provide research funding to the Company through December 2018, payable quarterly in advance throughout the research term.
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 11).

18


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 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.
The Company recorded rent expense related to the ADM Warrant of $30,000 and $51,000 during the three and six months ended June 30, 2015, respectively, and $0.2 million and $0.3 million during the three and six months ended June 30, 2014, respectively, which is 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 six months ended June 30, 2015 and 2014:
 
June 30, 2015
 
June 30, 2014
Average volatility
77
%
 
55
%
Average risk-free interest rate
1.5
%
 
1.6
%
Exercise price
$7.17

 
$7.17

Average stock price
$2.86

 
$11.38

Average expected remaining life
3.8

 
4.8

As of June 30, 2015, 166,666 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 lubricants and other industrial 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 $0.5 million and $2.1 million of revenue related to substantive milestones achieved under the Mitsui joint development agreement during the three and six months ended June 30, 2015, respectively and $1.5 million of revenue related to substantive milestones achieved under the Mitsui joint development agreement during the three and six months ended June 30, 2014.
AkzoNobel—In May 2013, the Company 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 the Company entered into a research and development plan with AkzoNobel which extends through June 2017.

19


Flotek—In March 2015, the Company entered into agreements with certain Flotek Industries Inc. affiliates (Flotek) to jointly commercialize Flocapso™, a drilling fluid additive, and to allow Flotek to market the Company's Encapso™ product in certain Middle Eastern markets.
14. DEBT
A summary of the Company’s debt as of June 30, 2015 and December 31, 2014 is as follows (in thousands):
 
June 30,
2015
 
December 31,
2014
Secured and unsecured debt
 
 
 
Equipment note
$
—

 
$
6

Total secured and unsecured debt
—

 
6

Convertible senior subordinated notes
211,133

 
211,132

Total debt
211,133

 
211,138

Add:
 
 
 
Fair value of embedded derivative
232

 
83

Less:
 
 
 
Unamortized debt discount
(9,957
)
 
(11,124
)
Current portion of debt
—

 
(6
)
Long-term portion of debt
$
201,408

 
$
200,091

Total interest costs incurred related to the Company’s total debt were $2.8 million and $5.6 million for the three and six months ended June 30, 2015, respectively, and $3.1 million and $4.4 million for the three and six months ended June 30, 2014, respectively. Total interest costs capitalized during the three and six months ended June 30, 2015 were $0, and $0.3 million and $0.6 million for the three and six months ended June 30, 2014, 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 June 30, 2015 and December 31, 2014.
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 on another facility. 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 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 11). Therefore, approximately $23.8 million of the HSBC facility remained available as of June 30, 2015.
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 pays HSBC a 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 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.

20


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 year ended December 31, 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. Through June 30, 2015, $63.4 million of the 2018 Notes were 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 six months ended June 30, 2015 there were no 2018 Note conversions or any early conversion payments made by the Company. The Company had $61.6 million aggregate principal amount of 2018 Notes outstanding as of June 30, 2015.
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 June 30, 2015.
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.

21


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 8.
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.
15. 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 $5.8 million and $2.5 million as of as of June 30, 2015 and December 31, 2014, respectively. Rent expense was $2.9 million and $5.7 million for the three and six months ended June 30, 2015, respectively, and $2.6 million and $5.1 million for the three and six months ended June 30, 2014, respectively.
Contractual Obligations—As of June 30, 2015 the Company had non-cancelable purchase obligations of $0.6 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 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 $77.8 million based on the exchange rate as of June 30, 2015), which has supported 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 June 30, 2015 the bank guarantee was in place and the corporate guarantee was not. See also Note 11.

