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 March 31, 2017
OR
o | 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: 001-34885
AMYRIS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 55-0856151 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Amyris, Inc.
5885 Hollis Street, Suite 100
Emeryville, CA 94608
(510) 450-0761
(Address and telephone number of 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 o
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | x |
Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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 April 30, 2017 |
Common Stock, $0.0001 par value per share | 297,086,351 |
AMYRIS, INC.
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2017
INDEX
Amyris, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Shares and Per Share Amounts)
(Unaudited)
March 31, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,297 | $ | 27,150 | ||||
Restricted cash | 301 | 4,326 | ||||||
Short-term investments | 1,188 | 1,374 | ||||||
Accounts receivable, net of allowance of $478 and $478, respectively | 8,122 | 13,105 | ||||||
Related party accounts receivable, net of allowance of $23 and $23, respectively | 416 | 872 | ||||||
Inventories, net | 7,077 | 6,213 | ||||||
Prepaid expenses and other current assets | 5,652 | 6,083 | ||||||
Total current assets | 24,053 | 59,123 | ||||||
Property, plant and equipment, net | 53,045 | 53,735 | ||||||
Restricted cash | 958 | 957 | ||||||
Equity and loans in affiliates | 34 | 34 | ||||||
Other assets | 16,794 | 15,464 | ||||||
Goodwill and intangible assets | 560 | 560 | ||||||
Total assets | $ | 95,444 | $ | 129,873 | ||||
Liabilities, Mezzanine Equity and Stockholders' Deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 16,453 | $ | 15,315 | ||||
Deferred revenue | 3,487 | 5,288 | ||||||
Accrued and other current liabilities | 31,806 | 29,188 | ||||||
Capital lease obligation, current portion | 405 | 922 | ||||||
Debt, current portion | 15,290 | 25,853 | ||||||
Related party debt | 34,165 | 33,302 | ||||||
Total current liabilities | 101,606 | 109,868 | ||||||
Capital lease obligation, net of current portion | 405 | 334 | ||||||
Long-term debt, net of current portion | 131,759 | 128,744 | ||||||
Related party debt | 39,724 | 39,144 | ||||||
Deferred rent, net of current portion | 8,691 | 8,906 | ||||||
Deferred revenue, net of current portion | 6,650 | 6,650 | ||||||
Derivative liabilities | 5,144 | 6,894 | ||||||
Other liabilities | 7,716 | 7,841 | ||||||
Total liabilities | 301,695 | 308,381 | ||||||
Commitments and contingencies (Note 6) | ||||||||
Mezzanine Equity | ||||||||
Contingently redeemable common stock (Note 8) | 5,000 | 5,000 | ||||||
Stockholders’ deficit: | ||||||||
Preferred stock - $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding | — | — | ||||||
Common stock - $0.0001 par value, 500,000,000 and 500,000,000 shares authorized as of March 31, 2017 and December 31, 2016, respectively; 287,973,020 and 274,108,808 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively | 28 | 27 | ||||||
Additional paid-in capital | 1,000,174 | 990,870 | ||||||
Accumulated other comprehensive loss | (40,581 | ) | (40,904 | ) | ||||
Accumulated deficit | (1,171,809 | ) | (1,134,438 | ) | ||||
Total Amyris, Inc. stockholders’ deficit | (212,188 | ) | (184,445 | ) | ||||
Noncontrolling interest | 937 | 937 | ||||||
Total stockholders' deficit | (211,251 | ) | (183,508 | ) | ||||
Total liabilities, mezzanine equity and stockholders' deficit | $ | 95,444 | $ | 129,873 |
See the accompanying notes to the unaudited condensed consolidated financial statements.
3 |
Amyris, Inc.
Condensed Consolidated Statements of Operations
(In Thousands, Except Shares and Per Share Amounts)
(Unaudited)
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Revenues | ||||||||
Renewable product sales | $ | 8,292 | $ | 3,140 | ||||
Grants and collaborations revenue | 4,688 | 5,671 | ||||||
Total revenues | 12,980 | 8,811 | ||||||
Cost and operating expenses | ||||||||
Cost of products sold | 12,768 | 11,178 | ||||||
Research and development | 14,778 | 11,906 | ||||||
Sales, general and administrative | 12,778 | 12,266 | ||||||
Total cost and operating expenses | 40,324 | 35,350 | ||||||
Loss from operations | (27,344 | ) | (26,539 | ) | ||||
Other income (expense): | ||||||||
Interest income | 61 | 57 | ||||||
Interest expense | (12,184 | ) | (8,359 | ) | ||||
Gain from change in fair value of derivative instruments | 2,339 | 21,678 | ||||||
Gain/(loss) upon extinguishment of debt | 96 | (216 | ) | |||||
Other expense, net | (380 | ) | (1,814 | ) | ||||
Total other income (expense) | (10,068 | ) | 11,346 | |||||
Loss before income taxes | (37,412 | ) | (15,193 | ) | ||||
(Benefit from)/provision for income taxes | 41 | (115 | ) | |||||
Net loss | (37,371 | ) | (15,308 | ) | ||||
Net loss attributable to noncontrolling interest | — | — | ||||||
Net loss attributable to Amyris, Inc. common stockholders | $ | (37,371 | ) | $ | (15,308 | ) | ||
Net loss per share attributable to common stockholders: | ||||||||
Basic | $ | (0.13 | ) | $ | (0.07 | ) | ||
Diluted | $ | (0.13 | ) | $ | (0.12 | ) | ||
Weighted-average shares of common stock outstanding used in computing net loss per share of common stock: | ||||||||
Basic | 290,039,216 | 207,199,563 | ||||||
Diluted | 290,039,216 | 260,932.09 |
See the accompanying notes to the unaudited condensed consolidated financial statements.
4 |
Amyris, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(In Thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Comprehensive loss: | ||||||||
Net loss | $ | (37,371 | ) | $ | (15,308 | ) | ||
Foreign currency translation adjustment, net of tax | 323 | 4,687 | ||||||
Total comprehensive loss | (37,048 | ) | (10,621 | ) | ||||
Loss attributable to noncontrolling interest | — | — | ||||||
Comprehensive loss attributable to Amyris, Inc. | $ | (37,048 | ) | $ | (10,621 | ) |
See the accompanying notes to the unaudited condensed consolidated financial statements.
5 |
Amyris, Inc.
Condensed Consolidated Statements of Stockholders’ Deficit
(In Thousands, Except Shares)
(Unaudited)
Common Stock | ||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Noncontrolling Interest | Total Deficit | Mezzanine Equity | |||||||||||||||||||||||||
December 31, 2016 | 274,108,808 | $ | 27 | $ | 990,870 | $ | (1,134,438 | ) | $ | (40,904 | ) | $ | 937 | $ | (183,508 | ) | $ | 5,000 | ||||||||||||||
Issuance of common stock upon exercise of stock options, net of restricted stock | 500 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Issuance of common stock for settlement of debt principal payments | 13,546,448 | 1 | 7,680 | — | — | — | 7,681 | — | ||||||||||||||||||||||||
Shares issued from restricted stock settlement | 317,264 | — | (22 | ) | — | — | — | (22 | ) | — | ||||||||||||||||||||||
Stock-based compensation | — | — | 1,646 | — | — | — | 1,646 | — | ||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | 323 | — | 323 | — | ||||||||||||||||||||||||
Net loss | — | — | — | (37,371 | ) | — | — | (37,371 | ) | — | ||||||||||||||||||||||
March 31, 2017 | 287,973,020 | $ | 28 | $ | 1,000,174 | $ | (1,171,809 | ) | $ | (40,581 | ) | $ | 937 | $ | (211,251 | ) | $ | 5,000 |
See the accompanying notes to the unaudited condensed consolidated financial statements.
6 |
Amyris, Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Operating activities | ||||||||
Net loss | $ | (37,371 | ) | $ | (15,308 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 2,715 | 2,869 | ||||||
Loss on disposal of property, plant and equipment | (55 | ) | (37 | ) | ||||
Stock-based compensation | 1,646 | 2,051 | ||||||
Amortization of debt discount and issuance costs | 4,473 | 2,994 | ||||||
(Gain)/loss upon extinguishment of debt | (96 | ) | 216 | |||||
Gain from change in fair value of derivative instruments | (2,339 | ) | (21,678 | ) | ||||
(Gain)/loss on foreign currency exchange rates | (295 | ) | 1,117 | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 4,888 | (1,484 | ) | |||||
Related party accounts receivable | 500 | (300 | ) | |||||
Inventories, net | (867 | ) | 3,870 | |||||
Prepaid expenses and other assets | (713 | ) | 1,288 | |||||
Accounts payable | 450 | (810 | ) | |||||
Accrued and other liabilities | 3,730 | 2,924 | ||||||
Deferred revenue | (1,844 | ) | (1,292 | ) | ||||
Deferred rent | (215 | ) | (163 | ) | ||||
Net cash used in operating activities | (25,393 | ) | (23,743 | ) | ||||
Investing activities | ||||||||
Purchase of short-term investments | (1,781 | ) | (1,377 | ) | ||||
Maturities of short-term investments | 2,094 | 1,627 | ||||||
Change in restricted cash | 4,040 | 13 | ||||||
Purchases of property, plant and equipment, net of disposals | (457 | ) | (271 | ) | ||||
Net cash provided by (used in) investing activities | 3,896 | (8 | ) | |||||
Financing activities | ||||||||
Employees' taxes paid upon vesting of restricted stock units | (22 | ) | (48 | ) | ||||
Principal payments on capital leases | (627 | ) | (160 | ) | ||||
Proceeds from debt issued | 1,500 | — | ||||||
Proceeds from debt issued to related party | — | 20,000 | ||||||
Principal payments on debt | (4,273 | ) | (729 | ) | ||||
Net cash provided by (used in) financing activities | (3,762 | ) | 19,063 | |||||
Effect of exchange rate changes on cash and cash equivalents | (83 | ) | 522 | |||||
Net decrease in cash and cash equivalents | (25,853 | ) | (4,166 | ) | ||||
Cash and cash equivalents at beginning of period | 27,150 | 11,992 | ||||||
Cash and cash equivalents at end of period | $ | 1,297 | $ | 7,826 |
7 |
Amyris, Inc.
Condensed Consolidated Statements of Cash Flows—(Continued)
(In Thousands)
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 1,863 | $ | 990 | ||||
Supplemental disclosures of non-cash investing and financing activities: | ||||||||
Acquisitions of property, plant and equipment under accounts payable, accrued liabilities and notes payable | $ | (821 | ) | $ | (521 | ) | ||
Financing of equipment | $ | 180 | $ | 100 | ||||
Financing of insurance premium under notes payable | $ | (146 | ) | $ | (159 | ) | ||
Issuance of common stock for settlement of debt principal and interest payments | $ | 7,681 | $ | — | ||||
Interest capitalized to debt | $ | 1,115 | $ | 1,010 | ||||
Purchase of property, plant and equipment via deposit | $ | — | $ | 24 | ||||
Non-cash investment in joint venture | $ | — | $ | 600 | ||||
Cancellation of debt and accrued interest on disposal of interest in affiliate | $ | — | $ | 4,252 |
See the accompanying notes to the unaudited condensed consolidated financial statements.
8 |
Amyris, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1. The Company
Amyris, Inc. (or the Company) was incorporated in California on July 17, 2003 and reincorporated in Delaware on April 15, 2010 for the purpose of leveraging breakthroughs in bioscience technology to develop and provide renewable compounds for a variety of markets. The Company is currently applying its industrial synthetic biology platform to engineer, manufacture and sell high performance, low cost products into Health and Nutrition, Personal Care and Performance Material markets. The Company's first commercialization efforts have been focused on a renewable hydrocarbon molecule called farnesene (Biofene®), which forms the basis for a wide range of products including nutraceuticals, skin care, fragrances, solvents, polymers, and lubricants ingredients. In 2014, the Company began manufacturing additional molecules for the flavors and fragrance (F&F) industry, in 2015 the Company began investing to expand its capabilities to other small molecule chemical classes beyond terpenes via its collaboration with the Defense Advanced Research Project Agency, as discussed below, and in 2016 the Company expanded into proteins. While the Company's platform is able to use a wide variety of feedstocks, the Company has initially focused on Brazilian sugarcane because of its renewability, low cost and relative price stability. The Company has established one principal operating subsidiary, Amyris Brasil Ltda. (formerly Amyris Brasil S.A., or Amyris Brasil) which oversees the Company’s production operations in Brazil.
The Company's renewable products business strategy is to generally focus on direct commercialization of specialty products while moving established commodity products into joint venture arrangements with leading industry partners. To commercialize its products, the Company must be successful in using its technology to manufacture its products at commercial scale and on an economically viable basis (i.e., low per unit production costs) and developing sufficient sales volume for those products to support its operations. The Company's prospects are subject to risks, expenses and uncertainties frequently encountered by companies in this stage of development.
Liquidity
The Company expects to fund its operations for the foreseeable future with cash and investments currently on hand, with cash inflows from collaborations and grants, with cash contributions from product sales, with new debt and equity financings and with proceeds from strategic asset divestments. The Company's planned 2017 and 2018 working capital needs and its planned operating and capital expenditures are dependent on significant inflows of cash from new and existing collaboration partners and from cash generated from renewable product sales and from strategic asset divestments, and will also require additional funding from debt or equity financings.
The Company has incurred significant operating losses since its inception and believes that it will continue to incur losses and negative cash flow from operations into at least 2018. As of March 31, 2017, the Company had negative working capital of $77.6 million, an accumulated deficit of $1,171.8 million, and had cash, cash equivalents and short term investments of $2.5 million. The Company will need additional financing as early as the second quarter of 2017 to support its liquidity needs. See Note 18, “Subsequent Events” for details regarding financing transactions completed subsequent to March 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. If the Company is unable to continue as a going concern, it may be unable to meet its obligations under its existing debt facilities, which could result in an acceleration of its obligation to repay all amounts outstanding under those facilities, and it may be forced to liquidate its assets.
As of March 31, 2017, the Company's debt, net of discount and issuance costs of $42.0 million, totaled $220.9 million, of which $49.5 million is classified as current. In addition to upcoming debt maturities, the Company's debt service obligations over the next twelve months are significant, including $20.8 million of anticipated cash interest payments. The Company's debt agreements contain various covenants, including certain restrictions on the Company's business that could cause the Company to be at risk of defaults such as restrictions on additional indebtedness, material adverse effect and cross default clauses. A failure to comply with the covenants and other provisions of the Company’s debt instruments, including any failure to make a payment when required would generally result in events of default under such instruments, which could permit acceleration of such indebtedness. If such indebtedness is accelerated, it would generally also constitute an event of default under the Company’s other outstanding indebtedness, permitting acceleration of such other outstanding indebtedness. Any required repayment of such indebtedness as a result of acceleration or otherwise would consume current cash on hand such that the Company would not have those funds available for use in its business or for payment of other outstanding indebtedness. Please refer to Note 5, “Debt and Mezzanine Equity”, Note 6, “Commitments and Contingencies” and Note 18, “Subsequent Events” for further details regarding the Company's debt service obligations and commitments. The Company also has a significant working capital deficit and contractual obligations related to capital and operating leases, as well as purchase commitments.
9 |
In addition to the need for financing described above, the Company may take the following actions as early as the second quarter of 2017 to support its liquidity needs through the remainder of 2017 and into 2018:
• | Effect significant headcount reductions, particularly with respect to employees not connected to critical or contracted activities across all functions of the Company, including employees involved in general and administrative, research and development, and production activities. |
• | Shift focus to existing products and customers with significantly reduced investment in new product and commercial development efforts. |
• | Reduce production activity at the Company’s Brotas manufacturing facility to levels only sufficient to satisfy volumes required for product revenues forecast from existing products and customers. |
• | Reduce expenditures for third party contractors, including consultants, professional advisors and other vendors. |
• | Reduce or delay uncommitted capital expenditures, including non-essential facility and lab equipment, and information technology projects. |
• | Closely monitor the Company’s working capital position with customers and suppliers, as well as suspend operations at pilot plants and demonstration facilities. |
Implementing this plan could have a negative impact on the Company's ability to continue its business as currently contemplated, including, without limitation, delays or failures in its ability to:
• | Achieve planned production levels; |
• | Develop and commercialize products within planned timelines or at planned scales; and |
• | Continue other core activities. |
Furthermore, any inability to scale-back operations as necessary, and any unexpected liquidity needs, could create pressure to implement more severe measures. Such measures could have an adverse effect on the Company's ability to meet contractual requirements, including obligations to maintain manufacturing operations, and increase the severity of the consequences described above.
10 |
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (or “GAAP”) and with the instructions for Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Form 10-K for the fiscal year ended December 31, 2016 as filed with the Securities and Exchange Commission (or the “SEC”) on April 17, 2017. The unaudited condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The Company uses the equity method to account for investments in companies, if its investments provide it with the ability to exercise significant influence over operating and financial policies of the investee. Consolidated net income or loss includes the Company’s proportionate share of the net income or loss of these companies. Judgments made by the Company regarding the level of influence over each equity method investment include considering key factors such as the Company’s ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions.
Principles of Consolidation
The condensed consolidated financial statements of the Company include the accounts of Amyris, Inc., its subsidiaries and two consolidated variable interest entities (or “VIEs”), with respect to which the Company is considered the primary beneficiary, after elimination of intercompany accounts and transactions. Disclosure regarding the Company’s participation in the VIEs is included in Note 7, "Joint Ventures and Noncontrolling Interest."
Variable Interest Entities
The Company has interests in joint venture entities that are VIEs. Determining whether to consolidate a VIE requires judgment in assessing (i) whether an entity is a VIE 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. The Company’s evaluation includes identification of significant activities and an assessment of its ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology, product supply, operations services, equity funding and financing and other applicable agreements and circumstances. The Company’s assessment of whether it is the primary beneficiary of its VIEs requires significant assumptions and judgment.
Use of Estimates
In preparing the unaudited condensed consolidated financial statements, management must make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The accompanying interim condensed consolidated financial statements and related disclosures are unaudited, have been prepared on the same basis as the annual consolidated financial statements, except for the impact of adoption of certain accounting standards as described below, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations for the periods presented. In the quarter ended March 31, 2017 the Company adopted Accounting Standards Update (“ASU”) No. 2015-11, Simplifying the Measurement of Inventory, ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments, ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. None of the ASU’s adopted had a material impact on the Company’s condensed consolidated financial statements.
The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The condensed consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.
Recent Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-18 Statement of Cash Flows - Restricted Cash. The amendments in this update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company has not adopted the update. Upon adoption this would result in a change in the presentation of restricted cash in the statement of cash flows.
11 |
In October 2016, FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory on simplifying the accounting for income taxes related to intra-entity asset transfers. The new guidance allows an entity to recognize the tax expense from the sale of an asset in the seller’s tax jurisdiction when the transfers occur, even though the pre-tax effects of that transaction are eliminated in consolidation. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted only in the first quarter of 2017. The Company does not expect a material impact on its financial statements upon adoption of this standard.
In August 2016, FASB issued ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments on the statement of cash flows. The new guidance clarifies classification of certain cash receipts and cash payments in the statement of cash flows. This guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the impact of adopting this accounting standard update on the financial statements and related disclosures.
In June 2016, FASB issued ASU No. 2016-13, Allowance for Loan and Lease Losses (Financial Instruments - Credit Losses Topic 326). New impairment guidance for certain financial instruments (including trade receivables) will replace the current “incurred loss” model for estimating credit losses with a forward looking “expected loss” model. The ASU is effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the impact of this standard on its financial statements.
In February 2016, FASB issued Accounting Standards Update2016-02-Leases with fundamental changes to how entities account for leases. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. Additional disclosures for leases will also be required. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. The new standard may materially impact the Company’s financial statements.
12 |
In January 2016, FASB issued Accounting Standards Update 2016-01 Financial Instruments-Overall, which address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlier application is permitted under specific circumstances. The Company expects the new standard to impact the extent of its disclosures of financial instruments, particularly in relation to fair value disclosures, but otherwise does not expect a significant impact from the new standard.
In May 2014, FASB issued new guidance related to revenue recognition. In March, April, May and December 2016, the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, and transition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition update guidance provides a unified model to determine how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised 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. The FASB has issued several updates to the standard which i) clarify the application of the principal versus agent guidance (ASU 2016-08); ii) clarify the guidance on inconsequential and perfunctory promises and licensing (ASU 2016-10) and iii) narrow-scope improvements and practical expedients (ASU 2016-12). On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt the new standard. Therefore, the new standard will be effective commencing with our quarter ending March 31, 2018. The Company is currently assessing the potential impact of this new standard on its financial statements and has not selected the transition method. While the Company continues to assess the impact of the new guidance on its revenue recognition policies, it is expected that a key area will be the assessment of contract modifications and collaboration contracts to determine if identification of performance obligations is impacted, which may impact the timing of revenue recognition. In addition, the Company expects additional disclosures related to revenue.
13 |
3. Fair Value of Financial Instruments
The inputs to the valuation techniques used to measure fair value are classified into the following categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
There were no transfers between the levels, and as of March 31, 2017, the Company’s financial assets and financial liabilities at fair value were classified within the fair value hierarchy as follows (in thousands):
Level 1 | Level 2 | Level 3 | Balance as of March 31, 2017 | |||||||||||||
Financial Assets | ||||||||||||||||
Money market funds | $ | 297 | $ | — | $ | — | $ | 297 | ||||||||
Certificates of deposit | 1,188 | — | — | 1,188 | ||||||||||||
Total financial assets | $ | 1,485 | $ | — | $ | — | $ | 1,485 | ||||||||
Financial Liabilities | ||||||||||||||||
Loans payable (1) | $ | — | $ | 51,378 | $ | — | $ | 51,378 | ||||||||
Credit facilities (1) | — | 50,891 | — | 50,891 | ||||||||||||
Convertible notes (1) | — | — | 115,268 | 115,268 | ||||||||||||
Compound embedded derivative liabilities | — | — | 2,728 | 2,728 | ||||||||||||
Currency interest rate swap derivative liability | — | 2,961 | — | 2,961 | ||||||||||||
Total financial liabilities | $ | — | $ | 105,230 | $ | 117,996 | $ | 223,226 |
________
(1) These liabilities are carried on the condensed consolidated balance sheet on a historical cost basis.
The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability. The fair values of money market funds and certificates of deposit are based on fair values of identical assets. The fair values of the loans payable, convertible notes, credit facilities and currency interest rate swaps are based on the present value of expected future cash flows and assumptions about current interest rates and the creditworthiness of the Company. The method of determining the fair value of the compound embedded derivative liabilities is described subsequently in this note. Market risk associated with the fixed and variable rate long-term loans payable, credit facilities and convertible notes relates to the potential reduction in fair value and negative impact to future earnings, from an increase in interest rates. Market risk associated with the compound embedded derivative liabilities relates to the potential reduction in fair value and negative impact to future earnings from a decrease in interest rates.
The carrying amounts of certain financial instruments, such as cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities and low market interest rates, if applicable.
14 |
As of December 31, 2016, the Company’s financial assets and financial liabilities are presented below at fair value and were classified within the fair value hierarchy as follows (in thousands):
Level 1 | Level 2 | Level 3 | Balance as of December 31, 2016 | |||||||||||||
Financial Assets | ||||||||||||||||
Money market funds | $ | 1,549 | $ | — | $ | — | $ | 1,549 | ||||||||
Certificates of deposit | 1,373 | — | — | 1,373 | ||||||||||||
Total financial assets | $ | 2,922 | $ | — | $ | — | $ | 2,922 | ||||||||
Financial Liabilities | ||||||||||||||||
Loans payable (1) | $ | — | $ | 53,579 | $ | — | $ | 53,579 | ||||||||
Credit facilities (1) | — | 51,261 | — | 51,261 | ||||||||||||
Convertible notes (1) | — | — | 117,767 | 117,767 | ||||||||||||
Compound embedded derivative liabilities | — | — | 4,135 | 4,135 | ||||||||||||
Currency interest rate swap derivative liability | — | 3,343 | — | 3,343 | ||||||||||||
Total financial liabilities | $ | — | $ | 108,183 | $ | 121,902 | $ | 230,085 |
_______
(1) These liabilities are carried on the condensed consolidated balance sheet on a historical cost basis (noting that the Remaining Notes subject to the Maturity Treatment Agreement were revalued to fair value on July 29, 2015, see Note 5 “Debt and Mezzanine Equity” and Note 18, “Subsequent Events” for details).
The following table provides a reconciliation of the beginning and ending balances for the convertible notes disclosed at fair value using significant unobservable inputs (Level 3) (in thousands):
2017 | ||||
Balance at January 1 | $ | 117,767 | ||
New instruments | 15,049 | |||
Conversion/extinguishment of convertible notes | (21,077 | ) | ||
Change in fair value of convertible notes | 3,529 | |||
Balance at March 31 | $ | 115,268 |
Derivative Instruments
The following table provides a reconciliation of the beginning and ending balances for the compound embedded derivative liabilities measured at fair value using significant unobservable inputs (Level 3) (in thousands):
2017 | ||||
Balance at January 1 | $ | 4,135 | ||
Gain from change in fair value of derivative liabilities | (1,984 | ) | ||
Additions | 577 | |||
Balance at March 31 | $ | 2,728 |
The compound embedded derivative liabilities represent the fair value of the equity conversion options and "make-whole" provisions, as well as the down round conversion price adjustment or conversion rate adjustment provisions of the R&D Notes, the Tranche I Notes, the Tranche II Notes, the 2014 144A Notes and the 2015 144A Notes (see Note 5, “Debt and Mezzanine Equity”). There is no current observable market for these types of derivatives and, as such, the Company determined the fair value of the embedded derivatives using a Monte Carlo simulation valuation model for the R&D Notes and the binomial lattice model for the Tranche I Notes, the Tranche II Notes, the 2014 144A Notes and the 2015 144A Notes (or, collectively, Convertible Notes). A Monte Carlo simulation valuation model combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, probability of a change of control and the trading information of the Company's common stock into which the notes are or may be convertible. A binomial lattice model generates two probable outcomes - one up and another down - arising at each point in time, starting from the date of valuation until the maturity date. A lattice model was used to determine if the Convertible Notes would be converted, called or held at each decision point. Within the lattice model, the following assumptions are made: (i) the Convertible Notes will be converted early if the conversion value is greater than the holding value and (ii) the Convertible Notes will be called if the holding value is greater than both (a) redemption price and (b) the conversion value at the time. If the Convertible Notes are called, then the holder will maximize their value by finding the optimal decision between (1) redeeming at the redemption price and (2) converting the Convertible Notes. Using this lattice method, the Company valued the embedded derivatives using the "with-and-without method", where the fair value of the Convertible Notes including the embedded derivative is defined as the "with", and the fair value of the Convertible Notes excluding the embedded derivatives is defined as the "without". This method estimates the fair value of the embedded derivatives by looking at the difference in the values between the Convertible Notes with the embedded derivatives and the fair value of the Convertible Notes without the embedded derivatives. The lattice model uses the stock price, conversion price, maturity date, risk-free interest rate, estimated stock volatility and estimated credit spread. The Company marks the compound embedded derivatives to market due to the conversion price not being indexed to the Company's own stock. As of March 31, 2017 and December 31, 2016, included in "Derivative Liabilities" on the condensed consolidated balance sheet are the Company's compound embedded derivative liabilities of $2.7 million and $4.1 million, respectively.
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The market-based assumptions and estimates used in valuing the compound embedded derivative liabilities include amounts in the following ranges/amounts:
March 31, 2017 | March 31, 2016 | |||||||
Risk-free interest rate | 0.74% | - | 1.30% | 0.80% | - | 0.89% | ||
Risk-adjusted yields | 12.50% | - | 22.63% | 35.00% | - | 45.13% | ||
Stock-price volatility | 45% | 45% | ||||||
Probability of change in control | 5% | 5% | ||||||
Stock price | $0.53 | $1.11 | ||||||
Credit spread | 11.28% | - | 21.35% | 34.16% | - | 44.25% | ||
Estimated conversion dates | 2017 | - | 2019 | 2016 | - | 2019 |
Changes in valuation assumptions can have a significant impact on the valuation of the embedded derivative liabilities. For example, all other things being equal, a decrease/increase in the Company’s stock price, probability of change of control, credit spread, term to maturity/conversion or stock price volatility decreases/increases the valuation of the liabilities, whereas a decrease/increase in risk adjusted yields or risk-free interest rates increases/decreases the valuation of the liabilities. The conversion price of certain of the Convertible Notes also include conversion price adjustment features and for, example, issuances of common stock by the Company at prices lower than the conversion price result in a reset of the conversion price of such notes, which increases the value of the embedded derivative liabilities. See Note 5, “Debt and Mezzanine Equity” for further details of conversion price adjustment features.
In June 2012, the Company entered into a loan agreement with Banco Pine S.A. (or "Banco Pine") under which Banco Pine provided the Company with a loan (or the "Banco Pine Bridge Loan") (see Note 5, “Debt and Mezzanine Equity”). At the time of the Banco Pine Bridge Loan, the Company also entered into a currency interest rate swap arrangement with Banco Pine with respect to the repayment of R$22.0 million (approximately US$6.9 million based on the exchange rate as of March 31, 2017) of the Banco Pine Bridge Loan. The swap arrangement exchanges the principal and interest payments under the Banco Pine Bridge Loan for alternative principal and interest payments that are subject to adjustment based on fluctuations in the foreign exchange rate between the U.S. dollar and Brazilian real. The swap has a fixed interest rate of 3.94%. Changes in the fair value of the swap are recognized in “Gain (loss) from change in fair value of derivative instruments" in the condensed consolidated statements of operations are as follows (in thousands):
Type of Derivative Contract | Income Statement Classification | Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||||
Currency interest rate swap | Gain from change in fair value of derivative instruments | $ | 355 | $ | 845 |
16 |
Derivative instruments measured at fair value as of March 31, 2017 and December 31, 2016, and their classification on the condensed consolidated balance sheets are as follows (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Fair market value of compound embedded derivative liabilities | $ | 2,150 | $ | 4,135 | ||||
Non-current fair value of swap obligations | 2,979 | 3,343 | ||||||
Total derivative liabilities | $ | 5,129 | $ | 7,478 |
4. Balance Sheet Components
Inventories, net
Inventories, net are stated at the lower of cost or net realizable value and comprise of the following (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Raw materials | $ | 3,038 | $ | 3,159 | ||||
Work-in-process | 1,343 | 1,848 | ||||||
Finished goods | 2,696 | 1,206 | ||||||
Inventories, net | $ | 7,077 | $ | 6,213 |
Property, Plant and Equipment, net
Property, plant and equipment, net is comprised of the following (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Machinery and equipment | $ | 84,853 | $ | 82,688 | ||||
Leasehold improvements | 38,828 | 38,785 | ||||||
Computers and software | 9,658 | 9,585 | ||||||
Buildings | 4,834 | 4,699 | ||||||
Furniture and office equipment | 2,350 | 2,333 | ||||||
Vehicles | 136 | 164 | ||||||
Land | 460 | 460 | ||||||
Construction in progress | 2,465 | 2,216 | ||||||
143,584 | 140,930 | |||||||
Less: accumulated depreciation and amortization | (90,539 | ) | (87,195 | ) | ||||
Property, plant and equipment, net | $ | 53,045 | $ | 53,735 |
The Company's first, purpose-built, large-scale Biofene production plant in southeastern Brazil commenced operations in December 2012. This plant is located at Brotas in the state of São Paulo, Brazil and is adjacent to an existing sugar and ethanol mill, Tonon Bioenergia S.A. (or “Tonon”) (formerly Paraíso Bioenergia) with which the Company has an agreement to purchase a certain number of tons of sugarcane per year, along with specified water and vapor volumes.
17 |
Property, plant and equipment, net includes $3.1 million and $3.1 million of machinery and equipment under capital leases as of March 31, 2017 and December 31, 2016, respectively. Accumulated amortization of assets under capital leases totaled $0.1 million and $0.6 million as of March 31, 2017 and December 31, 2016, respectively.
Depreciation and amortization expense, including amortization of assets under capital leases was $2.7 million and $2.9 million for the three months ended March 31, 2017 and 2016, respectively.
Other Assets (non-current)
Other assets are comprised of the following (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Recoverable taxes from Brazilian government entities | $ | 14,894 | $ | 13,723 | ||||
Deposits on property and equipment, including taxes | 499 | 291 | ||||||
Other | 1,401 | 1,450 | ||||||
Total other assets | $ | 16,794 | $ | 15,464 |
Accrued and Other Current Liabilities
Accrued and other current liabilities are comprised of the following (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Withholding tax related to conversion of related party notes | $ | 1,370 | $ | 1,370 | ||||
Professional services | 5,358 | 6,876 | ||||||
SMA relocation accrual | 3,746 | 3,641 | ||||||
Accrued interest | 8,259 | 4,847 | ||||||
Tax-related liabilities | 2,480 | 2,610 | ||||||
Accrued vacation | 2,228 | 2,034 | ||||||
Payroll and related expenses | 2,761 | 4,310 | ||||||
Deferred rent, current portion | 1,111 | 1,111 | ||||||
Contractual obligations to contract manufacturers | 381 | — | ||||||
Other | 1,960 | 2,389 | ||||||
Total accrued and other current liabilities | $ | 29,654 | $ | 29,188 |
18 |
5. Debt and Mezzanine Equity
Debt is comprised of the following (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Senior secured loan facility | $ | 27,844 | $ | 27,658 | ||||
BNDES credit facility | 904 | 1,172 | ||||||
FINEP credit facility | 637 | 696 | ||||||
Guanfu credit facility | 19,858 | 19,564 | ||||||
Total credit facilities | 49,243 | 49,090 | ||||||
Convertible notes | 75,218 | 78,981 | ||||||
Related party convertible notes | 43,335 | 42,754 | ||||||
Related party loan payable | 30,554 | 29,691 | ||||||
Loans payable | 22,588 | 26,527 | ||||||
Total debt | 220,938 | 227,043 | ||||||
Less: current portion | (49,455 | ) | (59,155 | ) | ||||
Long-term debt | $ | 171,483 | $ | 167,888 | ||||
Mezzanine equity | $ | 5,000 | $ | 5,000 |
Senior Secured Loan Facility
In March 2014, the Company entered into a Loan and Security Agreement (or the LSA) with Hercules Technology Growth Capital, Inc. (or Hercules) to make available to Amyris a collateralized loan facility (or the Senior Secured Loan Facility) in the aggregate principal amount of up to $25.0 million, which loan facility was fully drawn at the closing. The initial loan of $25.0 million under the Senior Secured Loan Facility accrues interest at a rate per annum equal to the greater of either the prime rate reported in the Wall Street Journal plus 6.25% or 9.50%. The Company may repay the outstanding amounts under the Senior Secured Loan Facility before the maturity date (October 15, 2018) if it pays an additional fee of 1% of the outstanding loans. The Company was also required to pay a 1% facility charge at the closing of the Senior Secured Loan Facility, and is required to pay a 10% end of term charge with respect to the initial loan of $25.0 million. In connection with the entry into the LSA, Amyris agreed to certain customary representations and warranties and covenants, as well as certain covenants that were subsequently amended (as described below).
In June 2014, the Company and Hercules entered into a first amendment of the LSA. Pursuant to the first amendment, the parties agreed to extend the maturity date of the loans under the Senior Secured Loan Facility from May 31, 2015 to February 1, 2017 and remove (i) a requirement for the Company to pay a forbearance fee of $10.0 million in the event certain covenants were not satisfied, (ii) a covenant that the Company maintain positive cash flow commencing with the fiscal quarter beginning October 1, 2014, (iii) a covenant that, commencing with the fiscal quarter beginning July 1, 2014, the Company and its subsidiaries achieve certain projected cash product revenues and projected cash product gross profits, and (iv) an obligation for the Company to file a registration statement on Form S-3 with the SEC by no later than June 30, 2014 and complete an equity financing of more than $50.0 million by no later than September 30, 2014. The Company further agreed to include a new covenant in the LSA requiring the Company to maintain unrestricted, unencumbered cash in defined U.S. bank accounts in an amount equal to at least 50% of the principal amount of the loans then outstanding under the Senior Secured Loan Facility (or the “Minimum Cash Covenant”) and borrow an additional $5.0 million. The additional $5.0 million borrowing under the Senior Secured Loan Facility was completed in June 2014, and accrues interest at a rate per annum equal to the greater of (i) the prime rate reported in the Wall Street Journal plus 5.25% and (ii) 8.5%.
19 |
In March 2015, the Company and Hercules entered into a second amendment of the LSA. Pursuant to the second amendment, the parties agreed to, among other things, establish an additional credit facility in the principal amount of up to $15.0 million, which would be available to be drawn by the Company through the earlier of March 31, 2016 or such time as the Company raised an aggregate of at least $20.0 million through the sale of new equity securities. Under the terms of the second amendment, the Company agreed to pay Hercules a 3.0% facility availability fee on April 1, 2015. The Company had the ability to cancel the additional facility at any time prior to June 30, 2015 at its own option, and the additional facility would terminate upon the Company securing a new equity financing of at least $20.0 million. If the facility was not canceled, and any outstanding borrowings were not repaid, before June 30, 2015, an additional 5.0% facility fee would become payable on June 30, 2015. The Company did not cancel the facility prior to June 30, 2015, and the 5.0% facility fee became payable as of June 30, 2015. The Company did not pay the additional facility fee and thereafter received a waiver from Hercules with respect thereto. The additional facility was cancelled undrawn upon the completion of the Company’s private offering of common stock and warrants in July 2015.
In November 2015, the Company and Hercules entered into a third amendment of the LSA. Pursuant to the third amendment, the Company borrowed $10,960,000 (or the Third Amendment Borrowed Amount) from Hercules on November 30, 2015. As of December 1, 2015, after the funding of the Third Amendment Borrowed Amount (and including repayment of $9.1 million of principal that had occurred prior to the third amendment), the aggregate principal amount outstanding under the Senior Secured Loan Facility was approximately $31.7 million. The Third Amendment Borrowed Amount accrues interest at a rate per annum equal to the greater of (i) 9.5% and (ii) the prime rate reported in the Wall Street Journal plus 6.25%,. Upon the earlier of the maturity date, prepayment in full or such obligations otherwise becoming due and payable, in addition to repaying the outstanding Third Amendment Borrowed Amount (and all other amounts owed under the Senior Secured Loan Facility, as amended), the Company is also required to pay an end-of-term charge of $767,200. Pursuant to the third amendment, the Company also paid Hercules fees of $1.0 million, $750,000 of which was owed in connection with the expired $15.0 million facility under the second amendment and $250,000 of which was related to the Third Amendment Borrowed Amount. Under the third amendment, the parties agreed that the Company would, commencing on December 1, 2015, be required to pay only the interest accruing on all outstanding loans under the Senior Secured Loan Facility until February 29, 2016. Commencing on March 1, 2016, the Company would have been required to begin repaying principal of all loans under the Senior Secured Loan Facility, in addition to the applicable interest. However, pursuant to the third amendment, the Company could, by achieving certain cash inflow targets in 2016, extend the interest-only period to December 1, 2016. Upon the issuance and sale by the Company of $20.0 million of unsecured promissory notes and warrants in a private placement in February 2016 for aggregate cash proceeds of $20.0 million, the Company satisfied the conditions for extending the interest-only period to May 31, 2016. On June 1, 2016, the Company commenced the repayment of outstanding principal under the Senior Secured Loan Facility. In June 2016, the Company was notified by Hercules that it had transferred and assigned its rights and obligations under the Senior Secured Loan Facility to Stegodon Corporation (Stegodon), an affiliate of Ginkgo Bioworks, Inc. (Ginkgo). On June 29, 2016, in connection with the execution by the Company and Ginkgo of an initial strategic partnership agreement, the Company received a deferment from Stegodon of all scheduled principal repayments under the Senior Secured Loan Facility, as well as a waiver of the Minimum Cash Covenant, through October 31, 2016. Refer to Note 8, “Significant Agreements” for additional details. On October 6, 2016, in connection with the execution by the Company and Ginkgo of a definitive collaboration agreement (or the Ginkgo Collaboration Agreement), the Company and Stegodon entered into a fourth amendment of the LSA, pursuant to which the parties agreed to (i) subject to the Company extending the maturity of certain of its other outstanding indebtedness (or the Extension Condition), extend the maturity date of the Senior Secured Loan Facility, (ii) make the Senior Secured Loan Facility interest-only until maturity, subject to the requirement that the Company apply certain monies received by it under the Ginkgo Collaboration Agreement to repay the amounts outstanding under the Senior Secured Loan Facility, up to a maximum amount of $1 million per month and (iii) waive the Minimum Cash Covenant until the maturity date of the Senior Secured Loan Facility. On January 11, 2017, the maturity date of the Senior Secured Loan Facility was extended to October 15, 2018 due to the Extension Condition being met as a result of the Fidelity Exchange (as defined below). See below under “Fidelity” for additional details. This modification of the Senior Secured Loan Facility was accounted for as a troubled debt restructuring with the future undiscounted cash flows being greater than the carrying value of the debt prior to extension. No gain was recorded and a new effective interest rate was established based on the carrying value of the debt and the revised cash flows. In December 2016, in connection with Stegodon granting certain waivers and releases under the LSA in connection with the Company’s formation of its Neossance joint venture with Nikko, as described in more detail in Note 7, “Joint Ventures and Noncontrolling Interest”, the Company agreed to pay to Stegodon (i) a fee of $425,000 on or prior to December 31, 2017 and (ii) a fee of $450,000 on or prior to the maturity date of the loans under the Senior Secured Loan Facility. Subsequently, in January 2017, in connection with Stegodon granting certain waivers of the debt and transfer covenants under the LSA, the Company, certain of its subsidiaries and Stegodon entered into a fifth amendment of the LSA. Pursuant to the fifth amendment, the Company agreed to apply additional monies received by the Company under the Ginkgo Collaboration Agreement towards repayment of the outstanding loans under the Senior Secured Loan Facility, up to a maximum amount of $3 million, to the extent any such monies are received by the Company.
20 |
As of March 31, 2017, $27.8 million was outstanding under the Senior Secured Loan Facility, net of discount and issuance costs of $0.7 million. The Senior Secured Loan Facility is collateralized by liens on the Company's assets, including on certain Company intellectual property. The Senior Secured Loan Facility includes customary events of default, including failure to pay amounts due, breaches of covenants and warranties, material adverse effect events, certain cross defaults and judgments, and insolvency. If an event of default occurs, Stegodon may require immediate repayment of all amounts outstanding under the Senior Secured Loan Facility.
BNDES Credit Facility
In December 2011, the Company entered into a credit facility with the Brazilian Development Bank (or “BNDES” and such credit facility is the “BNDES Credit Facility”) in the amount of R$22.4 million (approximately US$7.1 million based on the exchange rate as of March 31, 2017). This BNDES Credit Facility was extended as project financing for a production site in Brazil. The credit line was divided into an initial tranche of up to approximately R$19.1 million and an additional tranche of approximately R$3.3 million that would become available upon delivery of additional guarantees. The credit line was cancelled in 2013.
The principal of the loans under the BNDES Credit Facility is required to be repaid in 60 monthly installments, with the first installment paid in January 2013 and the last due in December 2017. Interest was due initially on a quarterly basis with the first installment due in March 2012. From and after January 2013, interest payments are due on a monthly basis together with principal payments. The loaned amounts carry interest of 7% per annum. Additionally, there is a credit reserve charge of 0.1% on the unused balance from each credit installment from the day immediately after it is made available through its date of use, when it is paid.
The BNDES Credit Facility is collateralized by a first priority security interest in certain of the Company's equipment and other tangible assets totaling R$24.9 million (approximately $7.9 million based on the exchange rate as of March 31, 2017). The Company is a parent guarantor for the payment of the outstanding balance under the BNDES Credit Facility. Additionally, the Company was required to provide a bank guarantee equal to 10% of the total approved amount (R$22.4 million in total debt) available under the BNDES Credit Facility. For advances of the second tranche (above R$19.1 million), the Company is required to provide additional bank guarantees equal to 90% of each such advance, plus additional Company guarantees equal to at least 130% of such advance. The BNDES Credit Facility contains customary events of default, including payment failures, failure to satisfy other obligations under this credit facility or related documents, defaults in respect of other indebtedness, bankruptcy, insolvency and inability to pay debts when due, material judgments, and changes in control of Amyris Brasil. If any event of default occurs, BNDES may terminate its commitments and declare immediately due all borrowings under the facility. As of March 31, 2017 and December 31, 2016, the Company had R$2.9 million (approximately US$0.9 million based on the exchange rate as of March 31, 2017) and R$3.8 million (approximately US$1.2 million based on the exchange rate as of December 31, 2016), respectively, in outstanding advances under the BNDES Credit Facility.
FINEP Credit Facility
In November 2010, the Company entered into a credit facility with Financiadora de Estudos e Projetos (or the “FINEP Credit Facility”). The FINEP Credit Facility was extended to partially fund expenses related to the Company’s research and development project on sugarcane-based biodiesel (or the “FINEP Project”) and provided for loans of up to an aggregate principal amount of R$6.4 million (approximately US$2.0 million based on the exchange rate as of March 31, 2017), which is secured by a chattel mortgage on certain equipment of Amyris Brasil as well as by bank letters of guarantee. All available credit under this facility is fully drawn.
21 |
Interest on loans drawn under the FINEP Credit Facility is fixed at 5% per annum. In case of default under or non-compliance with the terms of the agreement, the interest on loans will be dependent on the long-term interest rate as published by the Central Bank of Brazil (such rate, the “TJLP”). If the TJLP at the time of default is greater than 6%, then the interest will be 5% plus a TJLP adjustment factor, otherwise the interest will be 11% per annum. In addition, a fine of up to 10% shall apply to the amount of any obligation in default. Interest on late balances will be 1% per month, levied on the overdue amount. Payment of the outstanding loan balance is being made in 81 monthly installments, which commenced in July 2012 and extends through March 2019. Interest on loans drawn and other charges are paid on a monthly basis and commenced in March 2011. As of March 31, 2017 and December 31, 2016, the total outstanding loan balance under this credit facility was R$2.0 million (approximately US$0.7 million based on the exchange rate as of March 31, 2017) and R$2.3 million (approximately US$0.7 million based on exchange rate as of December 31, 2016), respectively.
Guanfu Credit Facility
On October 26, 2016, the Company and Guanfu Holding Co., Ltd. (or, together with its subsidiaries, Guanfu), an existing commercial partner of the Company, entered into a credit agreement (or the Guanfu Credit Agreement) to make available to the Company an unsecured credit facility (or the Guanfu Credit Facility) with an aggregate principal amount of up to $25.0 million, which the Company could borrow from time to time in up to three closings. The effectiveness of the Guanfu Credit Agreement was subject to the parties obtaining certain required approvals, which occurred on November 16, 2016, and upon the effectiveness of the Guanfu Credit Agreement, the Company granted to Guanfu the global exclusive purchase right with respect to the Company products subject to the parties’ pre-existing commercial relationship. The initial funding of the Guanfu Credit Facility was scheduled to occur on December 1, 2016, subject to Guanfu’s right to extend such initial funding to a date no later than December 31, 2016. Guanfu exercised its right to extend the initial funding to December 31, 2016, and on such date the Company borrowed the full amount under the Guanfu Credit Facility and issued to Guanfu a note in the principal amount of $25.0 million (or the Guanfu Note). The Guanfu Note has a term of five years and will accrue interest at a rate of 10% per annum, payable quarterly beginning March 31, 2017. The Company may, at its option, repay the Guanfu Note before its maturity date, in whole or in part, at a price equal to 100% of the amount being repaid plus accrued and unpaid interest on such amount to the date of repayment.
Upon the occurrence of certain specified events of default under the Guanfu Credit Facility, the Company will grant to Guanfu an exclusive, royalty-free, global license to certain intellectual property useful in connection with Guanfu’s existing commercial relationship with the Company. In addition, in the event the Company fails to pay interest or principal under the Guanfu Note within ten days of when due, the Company will also be required, subject to applicable laws and regulations, to repay the outstanding principal amount under the Guanfu Note, together with accrued and unpaid interest, in the form of shares of the Company’s common stock at a per share price equal to 90% of the volume weighted average closing sale price of the Company’s common stock for the 90 trading days ending on and including the trading day that is two trading days preceding such default.
Convertible Notes
Fidelity
In February 2012, the Company completed the sale of senior unsecured convertible promissory notes in an aggregate principal amount of $25.0 million pursuant to a securities purchase agreement between the Company and certain investment funds affiliated with FMR LLC (or the Fidelity Securities Purchase Agreement). The offering consisted of the sale of 3% senior unsecured convertible promissory notes with a March 1, 2017 maturity date and an initial conversion price equal to $7.0682 per share of the Company's common stock, subject to proportional adjustment for adjustments to outstanding common stock and anti-dilution provisions in case of dividends and distributions (or the Fidelity Notes). In October 2015, the Company issued and sold $57.6 million of convertible senior notes and used approximately $8.8 million of the proceeds therefrom to repurchase $9.7 million aggregate principal amount of outstanding Fidelity Notes. As of March 31, 2017, the Fidelity Notes were convertible into an aggregate of up to 2,165,898 shares of the Company's common stock. The holders of the Fidelity Notes have a right to require repayment of 101% of the principal amount of the Fidelity Notes in an acquisition of the Company, and the Fidelity Notes provide for payment of unpaid interest on conversion following such an acquisition if the note holders do not require such repayment. The Fidelity Securities Purchase Agreement and Fidelity Notes include covenants regarding payment of interest, maintaining the Company's listing status, limitations on debt, maintenance of corporate existence, and timely filing of SEC reports. The Fidelity Notes include standard events of default resulting in acceleration of indebtedness, including failure to pay, bankruptcy and insolvency, cross-defaults and breaches of the covenants in the Fidelity Securities Purchase Agreement and Fidelity Notes, with default interest rates and associated cure periods applicable to the covenant regarding SEC reporting. Furthermore, the Fidelity Notes include restrictions on the amount of debt the Company is permitted to incur. With exceptions for certain existing debt, refinancing of such debt and certain other exclusions and waivers, the Fidelity Notes provide that the Company's total outstanding debt at any time cannot exceed the greater of $200.0 million or 50% of its consolidated total assets and its secured debt cannot exceed the greater of $125.0 million or 30% of its consolidated total assets. In connection with the Company’s closing of a short-term bridge loan for $35.0 million in October 2013 (or the Temasek Bridge Note), holders of the Fidelity Notes waived compliance with the debt limitations outlined above as to the Temasek Bridge Note and the August 2013 Financing (as defined below). In consideration for such waiver, the Company granted to holders of the Fidelity Notes or their affiliates the right to purchase up to an aggregate of $7.6 million worth of convertible promissory notes in the first tranche of the August 2013 Financing (as defined below). See "Related Party Convertible Notes" in this Note 5, "Debt and Mezzanine Equity" for additional details. On December 28, 2016, the Company entered into an Exchange Agreement (or the Fidelity Exchange Agreement) with the holders of the outstanding Fidelity Notes. Pursuant to the Fidelity Exchange Agreement, the Company and the holders agreed to exchange (or the Fidelity Exchange) all outstanding Fidelity Notes, together with accrued and unpaid interest thereon, for approximately $19.1 million in aggregate principal amount of additional 2015 144A Notes (as defined below), representing an exchange ratio of approximately 1:1.25 (i.e., each $1.00 of Fidelity Notes was exchanged for approximately $1.25 of additional 2015 144A Notes), in a private placement exempt from registration under the Securities Act of 1933, as amended (or the Securities Act). The closing of the Fidelity Exchange occurred on January 11, 2017. At the closing, the Company issued approximately $19.1 million in aggregate principal amount of its 2015 144A Notes (or the Additional 2015 144A Notes) to the holders in exchange for the cancellation of the outstanding Fidelity Notes. The Company did not receive any cash proceeds from the Fidelity Exchange. The exchange has been accounted for as an extinguishment of the Fidelity Notes and issuance of the Additional 2015 144A Notes. A gain of approximately $0.1 million was recognized in the first quarter to recognize the deficit of the fair value of the Additional 2015 144A Notes (including related embedded derivatives) compared to the carrying value of the Fidelity Notes at the time of extinguishment. Pursuant to the Fidelity Exchange Agreement, upon the closing of the Fidelity Exchange, the Fidelity Securities Purchase Agreement terminated. In addition, upon the closing of the Fidelity Exchange, in accordance with the terms of the fourth amendment to the LSA, the maturity date of all outstanding loans under the LSA was extended to October 15, 2018. See above under “Senior Secured Loan Facility” for details regarding the fourth amendment to the LSA.