22


Legal Matters
Securities Class Action Litigation
In June 2015, a securities class action complaint entitled Norfolk County Retirement System v. Solazyme, Inc. et al. was filed against the Company, its CEO, Jonathan Wolfson, its CFO/COO, Tyler Painter, certain of its current and former directors, and the underwriters of its March 2014 equity and debt offerings, Goldman, Sachs & Co., Inc. and Morgan Stanley & Co. LLC, in the U.S. District Court for the Northern District of California.  The complaint asserts claims for alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1934, as well as Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks unspecified damages on behalf of a purported class that would comprise all individuals who acquired the Company's securities (i) between February 27, 2014 and November 5, 2014 and (ii) pursuant and/or traceable to the Company's public equity and debt offerings in March 2014. The complaint alleges that investors were misled by statements made during that period about the construction progress, development, and production capacity associated with the production facility located in Brazil owned by the Company’s joint venture, Solazyme Bunge Produtos Renovaveis Ltda.  The Company believes the complaint lacks merit, and intends to defend itself vigorously.
Derivative Litigation
In July 2015, a complaint entitled Jim Bertonis, derivatively on behalf of Solazyme, Inc. v. Jonathan Wolfson et al. was filed in the Superior Court of California, County of San Mateo. The complaint seeks unspecified damages, purportedly on behalf of the Company from certain of its current and former directors and officers and alleges these defendants breached their fiduciary duties to the Company and unjustly enriched themselves by making allegedly false and misleading statements and omitting certain material facts in the Company's securities filings and other public disclosures. This purported stockholder derivative action is based on substantially the same facts as the securities class action described above. Based on a review of the plaintiffs’ allegations, the Company believes that the plaintiff has not demonstrated standing to sue on its behalf.
Roquette Frères, S.A.
On November 3, 2010, the Company entered into a joint venture with Roquette Frères, S.A. (“Roquette”), and formed Solazyme Roquette Nutritionals, LLC (“SRN”), which was 50% owned by the Company and 50% owned by Roquette. The purpose of SRN was to pursue certain opportunities in microalgae-based products for the food, nutraceuticals and animal feed markets. 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.
In September 2013, an arbitration was initiated with Roquette (the “Roquette Arbitration”) in connection with the dissolution of SRN. The Company sought a declaration that, in accordance with the terms of the joint venture agreement between the parties, the Company should be assigned all improvements made by or on behalf of SRN to the Company’s intellectual property. On February 19, 2015 the arbitration panel released its decision, ordering, inter alia, the assignment to the Company of (i) all SRN patent applications, (ii) all SRN know-how related to high lipid algal flour and high protein algal powder and (iii) all Roquette patent applications filed since November 2010 relating to algal food and food ingredients, as well as methods for making and using them. In addition, the arbitration panel ordered Roquette to pay to the Company, $2.3 million in legal costs and fees.
In November 2014, Roquette filed an action against the Company in U.S. District Court for the District of Delaware for declaratory judgment related to the Roquette Arbitration. Roquette seeks a declaration that (i) the arbitrators in the Roquette Arbitration exceeded their authority by failing to render a timely arbitration award, (ii) the award issued by the arbitrators is void and (iii) all intangible assets of SRN should be assigned jointly to Roquette and the Company. The Company filed an Answer to the Complaint in January 2015, denying substantially all of Roquette’s claims and all of its prayers for relief. In April 2015, Roquette filed a motion for summary judgment in the action.
In February 2015, Roquette filed a second action against the Company in U.S. District Court for the District of Delaware for declaratory judgment related to the Roquette Arbitration. Roquette seeks a declaration that (A) the order of the arbitrators in the Roquette Arbitration for more discovery and new hearings is unenforceable and (B) in the alternative, the new discovery and hearings concerned an issue that is outside the scope of the arbitration. In February 2015, the two Delaware declaratory judgment actions were consolidated. The Company filed its Answer to the second Complaint in February 2015, denying all claims made in the Complaint and all related prayers for relief. In addition, the Company cross-claimed for (x) confirmation of the arbitration award, (y) an order compelling Roquette to comply with the arbitration award and (z) damages for misappropriation of the Company’s trade secrets, misuse of the Company’s confidential information and breach of contract. In April 2015, Roquette filed a motion for summary judgment in the action.

23


In March 2015 the Company filed a motion for an order confirming the award rendered in the Roquette Arbitration. In response, in April 2015, Roquette filed a motion to vacate the arbitration award, which included counterclaims alleging Company misuse of Roquette trade secrets.
In March 2015, the Company filed a motion for a preliminary injunction preventing Roquette’s continued use of trade secrets misappropriated from the Company.
A hearing on the main motions pending in the Delaware proceedings (including the Company's motion for preliminary injunction) was held on July 28, 2015. A decision on the outcome of the motions is pending.
The Company may be involved, from time to time, in additional legal proceedings and claims arising in the ordinary course of its business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. While there can be no assurances as to the ultimate outcome of any legal proceeding or other loss contingencies involving the Company, management does not believe any pending matters individually and in the aggregate will be resolved in a manner that would have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
16. STOCK-BASED COMPENSATION 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, 2014, for additional information related to these stock-based compensation plans.
The following table summarizes the components and classification of stock-based compensation expense related to stock options, restricted stock units and awards (“RSUs” and “RSAs”), performance-based restricted stock units (“PSUs”) and the 2011 ESPP for the three and six months ended June 30, 2015 and 2014 (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Stock options
$
3,208

 
$
4,155

 
$
5,455

 
$
8,331

RSUs/RSAs
1,334

 
1,574

 
3,111

 
3,916

ESPP
177

 
67

 
222

 
158

Stock-based compensation expense
$
4,719

 
$
5,796

 
$
8,788

 
$
12,405

Research and development
$
1,473

 
$
1,910

 
$
2,585

 
$
3,730

Sales, general and administrative
3,246

 
3,886

 
6,203

 
8,675

Stock-based compensation expense
$
4,719

 
$
5,796

 
$
8,788

 
$
12,405

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 June 30, 2015, 750,000 of the warrant shares had vested and the remaining 250,000 warrant shares could no longer vest. Refer to Note 11 for 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 1, 2019. As of June 30, 2015, 166,666 of the warrant shares had vested. See Note 13.
Performance-Based Restricted Stock Units—During the three months ended March 31, 2014, 100,000 shares of unvested performance-based restricted stock units (“PSUs”) were canceled and there were no shares of unvested PSUs as of December 31, 2014. No additional PSUs were granted during the six months ended June 30, 2015.

24


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 in an underwritten public offering (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.
Employee Stock Option Exchange Program—In January 2015, the Company commenced an exchange offer to allow employees the opportunity to exchange, on a grant-by-grant basis, their outstanding eligible options that had an exercise price per share equal to or greater than $6.79 for new stock options on a two-for-one basis that the Company granted under its 2011 EIP. Generally, all employees with options were eligible to participate in the program, which expired at 9:00 p.m. Pacific Time on February 18, 2015. Non-employee members of Solazyme’s Board of Directors were not eligible to participate. Each new stock option has an exercise price of $2.58, the last reported sale price per share of Solazyme common stock on the NASDAQ Global Select Market on the new stock option grant date, which was February 19, 2015.
Each new stock option has a maximum term that is equal to the remaining term of the corresponding eligible option. Each new stock option has the same final vesting date as the corresponding eligible option. Each new stock option has the same rate of vesting, from the same vesting commencement date, as the corresponding eligible option, provided that any vesting that would have occurred prior to January 1, 2016 cumulates and cliff vests on January 1, 2016. This is the case even if the eligible options were fully vested on the date of the exchange. The optionee must be employed by the Company on January 1, 2016 to benefit from this new option cliff vest.
On February 19, 2015, the Company granted new options to eligible options holders to purchase 2,745,279 shares of common stock in exchange for the cancellation of the tendered options. The Company will record a charge of approximately $0.5 million associated with the stock option modification over the vesting periods of the new options which range from ten months to four years. This modification charge was recorded as additional stock-based compensation expense beginning in the first quarter of 2015. This modification charge is estimated using an exchange price of $2.58.

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 and those discussed in the section entitled “Risk Factors” included in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (SEC).
Overview
Starting with microalgae, we create new, sustainable, high-performance products. Our proprietary technology uses highly optimized microalgae in an industrial fermentation process to transform a range of abundant plant-based sugars into high-value triglyceride oils and other bioproducts.
We tailor the composition of our oils and bioproducts to address specific customer requirements, via a renewable pathway, by replacing or improving intermediates and ingredients in major markets currently served by conventional oils and specialty markets. We are commercializing our primary products as either Intermediates/Ingredients that include branded products such as Encapso™, AlgaViaTM Lipid Powder and AlgaViaTM Protein, or as Personal Care Products that include branded products such as Algenist® skin and personal care products, targeted at customers in the: (1) Industrial Products, (2) Food Products, and (3) Personal Care Products markets. Algenist® skin and personal care line is formulated with our proprietary ingredients, Alguronic Acid® and Microalgal Oil, which is incorporated into a full-range of branded skin and personal care products.
In the first quarter of 2011, we began selling our consumer-focused Algenist® skin and personal care line in the Personal Care Products market. In the first quarter of 2014, we began manufacturing at commercial production scale, and we began selling intermediate and ingredient products. We expect to sell these intermediate and ingredients products broadly to customers in the Industrial Products and Food Products markets. We expect the average margins on these intermediate and ingredient

25


products will be lower than those of our consumer-focused personal care 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 and partnership agreements to advance commercialization efforts of our intermediate and ingredient products. 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 across multiple industries allow us to approach a wide range of customers across myriad 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 powdered ingredients targeted at the Food Products market. 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 forms of triglyceride oils and vegan proteins, and our powdered ingredients are composed of unmodified whole algal cells. AlgaViaTM Lipid Powder (also known as whole algal flour) and AlgaViaTM Protein (also known as whole algal protein) can improve the nutritional profile of foods and beverages. AlgaViaTM Lipid Powder is a new fat source that allows for the reduction or replacement of dairy fats, oils, and eggs. AlgaViaTM Protein is a new vegan source of protein that is free of known allergens and gluten. Both AlgaViaTM Lipid Powder and AlgaViaTM Protein can be used across a range of applications such as beverages (ready-to-drink and powdered), bakery, snacks, bars, dressings, sauces and frozen desserts.
Our production process is compatible with commercial-scale, widely-available fermentation and oil recovery equipment. We operate our lab and pilot fermentation and recovery equipment as scaled-down versions of our large commercial engineering designs, such as those used to perform development work under certain agreements with strategic partners and to fulfill commercial supply agreements with certain partners. 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 the Clinton Facility is comparable to the fermentation equipment at the Solazyme Bunge JV Plant in Brazil. Our existing manufacturing operations are as follows:
•
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.
•
In 2012, we successfully commissioned our first fully integrated biorefinery (IBR) at our Peoria, Illinois facility (the Peoria 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.
•
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 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 Plant produced its first products on full-scale production lines, including 625,000 liter fermenter tanks. 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. Additional capital expenditures may be required to reach nameplate capacity depending on the product mix produced at the plant. See “Significant Partner Agreements.”
•
In November 2012, we executed a strategic collaboration agreement with Archer-Daniels-Midland Company (ADM) to produce algal triglyceride oil products at ADM’s facility in Clinton, Iowa (Clinton Facility). 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 five distinct products at the facilities, and products are being sold and distributed. The Clinton Facility utilizes fermentation vessels that are approximately 500,000-liters and corn sugars as a feedstock to produce algal triglyceride oil products. The current focus for the Clinton Facility is to produce higher margin