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2014 Rule 144A Convertible Note Offering
In May 2014, the Company entered into a Purchase Agreement with Morgan Stanley & Co. LLC, as the initial purchaser (or the Initial Purchaser), relating to the sale of $75.0 million aggregate in principal amount of 6.50% Convertible Senior Notes due 2019 (or the 2014 144A Notes) to the Initial Purchaser in a private placement, and for initial resale by the Initial Purchaser to certain qualified institutional buyers (or the 2014 144A Convertible Note Offering). In addition, the Company granted the Initial Purchaser an option to purchase up to an additional $15.0 million aggregate principal amount of 2014 144A Notes, which option expired unexercised according to its terms. Under the terms of the purchase agreement for the 2014 144A Notes, the Company agreed to customary indemnification of the Initial Purchaser against certain liabilities. The Notes were issued pursuant to an Indenture, dated as of May 29, 2014 (or the 2014 Indenture), between the Company and Wells Fargo Bank, National Association, as trustee. The net proceeds from the offering of the 2014 144A Notes were approximately $72.0 million after payment of the Initial Purchaser’s discounts and offering expenses. In addition, in connection with obtaining a waiver from Total of its preexisting contractual right to exchange certain senior secured convertible notes previously issued by the Company for new notes issued in the 2014 144A Convertible Note Offering, the Company used approximately $9.7 million of the net proceeds to repay previously issued notes (representing the amount of 2014 144A Notes purchased by Total from the Initial Purchaser). Certain of the Company's affiliated entities purchased $24.7 million in aggregate principal amount of 2014 144A Notes from the Initial Purchaser (described further below under "Related Party Convertible Notes"). In October 2015, as discussed below, the Company issued $57.6 million of convertible senior notes and used approximately $18.3 million of the net proceeds therefrom to repurchase $22.9 million aggregate principal amount of outstanding 2014 144A Notes. The 2014 144A Notes bear interest at a rate of 6.50% per year, payable semiannually in arrears on May 15 and November 15 of each year, beginning November 15, 2014. The 2014 144A Notes mature on May 15, 2019, unless earlier converted or repurchased. The 2014 144A Notes are convertible into shares of the Company's common stock at any time prior to the close of business on the business day immediately preceding the maturity date of the 2014 144A Notes, at the initial conversion rate of 267.037 shares of Common Stock per $1,000 principal amount of 2014 144A Notes (subject to adjustment in certain circumstances). This represents an effective conversion price of approximately $3.74 per share of common stock. For any conversion on or after May 15, 2015, in the event that the last reported sale price of the Company’s common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending within five trading days immediately prior to the date the Company receives a notice of conversion exceeds the then-applicable conversion price per share on each such trading day, the holders, in addition to the shares deliverable upon conversion, noteholders will be entitled to receive a cash payment equal to the present value of the remaining scheduled payments of interest that would have been made on the 2014 144A Notes being converted from the conversion date to the earlier of the date that is three years after the date the Company receives such notice of conversion and maturity (May 15, 2019), which will be computed using a discount rate of 0.75%. In the event of a fundamental change, as defined in the 2014 Indenture, holders of the 2014 144A Notes may require the Company to purchase all or a portion of the 2014 144A Notes at a price equal to 100% of the principal amount of the 2014 144A Notes, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, holders of the 2014 144A Notes who convert their 2014 144A Notes in connection with a make-whole fundamental change will, under certain circumstances, be entitled to an increase in the conversion rate of such notes. Refer to the “Exchange” and “Maturity Treatment Agreement” sections of this Note 5, "Debt and Mezzanine Equity", as well as Note 18, “Subsequent Events”, for details of the impact of the Maturity Treatment and Exchange Agreements on the 2014 144A Notes.
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2015 Rule 144A Convertible Note Offering
In October 2015, the Company entered into a purchase agreement with certain qualified institutional buyers relating to the sale of $57.6 million aggregate principal amount of 9.50% Convertible Senior Notes due 2019 (or the 2015 144A Notes) to the purchasers in a private placement (or the 2015 144A Offering). The 2015 144A Notes were issued pursuant to an Indenture, dated as of October 20, 2015 (or the 2015 Indenture), between the Company and Wells Fargo Bank, National Association, as trustee. The net proceeds from the offering of the 2015 144A Notes were approximately $54.4 million after payment of the offering expenses and placement agent fees. The Company used approximately $18.3 million of the net proceeds to repurchase $22.9 million aggregate principal amount of outstanding 2014 144A Notes and approximately $8.8 million to repurchase $9.7 million aggregate principal amount of outstanding Fidelity Notes, in each case held by purchasers of the 2015 144A Notes. The 2015 144A Notes bear interest at a rate of 9.50% per year, payable semiannually in arrears on April 15 and October 15 of each year, beginning April 15, 2016. Interest on the 2015 144A Notes is payable, at the Company’s option, entirely in cash or entirely in common stock. The Company elected to make the April 15, 2016 interest payment in shares of common stock, the October 15, 2016 interest payment in cash and the April 15, 2017 interest payment in shares of common stock. The 2015 144A Notes will mature on April 15, 2019 unless earlier converted or repurchased.
The 2015 144A Notes are convertible into shares of the Company's common stock at any time prior to the close of business on April 15, 2019. The 2015 144A Notes had an initial conversion rate of 443.6557 shares of Common Stock per $1,000 principal amount of 2015 144A Notes (subject to adjustment in certain circumstances). This represented an initial effective conversion price of approximately $2.25 per share of common stock. Following the issuance by the Company of warrants to purchase common stock in a private placement transaction in February 2016 and the issuance by the Company of convertible notes in May, September and October 2016, as described below, the conversion rate of the 2015 144A Notes was 446.8707 shares of Common Stock per $1,000 principal amount of 2015 144A Notes as of December 31, 2016. Furthermore, following the issuance by the Company of shares of convertible preferred stock and warrants to purchase common stock in May 2017, the conversion rate of the 2015 144A Notes is 711.1209 shares of Common Stock per $1,000 principal amount of 2015 144A Notes as of May 11, 2017, representing an effective conversion price of approximately $1.41 per share of common stock. For any conversion on or after November 27, 2015, in addition to the shares deliverable upon conversion, noteholders will be entitled to receive a payment equal to the present value of the remaining scheduled payments of interest that would have been made on the 2015 144A Notes being converted from the conversion date to the earlier of the date that is three years after the date the Company receives such notice of conversion and maturity (April 15, 2019), which will be computed using a discount rate of 0.75%. The Company may make such payment (the “Early Conversion Payment”) either in cash or in common stock, at its election, provided that it may only make such payment in common stock if such common stock is not subject to restrictions on transfer under the Securities Act by persons other than the Company’s affiliates. If the Company elects to pay an Early Conversion Payment in common stock, then the stock will be valued at 92.5% of the simple average of the daily volume-weighted average price per share for the 10 trading days ending on and including the trading day immediately preceding the conversion date. Through March 31, 2017, the Company has elected to make each Early Conversion Payment in shares of common stock. In the event of a fundamental change, as defined in the 2015 Indenture, holders of the 2015 144A Notes may require the Company to purchase all or a portion of the 2015 144A Notes at a price equal to 100% of the principal amount of the 2015 144A Notes, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, holders of the 2015 144A Notes who convert their 2015 144A Notes in connection with a make-whole fundamental change will, under certain circumstances, be entitled to an increase in the conversion rate. The issuance of shares of common stock upon conversion of the 2015 144A Notes, upon the Company’s election to pay interest on the 2015 144A Notes in shares of common stock and upon the Company’s election to pay the Early Conversion Payment in shares of common stock in an aggregate amount in excess of 38,415,626 shares of the Company’s common stock was subject to stockholder approval, which was obtained on May 17, 2016. With exceptions for certain existing debt, refinancing of such debt and certain other exclusions and waivers, the 2015 144A Notes provide that, as long as the aggregate outstanding principal amount of the 2015 144A Notes exceeds $25.0 million, the Company's outstanding unsecured debt at any time cannot exceed $200.0 million and its secured debt cannot exceed the greater of $65.0 million or 30% of its consolidated total assets. In January 2017, the Company issued an additional $19.1 million in aggregate principal amount of 2015 144A Notes (or the Additional 2015 144A Notes) in exchange for the cancellation of $15.3 million in aggregate principal amount of outstanding Fidelity Notes. The Additional 2015 144A Notes were issued pursuant to the 2015 Indenture, as amended by the First Supplemental Indenture thereto, dated as of January 11, 2017, which amended the 2015 Indenture to clarify the Exchange Cap (as defined below) for the Additional 2015 144A Notes. Unless and until the Company obtains stockholder approval to issue a number of shares of the Company’s common Stock in excess of the Exchange Cap (as defined below), holders of the Additional 2015 144A Notes will not have the right to receive shares of the Company’s common stock upon conversion of the Additional 2015 144A Notes, and the Company will not have the right to issue shares of common stock as payment of interest on the Additional 2015 144A Notes, including any Early Conversion Payment, if the aggregate number of shares issued with respect to the Additional 2015 144A Notes (and any other transaction aggregated for such purpose) after giving effect to such conversion or payment, as applicable, would exceed 19.99% of the number of shares of the Company’s common stock outstanding as of December 28, 2016 (or the Exchange Cap). The Company will pay cash in lieu of any shares that would otherwise be deliverable in excess of the Exchange Cap.
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May 2016 Convertible Note Offering
In May 2016, the Company entered into a securities purchase agreement (or the May 2016 Purchase Agreement) between the Company and a private investor relating to the sale of up to $15.0 million aggregate principal amount of convertible notes (or the May 2016 Convertible Notes) that are convertible into shares of the Company’s common stock at an initial conversion price of $1.90 per share. The conversion price will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction. The May 2016 Purchase Agreement includes customary representations, warranties and covenants by the Company. The May 2016 Purchase Agreement also provides the purchaser with a right of first refusal with respect to any variable rate transaction on the same terms and conditions as are offered to a third-party purchaser for as long as the purchaser holds any May 2016 Convertible Notes or shares of the Company’s common stock underlying the May 2016 Convertible Notes.
Pursuant to the May 2016 Purchase Agreement, the May 2016 Convertible Notes were to be issued and sold in two separate closings. The initial closing occurred on May 10, 2016. At the initial closing, the Company issued and sold a May 2016 Convertible Note in a principal amount of $10.0 million to the purchaser, resulting in net proceeds to the Company of approximately $9.9 million. The second closing was to occur on the first trading day following the completion of the first three installment periods under the May 2016 Convertible Notes and the satisfaction or waiver of certain other closing conditions, including certain equity conditions, such as that no Triggering Event (as defined below) had occurred. At the second closing, the Company was to issue and sell a May 2016 Convertible Note in a principal amount of $5.0 million to the purchaser, resulting in expected net proceeds to the Company of approximately $5.0 million. On September 2, 2016, in connection with the Company and the purchaser waiving certain conditions to the second closing under the May 2016 Purchase Agreement, the Company issued and sold an additional May 2016 Convertible Note in the principal amount of $3.0 million to the purchaser, for proceeds to the Company of approximately $3.0 million, and granted the purchaser the option to purchase a further May 2016 Convertible Note in the principal amount of $2.0 million (or the Remaining May 2016 Note), representing the remaining May 2016 Convertible Notes provided for in the May 2016 Purchase Agreement, on or before December 31, 2016. On October 13, 2016, the Company issued and sold the Remaining May 2016 Note to the purchaser for proceeds to the Company of $2.0 million.
The May 2016 Convertible Notes are general unsecured obligations of the Company. Unless earlier converted or redeemed, the May 2016 Convertible Notes will mature on the 18-month anniversary of their respective issuance, subject to the rights of the holders to extend the maturity date in certain circumstances.
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The May 2016 Convertible Notes are payable in monthly installments, in either cash at 118% of such installment amount or, at the Company’s option, subject to the satisfaction of certain equity conditions, shares of common stock at a discount to the then-current market price, subject to a price floor. In addition, in the event that the Company elects to pay all or any portion of a monthly installment in common stock, the holders of the May 2016 Convertible Notes shall have the right to require that the Company repay in common stock an additional amount of the May 2016 Convertible Notes not to exceed 50% of the cumulative sum of the aggregate amounts by which the dollar-weighted trading volume of the Company’s common stock for all trading days during the applicable installment period exceeds $200,000. The Company elected to make the May, June, July, August, September and October 2016 installment payments on the May 2016 Convertible Notes in shares of common stock. As of October 31, 2016, all May 2016 Convertible Notes had been repaid in full.
The May 2016 Convertible Notes contain customary terms and covenants, including certain events of default, including failure to pay amounts due, breaches of warranties, material adverse effect events, certain cross defaults and judgments, and insolvency, after which the holders may require the Company to redeem all or any portion of their May 2016 Convertible Notes in cash at a price equal to the greater of (i) 118% of the amount being redeemed and (ii) the intrinsic value of the shares of common stock issuable upon an installment payment of the amount being redeemed in shares.
In the event of a Fundamental Transaction (as defined in the May 2016 Convertible Notes), holders of the May 2016 Convertible Notes may require the Company to redeem all or any portion of their May 2016 Convertible Notes at a price equal to the greater of (i) 118% of the amount being redeemed and (ii) the intrinsic value of the shares of common stock issuable upon an installment payment of the amount being redeemed in shares.
The Company has the right to redeem the May 2016 Convertible Notes for cash, in whole, at any time, or in part, from time to time, at a redemption price equal to 118% of the principal amount of the May 2016 Convertible Notes being redeemed. In addition, if the volume-weighted average price of the Company’s common stock is (i) less than $1.00 for 30 consecutive trading days or (ii) less than $0.50 for five consecutive trading days (each, a “Triggering Event”) within four months of the issuance of any 2016 Convertible Notes, the Company will have the option to redeem such May 2016 Convertible Notes in whole for cash at a redemption price equal to 112% of the principal amount of such May 2016 Convertible Notes.
Notwithstanding the foregoing, the holders will not have the right to convert any portion of a May 2016 Convertible Note, and the Company may not issue shares of common stock upon conversion or repayment of the May 2016 Convertible Notes, if (a) the holder, together with its affiliates, would beneficially own in excess of 4.99% (or such other percentage as determined by the holder and notified to the Company in writing, not to exceed 9.99%, provided that any increase of such percentage will not be effective until 61 days after notice thereof) of the number of shares of the Company’s common stock outstanding immediately after giving effect to such conversion or payment, as applicable, or (b) the aggregate number of shares issued with respect to the May 2016 Convertible Notes after giving effect to such conversion or payment, as applicable, would exceed 19.99% of the number of shares of the Company’s common stock outstanding as of May 10, 2016. In the event that the Company is prohibited from issuing any shares of common stock in respect of the May 2016 Convertible Notes as a result of such limits, the Company will pay cash in lieu of any shares that would otherwise be deliverable in excess thereof.
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For as long as they hold the May 2016 Convertible Notes or shares of common stock issued under the May 2016 Convertible Notes, the holders may not sell any shares of the Company’s common stock at a price less than $1.05 per share; provided, that with respect to any shares of common stock issued under the May 2016 Convertible Notes at a price less than $1.00, the holders may sell such shares at a price not less than the price floor applicable to the installment period with respect to which such shares were issued.
The May 2016 Convertible Notes had been fully repaid as of March 31, 2017.
December 2016 Convertible Note Offering
On December 1, 2016, the Company entered into a securities purchase agreement (or the December 2016 Purchase Agreement) with a private investor relating to the sale of a convertible note in the original principal amount $10.0 million (or the December 2016 Convertible Note) that is convertible into shares of the Company’s common stock at an initial conversion price of $1.90 per share. The conversion price will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction. The December 2016 Purchase Agreement includes customary representations, warranties and covenants by the Company. The Purchase Agreement also provides the purchaser with a right of first refusal with respect to any variable rate transaction, subject to certain exceptions, on the same terms and conditions as are offered to a third-party purchaser for as long as the purchaser holds the December 2016 Convertible Note or shares of common stock underlying the December 2016 Convertible Note.
The December 2016 Convertible Note was issued on December 2, 2016, resulting in net proceeds to the Company of approximately $9.9 million.
The December 2016 Convertible Note is a general unsecured obligation of the Company. Unless earlier converted or redeemed, the December 2016 Convertible Note will mature on May 1, 2018, subject to the rights of the holder to extend the maturity date in certain circumstances.
The December 2016 Convertible Note is payable in monthly installments, beginning January 1, 2017, in either cash at 118% of such installment amount or, at the Company’s option, subject to the satisfaction of certain equity conditions, shares of common stock at a discount to the then-current market price, subject to a price floor. In addition, between December 1, 2016 and December 31, 2016, or in the event that the Company elects to pay all or any portion of a monthly installment in common stock, the holder of the December 2016 Convertible Note shall have the right to require that the Company repay in common stock an additional amount of the December 2016 Convertible Note not to exceed 50% of the cumulative sum of the aggregate amounts by which the dollar-weighted trading volume of the Company’s common stock for all trading days during the applicable period exceeds $200,000.
The December 2016 Convertible Note contains customary terms and covenants, including certain events of default, including failure to pay amounts due, breaches of warranties, material adverse effect events, certain cross defaults and judgments, and insolvency, after which the holders may require the Company to redeem all or any portion of their December 2016 Convertible Note in cash at a price equal to the greater of (i) 118% of the amount being redeemed and (ii) the intrinsic value of the shares of common stock issuable upon an installment payment of the amount being redeemed in shares.
In the event of a Fundamental Transaction (as defined in the December 2016 Convertible Note), the holder of the December 2016 Convertible Note may require the Company to purchase all or any portion of its December 2016 Convertible Note at a price equal to the greater of (i) 118% of the amount being redeemed and (ii) the intrinsic value of the shares of Common Stock issuable upon an installment payment of the amount being redeemed in shares.
The Company has the right to redeem the December 2016 Convertible Note for cash, in whole, at any time, or in part, from time to time, at a redemption price equal to 118% of the principal amount of the December 2016 Convertible Note to be redeemed.
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Notwithstanding the foregoing, the holder will not have the right to convert any portion of the December 2016 Convertible Note, and the Company will not have the option to pay any amount in shares of common stock, if (a) the holder, together with its affiliates, would beneficially own in excess of 4.99% (or such other percentage as determined by the holder and notified to the Company in writing, not to exceed 9.99%, provided that any increase of such percentage will not be effective until 61 days after notice thereof) of the number of shares of the Company’s common stock outstanding immediately after giving effect to such conversion or payment, as applicable, or (b) the aggregate number of shares issued with respect to the December 2016 Convertible Note (and any other transaction aggregated for such purpose) after giving effect to such conversion or payment, as applicable, would exceed 19.99% of the number of shares of the Company’s common stock outstanding as of December 1, 2016. In the event that the Company is prohibited from issuing any shares of common stock in respect of the December 2016 Convertible Note as a result of such limits, the Company will pay cash in lieu of any shares that would otherwise be deliverable in excess thereof.
For as long as it holds the December 2016 Convertible Note or shares of common stock issued under the December 2016 Convertible Note, the holder may not sell any shares of the Company’s common stock at a price less than $1.05 per share; provided, that with respect to any shares of common stock issued under the December 2016 Convertible Note at a price less than $1.00, the holder may sell such shares at a price not less than the price floor applicable to the period with respect to which such shares were issued. The embedded derivative features in this instrument are separately accounted for and the fair value of such features was not material at March 31, 2017 and December 31, 2016.
In May 2017, the Company agreed to amend the December 2016 Convertible Note, as described in more detail in Note 18, “Subsequent Events.”
See Note 18, “Subsequent Events” for details regarding financing transactions completed subsequent to March 31, 2017.
Related Party Convertible Notes
Total R&D Convertible Notes
In July 2012 and December 2013, the Company entered into a series of agreements (or the Total Fuel Agreements) with Total Energies Nouvelles Activités USA (formerly known as Total Gas & Power USA, SAS, and referred to as Total) to establish a research and development program (or the Program) and form a joint venture (or the Fuels JV) with Total to produce and commercialize farnesene- or farnesane-based diesel and jet fuels, and established a convertible debt structure for the collaboration funding from Total.
The purchase agreement for the notes related to the funding from Total (or the Total Purchase Agreement) provided for the sale of an aggregate of $105.0 million in 1.5% Senior Unsecured Convertible Notes due March 2017 (or the Unsecured R&D Notes) as follows:
• | As part of an initial closing under the purchase agreement (which was completed in two installments), (i) on July 30, 2012, the Company sold an Unsecured R&D Note with a principal amount of $38.3 million, including $15.0 million in new funds and $23.3 million in previously-provided diesel research and development funding by Total, and (ii) on September 14, 2012, the Company sold another Unsecured R&D Note for $15.0 million in new funds from Total. These Unsecured R&D Notes had an initial conversion price of $7.0682 per share. |
• | At a second closing under the Total Purchase Agreement (also completed in two installments) the Company sold additional Unsecured R&D Notes for an aggregate of $30.0 million in new funds from Total ($10.0 million in June 2013 and $20.0 million in July 2013). These Unsecured R&D Notes had an initial conversion price of $3.08 per share, as described below. |
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• | At a third closing under the Total Purchase Agreement (also completed in two installments) the Company sold additional Unsecured R&D Notes for an aggregate of $21.7 million in new funds from Total ($10.85 million in July 2014 and $10.85 million in January 2015). These Unsecured R&D Notes had an initial conversion price of $4.11 per share, as described below. |
In March 2013, the Company entered into a letter agreement with Total (or the March 2013 Letter Agreement) under which Total agreed to waive its right to cease its participation in the parties' fuels collaboration at the July 2013 decision point and committed to proceed with the July 2013 funding tranche of $30.0 million (subject to the Company's satisfaction of the relevant closing conditions for such funding in the Total Purchase Agreement). As consideration for this waiver and commitment, the Company agreed to:
• | Reduce the conversion price for the $30.0 million in principal amount of Unsecured R&D Notes to be issued in connection with the second closing of the Unsecured R&D Notes (as described above) from $7.0682 per share to a price per share equal to the greater of (i) the consolidated closing bid price of the Company's common stock on the date of the March 2013 Letter Agreement, plus $0.01, and (ii) $3.08 per share, provided that the conversion price would not be reduced by more than the maximum possible amount permitted under the rules of The NASDAQ Stock Market (or NASDAQ) such that the new conversion price would require the Company to obtain stockholder consent; and |
• | Grant Total a senior security interest in the Company's intellectual property, subject to certain exclusions and subject to release by Total when the Company and Total enter into final documentation regarding the establishment of the Fuels JV. |
In addition to the waiver by Total described above, Total also agreed that, at the Company's request and contingent upon the Company meeting its obligations described above, it would pay advance installments of the amounts otherwise payable at the second closing.
In June 2013, the Company sold and issued $10.0 million in principal amount of Unsecured R&D Notes to Total pursuant to the second closing of the Unsecured R&D Notes as discussed above. In accordance with the March 2013 Letter Agreement, this Unsecured R&D Note had an initial conversion price equal to $3.08 per share of the Company's common stock.
In July 2013, the Company sold and issued $20.0 million in principal amount of Unsecured R&D Notes to Total pursuant to the Total second closing of the Unsecured R&D Notes as discussed above. This purchase and sale completed Total's commitment to purchase $30.0 million of the Unsecured R&D Notes in the second closing by July 2013. In accordance with the March 2013 Letter Agreement, this Unsecured R&D Note has an initial conversion price equal to $3.08 per share of the Company's common stock.
In December 2013, in connection with the Company's entry into a Shareholders Agreement dated December 2, 2013 and License Agreement dated December 2, 2013 (or, collectively, the JV Documents) with Total and Total Amyris BioSolutions B.V. (or TAB) relating to the establishment of TAB (see Note 7, "Joint Ventures and Noncontrolling Interest"), the Company (i) exchanged the $69.0 million of the then-outstanding Unsecured R&D Notes issued pursuant to the Total Purchase Agreement for replacement 1.5% Senior Secured Convertible Notes due March 2017 (or the Secured R&D Notes, and together with the Unsecured R&D Notes, the R&D Notes), in principal amounts equal to the principal amount of each cancelled note and with substantially similar terms except that such replacement notes were secured, (ii) in connection therewith, granted to Total a security interest in and lien on all of the Company’s rights, title and interest in and to the Company’s shares in the capital of TAB as security for such Secured R&D Notes and (iii) agreed that any securities to be purchased and sold at the third closing under the Total Purchase Agreement by Total would be Secured R&D Notes instead of Unsecured R&D Notes. As a consequence of executing the JV Documents and forming TAB, the security interest in all of the Company's intellectual property, granted by the Company in favor of Total, Maxwell (Mauritius) Pte Ltd (or Temasek), and certain entities affiliated with FMR LLC (or the Fidelity Entities) pursuant to the Restated Intellectual Property Security Agreement dated as of October 16, 2013, was automatically terminated effective as of December 2, 2013 upon Total’s and the Company’s joint written notice to Temasek and the Fidelity Entities.
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In April 2014, the Company and Total entered into a letter agreement dated as of March 29, 2014 (or the March 2014 Total Letter Agreement) to amend the Amended and Restated Master Framework Agreement entered into as of December 2, 2013 (included as part of JV Documents) and the Total Purchase Agreement. Under the March 2014 Total Letter Agreement, the Company agreed to (i) amend the conversion price of the Secured R&D Notes to be issued in the third closing under the Total Purchase Agreement from $7.0682 per share to $4.11 per share subject to stockholder approval at the Company's 2014 annual meeting (which was obtained in May 2014), (ii) extend the period during which Total may exchange for other Company securities Secured R&D Notes issued under the Total Fuel Agreements from June 30, 2014 to the later of December 31, 2014 and the date on which the Company shall have raised $75.0 million of equity and/or convertible debt financing (excluding any convertible promissory notes issued pursuant to the Total Purchase Agreement), (iii) eliminate the Company’s ability to qualify, in a disclosure letter to Total, certain of the representations and warranties that the Company must make at the closing of any third closing sale, and (iv) beginning on March 31, 2014, provide Total with monthly reporting on the Company’s cash, cash equivalents and short-term investments. In consideration of these agreements, Total agreed to waive its right not to consummate the third closing under the Total Purchase Agreement if it had decided not to proceed with the collaboration and had made a "No-Go" decision with respect thereto.
In July 2014, the Company sold and issued a Secured R&D Note to Total with a principal amount of $10.85 million with a March 1, 2017 maturity date pursuant to the Total Purchase Agreement. This purchase and sale constituted the initial installment of the $21.7 million third closing described above. In accordance with the March 2014 Total Letter Agreement, this Secured R&D Note had an initial conversion price equal to $4.11 per share of the Company's common stock.
In January 2015, the Company sold and issued a Secured R&D Note to Total with a principal amount of $10.85 million with a March 1, 2017 maturity date pursuant to the Total Purchase Agreement. This purchase and sale constituted the final installment of the $21.7 million third closing described above. In accordance with the March 2014 Total Letter Agreement, this Secured R&D Note had an initial conversion price equal to $4.11 per share of the Company's common stock.
In July 2015, Total exchanged all but $5.0 million of Secured R&D Notes then held by Total, such cancelled notes having an aggregate principal amount of $70 million, in exchange for approximately 30.4 million shares of the Company’s common stock in connection with the Exchange. Refer to the “Exchange” section of this Note 5, "Debt and Mezzanine Equity", for additional details of the impact of the Exchange on the R&D Notes.
In March 2016, in connection with the restructuring of TAB (see Note 7, "Joint Ventures and Noncontrolling Interest"), the Company sold to Total one half of the Company’s ownership stake in TAB (giving Total an aggregate ownership stake of 75% of TAB and giving the Company an aggregate ownership stake of 25% of TAB) in exchange for Total cancelling (i) approximately $1.3 million of Secured R&D Notes, plus all paid-in-kind and accrued interest under all outstanding Secured R&D Notes ($2.8 million, including all such interest that was outstanding as of July 29, 2015) and (ii) a note in the principal amount of Euro 50,000, plus accrued interest, issued to Total in connection with the original capitalization of TAB. To satisfy its purchase obligation above, Total surrendered to the Company the remaining Secured R&D Note of approximately $5.0 million in principal amount, and the Company executed and delivered to Total a new Unsecured R&D Note in the principal amount of $3.7 million. The disposal of the 25% ownership stake in the Fuels JV resulted in a gain to the Company of $4.2 million, which was recognized as a capital contribution from Total within equity.