26


products such as our Encapso™ product and to balance production with operating expenses. We have the option to expand the capacity. See “Significant Partner Agreements.”
•
We utilize contract manufacturing to assist in the production of our products, and we closely monitor and advise these contract manufacturers to maintain stringent quality standards for our products. We also produce some active ingredients for Solazyme Personal Care Products at our Peoria Facility.
Through fiscal year 2013, our revenues were generated from research and development programs and commercial sale of our personal care products. Starting in the first quarter of 2014 our product revenues expanded to include initial sales of intermediate and ingredient products. Our research and development programs have been conducted primarily under agreements with government agencies and strategic partners to fund development work and to perform application testing. We focus our innovation efforts on creating a broad suite of algal products that meet 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. Our main commercial focus is to sell high-value oils, encapsulated oils and whole algal powdered products to companies that use them as intermediates and ingredients.
Within the Personal Care Products market, we have developed a portfolio of innovative and branded microalgae-based consumer products. Our first major ingredient in this market was Alguronic Acid®, which was formulated into a full range of Algenist® skin care products. Since its launch in 2011, we have commercialized our Algenist® anti-aging skin care line, marketed to date primarily through Sephora S.A. and its affiliates (Sephora) and QVC. In April 2014, our Algenist® product 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 2,500 retail stores in 22 countries including several member countries of the EU, Mexico, Canada and China. Beginning in 2013, we further leveraged our innovative ingredient research and expertise by broadening the Algenist® line to include products that use microalgae oil and whole algal ingredients as replacements for essential oils currently used in other skin care products.
In the first quarter of 2014, we began selling our intermediate and ingredient products more broadly to customers in the Industrial Products market with the launch of EncapsoTM. Our initial commercial use for our EncapsoTM product is as a biodegradable oil and gas drilling fluid lubricant.
Significant Partner Agreements
We currently have joint venture, joint development, supply and distribution arrangements with several 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 (JDA) with Bunge that was extended through September 2014. Pursuant to the JDA, we and Bunge jointly developed microbe-derived oils and explored 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 the Solazyme Bunge JV Plant. 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. 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 products on full-scale production lines, including 625,000 liter fermentation tanks. Both oil and Encapso™ products have been manufactured; production optimization is continuing and is expected to ramp as we work to increase efficiency in unit operations, and balance production volumes with operating costs as we focus on higher value products. 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

27


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 pays 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 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. In March 2015, we entered into an additional JDA with Bunge to jointly develop a unique food ingredient. The additional JDA also stipulates that Bunge will provide research funding to us through December 2018, payable quarterly in advance throughout the research term.
Refer to Note 11 and Note 13 in the accompanying notes to our condensed consolidated financial statements for further discussion of the Bunge JDA, Joint Venture Agreement and Warrant.
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 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. 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 ANP. 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 lubricants and other industrial products.
Algenist® Distribution Partners. In 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 early 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). During 2011, we launched our Algenist® product line at Sephora inside JCPenney stores in the United States and 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.

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Flotek. In March 2015, we entered into agreements with certain Flotek Industries Inc. affiliates (Flotek) to jointly commercialize Flocapso™, a drilling fluid additive, and to allow Flotek to market our Encapso™ product in certain Middle Eastern markets.
Financial Operations Overview
Revenues
We are commercializing our products as intermediate and ingredient products and personal care products. Intermediate and ingredient products encompass a portfolio of ingredient products targeted at customers in the Industrial Products and Food Products markets. We are currently selling our consumer-focused Algenist® branded skin and personal care line in the Personal Care Product market. Prior to commercialization of our Algenist® products 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 consumer-focused branded products into the Personal Care Products 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 Industrial Products markets as we began to commercially produce and distribute products from the Clinton/Galva Facilities.
•
Product Revenues
Product revenues consist of revenues from products sold commercially into each of our target markets.
We began our commercialization from sale of consumer-focused branded skin and personal care products in the Personal Care Products market. Starting in 2011, we recognized revenues from the sale of our first consumer-focused 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 ULTA Beauty in 22 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 began selling our intermediate and ingredient products commercially into the Industrial Products market. We launched our Encapso™ product, a biodegradable lubricant for drilling fluids, Tailored™ oil products to customers that use our intermediate products, 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-focused product lines grow and as we continue to commercialize our portfolio of intermediate and ingredient products including Tailored™ oils and powders, our advanced biofuel blends, and our Encapso™ product targeted at customers in the Industrial Products market, as well as our food ingredients products targeted at customers in the Food Products market.
Product revenues represented 71% and 70% of our total revenues for the three and six months ended June 30, 2015, respectively, and 57% and 58% of our total revenues for the three and six months ended June 30, 2014, respectively.
•
Research and Development Program Revenues
Revenues from 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 other R&D program agreements were provided have been met and only perfunctory obligations are outstanding. We currently have active R&D programs with commercial partners and recently completed R&D programs with 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 from commercial and strategic partner development agreements represented 29% and 30% of our total revenues for the three and six months ended June 30, 2015, respectively, compared to 43% and 42% of our total revenue for the three and six months ended June 30, 2014, respectively.
Costs and Operating Expenses
Costs and operating expenses consist of cost of product revenue, research and development expenses, sales, general and administrative expenses and restructuring charges. 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,

29


reimbursable equipment and costs associated with government contracts, consultants and facility costs, comprise the significant components of these expenses.
•
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, including internal labor, shipping, supplies and other overhead costs associated with production of Alguronic Acid® and Microalgae Oil used in our Algenist® product line. Beginning in the first quarter of 2014, cost of product revenue also includes manufacturing, distribution and related third party contract costs associated with the production of our intermediate/ingredient products, such as our EncapsoTM product, TailoredTM 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. Starting in 2014, our EncapsoTM product and three of our TailoredTM oils met applicable regulatory requirements and we began capitalizing certain production costs to inventory.
Certain scale-up production costs related to operations at the Clinton/Galva facilities focused on process development associated with the manufacturing scale-up at the facilities may be charged to research and development costs. In addition, unallocated fixed costs for these manufacturing facilities may be charged to selling, general and administrative expenses when facilities are not operating at full capacity. 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 intermediate/ingredient products targeted at customers in the Industrial Products and Food Products markets.
•
Research and Development
Research and development expenses consist of costs incurred for internal projects as well as partner-funded collaborative research and development activities with commercial and strategic partners and governmental and JV entities (partners). Research and development expenses consist primarily of personnel and related costs including non-cash stock-based compensation, third party contract manufacturers, reimbursable equipment and other costs associated with our work on development programs associated with our collaboration agreements. Reimbursable equipment and costs associated with government contracts are a main component of research and development expenses prior to 2014. 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 a portion of certain manufacturing costs 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 as well as product and process development activities at our production facilities. 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 commercial samples for market development related to production of products such as our AlgaVia™ brand of whole algal powders and flours.  
•
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, marketing and business development functions, professional services, marketing programs and samples, facility and administrative overhead expenses and unallocated fixed third-party facilities costs incurred when facilities are not operating at full capacity. Professional services consist primarily of consulting, external accounting, legal and investor relations fees associated with operating as a publicly-traded company.

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•
Restructuring Charges
In December 2014 we took steps to decrease operating expenses through a reduction in workforce and other cost-cutting measures (2014 Restructuring Plan). Restructuring charges consist primarily of employee severance costs, asset impairment and accelerated depreciation related to consolidation of our Brazil subsidiary’s lab and offices.
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 6.00% Convertible Senior Subordinated Notes due 2018 (the 2018 Notes) and 5.00% Convertible Senior Subordinated Notes due 2019 (the 2019 Notes collectively with the 2018 Notes, the Notes). As of June 30, 2015 and December 31, 2014, our outstanding debt, net of debt discounts, was approximately $201.4 million and $200.1 million, respectively.
•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. 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 (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 2018 Notes and 2019 Notes issued in January 2013 and April 2014, respectively.
•Income (Loss) from Equity Method Investment
Income (loss) from our equity method investment in the Solazyme Bunge JV is recorded in our income statement as “Income (Loss) from Equity Method Investment”.
•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 2014 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 2014 Annual Report on Form 10-K.