As of March 31, 2017 and December 31, 2016, $3.7 million and $3.7 million, respectively, of R&D Notes were outstanding. In February 2017, the Company and Total agreed to extend the maturity of the outstanding R&D Notes from March 1, 2017 to May 15, 2017. The R&D Notes bear interest of 1.5% per annum (with a default rate of 2.5%), accruing from the date of issuance and payable at maturity or on conversion or a change of control where Total exercises the right to require the Company to repay the notes, as described below.
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The R&D Notes become convertible into the Company's common stock (i) within 10 trading days prior to maturity, (ii) on a change of control of the Company, and (iii) on a default by the Company. The conversion price of the R&D Notes are subject to adjustment for proportional adjustments to outstanding common stock and under anti-dilution provisions in case of certain dividends and distributions. Total has a right to require repayment of 101% of the principal amount of the R&D Notes in the event of a change of control of the Company and the R&D Notes provide for payment of unpaid future interest through the maturity date on conversion following such a change of control, subject to a cap, if Total does not require such repayment. The Total Purchase Agreement and R&D Notes include covenants regarding payment of interest, maintenance of the Company's listing status, limitations on debt, maintenance of corporate existence, and filing of SEC reports. The R&D Notes include standard events of default resulting in acceleration of indebtedness, including failure to pay, bankruptcy and insolvency, cross-defaults, and breaches of the covenants in the Total Purchase Agreement and R&D Notes, with added default interest rates and associated cure periods applicable to the covenant regarding SEC reporting. Furthermore, with exceptions for certain existing debt, refinancing of such debt and certain other exclusions and waivers, the R&D Notes provide that the Company's total outstanding debt at any time may not exceed the greater of $200.0 million or 50% of its consolidated total assets and its secured debt may not exceed the greater of $125.0 million or 30% of its consolidated total assets.
August 2013 Financing Convertible Notes and Temasek Bridge Note
In August 2013, the Company entered into a Securities Purchase Agreement (or the August 2013 SPA) with Total and Temasek to sell up to $73.0 million in convertible promissory notes in private placements (or the August 2013 Financing), with such notes to be sold and issued over a period of up to 24 months from the date of signing. The August 2013 SPA provided for the August 2013 Financing to be divided into two tranches (the first tranche for $42.6 million and the second tranche for $30.4 million), each with differing closing conditions. Of the total possible purchase price in the financing, $25.0 million was to be paid in the form of cash by Temasek ($25.0 million in the second tranche), $35.0 million was to be paid by the exchange and cancellation of the Temasek Bridge Note, as described below, and $13.0 million was to be paid by the exchange and cancellation of outstanding R&D Notes held by Total in connection with its exercise of pro rata rights ($7.6 million in the first tranche and $5.4 million in the second tranche). The August 2013 SPA included requirements that the Company meet certain production milestones before the second tranche would become available, obtain stockholder approval prior to completing any closing of the transaction, and issue a warrant to Temasek to purchase 1,000,000 shares of the Company's common stock at an exercise price of $0.01 per share, initially exercisable only if Total converted R&D Notes previously issued to Total in the second closing under the Total Purchase Agreement. In September 2013, prior to the initial closing of the August 2013 Financing, the Company's stockholders approved the issuance in a private placement of up to $110.0 million aggregate principal amount of senior convertible promissory notes, the issuance of a warrant to purchase 1,000,000 shares of the Company's common stock and the issuance of the common stock issuable upon conversion or exercise of such notes and warrant, which approval included the transactions contemplated by the August 2013 Financing.
In October 2013, the Company sold and issued a senior secured promissory note to Temasek (or the Temasek Bridge Note) in exchange for a bridge loan of $35.0 million. The Temasek Bridge Note was due on February 2, 2014 and accrued interest at a rate of 5.5% quarterly from the October 4, 2013 date of issuance. The Temasek Bridge Note was cancelled on October 16, 2013 as payment for Temasek’s purchase of Tranche I Notes in the first tranche of the August 2013 Financing, as further described below.
In October 2013, the Company amended the August 2013 SPA to include the investment by the Fidelity Entities in the first tranche of the August 2013 Financing of $7.6 million, and to proportionally increase the amount of first tranche notes acquired by exchange and cancellation of outstanding R&D Notes held by Total in connection with its exercise of pro rata rights up to $9.2 million in the first tranche. Also in October 2013, the Company completed the closing of the first tranche of senior convertible notes provided for in the August 2013 Financing (or the Tranche I Notes), issuing a total of $51.8 million in Tranche I Notes for cash proceeds of $7.6 million and exchange and cancellation of outstanding convertible promissory notes of $44.2 million, of which $35.0 million resulted from the exchange and cancellation of the Temasek Bridge Note and the remaining $9.2 million from the exchange and cancellation of an outstanding R&D Note held by Total. As a result of the exchange and cancellation of the $35.0 million Temasek Bridge Note and the $9.2 million R&D Note held by Total for the Tranche I Notes, the Company recorded a loss from extinguishment of debt of $19.9 million. The Tranche I Notes are due sixty months from the date of issuance and were initially convertible into the Company’s common stock at a conversion price equal to $2.44 per share, which represents a 15% discount to the trailing 60-day weighted-average closing price of the common stock on The NASDAQ Stock Market (or NASDAQ) through August 7, 2013, subject to certain adjustments as described below. The Tranche I Notes are convertible at the option of the holder: (i) at any time after 18 months from the date of the August 2013 SPA, (ii) on a change of control of the Company and (iii) upon the occurrence of an event of default. Each Tranche I Note accrues interest from the date of issuance until the earlier of the date that such Tranche I Note is converted into the Company’s common stock or is repaid in full. Interest accrues on the Tranche I Notes at a rate of 5% per six months, compounded semiannually (with graduated interest rates of 6.5% applicable to the first 180 days and 8% applicable thereafter as the sole remedy should the Company fail to maintain NASDAQ listing status or of 6.5% for all other defaults). Interest for the first 30 months is payable in kind and added to the principal every six months and thereafter, the Company may continue to pay interest in kind by adding to the principal every six months or may elect to pay interest in cash. Through March 31, 2017, the Company has elected to pay interest on the Tranche I Notes in kind. The Tranche I Notes may be prepaid by the Company on the 30-month anniversary of the issuance date, and thereafter every six months at the date of payment of the semi-annual coupon.
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In December 2013, the Company further amended the August 2013 SPA to sell $3.0 million of senior convertible notes under the second tranche of the August 2013 Financing (or the Tranche II Notes) to funds affiliated with Wolverine Asset Management, LLC (or Wolverine) and the Company elected to call $25.0 million in additional funds from Temasek pursuant to its previous commitment to purchase such amount of Tranche II Notes. In January 2014, the Company sold and issued, for face value, approximately $34.0 million of Tranche II Notes in the second tranche of the August 2013 Financing. At the closing, Temasek purchased $25.0 million of the Tranche II Notes and funds affiliated with Wolverine purchased $3.0 million of the Tranche II Notes, each for cash. Total purchased approximately $6.0 million of the Tranche II Notes through exchange and cancellation of the same amount of principal of previously outstanding R&D Notes held by Total. As a result of the exchange and cancellation of the $6.0 million R&D Note held by Total for the Tranche II Notes, the Company recorded a loss from extinguishment of debt of $9.4 million. The Tranche II Notes will be due sixty months from the date of issuance and were initially convertible into shares of common stock at a conversion price equal to $2.87 per share, which represents the trailing 60-day weighted-average closing price of the common stock on NASDAQ through August 7, 2013, subject to certain adjustments as described below. The Tranche II Notes are convertible at the option of the holder (i) at any time after the 12 month anniversary of the issue date, (ii) on a change of control of the Company and (iii) upon the occurrence of an event of default. Each Tranche II Note will accrue interest from the date of issuance until the earlier of the date that such Tranche II Note is converted into common stock or repaid in full. Interest will accrue on the Tranche II Notes at a rate per annum equal to 10%, compounded annually (with graduated interest rates of 13% applicable to the first 180 days and 16% applicable thereafter as the sole remedy should the Company fail to maintain NASDAQ listing status or of 12% for all other defaults). Interest for the first 36 months shall be payable in kind and added to principal every year following the issue date and thereafter, the Company may continue to pay interest in kind by adding to the principal on every year anniversary of the issue date or may elect to pay interest in cash.
The conversion prices of the Tranche I Notes and Tranche II Notes are subject to adjustment (i) according to proportional adjustments to outstanding common stock of the Company in case of certain dividends and distributions, (ii) according to anti-dilution provisions, and (iii) with respect to notes held by any purchaser other than Total, in the event that Total exchanges existing convertible notes for new securities of the Company in connection with future financing transactions in excess of its pro rata amount. The holders have a right to require repayment of 101% of the principal amount of the notes in the event of a change of control of the Company and the notes provide for payment of unpaid interest on conversion following such a change of control if the purchasers do not require such repayment. The August 2013 SPA, Tranche I Notes and Tranche II Notes include covenants regarding payment of interest, maintenance of the Company’s listing status, limitations on debt and on certain liens, maintenance of corporate existence, and filing of SEC reports. The Tranche I Notes and Tranche II Notes include standard events of default including failure to pay, bankruptcy and insolvency, cross-defaults, and breaches of the covenants in the August 2013 SPA, Tranche I Notes and Tranche II Notes, after which such notes may be due and payable immediately, as well as associated default interest rates as set forth above.
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In July 2015, Temasek exchanged all of the Tranche I and Tranche II Notes then held by Temasek, such notes having an aggregate principal amount of approximately $71.0 million, in exchange for approximately 30.86 million shares of the Company’s common stock in connection with the Exchange. Refer to the “Exchange” section of this Note 5, "Debt and Mezzanine Equity", for additional details of the impact of the Exchange on the Tranche I Notes and Tranche II Notes.
The conversion price of the Tranche I Notes and Tranche II Notes was reduced to approximately $1.42 per share upon the completion of a private placement of common stock and warrants to purchase common stock in July 2015, as described below. Following the issuance by the Company of warrants to purchase common stock in a private placement transaction in February 2016, the conversion price of the Tranche I Notes and Tranche II Notes was further adjusted to $1.40 per share, and following the sale by the Company of shares of common stock to the Bill & Melinda Gates Foundation in May 2016, as described below, the conversion price of the Tranche I Notes and Tranche II Notes was further adjusted to $1.14 per share. Furthermore, following the issuance by the Company of shares of convertible preferred stock and warrants to purchase common stock in May 2017, as described in Note 18, “Subsequent Events,” the conversion price of the Tranche I Notes and Tranche II Notes was further adjusted to approximately $0.50 per share.
As of March 31, 2017 and December 31, 2016, the related party convertible notes outstanding under the Tranche I Notes and Tranche II Notes were $22.1 million and $21.8 million, respectively, net of debt discount of $0.0 million and $0.0 million, respectively. Refer to the “Exchange” and “Maturity Treatment Agreement” sections of this Note 5, "Debt and Mezzanine Equity", for details of the impact of the Maturity Treatment and Exchange agreements on the Tranche I and II Notes.
2014 144A Notes Sold to Related Parties
As of March 31, 2017 and December 31, 2016, the related party convertible notes outstanding under the 2014 Rule 144A Convertible Note Offering were $17.6 million and $17.3 million, respectively, net of discount and issuance costs of $7.1 million and $7.4 million, respectively.
As of March 31, 2017 and December 31, 2016, the total related party convertible notes outstanding were $43.3 million and $42.8 million, respectively, net of discount and issuance costs of $5.6 million and $5.4 million, respectively.
Loans Payable
In July 2012, the Company entered into a Note of Bank Credit and a Fiduciary Conveyance of Movable Goods Agreement (together, the "July 2012 Bank Agreements") with each of Nossa Caixa Desenvolvimento (or “Nossa Caixa”) and Banco Pine S.A. (or “Banco Pine”). Under the July 2012 Bank Agreements, the Company pledged certain farnesene production assets as collateral for the loans of R$52.0 million. The Company's total acquisition cost for such pledged assets was approximately R$68.0 million (approximately US$21.5 million based on the exchange rate as of March 31, 2017). The Company is also a parent guarantor for the payment of the outstanding balance under these loan agreements. Under the July 2012 Bank Agreements, the Company could borrow an aggregate of R$52.0 million (approximately US$16.4 million based on the exchange rate as of March 31, 2017) as financing for capital expenditures relating to the Company's manufacturing facility located in Brotas, Brazil. Specifically, Banco Pine, agreed to lend R$22.0 million and Nossa Caixa agreed to lend R$30.0 million. The funds for the loans are provided by BNDES, but are guaranteed by the lenders. The loans have a final maturity date of July 15, 2022 and bear a fixed interest rate of 5.5% per year. The loans are also subject to early maturity and delinquency charges upon occurrence of certain events including interruption of manufacturing activities at the Company's manufacturing facility in Brotas, Brazil for more than 30 days, except during the sugarcane off-season. For the first two years that the loans are outstanding, the Company is required to pay interest only on a quarterly basis. Since August 15, 2014, the Company has been required to pay equal monthly installments of both principal and interest for the remainder of the term of the loans. As of March 31, 2017 and December 31, 2016, a principal amount of $10.9 million and $11.1 million, respectively, was outstanding under these loan agreements.
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Exchange (Debt Conversion - Related Party Transaction)
On July 29, 2015, the Company closed the "Exchange" pursuant to that certain Exchange Agreement, dated as of July 26, 2015 (or the Exchange Agreement), among the Company, Temasek and Total.
Under the Exchange Agreement, at the closing of the Exchange, Temasek exchanged $71.0 million in principal amount of outstanding Tranche I and Tranche II Notes (including paid-in-kind and accrued interest through July 29, 2015) and Total exchanged $70.0 million in principal amount of outstanding R&D Notes for shares of the Company’s common stock. The exchange price was $2.30 per share (or the Exchange Price) and was paid by the exchange and cancellation of such outstanding convertible promissory notes, and Temasek and Total received 30,860,633 and 30,434,782 shares of the Company’s common stock, respectively, in the Exchange. As a result of the Exchange, accretion of debt discount was accelerated based on the Company’s estimate of the expected conversion date, resulting in an additional interest expense of $39.2 million for the year ended December 31, 2015.
Under the Exchange Agreement, Total also received the following warrants, each with a five-year term, at the closing of the Exchange:
• | A warrant to purchase 18,924,191 shares of the Company’s Common Stock (or the Total Funding Warrant). |
• | A warrant to purchase 2,000,000 shares of the Company’s common stock that would only be exercisable if the Company failed, as of March 1, 2017, to achieve a target cost per liter to manufacture farnesene (or the Total R&D Warrant). The Total Funding Warrant and the Total R&D Warrant are collectively referred to as the “Total Warrants.” |
Additionally, under the Exchange Agreement, Temasek received the following warrants:
• | A warrant to purchase 14,677,861 shares of the Company’s common stock (or the Temasek Exchange Warrant). |
• | A warrant exercisable for that number of shares of the Company’s common stock equal to (1) (A) the number of shares for which Total exercises the Total Funding Warrant plus (B) the number of additional shares for which the certain convertible notes remaining outstanding following the completion of the Exchange may become exercisable as a result of a reduction in the conversion price of such remaining notes as of a result of and/or subsequent to the date of the Exchange plus (C) that number of additional shares in excess of 2,000,000, if any, for which the Total R&D Warrant becomes exercisable multiplied by a fraction equal to 30.6% divided by 69.4% plus (2) (A) the number of any additional shares for which certain other outstanding convertible promissory notes may become exercisable as a result of a reduction to the conversion price of such notes multiplied by (B) a fraction equal to 13.3% divided by 86.7% (or the Temasek Funding Warrant). |
• | A warrant exercisable for that number of shares of the Company’s common stock equal to 880,339 multiplied by a fraction equal to the number of shares for which Total exercises the Total R&D Warrant divided by 2,000,000 (or the Temasek R&D Warrant). If Total is entitled to, and does, exercise the Total R&D Warrant in full, the Temasek R&D Warrant would be exercisable for 880,339 shares. |
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The Temasek Exchange Warrant, the Temasek Funding Warrant and the Temasek R&D Warrant each have ten-year terms and are referred to herein as the “Temasek Warrants” and, the Temasek Warrants and Total Warrants are hereinafter collectively referred to as the “Exchange Warrants”. All of the Exchange Warrants have an exercise price of $0.01 per share.
In addition to the grant of the Exchange Warrants, a warrant issued by the Company to Temasek in October 2013 in conjunction with a prior convertible debt financing (or the 2013 Warrant) became exercisable in full upon the completion of the Exchange. There were 1,000,000 shares underlying the 2013 Warrant, with an exercise price of $0.01 per share.
The exercisability of all of the Exchange Warrants was subject to stockholder approval, which was obtained on September 17, 2015.
In February and May 2016, as a result of adjustments to the conversion price of the Tranche Notes discussed above, the Temasek Funding Warrant became exercisable for an additional 127,194 and 2,335,342 shares of common stock, respectively. Following the issuance by the Company of shares of convertible preferred stock and warrants to purchase common stock in May 2017, as described in Note 18, “Subsequent Events,” and a corresponding adjustment to the conversion price of the Tranche I Notes and Tranche II Notes, as described above, the Temasek Funding Warrant became exercisable for an additional 16,886,320 shares of common stock.
As of March 1, 2017, the Company had not achieved the target cost per liter to manufacture farnesene provided in the Total R&D Warrant, and as a result, on March 1, 2017 the Total R&D Warrant became exercisable in accordance with its terms. In addition, upon any exercise by Total of the Total R&D Warrant, the Temasek R&D Warrant will become exercisable for that number of shares of the Company's common stock equal to 880,339 multiplied by a fraction equal to the number of shares for which Total exercises the Total R&D Warrant divided by 2,000,000.
As of March 31, 2017, the Total Funding Warrant, the Temasek Exchange Warrant, and the 2013 Warrant had been fully exercised and Temasek had exercised the Temasek Funding Warrant with respect to 12,700,244 shares of common stock. Neither the Total R&D Warrant nor the Temasek R&D Warrant had been exercised as of March 31, 2017. Warrants to purchase 2,462,536 shares of common stock under the Temasek Funding Warrant were unexercised as of March 31, 2017
Maturity Treatment Agreement
At the closing of the Exchange, the Company, Total and Temasek also entered into a Maturity Treatment Agreement, dated as of July 29, 2015, pursuant to which Total and Temasek agreed to convert any Tranche I Notes, Tranche II Notes or 2014 144A Notes held by them that were not cancelled in the Exchange (or the Remaining Notes) into shares of the Company’s common stock in accordance with the terms of such Remaining Notes upon maturity, provided that certain events of default had not occurred with respect to the applicable Remaining Notes prior to such maturity. As of immediately following the closing of the Exchange, Temasek held $10.0 million in aggregate principal amount of Remaining Notes (consisting of 2014 144A Notes) and Total held approximately $25.0 million in aggregate principal amount of Remaining Notes (consisting of $9.7 million of 2014 144A Notes and $15.3 million of Tranche I and II Notes). See Note 18, “Subsequent Events” for additional details regarding the Remaining Notes.
February 2016 Private Placement - Related Party Transaction
On February 12, 2016, the Company entered into a Note and Warrant Purchase Agreement (or the February 2016 Purchase Agreement) with the purchasers named therein for the sale of $18.0 million in aggregate principal amount of unsecured promissory notes (or the February 2016 Notes) to the purchasers, as well as warrants to purchase 2,571,428 shares of the Company’s common stock at an exercise price of $0.01 per share, representing aggregate proceeds to the Company of $18 million (or the Initial Sale). On February 15, 2016, an additional purchaser joined the February 2016 Purchase Agreement and purchased $2.0 million in aggregate principal amount of the February 2016 Notes, as well as warrants to purchase 285,714 shares of the Company’s common stock at an exercise price of $0.01 per share, representing aggregate proceeds to the Company of $2 million (or the Subsequent Sale and together with the Initial Sale, the February 2016 Private Placement). The February 2016 Notes and the warrants were issued in a private placement exempt from registration under the Securities Act. The purchasers are existing stockholders of the Company and affiliated with certain members of the Company’s Board of Directors: Foris Ventures, LLC (or Foris, an entity affiliated with director John Doerr of Kleiner Perkins Caufield & Byers, a current stockholder), which purchased $16.0 million aggregate principal amount of the February 2016 Notes and warrants to purchase 2,285,714 shares of the Company’s common stock; Naxyris S.A. (an investment vehicle owned by Naxos Capital Partners SCA Sicar; director Carole Piwnica is Director of NAXOS UK, which is affiliated with Naxos Capital Partners SCA Sicar), which purchased $2.0 million aggregate principal amount of the February 2016 Notes and warrants to purchase 285,714 shares of the Company’s common stock; and Biolding Investment SA, a fund affiliated with director HH Sheikh Abdullah bin Khalifa Al Thani, which purchased $2.0 million aggregate principal amount of the February 2016 Notes and warrants to purchase 285,714 shares of the Company’s common stock. The Initial Sale closed on February 12, 2016, and the Subsequent Sale closed on February 15, 2016.
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The February 2016 Notes are unsecured obligations of the Company and are subordinate to the Company’s obligations under the Senior Secured Loan Facility pursuant to a Subordination Agreement, dated as of February 12, 2016, by and among the Company, the purchasers and the administrative agent under the Senior Secured Loan Facility. Interest will accrue on the February 2016 Notes from and including, with respect to the Initial Sale, February 12, 2016, and with respect to the Subsequent Sale, February 15, 2016, at a rate of 13.50% per annum and is payable on May 15, 2017, the maturity date of the February 2016 Notes, unless the February 2016 Notes are prepaid in accordance with their terms prior to such date. The February 2016 Purchase Agreement and the February 2016 Notes contain customary terms, provisions, representations and warranties, including certain events of default after which the February 2016 Notes may be due and payable immediately, as set forth in the February 2016 Notes.
The exercisability of the warrants issued in the February 2016 Private Placement, which each have a term of five years, was subject to stockholder approval, which was obtained on May 17, 2016. As of March 31, 2017, the carrying amount of the February 2016 Notes was $19.6 million.
In May 2017, in connection with the issuance and sale of convertible preferred stock and warrants to purchase common stock, as described in more detail below in Note 18, “Subsequent Events,” $18.0 million of the February 2016 Notes were exchanged for shares of convertible preferred stock and warrants to purchase common stock in the offering.
June 2016 Private Placement - Related Party Transaction
On June 24, 2016, the Company entered into a Note Purchase Agreement (or the June 2016 Purchase Agreement) with Foris for the sale of $5.0 million in aggregate principal amount of secured promissory notes (or the June 2016 Notes) to Foris in exchange for aggregate proceeds to the Company of $5.0 million (or the June 2016 Private Placement). The June 2016 Notes were issued in a private placement exempt from registration under the Securities Act. The June 2016 Private Placement closed on June 24, 2016.
The June 2016 Notes are collateralized by a second priority lien on the assets securing the Company’s obligations under the Senior Secured Loan Facility, and are subordinate to the Company’s obligations under the Senior Secured Loan Facility pursuant to a Subordination Agreement, dated as of June 24, 2016, by and among the Company, Foris and the administrative agent under the Company’s Senior Secured Loan Facility. Interest will accrue on the June 2016 Notes from and including June 24, 2016 at a rate of 13.50% per annum and is payable in full on May 15, 2017, the maturity date of the June 2016 Notes, unless the June 2016 Notes are prepaid in accordance with their terms prior to such date. The June 2016 Purchase Agreement and the June 2016 Notes contain customary terms, provisions, representations and warranties, including certain events of default after which the June 2016 Notes may be due and payable immediately, as set forth in the June 2016 Notes.
In May 2017, in connection with the issuance and sale of convertible preferred stock and warrants to purchase common stock, as described in more detail below in Note 18, “Subsequent Events,” the June 2016 Notes were exchanged for shares of convertible preferred stock and warrants to purchase common stock in the offering.
October 2016 Private Placements
On October 21 and October 27, 2016, the Company entered into separate Note Purchase Agreements (or the October 2016 Purchase Agreements) with Foris and Ginkgo, respectively, for the sale of $6.0 million and $8.5 million, respectively, in aggregate principal amount of secured promissory notes (or the October 2016 Notes) in exchange for aggregate proceeds to the Company of $6.0 million and $8.5 million, respectively (or the October 2016 Private Placements). The October 2016 Notes were issued in private placements exempt from registration under the Securities Act. The October 2016 Private Placements closed on October 21 and October 27, 2016, respectively.
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The October 2016 Notes are collateralized by a second priority lien on the assets securing the Company’s obligations under the Senior Secured Loan Facility, and are subordinate to the Company’s obligations under the Senior Secured Loan Facility pursuant to Subordination Agreements, dated as of the respective dates of the October 2016 Purchase Agreements, by and among the Company, the applicable purchaser and the administrative agent under the Company’s Senior Secured Loan Facility. Interest will accrue on the October 2016 Notes from and including October 21 and 27, 2016, respectively, at a rate of 13.50% per annum and is payable in full on May 15, 2017, the maturity date of the October 2016 Notes, unless the October 2016 Notes are prepaid in accordance with their terms prior to such date. The October 2016 Purchase Agreements and the October 2016 Notes contain customary terms, provisions, representations and warranties, including certain events of default after which the October 2016 Notes may be due and payable immediately, as set forth in the October 2016 Notes.
In May 2017, in connection with the issuance and sale of convertible preferred stock and warrants to purchase common stock, as described in more detail below in Note 18, “Subsequent Events,” the October 2016 Notes purchased by Foris in the October 2016 Private Placements were exchanged for shares of convertible preferred stock and warrants to purchase common stock in the offering.
Salisbury Note
In December 2016, in connection with the Company’s purchase of a manufacturing facility in Leland, North Carolina and related assets (Glycotech Assets), as discussed in more detail in Note 7, “Joint Venture and Noncontrolling Interests,” the Company issued a purchase money promissory note in the principal amount of $3.5 million (Salisbury Note) in favor of Salisbury Partners, LLC (Salisbury). The Salisbury Note (i) bears interest at a rate of 5% per year, (ii) has a term of 13 years, (iii) is payable in equal monthly installments of principal and interest beginning on January 1, 2017 (which payments are subject to a penalty of 5% if delinquent more than 5 days) and (iv) is secured by a purchase money lien on the Glycotech Assets. The Salisbury Note contains customary terms and provisions, including certain events of default after which the Salisbury Note may become immediately due and payable. In addition, the Salisbury Note may be prepaid in full or in part at any time without penalty or premium. In January 2017, the Salisbury Note was repaid with proceeds from the Nikko Note (as defined below).