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Results of Operations
Comparison of Three Months Ended June 30, 2015 and 2014
Revenues
 
Three Months Ended June 30,
 
2015
 
2014
 
$ Change
 
(In thousands)
Revenues:
 
 
 
 
 
Product revenues
$
8,307

 
$
9,022

 
$
(715
)
Research and development programs
3,433

 
6,917

 
(3,484
)
Total revenues
$
11,740

 
$
15,939

 
$
(4,199
)
Our total revenues decreased by $4.2 million due to a decrease in R&D program revenues of $3.5 million and a decrease in product revenues of $0.7 million in the second quarter of 2015 compared to the same period in 2014.
We have two reportable segments for financial statement reporting purposes: Algenist® and Intermediates/Ingredients and Other. The Intermediates/Ingredients and Other segment includes sale of our Encapso™ product and TailoredTM oils. Our discussions below surrounding changes in product revenue and gross margin are based on those reportable segments.
Product Revenues and Cost of Product Revenues
Products revenues and cost of product revenues by segment for the three months ended June 30, 2015 and 2014 were as follows:
 
Three Months Ended June 30,
 
2015
 
2014
 
Change
 
(In thousands)
Algenist®
 
 
 
 
 
  Product revenues
$
5,191

 
$
5,960

 
$
(769
)
  Cost of product revenues
1,347

 
1,890

 
(543
)
  Gross profit
$
3,844

 
$
4,070

 
$
(226
)
  Gross margin
74
%
 
68
%
 
6
 %
 
 
 
 
 
 
Intermediate/Ingredients and Other
 
 
 
 
 
  Product revenues
$
3,116

 
$
3,062

 
$
54

  Cost of product revenues
3,014

 
2,580

 
434

  Gross profit
$
102

 
$
482

 
$
(380
)
  Gross margin
3
%
 
16
%
 
(13
)%
Algenist® product revenues and cost of product revenues decreased $0.8 million and $0.5 million, respectively, in the second quarter of 2015 compared to the same period in 2014. Second quarter 2014 results benefited from the timing of certain sales activities, that occurred in the third quarter of 2015 instead of the second quarter. This benefit was partially offset by new product offerings and increased consumer demand in the second quarter of 2015 compared to the same period in 2014. Algenist® gross margin increased from 68% during the second quarter of 2014 to 74% in the second quarter of 2015 primarily as a result of inventory reserve adjustments, which had an impact of 6% on the second quarter of 2015 gross margin.
Intermediate/Ingredients and Other product revenues increased slightly due to an increase in product sales of Encapso™ and industrial oils, partially offset by a decrease in Fuel blend sales related to our fuels marketing and commercial development program. We expect Intermediates/Ingredients and Other product revenues to increase as a percentage of total net product revenues as we continue to ramp our large-scale production and focus on higher value Industrial Products and Food Products.

Certain inventories manufactured prior to regulatory approval are charged to research and development expense in periods prior to when those inventories are sold. Beginning in early 2014 we began to sell our Intermediates/Ingredients and Other products more broadly in the Industrial Products markets, however, due to certain inventories previously expensed to

32


research and development expense, our cost of product revenues did not include all production costs associated with our Intermediates/Ingredients and Other products until those products met the applicable regulatory requirements. In addition, during scale-up of the manufacturing process at the Clinton/Galva facilities, certain Intermediate/Ingredient and Other product manufacturing, related production and unallocated fixed facilities costs are charged to research and development and selling, general and administrative expenses.
The gross margin for Intermediates/Ingredients and Other product sales was 3% in the second quarter of 2015 compared to 16% in the second quarter of 2014, primarily due to changes in customer and product mix, and gross margin was impacted favorably in the second quarter of 2014 by the sale of inventory that was expensed to research and development expense. Gross margins for our Intermediates/Ingredients and Other products would have been negative in the current quarter if certain costs, including scale-up production costs related to operations at the Clinton/Galva facilities and unallocated fixed facilities costs, had not been charged to operating expenses. We expect our customer and product mix will change as we complete existing industrial oil supply agreements with customers and focus on production and sales of higher margin Intermediates/Ingredients and Other products.
We expect our total cost of production for products manufactured at the Clinton/Galva Facilities will increase as we continue to sell Intermediates/Ingredients in the Industrial Products and Food Products markets and as we focus the Clinton Facility on higher margin products such as our Encapso™ product 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 production volumes fluctuate. As production volume increases our cost per metric ton produced is expected to decrease.
Research and Development Programs Revenue
We are currently engaged in development activities with multiple strategic partners and the Solazyme Bunge JV, and although we expect funded program revenue to remain an important indication of strategic commitment from partners and a source of future customers, we expect funded program revenue to become a less meaningful part of our overall revenue as our focus shifts to commercialization and product revenues. In line with this strategy, research and development programs revenue decreased by $3.5 million in the second quarter of 2015 compared to the same period in 2014, due to decreased revenues from development agreements with the Solazyme Bunge JV and strategic partners. Our revenues from development agreements with the Solazyme Bunge JV and strategic partners fluctuate due to timing and terms of the development work performed and achievement of contract milestones defined in these agreements. Revenues from the Solazyme Bunge JV decreased in the second quarter of 2015 compared to the same period in 2014, due primarily to a reduction of revenue associated with technical and commercial services related to the operations of the Solazyme Bunge JV Plant and support for its commercial activities as the plant ramps up. In addition, research and development program revenue associated with payments for the achievement of milestones under a development agreement with a strategic partner was $1.0 million lower in the second quarter of 2015 compared to the same period in 2014.
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 with strategic partners.
Operating Expenses
 
Three Months Ended June 30,
 
2015
 
2014
 
$ Change
 
(In thousands)
Operating expenses:
 
 
 
 
 
Research and development
$
12,747

 
$
22,064

 
$
(9,317
)
Sales, general and administrative
20,981

 
21,637

 
(656
)
Restructuring charges
(31
)
 
—

 
(31
)
Total operating expenses
$
33,697

 
$
43,701

 
$
(10,004
)
Certain scale-up production costs related to operations at the Clinton/Galva facilities focused on process development associated with the manufacturing scale-up at the facilities may be charged to research and development costs. In addition, unallocated fixed costs for these manufacturing facilities may be charged to selling, general and administrative expenses when facilities are not operating at full capacity.

33


Research and Development Expenses
The total fluctuation on our research and development expenses in the second quarter of 2015 compared to the same period in 2014 decreased by $9.3 million, due primarily to a $3.9 million decrease in ongoing research and development expenses, and a $5.5 million decrease in scale-up production costs related to operations at the Clinton/Galva facilities. Research and development expenses, excluding scale-up costs, decreased $3.9 million in the second quarter of 2015 compared to the same period in 2014, due primarily to $2.3 million of decreased personnel-related and facilities-related costs and $0.6 million of decreased product development costs related to restructuring activities implemented starting in late December 2014. Personnel-related costs include non-cash stock-based compensation expense of $1.5 million in the second quarter of 2015 compared to $1.9 million in the same period in 2014. Scale up costs decreased as we had limited operations at the Clinton/Galva Facilities in the second quarter of 2015 compared to the same period in 2014.
We expect overall research and development costs to decrease in 2015, compared to 2014, in particular personnel-related costs, as a result of the reduction in workforce and other cost-cutting measures we implemented starting in December 2014. We plan to continue to make investments in research and development for the foreseeable future, but at a lower rate, 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 as well as process and product development activities at the Clinton/Galva Facilities to commercial scale.
Sales, General and Administrative Expenses
The total fluctuation in our sales, general and administrative expenses in the second quarter of 2015 compared to the same period in 2014 decreased by $0.7 million, due primarily to a $4.1 million decrease in ongoing sales, general and administrative expenses, partially offset by a $3.4 million increase in unallocated fixed costs for the Clinton/Galva facilities associated with the facilities not operating at full capacity. Sales, general and administrative expenses, excluding unallocated fixed costs, decreased $4.1 million in the second quarter of 2015 compared to the same period in 2014, due primarily to $1.2 million of decreased personnel-related and facilities costs, decreased external legal and outside services costs of $1.7 million and decreased marketing and promotional costs of $0.9 million. Personnel-related and facilities-related costs decreased primarily as a result of decreased non-cash stock-based compensation expense, and decreased personnel costs as a result of restructuring activities implemented in December 2014. Personnel-related costs include non-cash stock-based compensation of $3.2 million in the second quarter of 2015 compared to $3.9 million in the same period in 2014. Stock-based compensation decreased in the second quarter of 2015 compared to the same period in 2014 primarily due to stock option modification expense recorded in the prior period.
During the second quarter of 2015, our facilities were not operating at full capacity as we managed limited production campaigns at the Clinton/Galva Facilities to focus on establishing operations at the Solazyme Bunge JV Plant pursuant to our 2014 Restructuring Plan. We plan to continue to invest in commercialization of our high value Intermediate/Ingredient products in the Industrial Products and Food Products markets, which may increase our overall selling, general and administrative expense, but expect personnel-related expenses to decrease for the remainder of 2015 compared to the same periods in 2014, as a result of a reduction in workforce and other cost-cutting measures we implemented starting in December 2014.
Restructuring Charges
In December 2014, we took steps to decrease operating expenses through the 2014 Restructuring Plan. Restructuring charges in the second quarter of 2015 consist primarily of adjustments to employee severance costs and related asset accelerated depreciation charges. We anticipate a reduction in annualized cash operating expenses of at least $18.0 million in 2015 related to the 2014 Restructuring Plan.
Other Income (Expense), Net 
 
Three Months Ended June 30,
 
2015
 
2014
 
$ Change
 
(In thousands)
Other income (expense):
 
 
 
 
 
Interest and other income, net
$
137

 
$
393

 
$
(256
)
Interest expense
(3,547
)
 
(5,055
)
 
(1,508
)
Loss from equity method investment
(7,309
)
 
(4,278
)
 
3,031

Loss from change in fair value of derivative liabilities
(134
)
 