Nikko Note
In December 2016, in connection with the Company’s formation of its cosmetics joint venture (or the Aprinnova JV) with Nikko Chemicals Co., Ltd. (or Nikko), an existing commercial partner of the Company, and Nippon Surfactant Industries Co., Ltd., an affiliate of Nikko, as discussed in more detail in Note 7, “Joint Venture and Noncontrolling Interests,” Nikko made a loan to the Company in the principal amount of $3.9 million, and the Company in consideration therefor issued a promissory note (or the Nikko Note) to Nikko in an equal principal amount. The proceeds of the Nikko Note were used to satisfy the Company’s remaining liabilities relating to the Company’s purchase of the Glycotech Assets, including liabilities under the Salisbury Note. The Nikko Note (i) bears interest at a rate of 5% per year, (ii) has a term of 13 years, (iii) is payable in equal monthly installments of principal and interest beginning on January 1, 2017 (which payments are subject to a penalty of 5% if delinquent more than 5 days) and (iv) is collateralized by a first-priority lien on 10% of the Aprinnova JV interests owned by the Company. In addition to the payments under the Nikko Note set forth in the preceding sentence, the Company is required to (i) repay $400,000 of the Nikko Note in equal monthly installments of $100,000 on January 1, 2017, February 1, 2017, March 1, 2017 and April 1, 2017 and (ii) commencing with the distributions from the Aprinnova JV to its members relating to the fourth fiscal year of the Aprinnova JV and continuing for each fiscal year thereafter until the Nikko Note is fully repaid, repay the Nikko Note in an amount equal to the profits, if any, distributed to the Company by the Aprinnova JV. The Note contains customary terms and provisions, including certain events of default after which the Note may become immediately due and payable. In addition, the Nikko Note may be prepaid in full or in part at any time without penalty or premium.
In February 2017, in connection with the Aprinnova JV, Nikko made an unsecured loan to Aprinnova JV in the principal amount of $1.5 million and the Aprinnova issued a promissory note (Aprinnova Note) to Nikko in an equal principal amount. The proceeds of the Aprinnova Note will be used as working capital for Aprinnova JV and are repayable in $375,000 instalments on the following dates: May 1, 2017, August, 2017, November 1, 2018 and February 1, 2018. The Aprinnova Note bears interest at 2.75% annually payable on the principal installment dates.
Letters of Credit
In June 2012, the Company entered into a letter of credit agreement for $1.0 million under which it provided a letter of credit to the landlord of its headquarters in Emeryville, California, in order to cover the security deposit on the lease. This letter of credit is secured by a certificate of deposit. Accordingly, the Company has $1.0 million as restricted cash under this arrangement as of March 31, 2017 and December 31, 2016.
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Future minimum payments under the debt agreements as of March 31, 2017 are as follows (in thousands):
Years ending December 31: | Related Party Convertible Debt | Convertible Debt | Loans Payable | Related Party Loans payable | Credit Facility | Total | ||||||||||||||||||
2017 (remaining nine months) | $ | 4,537 | $ | 12,677 | $ | 11,899 | $ | 31,511 | $ | 5,271 | $ | 65,895 | ||||||||||||
2018 | 16,290 | 21,803 | 2,878 | — | 33,710 | 74,681 | ||||||||||||||||||
2019 | 34,913 | 93,287 | 2,766 | — | 2,580 | 133,546 | ||||||||||||||||||
2020 | — | — | 2,656 | — | 2,500 | 5,156 | ||||||||||||||||||
2021 | — | — | 2,543 | — | 27,396 | 29,939 | ||||||||||||||||||
Thereafter | — | — | 1,442 | — | — | 1,442 | ||||||||||||||||||
Total future minimum payments(1) | 55,740 | 127,767 | 24,184 | 31,511 | 71,457 | 310,659 | ||||||||||||||||||
Less: amount representing interest(2) | (12,405 | ) | (52,549 | ) | (1,596 | ) | (957 | ) | (22,214 | ) | (89,721 | ) | ||||||||||||
Present value of minimum debt payments | 43,335 | 75,218 | 22,588 | 30,554 | 49,243 | 220,938 | ||||||||||||||||||
Less: current portion | (3,611 | ) | (2,288 | ) | (11,780 | ) | (30,554 | ) | (1,222 | ) | (49,455 | ) | ||||||||||||
Noncurrent portion of debt | $ | 39,724 | $ | 72,930 | $ | 10,808 | $ | — | $ | 48,021 | $ | 171,483 |
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(1) Including $3.9 million in 2017 related to Nomis Bay convertible note which, at the Company’s election, may be settled in shares or cash, and $46.8 million between 2018 and 2019 subject to the Maturity Treatment Agreement, which will be converted to common stock at maturity, subject to there being no default under the terms of the debt. See Note 18, “Subsequent Events” for additional details regarding the notes subject to the Maturity Treatment Agreement.
(2) Including debt discount and issuance cost of $42.0 million associated with the related party and non-related party debt which will be accreted to interest expense under the effective interest method over the term of the debt.
6. Commitments and Contingencies
Lease Obligations
The Company leases certain facilities and finances certain equipment under operating and capital leases, respectively. Operating leases include leased facilities and capital leases include leased equipment (see Note 4, "Balance Sheet Components"). The Company recognizes rent expense on a straight-line basis over the non-cancellable lease term and records the difference between rent payments and the recognition of rent expense as a deferred rent liability. Where leases contain escalation clauses, rent abatements, and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, the Company applies them as a straight-line rent expense over the lease term. The Company has non-cancellable operating lease agreements for office, research and development, and manufacturing space that expire at various dates, with the latest expiration in February 2031. Rent expense under operating leases was $1.3 million for each of the three months ended March 31, 2017 and 2016, respectively.
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Future minimum payments under the Company's lease obligations as of March 31, 2017, are as follows (in thousands):
Years ending December 31: | Capital Leases | Operating Leases | Total Lease Obligations | |||||||||
2017 (remaining nine months) | $ | 734 | $ | 5,194 | $ | 5,928 | ||||||
2018 | 106 | 6,909 | 7,015 | |||||||||
2019 | 9 | 6,782 | 6,791 | |||||||||
2020 | — | 7,012 | 7,012 | |||||||||
2021 | — | 7,248 | 7,248 | |||||||||
Thereafter | — | 10,993 | 10,993 | |||||||||
Total future minimum lease payments | 849 | $ | 44,138 | $ | 44,987 | |||||||
Less: amount representing interest | (39 | ) | ||||||||||
Present value of minimum lease payments | 810 | |||||||||||
Less: current portion | (405 | ) | ||||||||||
Long-term portion | $ | 405 |
Guarantor Arrangements
The Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is serving in his or her official capacity. The indemnification period remains enforceable for the officer's or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future payments. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company had no liabilities recorded for these agreements as of March 31, 2017 and December 31, 2016.
The Company entered into the FINEP Credit Facility to finance a research and development project on sugarcane-based biodiesel (see Note 5, "Debt and Mezzanine Equity"). The FINEP Credit Facility is guaranteed by a chattel mortgage on certain equipment of the Company. The Company's total acquisition cost for the equipment under this guarantee is approximately R$6.0 million (approximately US$1.9 million based on the exchange rate as of March 31, 2017).
The Company entered into the BNDES Credit Facility to finance a production site in Brazil (see Note 5, "Debt and Mezzanine Equity").The BNDES Credit Facility is collateralized by a first priority security interest in certain of the Company's equipment and other tangible assets with a total acquisition cost of R$24.9 million (approximately US$7.9 million based on the exchange rate as of March 31, 2017). The Company is a parent guarantor for the payment of the outstanding balance under the BNDES Credit Facility. Additionally, the Company is required to provide certain bank guarantees under the BNDES Credit Facility.
The Company entered into loan agreements and security agreements whereby the Company pledged certain farnesene production assets as collateral (the fiduciary conveyance of movable goods) with each of Nossa Caixa and Banco Pine (see Note 5, "Debt and Mezzanine Equity"). The Company's total acquisition cost for the farnesene production assets pledged as collateral under these agreements is approximately R$68.0 million (approximately US$21.5 million based on the exchange rate as of March 31, 2017). The Company is also a parent guarantor for the payment of the outstanding balance under these loan agreements.
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In December 2013, in connection with the execution of the JV Documents entered into by and among the Company, Total and TAB relating to the establishment of TAB (see Note 5, "Debt and Mezzanine Equity" and Note 7, “Joint Venture and Noncontrolling Interests”), the Company agreed to exchange the $69.0 million of outstanding Unsecured R&D Notes issued pursuant to the Total Purchase Agreement for replacement 1.5% Senior Secured Convertible Notes due March 2017, and grant a security interest to Total in and lien on all the Company’s rights, title and interest in and to the Company’s shares in the capital of TAB. Following execution of the JV Documents, all Unsecured R&D Notes that had been issued were exchanged for Secured R&D Notes. Further, the $10.85 million in principal amount of such notes issued in the initial tranche of the third closing under the Total Purchase Agreement in July 2014 and the $10.85 million in principal amount of such notes issued in the second tranche of the third closing in January 2015 were Secured R&D Notes instead of Unsecured R&D Notes. See Note 5,"Debt and Mezzanine Equity" for details regarding the impact of the Exchange and Maturity Treatment Agreement on the R&D Notes. In March 2016, as a result of the restructuring of TAB discussed under Note 5, “Debt and Mezzanine Equity” and Note 7, “Joint Venture and Noncontrolling Interests,” the remaining Secured R&D Notes were exchanged for an Unsecured R&D Note in the principal amount of $3.7 million. Further, in February 2017, the Company and Total agreed to extend the maturity of the outstanding R&D Notes from March 1, 2017 to May 15, 2017.
The Senior Secured Loan Facility and the June 2016 Notes and October 2016 Notes (see Note 5, "Debt and Mezzanine Equity") are collateralized by first- and second- priority liens, respectively, on substantially all of the Company's assets, including Company intellectual property. In addition, as discussed above, the Nikko Note is collateralized by a first-priority lien on 10% of the Aprinnova JV interests owned by the Company.
Purchase Obligations
As of March 31, 2017 and December 31, 2016, the Company had $3.7 million and $0.8 million, respectively, in purchase obligations which included zero and $0.6 million, respectively, of non-cancellable contractual obligations and construction commitments.
Production Cost Commitment
As of March 31, 2017, the Company committed to manufacture Squalane and Hemisqualane supplied to our Aprinnova JV at specified cost targets. The Company is obligated to pay all manufacturing costs above the production cost target but is not obligated to produce squalane and hemisqualane at a loss. The Company’s obligations under this arrangement for the quarter ended March 31, 2017 were offset by its entitlement to all of the profits of Aprinnova for the same period, which entitlement continues for the three year period following the date of the Joint Venture Agreement, up to a maximum of $10 million.
Other Matters
Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but will only be recorded when one or more future events occur or fail to occur. The Company's management assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against and by the Company or unasserted claims that may result in such proceedings, the Company's management evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company's financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be reasonably estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed. The Company has levied indirect taxes on sugarcane-based biodiesel sales by Amyris Brasil to customers in Brazil based on advice from external legal counsel. In the absence of definitive rulings from the Brazilian tax authorities on the appropriate indirect tax rate to be applied to such product sales, the actual indirect rate to be applied to such sales could differ from the rate we levied.
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In April 2017, a securities class action complaint was filed against Amyris and our CEO, John G. Melo, and CFO, Kathleen Valiasek, in the U.S. District Court for the Northern District of California. The complaint seeks unspecified damages on behalf of a purported class that would comprise all individuals who acquired our common stock between March 2, 2017 and April 17, 2017. The complaint alleges securities law violations based on statements made by the Company in its earnings press release issued on March 2, 2017 and Form 12b-25 filed with the SEC on April 3, 2017. The Company believes that the complaint lacks merit, and intends to defend itself vigorously.
The Company is subject to disputes and claims that arise or have arisen in the ordinary course of business and that have not resulted in legal proceedings or have not been fully adjudicated. Such matters that may arise in the ordinary course of business are subject to many uncertainties and outcomes are not predictable with reasonable assurance and therefore an estimate of all the reasonably possible losses cannot be determined at this time. Therefore, if one or more of these legal disputes or claims resulted in settlements or legal proceedings that were resolved against the Company for amounts in excess of management’s expectations, the Company’s condensed consolidated financial statements for the relevant reporting period could be materially adversely affected.
7. Joint Ventures and Noncontrolling Interests
Novvi LLC
In September 2011, the Company and Cosan US, Inc. (Cosan U.S.) formed Novvi LLC (or Novvi), a U.S. entity that was initially jointly owned by the Company and Cosan U.S. In March 2013, the Company and Cosan U.S. entered into agreements to (i) expand their base oils joint venture to also include additives and lubricants and (ii) operate their joint venture exclusively through Novvi. Specifically, the parties entered into an Amended and Restated Operating Agreement for Novvi (or the Novvi Operating Agreement), which sets forth the governance procedures for Novvi and the parties' initial contribution. The Company also entered into an IP License Agreement with Novvi (as amended, the Novvi IP License Agreement) under which the Company granted Novvi (i) an exclusive (subject to certain limited exceptions for the Company), worldwide, royalty-free license to develop, produce and commercialize base oils, additives, and lubricants derived from Biofene for use in automotive, commercial, and industrial lubricants markets, and (ii) a non-exclusive, royalty free license, subject to certain conditions, to manufacture Biofene solely for its own products. In addition, both the Company and Cosan U.S. granted Novvi certain rights of first refusal with respect to alternative base oil and additive technologies that may be acquired by the Company or Cosan U.S. during the term of the IP License Agreement. Under these agreements, through December 31, 2015 the Company and Cosan U.S. each owned 50% of Novvi and each party shared equally in any costs and any profits ultimately realized by the joint venture. Novvi is governed by a six member Board of Managers (or the Board of Managers). The Board of Managers appoints the officers of Novvi, who are responsible for carrying out the daily operating activities of Novvi as directed by the Board of Managers. The Novvi IP License Agreement has an initial term of 20 years from the date of the agreement, subject to standard early termination provisions such as uncured material breach or a party's insolvency. Under the terms of the Novvi Operating Agreement, Cosan U.S. was obligated to fund its initial 50% ownership share of Novvi in cash in the amount of $10.0 million and the Company was obligated to fund its initial 50% ownership share of Novvi through the granting of an intellectual property license to develop, produce and commercialize base oils, additives, and lubricants derived from Biofene for use in the automotive, commercial and industrial lubricants markets, which Cosan U.S. and Amyris agreed was valued at $10.0 million. In March 2013, the Company measured its initial contribution of intellectual property to Novvi at the Company's carrying value of the licenses granted under the Novvi IP License Agreement, which was zero.
In April 2014, the Company, via its forgiveness of existing receivables due from Novvi related to rent and other services performed by the Company, purchased additional membership units of Novvi for a purchase price of $0.2 million. Concurrently, Cosan U.S. purchased an equal amount of additional membership units of Novvi. Also in April 2014, the Company and Cosan U.S. each contributed $2.1 million in cash in exchange for receiving additional membership units in Novvi. Following such transactions, the Company and Cosan U.S. continued to each own 50% of Novvi's issued and outstanding membership units.
In September 2014, the Company and Cosan U.S. entered into a member senior loan agreement to grant Novvi a loan amounting to approximately $3.7 million. The loan is due on September 1, 2017 and bears interest at a rate of 0.36% per annum. Interest accrues daily and is due and payable in arrears on September 1, 2017. The Company and Cosan U.S. each agreed to provide 50% of the loan. The Company's share of approximately $1.8 million was disbursed in two installments. The first installment of $1.2 million was made in September 2014 and the second installment of $0.6 million was made in October 2014. In November 2014, the Company and Cosan U.S. entered into a second member senior loan agreement to grant Novvi a loan of approximately $1.9 million on the same terms as the loan issued in September 2014, except that the due date is November 10, 2017. The Company and Cosan U.S. each agreed to provide 50% of the loan. The Company disbursed its share of the loan (i.e., approximately $1.0 million) in November 2014. In May 2015, the Company and Cosan U.S. entered into a third member senior loan agreement to grant Novvi a loan of approximately $1.1 million on the same terms as the loan issued in September 2014, except that the due date is May 14, 2018. The Company and Cosan U.S. each agreed to provide 50% of the loan.
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In the fourth quarter of 2015, the Company and Cosan U.S. entered into four additional member senior loan agreements to grant Novvi an aggregate loan of approximately $1.6 million on the same terms as the loan issued in September 2014, except that the respective due dates are August 19, 2018, October 15, 2018, November 12, 2018 and December 17, 2018. The Company and Cosan U.S. each agreed to provide 50% of each of these four loans. In July 2016, the Company contributed all outstanding amounts owing by Novvi to the Company under the seven member senior loan agreements in exchange for receiving additional membership units in Novvi.
In February 2016, the Company purchased additional membership units of Novvi for an aggregate purchase price of approximately $0.6 million in the form of forgiveness of existing receivables due from Novvi related to rent and other services performed by the Company, and Cosan U.S. purchased an equal number of additional membership units in Novvi for approximately $0.6 million in cash. Following such transactions, each member continued to own 50% of Novvi's issued and outstanding membership units.
On July 19, 2016, American Refining Group, Inc. (ARG) agreed to make a capital contribution of up to $10.0 million in cash to Novvi, subject to certain conditions, in exchange for a one third ownership stake in Novvi. In connection with such investment, the Company agreed to contribute all outstanding amounts owed by Novvi to the Company under the seven existing member senior loan agreements between the Company and Novvi, as well as certain existing receivables due from Novvi to the Company related to rent and other services performed by the Company, in exchange for receiving additional membership units in Novvi. Likewise, Cosan U.S. contributed an equal amount to Novvi as the Company in exchange for receiving an equal amount of additional membership interests in Novvi. Following the ARG investment, assuming it is made in full, and the capital contributions of the Company and Cosan U.S., each of Novvi’s three members (i.e., ARG, the Company and Cosan U.S.) would own one third of Novvi’s issued and outstanding membership units and would each be represented by two members of the Board of Managers. In order to reflect the ARG investment in Novvi and related transactions, the Novvi Operating Agreement was amended and restated on July 19, 2016. In addition, the Novvi IP License Agreement was also amended on July 19, 2016. As of March 31, 2017, all of the $10.0 million of ARG's capital contribution to Novvi had been funded.
In November 2016, Chevron U.S.A. Inc. (Chevron) made a capital contribution of $1.0 million in cash to Novvi in exchange for 20,000 membership units, representing an approximately 3% ownership stake in Novvi, which reduced the ownership interests of the Company, Cosan U.S. and ARG pro rata. In connection with its investment in Novvi, for so long as Chevron or its affiliates owns any membership units in Novvi, Chevron shall have the right to purchase up to such additional membership units as would result in Chevron owning the greater of (i) 25% of the aggregate membership units then outstanding held by Chevron, the Company, Cosan U.S. and ARG (including their affiliates and successors-in-interest) following such purchase and (ii) the highest percentage of such membership units held by the Company, Cosan U.S. and ARG (including their affiliates and successors-in-interest) following such purchase. In addition, Chevron shall have the right to purchase up to its pro rata share (as determined by the then issued and outstanding membership units, excluding any such units beneficially owned by Novvi) of all additional membership units that Novvi may, from time to time, propose to sell or issue.
Additional funding requirements to finance the ongoing operations of Novvi are expected to happen through revolving credit or other loan facilities provided by unrelated parties (i.e., such as financial institutions); cash advances or other credit or loan facilities provided by Novvi’s members or their affiliates; or additional capital contributions by the existing Novvi members or new investors.
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The Company has identified Novvi as a VIE and determined that the power to direct activities which most significantly impact the economic success of the joint venture (i.e., continuing research and development, marketing, sales, distribution and manufacturing of Novvi products) are shared among the Company, Cosan U.S. and ARG. Accordingly, the Company is not the primary beneficiary and therefore accounts for its investment in Novvi under the equity method of accounting. The Company will continue to reassess its primary beneficiary analysis of Novvi if there are changes in events and circumstances impacting the power to direct activities that most significantly affect Novvi's economic success. Under the equity method, the Company's share of profits and losses and impairment charges on investments in affiliates (nil for both periods presented) are included in “Loss from investments in affiliates” in the condensed consolidated statements of operations. The carrying amount of the Company's equity investment in Novvi was zero as of each of March 31, 2017 and 2016.
Total Amyris BioSolutions B.V.
In November 2013, the Company and Total formed Total Amyris BioSolutions B.V. (TAB), a joint venture to produce and commercialize farnesene- or farnesane-based jet and diesel fuels. Prior to the restructuring of TAB in March 2016 as described below, the common equity of TAB was owned equally by the Company and Total, and TAB’s purpose was limited to executing the License Agreement dated December 2, 2013 between the Company, Total and TAB and maintaining such licenses under it, unless and until either (i) Total elected to go forward with either the full (diesel and jet fuel) TAB commercialization program (R&D Program) or the jet fuel component of the R&D Program (or a Go Decision), (ii) Total elected to not continue its participation in the R&D Program and TAB (or a No-Go Decision), or (iii) Total exercised any of its rights to buy out the Company’s interest in TAB. Following a Go Decision, the articles and shareholders’ agreement of TAB would be amended and restated to be consistent with the shareholders’ agreement contemplated by the Total Fuel Agreements (see Note 5, "Debt and Mezzanine Equity" and Note 8, "Significant Agreements").
In July 2015, the Company and Total entered into a Letter Agreement (or, as amended in February 2016, the TAB Letter Agreement) regarding the restructuring of the ownership and rights of TAB (Restructuring), pursuant to which the parties agreed to, among other things, enter into an Amended & Restated Jet Fuel License Agreement between the Company and TAB (Jet Fuel Agreement), a License Agreement regarding Diesel Fuel in the European Union (EU) between the Company and Total (EU Diesel Fuel Agreement), and an Amended and Restated Shareholders’ Agreement among the Company, Total and TAB, and file a Deed of Amendment of Articles of Association of TAB, all in order to reflect certain changes to the ownership structure of TAB and license grants and related rights pertaining to TAB.
On February 12, 2016, the Company and Total entered into an amendment to the TAB Letter Agreement, pursuant to which the parties agreed that, upon the closing of the Restructuring, Total would cancel R&D Notes in an aggregate principal amount of approximately $1.3 million, plus all paid-in-kind and accrued interest as of the closing of the Restructuring under all outstanding R&D Notes (including all such interest that was outstanding as of July 29, 2015), and a note in the principal amount of Euro 50,000, plus accrued interest, issued by the Company to Total in connection with the existing TAB capitalization, in exchange for an additional 25% ownership interest of TAB (giving Total an aggregate ownership stake of 75% of TAB and giving the Company an aggregate ownership stake of 25% of TAB). In connection therewith, Total would surrender to the Company the remaining R&D Notes and the Company would provide to Total a new R&D Note containing substantially similar terms and conditions to the outstanding R&D Notes other than it would be unsecured and its payment terms would be severed from TAB’s business performance, in the principal amount of $3.7 million (collectively, the “TAB Share Purchase”).
On March 21, 2016, the Company, Total and TAB closed the Restructuring and the TAB Share Purchase. See Note 5, “Debt and Mezzanine Equity” for further details of these transactions and the impact of these transaction on the Company’s condensed consolidated financial statements.
Under the Jet Fuel Agreement, (a) the Company granted exclusive (co-exclusive in Brazil), world-wide, royalty-free rights to TAB for the production and commercialization of farnesene- or farnesane-based jet fuel, (b) the Company granted TAB the option, until March 1, 2018, to purchase the Company’s Brazil jet fuel business at a price based on the fair value of the commercial assets and on the Company’s investment in other related assets, (c) the Company granted TAB the right to purchase farnesene or farnesane for its jet fuel business from us on a “most-favored” pricing basis and (d) all rights to farnesene- or farnesane-based diesel fuel the Company previously granted to TAB reverted back to the Company. As a result of the Jet Fuel Agreement, the Company generally no longer has an independent right to make or sell, without the approval of TAB, farnesene- or farnesane-based jet fuels outside of Brazil.
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Upon all farnesene-or farnesane-based diesel fuel rights reverting back to the Company, the Company granted to Total, pursuant to the EU Diesel Fuel Agreement, (a) an exclusive, royalty-free license to offer for sale and sell farnesene- or farnesane-based diesel fuel in the EU, (b) the non-exclusive right to make farnesene or farnesane anywhere in the world, but Total must (i) use such farnesene or farnesane to produce only diesel fuel to offer for sale or sell in the EU and (ii) pay the Company a to-be-negotiated, commercially reasonable, “most-favored” basis royalty and (c) the right to purchase farnesene or farnesane for its EU diesel fuel business from the Company on a “most-favored” pricing basis. As a result of the EU Diesel Fuel Agreement, the Company generally no longer has an independent right to make or sell, without the approval of Total, farnesene- or farnesane-based diesel fuels in the EU.
As a result of, and in order to reflect, the changes to the ownership structure of TAB described above, on March 21, 2016, (a) the Company, Total and TAB entered into an Amended and Restated Shareholders’ Agreement and filed a Deed of Amendment of Articles of Association of TAB and (b) the Company and Total terminated the Amended and Restated Master Framework Agreement, dated December 2, 2013 and amended on April 1, 2015, between the Company and Total.
As of March 31, 2017, the common equity of TAB was owned 25% by the Company and 75% by Total. TAB has a capitalization as of March 31, 2017 of €0.1 million (approximately US$0.1 million based on the exchange rate as of March 31, 2017). The Company has identified TAB as a VIE and determined that the Company is not the primary beneficiary and therefore accounts for its investment in TAB under the equity method of accounting. Under the equity method, the Company's share of profits and losses (nil for both periods presented) are included in “Loss from investment in affiliate” in the condensed consolidated statements of operations.
SMA Indústria Química S.A.
In April 2010, the Company established SMA Indústria Química (or SMA), a joint venture with São Martinho S.A. (or SMSA), to build a production facility in Brazil. SMA is located at the SMSA mill in Pradópolis, São Paulo state. The joint venture agreements establishing SMA had a 20 year initial term.
SMA was initially managed by a three member executive committee, of which the Company appointed two members, one of whom is the plant manager who is the most senior executive responsible for managing the construction and operation of the facility. SMA was initially governed by a four member board of directors, of which the Company and SMSA each appointed two members. The board of directors had certain protective rights which include final approval of the engineering designs and project work plan developed and recommended by the executive committee.
The joint venture agreements required the Company to fund the construction costs of the new facility and SMSA would reimburse the Company up to R$61.8 million (approximately US$19.5 million based on the exchange rate as of March 31, 2017) of the construction costs after SMA commences production. After commercialization, the Company would market and distribute Amyris renewable products produced by SMA and SMSA would sell feedstock and provide certain other services to SMA. The cost of the feedstock to SMA would be a price that is based on the average return that SMSA could receive from the production of its current products, sugar and ethanol. The Company would be required to purchase the output of SMA for the first four years at a price that guarantees the return of SMSA’s investment plus a fixed interest rate. After this four year period, the price would be set to guarantee a break-even price to SMA plus an agreed upon return.
Under the terms of the joint venture agreements, if the Company became controlled, directly or indirectly, by a competitor of SMSA, then SMSA would have the right to acquire the Company’s interest in SMA. If SMSA became controlled, directly or indirectly, by a competitor of the Company, then the Company would have the right to sell its interest in SMA to SMSA. In either case, the purchase price would be determined in accordance with the joint venture agreements, and the Company would continue to have the obligation to acquire products produced by SMA for the remainder of the term of the supply agreement then in effect even though the Company would no longer be involved in SMA’s management.
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The Company initially had a 50% ownership interest in SMA. The Company had identified SMA as a VIE pursuant to the accounting guidance for consolidating VIEs because the amount of total equity investment at risk was not sufficient to permit SMA to finance its activities without additional subordinated financial support, as well as because the related commercialization agreement provides a substantive minimum price guarantee. Under the terms of the joint venture agreement, the Company directed the design and construction activities, as well as production and distribution. In addition, the Company had the obligation to fund the design and construction activities until commercialization was achieved. Subsequent to the construction phase, both parties equally would fund SMA for the term of the joint venture. Based on those factors, the Company was determined to have the power to direct the activities that most significantly impact SMA’s economic performance and the obligation to absorb losses and the right to receive benefits. As of March 31, 2017, the Company indirectly owned 100% of the equity interest in SMA and as a wholly owned subsidiary its financial results are included in the Company’s condensed consolidated financial statements.
The Company completed a significant portion of the construction of the new facility in 2012. The Company suspended construction of the facility in 2013 in order to focus on completing and operating the Company's smaller production facility in Brotas, Brazil. In February 2014, the Company entered into an amendment to the joint venture agreement with SMSA which updated and documented certain preexisting business plan requirements related to the recommencement of construction at the joint venture operated plant and sets forth, among other things, (i) the extension of the deadline for the commencement of operations at the joint venture operated plant to no later than 18 months following the construction of the plant no later than March 31, 2017, and (ii) the extension of an option held by SMSA to build a second large-scale farnesene production facility to no later than December 31, 2018 with the commencement of operations at such second facility to occur no later than April 1, 2019. On July 1, 2015 SMSA filed a material fact document with CVM, the Brazilian securities regulator, that announced that certain contractual targets undertaken by the Company have not been achieved, which affects the feasibility of the project. Therefore, SMSA decided not to approve continuing construction of the plant for the joint venture with the Company and its Brazilian subsidiary Amyris Brasil. In July 2015, the Company announced that it was in discussions with SMSA regarding the continuation of the joint venture. In December 2015, the Company and SMSA entered into a Termination Agreement and a Share Purchase and Sale Agreement relating to the termination of the joint venture. Under the Termination Agreement, the parties agreed that the joint venture would be terminated effective upon the closing of a purchase by Amyris Brasil of SMSA’s shares of SMA. Under the Share Purchase and Sale Agreement, Amyris Brasil agreed to purchase, for R$50,000 (approximately US$15,780 based on the exchange rate as of March 31, 2017), 50,000 shares of SMA (representing all the outstanding shares of SMA held by SMSA), which purchase and sale was consummated on January 11, 2016. The Share Purchase and Sale Agreement also provided that the Company and Amyris Brasil would have 12 months following the closing of the share purchase to remove assets from SMSA’s site, and enter into an extension of the lease for such 12 month period for monthly rental payments of R$9,853 (approximately US$3,110 based on the exchange rate as of March 31, 2017). The Share Purchase and Sale Agreement also clarified that the Company and Amyris Brasil would not be required to demolish or remove the foundations of the plant at the SMSA site. On September 1, 2016, the parties entered into an addendum to the Share Purchase and Sale Agreement (and a corresponding amendment to the lease) which extended the deadline for the Company and Amyris Brasil to remove assets from SMSA’s site until December 31, 2017.
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Salisbury transaction
In January 2011, the Company entered into a production service agreement (Glycotech Agreement) with Glycotech, Inc. (or Glycotech), under which Glycotech provides process development and production services for the manufacturing of various Company products at its leased facility in Leland, North Carolina (Glycotech Facility). The Company products manufactured by Glycotech are owned and distributed by the Company. Pursuant to the terms of the Glycotech Agreement, the Company is required to pay the manufacturing and operating costs of the Glycotech facility, which is dedicated solely to the manufacture of Amyris products. The initial term of the Glycotech Agreement was for a two year period commencing on February 1, 2011 and the Glycotech Agreement renews automatically for successive one-year terms, unless terminated by the Company. Concurrent with the Glycotech Agreement, the Company also entered into a Right of First Refusal Agreement with Salisbury Partners, LLC (or Salisbury), the lessor of the facility and site leased by Glycotech (ROFR Agreement). Per conditions of the ROFR Agreement, Salisbury agreed not to sell the facility and site leased by Glycotech during the term of the Glycotech Agreement. In the event that Salisbury was presented with an offer to sell or decides to sell an adjacent parcel, the Company had the right of first refusal to acquire it.
On November 10, 2016, the Company, Glycotech and Salisbury entered into a Purchase and Sale Agreement (PSA) for the purchase and sale of the Glycotech Facility, the real property on which the Glycotech Facility is located and the fixtures, equipment, materials and supplies and other tangible assets located at or used in connection with the Facility (collectively, the Glycotech Assets). Pursuant to the PSA, on December 5, 2016, the Company purchased the Glycotech Assets from Glycotech and Salisbury for an aggregate purchase price of $4.35 million, of which $3.5 million was paid in the form of a purchase money promissory note in favor of Salisbury, as described in more detail in Note 5, “Debt.” In connection with the closing of the purchase and sale of the Glycotech Assets under the PSA, the Company, Glycotech and Salisbury terminated the current lease of the Glycotech Facility and the Glycotech Agreement and modified the ROFR Agreement such that the Company’s right of first refusal with respect to certain parcels of real property owned by Salisbury adjacent to the Glycotech Facility would be an appurtenant right running with the ownership of the real property on which the Glycotech Facility is located. The Glycotech Assets were subsequently transferred to the Company’s cosmetics joint venture with Nikko Chemicals Co., Ltd. and Nippon Surfactant Industries Co., Ltd. in connection with the formation of such joint venture, as described below under “Aprinnova JV.”
Aprinnova JV
On December 12, 2016, the Company, Nikko Chemicals Co., Ltd. an existing commercial partner of the Company, and Nippon Surfactant Industries Co., Ltd., an affiliate of Nikko (collectively, Nikko) entered into a Joint Venture Agreement (Aprinnova JV Agreement), pursuant to which the Company and Nikko agreed to form a joint venture under the name Neossance, LLC, a Delaware limited liability company (Aprinnova JV). Pursuant to the Aprinnova JV Agreement, the Company agreed to initially form the Aprinnova JV and contribute certain assets of the Company, including certain intellectual property and other commercial assets relating to its Neossance cosmetic ingredients business (Aprinnova JV Business), as well as the Glycotech Assets. The Company also agreed to provide the Aprinnova JV with exclusive (to the extent not already granted to a third party), royalty-free licenses to certain intellectual property of the Company necessary to make and sell products associated with the Aprinnova JV Business (Aprinnova JV Products), and, in the event the Company is unable to meet its supply commitments under the Aprinnova JV Supply Agreement (as defined below), or Nikko terminates the Aprinnova JV Supply Agreement due to a material breach or default thereunder by the Company, the Company would be required to grant to the Aprinnova JV and Nikko additional non-exclusive, royalty-free licenses to certain intellectual property rights of the Company related to the production of farnesene in connection with the manufacture, production and sale of the Aprinnova JV Products. In March 2017, the name of the Aprinnova JV was changed to Aprinnova, LLC.
At the closing of the formation of the Neossance JV, which occurred on December 19, 2016, Nikko purchased a 50% interest in the Aprinnova JV in exchange for the following payments to the Company: (i) an initial payment of $10 million and (ii) the profits, if any, distributed to Nikko in cash as members of the Aprinnova JV during the three year period following the date of the Joint Venture Agreement, up to a maximum of $10 million.
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Pursuant to the Joint Venture Agreement, the Company and Nikko agreed to make working capital loans to the Aprinnova JV in the amounts of $500,000 and $1,500,000, respectively. In addition, the Company agreed to execute, and cause Amyris Brasil to execute, a supply agreement (Aprinnova JV Supply Agreement) to supply farnesene to the Aprinnova JV, and further agreed to conduct its business in the Aprinnova JV Products through the Aprinnova JV, to purchase all of its requirements for the Aprinnova JV Products from the Neossance JV and to transfer all of its customers for the Aprinnova JV Products to the Aprinnova JV. In addition, the Company agreed to guarantee a maximum production cost for certain Aprinnova JV Products to be produced by the Aprinnova JV and to bear any cost of production above such guaranteed costs.
Under the Aprinnova JV Agreement, in the event of a merger, acquisition, sale or other similar reorganization, or a bankruptcy, dissolution, insolvency or other similar event, of the Company, on the one hand, or Nikko, on the other hand, the other member will have a right of first purchase with respect to such member’s interest in the Aprinnova JV, at the fair market value of such interest, in the case of a merger, acquisition, sale or other similar reorganization, and at the lower of the fair market value or book value of such interest, in the case of a bankruptcy, dissolution, insolvency or other similar event.
In connection with the formation of the Aprinnova JV, the members entered into a First Amended and Restated LLC Operating Agreement of the Aprinnova JV (Operating Agreement). Pursuant to the Operating Agreement, the Aprinnova JV will be managed by a Board of Directors, which shall initially consist of four directors, two of which will be appointed by the Company and two of which will be appointed by Nikko. In addition, Nikko will have the right to designate the Chief Executive Officer of the Aprinnova JV from among the directors and the Company will have the right to designate the Chief Financial Officer. Pursuant to the Joint Venture Agreement, Nikko designated John Melo, the President and CEO of the Company, to serve as the initial CEO of the Aprinnova JV for a period of one year and the Company designated Shizuo Ukaji, the President and CEO of Nikko, to serve as the initial CFO of the Aprinnova JV for a period of one year. The Company has determined that it controls the Aprinnova JV because of its significant ongoing involvement in operational decision making and its guarantee of production costs for squalane/hemisqualane.
Under the Operating Agreement, profits from the operations of the Aprinnova JV, if any, will be distributed as follows: (i) first, to the members in proportion to their respective unreturned capital contribution balances, until each member’s unreturned capital contribution balance equals zero and (ii) second, to the members in proportion to their respective interests. In addition, future capital contributions will be made from time to time as the members shall determine, in each case on an equal (50%/50%) basis between the Company, on the one hand, and Nikko, on the other hand, unless otherwise mutually agreed by the members.
In connection with the contribution of the Glycotech Assets by the Company to the Aprinnova JV, at the closing of the formation of the Aprinnova JV, Nikko made a loan to the Company in the principal amount of $3.9 million, and the Company in consideration therefor issued a promissory note to Nikko in an equal principal amount, as described in more detail in Note 5, “Debt.”
The table below reflects the carrying amount of the assets and liabilities of the consolidated VIE for which the Company is the primary beneficiary at March 31, 2017. The creditors of each consolidated VIE have recourse only to the assets of that VIE.
(In thousands) | March 31, 2017 | December 31, 2016 | ||||||
Assets | $ | 2,306 | $ | 2,277 | ||||
Liabilities | $ | 158 | $ | 135 |
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The change in noncontrolling interest for the three months ended March 31, 2017 and 2016, is summarized below (in thousands):
2017 | 2016 | |||||||
Balance at January 1 | $ | 937 | $ | 391 | ||||
Acquisition of noncontrolling interest | — | (277 | ) | |||||
Balance at March 31 | $ | 937 | $ | 114 |
8. Significant Agreements
Research and Development Activities
Firmenich Collaboration Agreement
In March 2013, the Company entered into a Collaboration Agreement (or, as amended, the Firmenich Collaboration Agreement) with Firmenich SA (or Firmenich), a global flavors and fragrances company, to establish a collaboration arrangement for the development and commercialization of multiple renewable flavors and fragrances compounds. Under the Firmenich Collaboration Agreement, except for rights granted under pre-existing collaboration relationships, the Company granted Firmenich exclusive access to specified Company intellectual property for the development and commercialization of flavors and fragrances compounds in exchange for research and development funding and a profit sharing arrangement. The Firmenich Collaboration Agreement superseded and expanded the November 2010 Master Collaboration and Joint Development Agreement between the Company and Firmenich. Unless sooner terminated in accordance with its terms, the Firmenich Collaboration Agreement has an initial term of 10 years and will automatically renew at the end of such term (and at the end of any extension) for an additional 3-year term unless and until a party provides the other party written notice, at least twelve months before the end of the then-current term, of its desire to terminate the agreement at the end of the then-current term.
The Firmenich Collaboration Agreement provided for annual, up-front funding to the Company by Firmenich of $10.0 million for each of the first three years of the collaboration. Payments of $10.0 million were received by the Company in each of March 2013, 2014 and 2015. The Firmenich Collaboration Agreement contemplates additional funding by Firmenich of up to $5.0 million under four potential milestone payments, as well as additional funding by the collaboration partner on a discretionary basis. Through March 2017, the Company had achieved the third performance milestone under the Firmenich Collaboration Agreement and recognized collaboration revenues of $1.1 million and $3.0 million for the three months ended March 31, 2017 and 2016, respectively. The Firmenich Collaboration Agreement does not impose any specific research and development obligations on either party after year six, but provides that if the parties mutually agree to perform research and development activities after year six, the parties will fund such activities equally.
Under the Firmenich Collaboration Agreement, the parties agreed to jointly select target compounds, subject to final approval of compound specifications by Firmenich. During the development phase, the Company would be required to provide labor, intellectual property and technology infrastructure and Firmenich would be required to contribute downstream polishing expertise and market access. The Firmenich Collaboration Agreement provides that the Company will own research and development and strain engineering intellectual property, and Firmenich will own blending and, if applicable, chemical conversion intellectual property. Under certain circumstances, such as the Company’s insolvency, Firmenich would gain expanded access to the Company’s intellectual property. The Firmenich Collaboration Agreement contemplates that, following development of flavors and fragrances compounds, the Company will manufacture the initial target molecules for the compounds and Firmenich will perform any required downstream polishing and distribution, sales and marketing. The Firmenich Collaboration Agreement provides that the parties will mutually agree on a supply price for each compound developed under the agreement and, subject to certain exceptions, will share product margins from sales of each such compound on a 70/30 basis (70% for Firmenich) until Firmenich receives $15.0 million more than the Company in the aggregate from such sales, after which time the parties will share the product margins 50/50. The Company also agreed to pay a one-time success bonus to Firmenich of up to $2.5 million if certain commercialization targets are met.
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In September 2014, the Company entered into a supply agreement with Firmenich for compounds developed under the Firmenich Collaboration Agreement. The Company recognized $1.2 million and $2.0 million of revenues from product sales under this supply agreement for the three months ended March 31, 2017 and 2016, respectively.
In December 2016, the Company and Firmenich entered into an amendment of the Firmenich Collaboration Agreement, pursuant to which the parties agreed to exclude certain compounds from the scope of the agreement and to permit the Company to engage in certain activities relating to such excluded compounds with a third party, in exchange for a ten percent royalty on net sales by the Company to such third party of products related to such excluded compounds, as well as (i) the transfer of certain technical materials relating to the Firmenich Collaboration Agreement, previously held in escrow, to Firmenich, (ii) a credit to Firmenich against products previously ordered from the Company under the parties’ existing supply agreement, (iii) a reduced price for the sale of additional products to Firmenich under such supply agreement, and (iv) training for the employees of Firmenich at the Company’s manufacturing plant located in Brotas, Brazil.
Kuraray Collaboration Agreement
In July 2011, the Company entered into a collaboration agreement with Kuraray Co., Ltd (or Kuraray), with an initial focus on using farnesene-based polymers to replace petroleum-derived additives in tires. In March 2014, the Company entered into the Second Amended and Restated Collaboration Agreement with Kuraray in order to extend the term of the original collaboration agreement between the Company and Kuraray for an additional two years and add additional fields and products to the scope of development. In consideration for the Company’s agreement to extend the term of the original collaboration agreement and add additional fields and products, Kuraray agreed to pay the Company $4.0 million in two equal installments of $2.0 million. The first installment was paid on April 30, 2014 and the second installment was due on April 30, 2015. In March 2015, the Company and Kuraray entered into the First Amendment to the Second Amended and Restated Collaboration Agreement to extend the term of the collaboration agreement until December 31, 2016 and to accelerate payment to the Company of the second installment of $2.0 million due from Kuraray under the Second Amended and Restated Collaboration Agreement to March 31, 2015. Subsequently, in November 2016 the Company and Kuraray entered into Amendment #3 to the Second Amended and Restated Collaboration Agreement to, among other things, extend the term of the collaboration agreement to December 31, 2018 as well as extend certain exclusive rights granted to Kuraray under the collaboration agreement. In connection with such extensions, Kuraray agreed to pay the Company $1.0 million in two equal installments of $500,000 on or before January 15, 2017 and January 15, 2018, respectively.
The Company recognized (i) collaboration revenues of $0.1 million and $0.4 million for the three months ended March 31, 2017 and 2016, respectively, and (ii) $1.6 million and zero of revenues from product sales for the three months ended March 31, 2017 and 2016, respectively, under this agreement.
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DARPA Technology Investment Agreement
In September 2015, the Company entered into a Technology Investment Agreement (or, as amended, the 2015 TIA) with The Defense Advanced Research Projects Agency (or DARPA), under which the Company, with the assistance of five specialized subcontractors, will work to create new research and development tools and technologies for strain engineering and scale-up activities. The program that is the subject of the 2015 TIA will be performed and funded on a milestone basis, where DARPA, upon the Company’s successful completion of each milestone event in the 2015 TIA, will pay the Company the amount set forth in the 2015 TIA corresponding to such milestone event. Under the 2015 TIA, the Company and its subcontractors could collectively receive DARPA funding of up to $35.0 million over the program’s 4-year term if all of the program’s milestones are achieved. In conjunction with DARPA’s funding, the Company and its subcontractors are obligated to collectively contribute approximately $15.5 million toward the program over its four year term (primarily by providing specified labor and/or purchasing certain equipment). The Company can elect to retain title to the patentable inventions it produces under the program, but DARPA receives certain data rights as well as a government purposes license to certain of such inventions. Either party may, upon written notice and subject to certain consultation obligations, terminate the 2015 TIA upon a reasonable determination that the program will not produce beneficial results commensurate with the expenditure of resources.
The Company recognized collaboration revenues of $1.0 million and $0.4 million under this agreement for the three months ended March 31, 2017 and 2016, respectively.
Nenter Supply Agreement
In April 2016, the Company entered into a Renewable Farnesene Supply Agreement (or the Nenter Supply Agreement) with Nenter & Co., Inc. (or Nenter) to establish the terms of a supply and value-share arrangement between the Company and Nenter related to farnesene. Under the Nenter Supply Agreement and related agreements, the Company has agreed to supply Nenter with farnesene at prices and on delivery terms set forth in the Nenter Supply Agreement and to provide Nenter with certain exclusive purchase rights, and Nenter has agreed to annual minimum purchase volume requirements and to provide the Company with quarterly value-share payments representing a portion of Nenter’s profit on the sale of products produced using farnesene purchased under the Nenter Supply Agreement. Unless earlier terminated in accordance with its terms, the Nenter Supply Agreement will remain in effect until December 31, 2020 and will automatically renew at the end of such initial term for an additional 5-year term unless a party provides the other party written notice, no later than July 1, 2020, of its desire to terminate the agreement at the end of the initial term.
The Company recognized $2.3 million of revenues from product sales under the Nenter Supply Agreement for the three months ended March 31, 2017.
Givaudan Agreements
In February 2011, the Company entered into an Amended and Restated Research Agreement with Givaudan International, SA (or Givaudan), a global flavors and fragrances company, relating to the development of a fragrance ingredient. In October 2015, the Company and Givaudan entered into a Farnesene Supply Agreement (or the Givaudan Supply Agreement) related to the supply of farnesene by the Company to Givaudan for use in the production of such ingredient, on such terms and at such prices set forth in the Givaudan Supply Agreement. The Company recognized $0.6 million and zero of revenues from product sales under the Givaudan Supply Agreement for the three months ended March 31, 2017 and 2016, respectively. The Givaudan Supply Agreement has an initial term of 5 years, which term shall be automatically extended for additional periods of 2 years each, up to a maximum of three such extensions, unless sooner terminated in accordance with its terms.
In June 2016, the Company entered into a Collaboration Agreement with Givaudan to establish a collaboration for the development and commercialization of certain renewable compounds for use in the fields of active cosmetics and flavors (or the Givuadan Collaboration Agreement). Under the Givaudan Collaboration Agreement, the Company agreed to use its labor, intellectual property and technology infrastructure to develop and commercialize certain compounds for Givaudan. In exchange, Givaudan agreed to pay to the Company $12.0 million in semi-annual installments of $3.0 million each, beginning on June 30, 2016. The Company received installments of $3.0 million on June 30, 2016 and December 29, 2016, and these amounts were recognized in deferred revenue as of such dates.
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Pursuant to the Givaudan Collaboration Agreement, the Company agreed to grant to Givaudan an exclusive license to the intellectual property that the Company generates under the agreement. Such license will include the rights to make, use and sell compounds in the active cosmetics and flavors fields, and is subject to certain ‘claw back’ rights by the Company if a compound is not commercialized by Givaudan during the term of the agreement. The Company also agreed to grant Givaudan non-exclusive rights to certain portions of the Company’s existing intellectual property in order to facilitate activities under the Givaudan Collaboration Agreement. Givaudan, on the other hand, agreed to grant the Company a non-exclusive license to the intellectual property that is generated under the Givaudan Collaboration Agreement. Such non-exclusive license will include the rights to make, use and sell compounds in all fields except active cosmetics and flavors.
Subject to certain rights granted to a third party, Givaudan will have the exclusive right to commercialize the compounds in the active cosmetics and flavors markets during the term of the agreement. Further, the Company has agreed that it will not assist any third party in the development or commercialization of other compounds for sale or use in the active cosmetics or flavors markets during the term of the Givaudan Collaboration Agreement. In addition, the Givaudan Collaboration Agreement contemplates that the Company will be the primary supplier of commercial quantities of the compounds to Givaudan pursuant to supply agreements to be mutually negotiated by the parties. Unless sooner terminated in accordance with its terms, the Givaudan Collaboration Agreement has an initial term of 2 years and, prior to the expiration of the initial term, the parties will meet and discuss in good faith the extension of the agreement beyond the initial term.
The Company recognized collaboration revenues of $1.5 million under the Givaudan Collaboration Agreement for the three months ended March 31, 2017.
Ginkgo Initial Strategic Partnership Agreement and Collaboration Agreement
In June 2016, the Company entered into an Initial Strategic Partnership Agreement (Initial Ginkgo Agreement) with Ginkgo Bioworks, Inc. (or Ginkgo), pursuant to which the Company licensed certain intellectual property to Ginkgo in exchange for a fee of $20.0 million, to be paid by Ginkgo to the Company in two installments, and a ten percent royalty on net revenue, including without limitation net sales, royalties, fees and any other amounts received by Ginkgo related directly to such license. The first installment of $15.0 million was received on July 25, 2016. The second installment, in the amount of $5.0 million, has not been received as of March 31, 2017.
In addition, pursuant to the Initial Ginkgo Agreement, (i) the Company and Ginkgo agreed to pursue the negotiation and execution of a detailed definitive partnership and license agreement setting forth the terms of a commercial partnership and collaboration arrangement between the parties (Ginkgo Collaboration), (ii) the Company agreed to issue to Ginkgo an option to purchase five million shares of the Company’s common stock at an exercise price of $0.50, exercisable for one year from the date of issuance, in connection with the execution of such definitive agreement for the Ginkgo Collaboration, (iii) the Company received a deferment of all scheduled principal repayments under the Senior Secured Loan Facility, the lender and administrative agent under which is an affiliate of Ginkgo, as well as a waiver of the Minimum Cash Covenant, through October 31, 2016 and (iv) in connection with the execution of the definitive agreement for the Ginkgo Collaboration, the parties would effect an amendment of the LSA to (x) extend the maturity date of all outstanding loans under the Senior Secured Loan Facility, (y) waive any required amortization payments under the Senior Secured Loan Facility until maturity and (z) eliminate the Minimum Cash Covenant under the Senior Secured Loan Facility. See Note 5, “Debt and Mezzanine Equity” for details regarding the amendments to the LSA entered into in connection with the Initial Ginkgo Agreement and Ginkgo Collaboration Agreement (as defined below).
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On August 6, 2016, the Company issued to Ginkgo a warrant to purchase five million shares of the Company’s common stock at an exercise price of $0.50 per share, exercisable for one year from the date of issuance. The warrant was issued prior to the execution of the definitive agreement for the Ginkgo Collaboration in connection with the transfer of certain information technology from Ginkgo to the Company.
On September 30, 2016, the Company and Ginkgo entered into a Collaboration Agreement (Ginkgo Collaboration Agreement) setting forth the terms of the Ginkgo Collaboration, under which the parties will collaborate to develop, manufacture and sell commercial products and will share in the value created thereby. The Ginkgo Collaboration Agreement provides that, subject to certain exceptions, all third party contracts for the development of chemical small molecule compounds whose manufacture is enabled by the use of microbial strains and fermentation technologies that are entered into by the Company or Ginkgo during the term of the Ginkgo Collaboration Agreement will be subject to the Ginkgo Collaboration and the approval of the other party (not to be unreasonably withheld). Responsibility for the engineering and small-scale process development of the newly developed products will be allocated between the parties on a project-by-project basis, and the Company will be principally responsible for the commercial scale-up and production of such products, with each party generally bearing their own respective costs and expenses relating to the Ginkgo Collaboration, including capital expenditures. Notwithstanding the foregoing, subject to the Company sourcing funding and breaking ground on a new production facility by March 30, 2017, Ginkgo will pay the Company a fee of $5.0 million on or before March 31, 2017. The $5.0 million fee has not been received as of March 31, 2017.
Under the Ginkgo Collaboration Agreement, subject to certain exceptions, including excluded or refused products and cost savings initiatives, the profit on the sale of products subject to the Ginkgo Collaboration Agreement as well as cost-sharing, milestone and “value-creation” payments associated with the development and production of such products will be shared equally between the parties. The parties also agreed to provide each other with a license and other rights to certain intellectual property necessary to support the development and manufacture of the products under the Ginkgo Collaboration, and also to provide each other with access to certain other intellectual property useful in connection with the activities to be undertaken under the Ginkgo Collaboration Agreement, subject to certain carve-outs.
The initial term of the Ginkgo Collaboration Agreement is three years, and will automatically renew for successive one-year terms unless either party provides written notice of termination not less than 90 days prior to the expiration of the then-current term. In addition, the Ginkgo Collaboration Agreement provides that the parties will evaluate the performance of the Ginkgo Collaboration as of the 18-month anniversary of the Ginkgo Collaboration Agreement, and if either party has been repeatedly unable to perform or meet its commitments under the Ginkgo Collaboration Agreement, the other party will have the right to terminate the Ginkgo Collaboration Agreement on 30 days written notice.