(1,745
)
 
1,611

Total other income (expense), net
$
(10,853
)
 
$
(10,685
)
 
$
168


34


Interest expense
Interest expense decreased by $1.5 million in the second quarter of 2015 compared to the same period in 2014 due primarily to $1.8 million of debt conversion expense incurred in the second quarter of 2014. We expect interest expense to increase primarily as a result of issuing the 2019 Notes.
Loss from Equity Method Investment
Loss from equity method investment increased by $3.0 million in the second quarter of 2015 compared to the same period in 2014, 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 optimization of the Solazyme Bunge JV Plant and to decrease once commercial-scale production is achieved.
Gain (Loss) from Change in Fair Value of Derivative Liabilities
Loss from change in fair value of derivative liabilities of $0.1 million in the second quarter of 2015 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 $1.7 million gain in the same period in 2014. 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.
Results of Operations
Comparison of Six Months Ended June 30, 2015 and 2014
Revenues
 
Six Months Ended June 30,
 
2015
 
2014
 
$ Change
 
(In thousands)
Revenues:
 
 
 
 
 
Product revenues
$
17,128

 
$
16,370

 
$
758

Research and development programs
7,217

 
11,960

 
(4,743
)
Total revenues
$
24,345

 
$
28,330

 
$
(3,985
)
Our total revenues decreased by $4.0 million in the first half of 2015 compared to the same period in 2014, due to $0.8 million of increased product sales, offset by $4.7 million of decreased R&D program revenues.
We have two reportable segments for financial statement reporting purposes: Algenist® and Intermediates/Ingredients and Other. The Intermediates/Ingredients and Other segment includes sale of our Encapso™ product and TailoredTM oils. Our discussions below surrounding changes in product revenue and gross margin are based on those reportable segments.

35


Product Revenues and Cost of Product Revenues
Product revenues and cost of product revenues by segment for the six months ended June 30, 2015 and 2014 were as follows:
 
Six Months Ended June 30,
 
2015
 
2014
 
Change
 
(In thousands)
Algenist®
 
 
 
 
 
  Product revenues
$
11,402

 
$
10,901

 
$
501

  Cost of product revenues
3,667

 
3,377

 
290

  Gross profit
$
7,735

 
$
7,524

 
$
211

  Gross margin
68
%
 
69
%
 
(1
)%
 
 
 
 
 
 
Intermediate/Ingredients and Other
 
 
 
 
 
  Product revenues
$
5,726

 
$
5,469

 
$
257

  Cost of product revenues
5,364

 
4,483

 
881

  Gross profit
$
362

 
$
986

 
$
(624
)
  Gross margin
6
%
 
18
%
 
(12
)%
Algenist® product revenues and cost of product revenues increased $0.5 million and $0.3 million, respectively, in the first half of 2015 compared to the same period in 2014 as a result of new product offerings and increased consumer demand.
Intermediate/Ingredients and Other product revenues increased $0.3 million in the first half of 2015 compared to the same period in 2014 due an increase in product sales of Encapso™ and industrial oils, partially offset by a decrease in Fuel blend sales related to our fuels marketing and commercial development program. We expect Intermediates/Ingredients and Other product revenues to increase as a percentage of total net product revenues as we continue to ramp our large-scale production and focus on higher value Industrial Products and Food Products.

Certain inventories manufactured prior to regulatory approval are charged to research and development expense in periods prior to when those inventories are sold. Beginning in early 2014 we began to sell our Intermediates/Ingredients and Other products more broadly in the Industrial Products markets, however, due to certain inventories previously expensed to research and development expense, our cost of product revenues did not include all production costs associated with our Intermediates/Ingredients and Other products until those products met the applicable regulatory requirements. In addition, during scale-up of the manufacturing process at the Clinton/Galva facilities, certain Intermediate/Ingredient and Other product manufacturing, related production and unallocated fixed facilities costs are charged to research and development and selling, general and administrative expenses.
The gross margin for Intermediates/Ingredients and Other product sales was 6% in the first half of 2015 compared to 18% in the first half of 2014, primarily due to changes in customer and product mix. In addition, gross margin was impacted favorably in the first half of 2014 by the sale of inventory that was expensed to research and development expense prior to its regulatory approval. Gross margins for our Intermediates/Ingredients and Other products would have been negative in the current period if certain costs, including scale-up production costs related to operations at the Clinton/Galva facilities and unallocated fixed facilities costs, had not been charged to operating expenses. We expect our customer and product mix will change as we complete existing industrial oil supply agreements with customers and focus on production and sales of higher margin Intermediates/Ingredients and Other products.
We expect our total cost of production for products manufactured at the Clinton/Galva Facilities will increase as we continue to sell Intermediates/Ingredients in the Industrial Products and Food Products markets and as we focus the Clinton Facility on higher margin products such as our Encapso™