The Company recognized zero of collaboration revenue under the Initial Ginkgo Agreement and the Ginkgo Collaboration Agreement for the three months ended March 31, 2017. As of March 31, 2017, $3.0 million is payable by the Company to Ginkgo under the Ginkgo Collaboration Agreement for its share of collaboration payments and license .fees (December 31, 2016, $1.6 million).
Intellectual Property License and Strain Access Agreement with Blue California
In December 2016, the Company entered into an Intellectual Property License and Strain Access Agreement with Phyto Tech Corp. (d/b/a Blue California), a food ingredients and nutraceuticals company. Pursuant to the agreement, the Company granted Blue California a royalty-free, non-exclusive, worldwide, license to access and use certain Company intellectual property for the purpose of research and development, scale-up, manufacturing and commercialization activities. In exchange for such license, Blue California agreed to pay the Company a fee of $10 million in cash. On March 31, 2017, the Company entered into a subsequent agreement with Blue California whereby, among other things, Blue California’s affiliates will provide the Company with access to their fermentation manufacturing capacity in China and the Company will transfer additional intellectual property to Blue California for use in collaboration activities between the parties. See Note 18 “Subsequent Events” for further details.
Financing Agreements
At Market Issuance Sales Agreement
On March 8, 2016, the Company entered into an At Market Issuance Sales Agreement (ATM Sales Agreement) with FBR Capital Markets & Co. and MLV & Co. LLC (Agents) under which the Company may issue and sell shares of its common stock having an aggregate offering price of up to $50.0 million (ATM Shares) from time to time through the Agents, acting as its sales agents, under the Company’s Registration Statement on Form S-3 (File No. 333-203216), effective April 15, 2015. Sales of the ATM Shares through the Agents, if any, will be made by any method that is deemed an “at the market offering” as defined in Rule 415 under the Securities Act, including by means of ordinary brokers’ transactions at market prices, in block transactions, or as otherwise agreed by the Company and the Agents. Each time that the Company wishes to issue and sell ATM Shares under the ATM Sales Agreement, the Company will notify one of the Agents of the number of ATM Shares to be issued, the dates on which such sales are anticipated to be made, any minimum price below which sales may not be made and other sales parameters as the Company deems appropriate. The Company will pay the designated Agent a commission rate of up to 3.0% of the gross proceeds from the sale of any ATM Shares sold through such Agent as agent under the ATM Sales Agreement. The ATM Sales Agreement contains customary terms, provisions, representations and warranties. The ATM Sales Agreement includes no commitment by other parties to purchase shares the Company offers for sale.
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During the three months ended March 31, 2017, the Company did not sell any shares of common stock under the ATM Sales Agreement. As of the date hereof, $50.0 million remained available for future sales under the ATM Sales Agreement.
LSA Amendment
See Note 5, “Debt and Mezzanine Equity” for details regarding the Fifth LSA Amendment.
Fidelity Notes Exchange
See Note 5, “Debt and Mezzanine Equity” for details regarding the Fidelity Exchange.
Amendment to March 2016 R&D Note
See Note 5, “Debt and Mezzanine Equity” for details regarding the March 2016 R&D Note Amendment.
9. Goodwill and Intangible Assets
The following table presents the components of the Company's intangible assets (in thousands):
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||
Useful Life in Years | Gross Carrying Amount | Accumulated Amortization/ Impairment | Net Carrying Value | Gross Carrying Amount | Accumulated Amortization/ Impairment | Net Carrying Value | ||||||||||||||||||||
In-process research and development | Indefinite | $ | 8,560 | $ | (8,560 | ) | $ | — | $ | 8,560 | $ | (8,560 | ) | $ | — | |||||||||||
Acquired licenses and permits | 2 | 772 | (772 | ) | — | 772 | (772 | ) | — | |||||||||||||||||
Goodwill | Indefinite | 560 | — | 560 | 560 | — | 560 | |||||||||||||||||||
$ | 9,892 | $ | (9,332 | ) | $ | 560 | $ | 9,892 | $ | (9,332 | ) | $ | 560 |
The in-process research and development (IPR&D) of $8.6 million was acquired through the acquisition of Draths in October 2011 and was treated as indefinite lived intangible assets pending completion or abandonment of the projects to which the IPR&D related. The IPR&D was fully impaired in 2015.
The Company has a single reportable segment (see Note 15, “Reporting Segments” for further details). Consequently, all of the Company's goodwill is attributable to that single reportable segment.
10. Stockholders’ Deficit
Unexercised Common Stock Warrants
As of March 31, 2017 and 2016, the Company had 14,663,411 and 7,328,069, respectively, of unexercised common stock warrants with exercise prices ranging from $0.01 to $10.67 per warrant and a weighted average remaining maturity of 5.1 years.
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11. Stock-Based Compensation
The Company’s stock option activity and related information for the three months ended March 31, 2017 was as follows:
Number Outstanding | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life (Years) | Aggregate Intrinsic Value | |||||||||||||
(in thousands) | ||||||||||||||||
Outstanding - December 31, 2016 | 13,487,685 | $ | 3.63 | 6.70 | $ | 443 | ||||||||||
Options granted | 726,000 | $ | 0.58 | — | — | |||||||||||
Options exercised | (500 | ) | $ | 0.28 | — | — | ||||||||||
Options cancelled | (695,912 | ) | $ | 1.82 | — | — | ||||||||||
Outstanding - March 31, 2017 | 13,517,273 | $ | 3.55 | 6.83 | $ | 44 | ||||||||||
Vested and expected to vest after March 31, 2017 | 12,347,493 | $ | 3.79 | 6.63 | $ | 38 | ||||||||||
Exercisable at March 31, 2017 | 7,478,686 | $ | 5.42 | 5.28 | $ | 1 |
The aggregate intrinsic value of options exercised under all option plans was zero for each of the three months ended March 31, 2017 and 2016, determined as of the date of option exercise.
The Company’s restricted stock units (or "RSUs") and restricted stock activity and related information for the three months ended March 31, 2017 was as follows:
RSUs | Weighted- Average Grant- Date Fair Value | Weighted Average Remaining Contractual Life (Years) | ||||||||||
Outstanding - December 31, 2016 | 6,997,084 | $ | 1.18 | 1.44 | ||||||||
Awarded | 825,980 | $ | 0.59 | — | ||||||||
Vested | (348,699 | ) | $ | 1.28 | — | |||||||
Forfeited | (250,329 | ) | $ | 1.03 | — | |||||||
Outstanding - March 31, 2017 | 7,224,036 | $ | 1.11 | 1.39 | ||||||||
Expected to vest after March 31, 2017 | 5,735,089 | $ | 1.15 | 1.17 |
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The following table summarizes information about stock options outstanding as of March 31, 2017:
Options Outstanding | Options Exercisable | |||||||||||||||||||||
Exercise Price | Number of Options | Weighted- Average Remaining Contractual Life (Years) | Weighted-Average Exercise Price | Number of Options | Weighted-Average Exercise Price | |||||||||||||||||
$0.28 | — | $0.58 | 795,734 | 9.48 | $ | 0.49 | 2,234 | $ | 0.28 | |||||||||||||
$0.59 | — | $0.59 | 2,224,375 | 9.13 | $ | 0.59 | — | $ | — | |||||||||||||
$0.69 | — | $1.63 | 1,491,082 | 8.67 | $ | 1.30 | 361,067 | $ | 1.60 | |||||||||||||
$1.64 | — | $1.96 | 2,192,975 | 7.51 | $ | 1.84 | 1,026,492 | $ | 1.83 | |||||||||||||
$1.98 | — | $2.87 | 1,780,408 | 6.07 | $ | 2.69 | 1,579,154 | $ | 2.73 | |||||||||||||
$2.96 | — | $3.44 | 688,795 | 6.40 | $ | 3.15 | 597,154 | $ | 3.13 | |||||||||||||
$3.51 | — | $3.51 | 1,447,979 | 6.90 | $ | 3.51 | 1,057,049 | $ | 3.51 | |||||||||||||
$3.55 | — | $4.31 | 1,723,976 | 3.31 | $ | 3.97 | 1,683,443 | $ | 3.98 | |||||||||||||
$4.35 | — | $26.84 | 1,111,949 | 3.52 | $ | 17.71 | 1,111,949 | $ | 17.71 | |||||||||||||
$30.17 | — | $30.17 | 60,000 | 3.96 | $ | 30.17 | 60,000 | $ | 30.17 | |||||||||||||
$0.28 | — | $30.17 | 13,517,273 | 6.83 | $ | 3.55 | 7,478,686 | $ | 5.42 |
Stock-Based Compensation Expense
Stock-based compensation expense related to options and restricted stock units granted to employees and nonemployees was allocated to research and development expense and sales, general and administrative expense as follows (in thousands):
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Research and development | $ | 484 | $ | 491 | ||||
Sales, general and administrative | 1,162 | 1,560 | ||||||
Total stock-based compensation expense | $ | 1,646 | $ | 2,051 |
As of March 31, 2017, there was unrecognized compensation expense of $3.7 million and $4.7 million related to stock options and RSUs, respectively, the Company expects to recognize this expense over a weighted average period of 2.71 years and 2.58 years, respectively.
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Stock-based compensation expense for RSUs is measured based on the closing fair market value of the Company's common stock on the date of grant. Stock-based compensation expense for stock options and employee stock purchase plan rights is estimated at the grant date and offering date, respectively, based on their fair-value using the Black-Scholes option pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of employee stock options was estimated using the following weighted-average assumptions:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Expected dividend yield | — | % | — | % | ||||
Risk-free interest rate | 2.1 | % | 1.4 | % | ||||
Expected term (in years) | 6.15 | 6.23 | ||||||
Expected volatility | 80 | % | 73 | % |
Expected Dividend Yield—The Company has never paid dividends and does not expect to pay dividends.
Risk-Free Interest Rate—The risk-free interest rate was based on the market yield currently available on United States Treasury securities with maturities approximately equal to the option’s expected term.
Expected Term—Expected term represents the period that the Company’s stock-based awards are expected to be outstanding. The Company’s assumptions about the expected term have been based on that of companies that have similar industry, life cycle, revenue, and market capitalization and the historical data on employee exercises.
Expected Volatility—The expected volatility is based on a combination of historical volatility for the Company's stock and the historical stock volatilities of several of the Company’s publicly listed comparable companies over a period equal to the expected terms of the options, as the Company does not have a long trading history.
Forfeiture Rate—The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from that estimated by the Company, the Company may be required to record adjustments to stock-based compensation expense in future periods.
Each of the inputs discussed above is subjective and generally requires significant management and director judgment.
12. Employee Benefit Plan
The Company established a 401(k) Plan to provide tax deferred salary deductions for all eligible employees. Participants may make voluntary contributions to the 401(k) Plan up to 90% of their eligible compensation, limited by certain Internal Revenue Service (or the "IRS") restrictions. Effective January 2014, the Company implemented a discretionary employer match plan whereby the Company will match employee contributions up to the IRS limit or 90% of compensation, with a minimum one year of service required for vesting. The total matching amount for each of the three months ended March 31, 2017 and 2016 was $0.1 million.
13. Related Party Transactions
Related Party Financings
See Note 5, “Debt and Mezzanine Equity” for a description of the February 2016 Private Placement transaction with Foris Ventures, LLC (or Foris), Naxyris S.A. and Biolding Investment SA, each a related party of the Company, the March 2016 R&D Note transaction with Total and the June 2016 and October 2016 Private Placement transactions with Foris. In addition, see Note 18, “Subsequent Events” for related party financings and related transactions subsequent to March 31, 2017.
As of March 31, 2017 and December 31, 2016, convertible notes and loan with related parties were outstanding in an aggregate amount of $73.9 million and $72.4 million, respectively, net of debt and issuance costs of $6.0 million and $6.7 million, respectively.
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The fair value of the derivative liability related to the related party convertible notes as of March 31, 2017 and December 31, 2016 was $1.4 million and $0.8 million, respectively. The Company recognized a gain from change in fair value of the derivative instruments of $1.1 million and $4.5 million for the three months ended March 31, 2017 and 2016, respectively, (see Note 3, "Fair Value of Financial Instruments" for further details).
Related Party Revenues
The Company recognized no related party revenues from product sales to Total for each of the three months ended March 31, 2017 and 2016. Related party accounts receivable from Total as of March 31, 2017 and December 31, 2016, were $0.3 million and $0.8 million, respectively. In addition, in October 2016 the Company entered into an assistance agreement with the United States Department of Energy, in which Total and Renmatix participate as subcontractors. There was no amount accrued by or due to Total or Renmatix for the three months ended March 31, 2017 and for the year ended December 31, 2016.
Loans to Related Parties
See Note 7, "Joint Ventures and Noncontrolling Interest" for details of the Company's transactions with its affiliate, Novvi LLC.
Joint Venture with Total
In November 2013, the Company and Total formed TAB as discussed above under Note 7, "Joint Ventures and Noncontrolling Interest."
Pilot Plant Agreements
In May 2014, the Company received the final consents necessary for the Pilot Plant Services Agreement (Pilot Plant Services Agreement) and a Sublease Agreement (Sublease Agreement), each dated as of April 4, 2014 (collectively the Pilot Plant Agreements), between the Company and Total. The Pilot Plant Agreements generally have a term of five years. Under the terms of the Pilot Plant Services Agreement, the Company agreed to provide certain fermentation and downstream separations scale-up services and training to Total and receives an aggregate annual fee payable by Total for all services in the amount of up to approximately $0.9 million per annum. In July 2015, Total and the Company entered into Amendment #1 (Pilot Plant Agreement Amendment) to the Pilot Plant Services Agreement whereby the Company agreed to waive a portion of these fees, up to approximately $2.0 million, over the term of the Pilot Plant Services Agreement in connection with the restructuring of TAB discussed above. Prior to February 28, 2017, Total charged its secondees to the Company for research and development services pursuant to an Amended and Restated Secondment Agreement, dated August 1, 2012, between the Company and Total. On February 28, 2017, the Company and Total entered into an amendment to the Amended and Restated Secondment Agreement, which provided that Total would not charge Amyris for the cost of Total’s secondees on or after May 1, 2016, other than overhead charges. Total charges its secondees to the Company for research and development services. The payable to Total under these arrangements was $1.7 million and $2.2 million as of March 31, 2017 and December 31, 2016, respectively.
As of March 31, 2017, the Company had received $1.7 million in cash under the Pilot Plant Agreements from Total. In connection with these arrangements, sublease payments and service fees of $0.0 million and $0.2 million was offset against cost and operating expenses for the three months ended March 31, 2017 and 2016, respectively.
14. Income Taxes
The Company recorded a benefit from income taxes of $0.04 million for the three months ended March 31, 2017 and a provision for income taxes of $0.1 million for the three months ended March 31, 2016. The provision for income taxes for the three months ended March 31, 2017 and 2016 consisted of an accrual of Brazilian withholding tax on intercompany interest on intercompany loans. Other than the above mentioned income tax amounts, no additional provision for income taxes has been made, net of the valuation allowance, due to cumulative losses since the commencement of operations.
On December 15, 2011, the IRS completed its audit of the Company for tax year 2008 which concluded that there were no adjustments resulting from the audit. While the statutes are closed for tax year 2008, the US federal tax carryforwards (net operating losses and tax credits) may be adjusted by the IRS in the year in which the carryforward is utilized.
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15. Reportable Segments
The chief operating decision maker for the Company is the chief executive officer. The chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of allocating resources and evaluating financial performance. The Company has one business activity comprised of research and development and sales of fuels and farnesene-derived products and there are no segment managers who are held accountable for operations, operating results or plans for levels or components below the consolidated unit level. Accordingly, the Company has determined that it has a single reportable segment and operating segment structure.
Revenues by geography are based on the location of the customer. The following tables set forth revenue and long-lived assets by geographic area (in thousands):
Revenues
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Europe | $ | 5,376 | $ | 4,372 | ||||
United States | 3,096 | 3,462 | ||||||
Asia | 4,433 | 590 | ||||||
Brazil | 19 | 375 | ||||||
Other | 56 | 12 | ||||||
Total | $ | 12,980 | $ | 8,811 |
Long-Lived Assets (Property, Plant and Equipment)
March 31, 2017 | December 31, 2016 | |||||||
Brazil | $ | 39,137 | $ | 44,153 | ||||
United States | 13,683 | 9,342 | ||||||
Europe | 225 | 240 | ||||||
Total | $ | 53,045 | $ | 53,735 |
16. Comprehensive Loss
Comprehensive loss represents all changes in stockholders’ deficit except those resulting from investments or contributions by stockholders. The Company’s foreign currency translation adjustments represent the components of comprehensive loss excluded from the Company’s net loss and have been disclosed in the condensed consolidated statements of comprehensive loss for the periods presented.
The components of accumulated other comprehensive loss are as follows (in thousands):
March 31, 2017 | December 31, 2016 | |||||||
Foreign currency translation adjustment, net of tax | $ | (40,581 | ) | $ | (40,904 | ) | ||
Total accumulated other comprehensive loss | $ | (40,581 | ) | $ | (40,904 | ) |
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17. Net Loss Attributable to Common Stockholders and Net Loss per Share
The Company computes net loss per share in accordance with ASC 260, “Earnings per Share.” Basic net loss per share of common stock is computed by dividing the Company’s net loss attributable to Amyris, Inc. common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share of common stock is computed by giving effect to all potentially dilutive securities, including stock options, restricted stock units, common stock warrants and convertible promissory notes using the treasury stock method or the as converted method, as applicable. For the three months ended March 31, 2017, basic net loss per share was the same as diluted net loss per share because the inclusion of all potentially dilutive securities outstanding was anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss was the same for that period.
The following table presents the calculation of basic and diluted net loss per share of common stock attributable to Amyris, Inc. common stockholders (in thousands, except share and per share amounts):
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Numerator: | ||||||||
Net loss attributable to Amyris, Inc. common stockholders | $ | (37,371 | ) | $ | (15,308 | ) | ||
Interest on convertible debt | — | 1,817 | ||||||
Accretion of debt discount | — | 1,633 | ||||||
Gain from change in fair value of derivative instruments | — | (18,415 | ) | |||||
Net loss attributable to Amyris, Inc. common stockholders after assumed conversion | $ | (37,371 | ) | $ | (30,273 | ) | ||
Denominator: | ||||||||
Weighted average shares of common stock outstanding for basic EPS | 290,039,216 | 207,199,563 | ||||||
Basic and diluted loss per share | $ | (0.13 | ) | $ | (0.07 | ) | ||
Weighted average shares of common stock outstanding | 290,039,216 | 207,199,563 | ||||||
Effect of dilutive securities: | ||||||||
Convertible promissory notes | — | 53,732,522 | ||||||
Weighted common stock equivalents | — | 53,732,522 | ||||||
Diluted weighted-average common shares | 290,039,216 | 260,932,085 | ||||||
Diluted loss per share | $ | (0.13 | ) | $ | (0.12 | ) |
The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share of common stock because including them would have been anti-dilutive:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Period-end stock options to purchase common stock | 13,517,273 | 12,159,154 | ||||||
Convertible promissory notes(1) | 72,826,108 | 99,648,739 | ||||||
Period-end common stock warrants | 5,021,087 | 5,885,762 | ||||||
Period-end restricted stock units | 7,224,036 | 5,175,430 | ||||||
Total | 98,588,504 | 122,869,085 |
______________
(1) | The potentially dilutive effect of convertible promissory notes was computed based on conversion ratios in effect as of the respective period end dates. A portion of the convertible promissory notes issued carries a provision for a reduction in conversion price under certain circumstances, which could potentially increase the dilutive shares outstanding. Another portion of the convertible promissory notes issued carries a provision for an increase in the conversion rate under certain circumstances, which could also potentially increase the dilutive shares outstanding. |
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18. Subsequent Events
Ginkgo Collaboration Note
On April 13, 2017, the Company issued a secured promissory note to Ginkgo, in the principal amount of $3 million dollars (or the Ginkgo Collaboration Note), in satisfaction of certain payments owed by the Company to Ginkgo under the Ginkgo Collaboration Agreement (see Note 8, “Significant Agreements” above for details regarding the Ginkgo Collaboration Agreement). The Ginkgo Collaboration Note is collateralized by a second priority lien on the assets securing the Company’s obligations under the Senior Secured Loan Facility, and is subordinate to the Company’s obligations under the Senior Secured Loan Facility pursuant to a Subordination Agreement, dated as of October 27, 2016 and ratified on April 13, 2017, by and among the Company, Ginkgo and Stegodon. Interest will accrue on the Ginkgo Collaboration Note from and including April 13, 2017 at a rate of 13.50% per annum and is payable in full on May 15, 2017, the maturity date of the Ginkgo Collaboration Note, unless the Ginkgo Collaboration Note is prepaid in accordance with their terms prior to such date. The Ginkgo Collaboration Note contains customary terms, provisions, representations and warranties, including certain events of default after which the Ginkgo Collaboration Note may be due and payable immediately, as set forth in the Ginkgo Collaboration Note.
April 2017 Convertible Note Offering
On April 13, 2017, the Company entered into a securities purchase agreement (or the April 2017 Purchase Agreement) between the Company and a private investor (or the Purchaser) relating to the sale of up to $15.0 million aggregate principal amount of convertible notes (or the April 2017 Convertible Notes) that are convertible into shares of the Company’s common stock at an initial conversion price of $1.90 per share. The April 2017 Purchase Agreement includes customary representations, warranties and covenants by the Company. The April 2017 Purchase Agreement also provides the Purchaser with a right of first refusal with respect to any variable rate transaction, subject to certain exceptions, on the same terms and conditions as are offered to a third-party purchaser for as long as the Purchaser holds any April 2017 Convertible Notes or shares of common stock underlying the April 2017 Convertible Notes.
The April 2017 Convertible Notes will be issued and sold in two separate closings. The initial closing occurred on April 17, 2017. At the initial closing, the Company issued and sold an April 2017 Convertible Note in a principal amount of $7.0 million to the Purchaser. If the Purchaser so elects at its option and in its sole discretion, the second closing will occur on or prior to December 31, 2017, subject to the satisfaction of certain closing conditions, including certain equity conditions. At the second closing, the Company will issue and sell an April 2017 Convertible Note in a principal amount of $8.0 million to the Purchaser.
The April 2017 Convertible Notes are general unsecured obligations of the Company. Unless earlier converted or redeemed, the April 2017 Convertible Notes will mature on or about the 18-month anniversary of their respective issuance, subject to the rights of the holders to extend the maturity date in certain circumstances.
The April 2017 Convertible Notes are payable in monthly installments, in either cash at 118% of such installment amount or, at the Company’s option, subject to the satisfaction of certain equity conditions, shares of common stock at a discount to the then-current market price, subject to a price floor. In addition, in the event that the Company elects to pay all or any portion of a monthly installment in common stock, the holders of the April 2017 Convertible Notes shall have the right to require that the Company repay in common stock an additional amount of the April 2017 Convertible Notes not to exceed 50% of the cumulative sum of the aggregate amounts by which the dollar-weighted trading volume of the common stock for all trading days during the applicable installment period exceeds $200,000.
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The April 2017 Convertible Notes contain customary terms and covenants, including certain events of default after which the holders may require the Company to redeem all or any portion of their April 2017 Convertible Notes in cash at a price equal to the greater of (i) 118% of the amount being redeemed and (ii) the intrinsic value of the shares of common stock issuable upon an installment payment of the amount being redeemed in shares.
In the event of a Fundamental Transaction (as defined in the April 2017 Convertible Notes), holders of the April 2017 Convertible Notes may require the Company to redeem all or any portion of their April 2017 Convertible Notes at a price equal to the greater of (i) 118% of the amount being redeemed and (ii) the intrinsic value of the shares of common stock issuable upon an installment payment of the amount being redeemed in shares.
The Company has the right to redeem the April 2017 Convertible Notes for cash, in whole, at any time, or in part, from time to time, at a redemption price equal to 118% of the principal amount of the April 2017 Convertible Notes to be redeemed.
The April 2017 Convertible Notes will be convertible from time to time, at the election of the holders, into shares of common stock at an initial conversion price of $1.90 per share. The conversion price will be subject to adjustment in the event of any stock split, reverse stock split, recapitalization, reorganization or similar transaction.
Notwithstanding the foregoing, the holders will not have the right to convert any portion of an April 2017 Convertible Note, and the Company will not have the option to pay any amount in shares of common stock, if (a) the holder, together with its affiliates, would beneficially own in excess of 4.99% (or such other percentage as determined by the holder and notified to the Company in writing, not to exceed 9.99%, provided that any increase of such percentage will not be effective until 61 days after notice thereof) of the number of shares of common stock outstanding immediately after giving effect to such conversion or payment, as applicable, or (b) the aggregate number of shares issued with respect to the April 2017 Convertible Notes (and any other transaction aggregated for such purpose) after giving effect to such conversion or payment, as applicable, would exceed 54,676,770 shares of common stock (or the Exchange Cap). In the event that the Company is prohibited from issuing any shares of common stock under the April 2017 Convertible Notes as a result of the Exchange Cap, the Company will pay cash in lieu of any shares that would otherwise be deliverable in excess of the Exchange Cap. In addition, pursuant to the April 2017 Purchase Agreement, in the event that the aggregate number of shares of common stock issuable with respect to the April 2017 Convertible Notes (and any other transaction aggregated for such purpose) would equal or exceed 49,233,710 of shares of common stock, the Company will be required to take all actions necessary for, and use its reasonable best efforts to solicit and obtain, stockholder approval for the issuance of shares of common stock in excess of the Exchange Cap.
For as long as they hold April 2017 Convertible Notes or shares of common stock issued under the April 2017 Convertible Notes, the holders may not sell any shares of common stock at a price less than $1.05 per share; provided, that with respect to any shares of Common Stock issued under the April 2017 Convertible Notes at a price less than $1.00, the holders may sell such shares at a price not less than the price floor applicable to the installment period with respect to which such shares were issued.
Amendment to Convertible Notes
On May 2, 2017, in connection with the Purchaser agreeing to extend the time period for certain obligations of the Company under the April 2017 Purchase Agreement, the Company and the Purchaser entered into an Amendment Agreement (or the Amendment Agreement) with respect to the December 2016 Purchase Agreement, the April 2017 Purchase Agreement, the December 2016 Convertible Note and the April 2017 Convertible Notes (or the Amended Notes). Pursuant to the Amendment Agreement, the Company and the Purchaser agreed, among other things, to amend the December 2016 Convertible Note and the April 2017 Convertible Notes to (i) reduce the price at which the Company may pay monthly installments under the Amended Notes in shares of common stock from a 10% discount to a market-based price to a 20% discount to a market-based price and (ii) reduce the price floor related to any such payment from 80% of, in the case of the December 2016 Convertible Note, the volume-weighted average price per share (VWAP) of the Company’s common stock on the trading day immediately preceding the applicable installment date and, in the case of the April 2017 Convertible Notes, the arithmetic average of the VWAP of the Company’s common stock for the five trading days immediately preceding the applicable installment date, to 70% of such amount. The closing of the Amendment Agreement and the issuance of the Amended Notes is subject to customary closing conditions.
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Blue California
In April 2017, the Company announced that it had amended the terms of its December 2016 Intellectual Property License and Strain Access Agreement with Blue California to take a minority equity stake in SweeGen, Inc. (or SweeGen), one of Blue California’s affiliates focused on the sweetener market, in lieu of a $10 million cash payment for intellectual property transferred to Blue California in December 2016. On April 21, 2017, Amyris received 850,115 shares of SweeGen common stock in satisfaction of Blue California’s payment obligation under the Intellectual Property License and Strain Access Agreement.
May 2017 Financing Transactions
On May 8, 2017, the Company entered into a Securities Purchase Agreement (or the May 2017 Purchase Agreement) with certain investors for the issuance and sale of 22,140 shares of the Company’s Series A 17.38% Convertible Preferred Stock, par value $0.0001 per share (or the Series A Preferred Stock), 65,203.8756 shares of the Company’s Series B 17.38% Convertible Preferred Stock, par value $0.0001 per share (or the Series A Preferred Stock and, together with the Series A Preferred Stock, the Preferred Stock), which Preferred Stock is convertible into the Company’s common stock, par value $0.0001 per share as described below, and Cash Warrants (as defined below) to purchase an aggregate of 207,954,414 shares of Common Stock and Dilution Warrants (as defined below) (or, collectively, the May 2017 Warrants, and the shares of common stock issuable upon exercise of the Warrants, the May 2017 Warrant Shares) (or the May 2017 Offering).
On May 11, 2017, the Company and the investors closed the issuance and sale of the Series A Preferred Stock, Series B Preferred Stock and May 2017 Warrants (or the May 2017 Offering Closing). The net proceeds to the Company from the May 2017 Offering were approximately $44.5 million after payment of the estimated offering expenses and placement agent fees. The Series A Preferred Stock and May 2017 Warrants relating thereto were sold to the purchasers thereof in exchange for aggregate cash consideration of $22,140,000, and the Series B Preferred Stock and May 2017 Warrants relating thereto were sold to the purchasers thereof in exchange for (i) aggregate cash consideration of $25,000,000 and (ii) the cancellation of approximately $40.2 million of outstanding indebtedness (including accrued interest thereon) owed by the Company to such purchasers, as further described below.
The May 2017 Purchase Agreement includes customary representations, warranties and covenants of the parties. In addition, pursuant to the May 2017 Purchase Agreement, the Company, subject to certain exceptions, including the issuance of the Second Tranche Securities (as defined below), (i) may not issue, enter into any agreement to issue or announce the issuance or proposed issuance of any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock until July 31, 2017 and (ii) may not enter into an agreement to effect any issuance by the Company involving a variable rate transaction until one year from the May 2017 Offering Closing (as defined below).
Series A Preferred Stock
Each share of Series A Preferred Stock has a stated value of $1,000 and is convertible at any time, at the option of the holder, into Common Stock at an initial conversion price of $1.15 per share (or the Preferred Stock Conversion Rate). The Preferred Stock Conversion Rate is subject to adjustment in the event of any dividends or distributions of common stock, or any stock split, reverse stock split, recapitalization, reorganization or similar transaction. If not previously converted at the option of the holder, each share of Series A Preferred Stock will be automatically converted, without any further action by the holder, on the 90th day following the date that the Stockholder Approval (as defined below) has been obtained and effected.
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Dividends, at a rate per year equal to 17.38% of the stated value of the Series A Preferred Stock, will be payable semi-annually from the issuance of the Series A Preferred Stock until the tenth anniversary of the date of issuance, on each October 15 and April 15, beginning October 15, 2017, on a cumulative basis, at the Company’s option, in cash, out of any funds legally available for the payment of dividends, or, subject to the satisfaction of certain conditions, in Common Stock at the Preferred Stock Conversion Rate, or a combination thereof. In addition, upon the conversion of the Series A Preferred Stock prior to the tenth anniversary of the date of issuance, the holders of the Series Preferred A Stock shall be entitled to a payment equal to $1,738 per $1,000 of stated value of the Series A Preferred Stock, less the amount of all prior semi-annual dividends paid on such converted Series A Preferred Stock prior to the relevant conversion date (the Preferred Stock Make-Whole Payment), at the Company’s option, in cash, out of any funds legally available for the payment of dividends, or, subject to the satisfaction of certain conditions, in Common Stock at the Preferred Stock Conversion Rate, or a combination thereof. If the Company elects to pay any dividend in the form of cash, it shall provide each holder with notice of such election not later than the first day of the month of prior to the applicable dividend payment date.
Unless and until converted into common stock in accordance with its terms, the Series A Preferred Stock has no voting rights, other than as required by law or with respect to matters specifically affecting the Series A Preferred Stock.
In the event of a fundamental transaction, the holders of the Series A Preferred Stock will have the right to receive the consideration receivable as a result of such fundamental transaction by a holder of the number of shares of Common Stock for which the Series A Preferred Stock is convertible immediately prior to such fundamental transaction (without regard to whether such Series A Preferred Stock is convertible at such time), which amount shall be paid pari passu with all holders of Common Stock.
Upon any liquidation, dissolution or winding-up of the Company, the holders of the Series A Preferred Stock shall be entitled to receive out of the assets of the Company the same amount that a holder of Common Stock would receive if the Series A Preferred Stock were fully converted to Common Stock immediately prior to such liquidation, dissolution or winding-up (without regard to whether such Series A Preferred Stock is convertible at such time) , which amount shall be paid pari passu with all holders of Common Stock.
Notwithstanding the foregoing, the holders (other than the Designated Holder (as defined below)) will not have the right to convert any Series A Preferred Stock, and the Company shall not effect any conversion of the Series A Preferred Stock, if the holder, together with its affiliates, would beneficially own in excess of 4.99% (or such other percentage as determined by the holder and notified to the Company in writing, not to exceed 9.99%, provided that any increase of such percentage will not be effective until 61 days after notice thereof) of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon conversion of such Series A Preferred Stock.
On May 8, 2017, the Company filed the Certificate of Designation of Preferences, Rights and Limitations of Series A 17.38% Convertible Preferred Stock with the Secretary of State of Delaware.
Series B Preferred Stock
The Series B Preferred Stock will have substantially identical terms to the Series A Preferred Stock (as described above), except that the issuance of the shares of common stock issuable upon conversion of the Series B Preferred Stock or as payment of dividends or the Make-Whole Payment on the Series B Preferred Stock (or the Series B Conversion Shares) will be subject to the Stockholder Approval (as defined below).
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The investors that purchased shares of the Series B Preferred Stock included existing stockholders of the Company affiliated with certain members of our Board of Directors (or the Affiliated Investors): Foris Ventures, LLC (Foris, an entity affiliated with director John Doerr of Kleiner Perkins Caufield & Byers, a current stockholder), which purchased 30,728.589 shares of Series B Preferred Stock and May 2017 Warrants to purchase 73,160,764 shares of Common Stock; and Naxyris S.A. (or Naxyris, an investment vehicle owned by Naxos Capital Partners SCA Sicar; director Carole Piwnica is Director of NAXOS UK, which is affiliated with Naxos Capital Partners SCA Sicar), which purchased 2,333.216 shares of Series B Preferred Stock and May 2017 Warrants to purchase 5,556,038 shares of common stock. The Affiliated Investors purchased their respective shares of Series B Preferred Stock and Warrants in exchange for the cancellation of existing indebtedness of the Company held by such Affiliated Investors: Foris agreed to exchange an aggregate principal amount of $27.0 million of indebtedness, plus accrued interest thereon, issued to Foris by the Company on February 12, 2016, June 24, 2016 and October 21, 2016, as described above in Note 5, “Debt and Mezzanine Equity”; and Naxyris exchanged an aggregate principal amount of $2.0 million of indebtedness, plus accrued interest thereon, issued to Naxyris by the Company on February 12, 2016, as described above in Note 5, “Debt and Mezzanine Equity”.
In addition, the investors that purchased shares of the Series B Preferred Stock included holders of certain of the Company’s existing indebtedness, including the 2014 144A Notes and the 2015 144A Notes (see Note 5, “Debt and Mezzanine Equity” for details regarding the terms of the 2014 144A Notes and the 2015 144A Notes), which investors exchanged all or a portion of their holding of such indebtedness, including accrued interest thereon, representing an aggregate of $3.4 million of 2014 144A Notes and approximately $3.7 million of 2015 144A Notes, for Series B Preferred Stock and May 2017 Warrants in the May 2017 Offering. Upon the May 2017 Offering Closing, such indebtedness was cancelled and the agreements relating thereto, including any note purchase agreements or unsecured or secured promissory notes (including any security interest relating thereto), were terminated, except to the extent such investors or other investors retain a portion of such indebtedness.
The Series B Preferred Stock was issued in a private placement pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act and Regulation D promulgated under the Securities Act.
On May 8, 2017, the Company filed the Certificate of Designation of Preferences, Rights and Limitations of Series B 17.38% Convertible Preferred Stock with the Secretary of State of Delaware.
May 2017 Warrants
Pursuant to the May 2017 Purchase Agreement, at the May 2017 Offering Closing the Company issued to each investor (i) a warrant, with an exercise price of $0.52 per share, to purchase a number of shares of Common Stock equal to 50% of the shares of common stock into which such investor’s shares of Preferred Stock were initially convertible (including shares of Common Stock issuable as payment of the Make-Whole Payment, assuming that the Make-Whole Payment is made in Common Stock), representing warrants to purchase 103,977,207 shares of common stock in the aggregate for all investors and (ii) a warrant, with an exercise price of $0.62 per share, to purchase a number of shares of Common Stock equal to 50% of the shares of common stock into which such investor’s shares of Preferred Stock were initially convertible (including shares of Common Stock issuable as payment of the Make-Whole Payment, assuming that the Make-Whole Payment is made in Common Stock), representing warrants to purchase 103,977,207 shares of common stock in the aggregate for all investors (or, collectively, the Cash Warrants). The exercise price of the Cash Warrants is subject to standard adjustments as well as full-ratchet anti-dilution protection for any issuance by the Company of equity or equity-linked securities during the three-year period following the May 2017 Offering Closing at a per share price (including any conversion or exercise price, if applicable) less than the then-current exercise price of the Cash Warrants, subject to certain exceptions.
In addition, at the May 2017 Offering Closing, the Company issued to each investor a warrant, with an exercise price of $0.0001 per share (or, collectively, the Dilution Warrants), to purchase a number of shares of common stock sufficient to provide the investor with full-ratchet anti-dilution protection for any issuance by the Company of equity or equity-linked securities during the three-year period following the May 2017 Offering Closing at a per share price (including any conversion or exercise price, if applicable) less than $0.42 per share, the effective per share price paid by the investors for the shares of common stock issuable upon conversion of the Preferred Stock purchased by the investors in the May 2017 Offering (including shares of common stock issuable as payment of dividends or the Make-Whole Payment, assuming that all such dividends and the Make-Whole Payment are made in common stock), subject to certain exceptions.
The exercise of the May 2017 Warrants will be subject to the Stockholder Approval (as defined below). The May 2017 Warrants each have a term of five years from the date the Warrants are initially exercisable following the Stockholder Approval.
The May 2017 Warrants were issued in a private placement pursuant to the exemption from registration under Section 4 (a)(2) of the Securities Act and Regulation D promulgated under the Securities Act.
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Stockholder Approval
Pursuant to the May 2017 Purchase Agreement, the Company has agreed to solicit from the Company’s stockholders (i) any approval for the transactions contemplated by the May 2017 Purchase Agreement required by the rules and regulations of the NASDAQ Stock Market, including without limitation the issuance of shares of common stock upon conversion of the Series B Preferred Stock and upon exercise of the May 2017 Warrants (or the NASDAQ Approval) and (ii) approval to effect a reverse stock split of the common stock (together with the NASDAQ Approval, collectively, the Stockholder Approval) at an annual or special meeting of stockholders to be held on or prior to July 10, 2017, and to use commercially reasonable efforts to secure the Stockholder Approval. As described in more detail below, the parties subject to the Voting Agreements (as defined below) have agreed to vote in favor of the Stockholder Approval. The Company has presented a 15-for-1 reverse stock split to its stockholders for approval at its 2017 Annual Meeting of Stockholders to be held on May 23, 2017 (or the Annual Meeting), and intends to solicit the NASDAQ Approval at a special meeting of stockholders to occur on or prior to July 10, 2017 (or the Special Meeting and, together with the Annual Meeting, the Stockholder Meetings) Pursuant to the May 2017 Purchase Agreement, if the Company does not obtain Stockholder Approval at the Stockholder Meetings, the Company will call a stockholder meeting every four months thereafter to seek the Stockholder Approval until the earlier of the date Stockholder Approval is obtained or the Preferred Stock and May 2017 Warrants are no longer outstanding.
Registration Rights
Pursuant to the May 2017 Purchase Agreement, within 30 calendar days of the date of the Stockholder Approval, the Company has agreed to file a registration statement on Form S-3 (or other appropriate form if the Company is not then S-3 eligible) providing for the resale by the Investors of the Series B Conversion Shares and May 2017 Warrant Shares. The Company shall use commercially reasonable efforts to cause such registration statement to become effective within 181 days following the Closing and commercially reasonable efforts to keep such registration statement effective at all times until (i) no Investor owns any Series B Conversion Shares or May 2017 Warrant Shares or (ii) the Series B Conversion Shares and May 2017 Warrant Shares are eligible for resale under Rule 144 without regard to volume limitations.
Stockholder Agreement
In connection with, and as a condition to, the May 2017 Offering Closing, on May 11, 2017, the Company and one of the investors, DSM International B.V. (or the Designated Holder), a subsidiary of Koninklijke DSM N.V., entered into a Stockholder Agreement (or the Stockholder Agreement) setting forth certain rights and obligations of the Designated Holder and the Company. The Designated Holder purchased 25,000 shares of Series B Preferred Stock, Cash Warrants for the purchase of 59,521,740 shares of Common Stock and Dilution Warrants in the May 2017 Offering in exchange for aggregate cash consideration of $25,000,000. Pursuant to the Stockholder Agreement, the Designated Holder will have the right to designate one director selected by the Designated Holder (a Designated Holder Director), subject to certain restrictions, to the Company’s Board of Directors (or the Board). The Company will agree to appoint the Designated Holder Director and to use reasonable efforts, consistent with the Board’s fiduciary duties, to cause the Designated Holder Director to be re-nominated in the future; provided, that the Designated Holder will no longer have the right to designate any Designated Holder Director at such time as the Designated Holder holds less than 4.5% of the Company’s outstanding common stock. In addition, for as long as there is a Designated Holder Director serving on the Board, the Company will agree not to engage in certain commercial or financial transactions or arrangements without the consent of any then-serving Designated Holder Director. The Company will also agree to provide the Designated Holder with certain exclusive negotiating rights in connection with certain future commercial projects and arrangements, whereby the Designated Holder will have a 60-day negotiation period with respect to any such projects, as well as a right to use a portion of the Company’s manufacturing capacity for toll manufacturing of the Designated Holder’s products, subject to certain conditions, including, with respect to the toll manufacturing option, that the Designated Holder provide the Company with a minimum annual level of cash funding in connection with commercial activity between the Company and the Designated Holder, beginning in 2018. The Designated Holder will also have the right to purchase additional shares of capital stock of the Company in connection with a sale of equity or equity-linked securities by the Company in a capital raising transaction for cash, subject to certain exceptions, to maintain its proportionate ownership percentage in the Company. At the May 2017 Offering Closing, the Company and the Designated Holder entered into licenses granted by the Company to the Designated Holder with respect to certain Company intellectual property useful in the Designated Holder’s business, which licenses will become effective upon the occurrence of certain events specified therein.
Pursuant to the Stockholder Agreement, the Designated Holder agreed not to sell or transfer any of the shares of Series B Preferred Stock or May 2017 Warrants purchased by the Designated Holder in the Offering, any Second Tranche Securities (as defined below), or any shares of Common Stock issuable upon conversion or exercise thereof (or the Transfer Restricted Shares), other than to its affiliates, without the consent of the Company during the one-year period following the May 2017 Closing. Thereafter, the Designated Holder will have the right to sell or transfer the Transfer Restricted Shares to any third party, other than a competitor of the Company or any controlled affiliate of a competitor of the Company; provided, that the Company will have a customary right of first offer with respect to any such sale or transfer other than to affiliates of the Designated Holder. In addition, the Designated Holder will agree that, other than in connection with the purchase, conversion or exercise of (i) the Series B Preferred Stock or May 2017 Warrants purchased by the Designated Holder pursuant to the May 2017 Purchase Agreement or (ii) the Second Tranche Securities (as defined below) in accordance with their terms or the exercise of its pre-emptive rights, until three months after there is no Designated Holder Director on the Board, the Designated Holder will not, without the prior consent of the Board, among other things, purchase any Common Stock, any options or other rights to acquire Common Stock or any indebtedness of the Company, or make any public offer to acquire common stock, options or other rights to acquire common stock or indebtedness of the Company, that would result in the Designated Holder and its affiliates beneficially owning more than 33% of the Company’s outstanding voting securities at the time of acquisition (assuming the exercise or conversion, whether then exercisable or convertible, of any shares of Series B Preferred Stock, May 2017 Warrants or Second Tranche Securities beneficially owned by the Designated Holder and/or its affiliates), join in any solicitation of proxies for any matter not previously approved by the Board, or join any “group” (as such term is defined in Section 13(d)(3) of the Securities Exchange Act of 1934) with respect to any of the foregoing.
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In addition, the Company has agreed to register, via one or more registration statements filed with the SEC under the Securities Act, the shares of common stock issuable upon conversion or exercise, as applicable, of the Series B Preferred Stock, May 2017 Warrants and Second Tranche Securities held by the Designated Holder. Under the terms of the Stockholder Agreement, the Company is required to file such registration statement within 180 days following the May 2017 Closing, and to use its commercially reasonable efforts to cause the Registration Statement to be declared effective by the SEC as soon as practicable and no later than the 225th day following the May 2017 Closing. In addition, the Designated Holder may request that up to three of such registrations provide for an underwritten offering of such shares. In addition, if the Company registers any of its securities for public sale under the Securities Act, the Designated Holder will have the right to include their shares in the registration statement, subject to certain exceptions. The managing underwriter of any underwritten offering will have the right to limit, due to marketing reasons, the number of shares registered by the Designated Holder to 25% of the total shares covered by the registration statement. The Company will agree to pay all expenses incurred in connection with the exercise of such demand and piggyback registration rights, except for legal costs of the Designated Holder, stock transfer taxes and underwriting discounts and commissions.
Pursuant to the Stockholder Agreement, the Company and the Designated Holder have agreed to negotiate in good faith during the 90-day period following the May 2017 Closing to mutually agree on certain terms and conditions upon which the Designated Holder shall purchase additional shares of Series B Preferred Stock and warrants (or the Second Tranche Securities), in an amount to be agreed by the Company and the Designated Holder, provided such amount is no less than $25 million and no more than $30 million (such amount, the Second Tranche Funding Amount) prior to the end of such 90-day period (or the Second Tranche Funding). The Second Tranche Funding is subject to approval of the Designated Holder’s managing board. In connection with the Second Tranche Funding, the Company and the Designated Holder shall enter into an amendment to the Stockholder Agreement providing for a second Designated Holder Director on terms to be agreed by the parties, and certain of the License Agreements will become effective. If the Second Tranche Funding occurs, the parties will thereafter negotiate in good faith regarding an agreement concerning the development of certain products in the health and nutrition field. In the event that the parties do not reach such agreement prior to the earlier of 90 days after the Second Tranche Funding or December 31, 2017, (a) the exclusive negotiating right granted to the Designated Holder in connection with certain future commercial projects and arrangements of the Company will expire, (b) on the first anniversary of the closing of the Second Tranche Funding and each subsequent anniversary thereof, the Company will make a $5 million cash payment to the Designated Holder, provided that the aggregate amount of such payments shall not exceed the Second Tranche Funding Amount, and (c) an intellectual property escrow agreement relating to the License Agreements, entered into by the Company and the Designated Holder at the Closing, will become effective.
Exchange
In connection with the transactions contemplated by the May 2017 Purchase Agreement, on May 8, 2017, the Company entered into a Security Holder Agreement with Foris and Naxyris. Pursuant to the Security Holder Agreement, Foris and Naxyris agreed to exchange (or the May 2017 Exchange) their outstanding shares of common stock, representing a total of 20,920,578 shares, for 20,920.578 shares of the Company’s Series C Convertible Preferred Stock, par value $0.0001 per share (or the Series C Preferred Stock). In addition, pursuant to the Security Holder Agreement, Foris and Naxyris agreed to not convert any of their outstanding convertible promissory notes, warrants and any other equity-linked securities of the Company until the Stockholder Approval, to not sell or otherwise transfer or assign any voting securities of the Company prior to the Stockholder Approval, and to vote any shares of Common Stock and Series C Preferred Stock beneficially owned by them in favor of the Stockholder Approval. The Exchange was consummated concurrently with the closing of the May 2017 Offering.
Series C Preferred Stock
Each share of Series C Preferred Stock has a stated value of $1,000 and will automatically convert into common stock upon the approval by the Company’s stockholders and implementation of the reverse stock split, on a 1:1 basis (i.e., each $1 of stated value of the Series C Preferred Stock will convert into 1 share of Common Stock) (or the Series C Conversion Rate). The Series C Conversion Rate is subject to adjustment in the event of any dividends or distributions of the common stock, or any stock split, reverse stock split, recapitalization, reorganization or similar transaction.
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The Series C Preferred Stock will be entitled to participate with the common stock on an as-converted basis with respect to any dividends or other distributions to holders of common stock.
The Series C Preferred Stock shall vote together as one class with the Common Stock on an as-converted basis, and shall also vote with respect to matters specifically affecting the Series C Preferred Stock.
In the event of a fundamental transaction, the holders of the Series C Preferred Stock will have the right to receive the consideration receivable as a result of such fundamental transaction by a holder of the number of shares of common stock for which the Series C Preferred Stock is convertible immediately prior to such fundamental transaction (without regard to whether such Series C Preferred Stock is convertible at such time), which amount shall be paid pari passu with all holders of common stock.
Upon any liquidation, dissolution or winding-up of the Company, the holders of the Series C Preferred stock shall be entitled to receive out of the assets of the Company an amount equal to the greater of (i) the par value of each share of Series C Preferred Stock, plus any accrued and unpaid dividends or other amounts due on such Series C Preferred Stock, prior to any distribution or payment to the holders of common stock or (ii) the amount that a holder would receive if the Series C Preferred Stock were fully converted to common stock immediately prior to such liquidation, dissolution or winding-up (without regard to whether such Series C Preferred Stock is convertible at such time), which amount shall be paid pari passu with all holders of Common Stock.
On May 8, 2017, the Company filed the Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock with the Secretary of State of Delaware.
The Series C Preferred Stock will be issued in a private exchange pursuant to the exemption from registration under Section 3(a)(9) of the Securities Act.
Voting Agreements
In connection with the transactions contemplated by the May 2017 Purchase Agreement, the Company and certain stockholders of the Company, including Total, Temasek and Biolding Investment SA, entered into Voting Agreements, pursuant to which such existing stockholders agreed to vote their shares of common stock in favor of the Stockholder Approval. The stockholders who are party to the Voting Agreements held approximately 51.2% of the Company’s outstanding common stock as of April 30, 2017.
Nenter Termination Agreement
In connection with the transactions contemplated by the May 2017 Purchase Agreement and the Stockholder Agreement, on May 8, 2017, the Company and Nenter & Co., Inc. (or Nenter) entered into a letter agreement to terminate the Cooperation Agreement, dated as of October 26, 2016, between the Company and Nenter, pursuant to which the parties had agreed to collaborate to create and develop certain compounds and, in the event the parties achieved certain specified development targets, to establish and implement a worldwide manufacturing and commercialization plan relating thereto. In connection with the termination of the Cooperation Agreement, the Company agreed to pay Nenter a fee of $2.5 million on or before June 22, 2017.
Temasek Letter Agreement
On May 5, 2017, the Company entered into a letter agreement with Temasek, pursuant to which the Company and Temasek agreed that Temasek’s Remaining Notes under the Maturity Treatment Agreement ($10.0 million s of March 31, 2017) would no longer be subject to mandatory conversion by Temasek at or prior to the maturity of such Remaining Notes. Accordingly, the Company will be required to pay any portion of such Remaining Notes that remain outstanding at maturity in cash in accordance with the terms of such Remaining Notes. See Note 5, “Debt and Mezzanine Equity” for details regarding the Maturity Treatment Agreement and the Remaining Notes.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes that appear elsewhere in this Form 10-Q. These discussions contain forward-looking statements reflecting our current expectations that involve risks and uncertainties which are subject to safe harbors under the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward looking statements include, but are not limited to, statements concerning our strategy of achieving a significant reduction in net cash outflows in 2016, future production capacity and other aspects of our future operations, ability to improve our production efficiencies, future financial position, future revenues, projected costs, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward looking statements. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors,” in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
Trademarks
Amyris, the Amyris logo, Biofene, Biossance, Dial-A-Blend, Diesel de Cana, Evoshield, µPharm, Muck Daddy, Myralene, Neossance and No Compromise are trademarks or registered trademarks of Amyris, Inc. This report also contains trademarks and trade names of other businesses that are the property of their respective holders.
Overview
Amyris, Inc. (referred to as the “Company,” “Amyris,” “we,” “us,” or “our”) is a leading integrated industrial biotechnology company that is applying its technology platform to engineer, manufacture and sell high performance, low cost products into the Health and Nutrition, Personal Care and Performance Materials markets. Our proven technology platform allows us to rapidly engineer microbes and use them as catalysts to metabolize renewable, plant-sourced sugars into large volume, high-value ingredients. Our biotechnology platform and industrial fermentation process replaces existing complex and expensive chemical manufacturing processes. We believe industrial synthetic biology represents a third industrial revolution, bringing together biology and engineering to generate new, more sustainable materials to meet the growing global demand for bio-based replacements for petroleum, animal- or plant-derived ingredients. We continue to build demand for our current portfolio of products through a sales network comprised of direct sales and distributors, and are engaged in collaborations across each of our three market focus areas to drive additional product sales and partnership opportunities. Via our partnership model, we co-invest in the development of each molecule to bring it from the lab to commercial scale and then capture long term revenue either via the sale of the molecule to the partner and/or value sharing of end product sales.
Amyris was founded in 2003 in the San Francisco Bay Area by a group of scientists from the University of California, Berkeley. Our first major milestone came in 2005 when, through a grant from the Bill & Melinda Gates Foundation, we developed technology capable of creating microbial strains that produce artemisinic acid - a precursor of artemisinin, an effective anti-malarial drug. In 2008, we granted royalty-free licenses to allow Sanofi-Aventis (Sanofi) to produce artemisinic acid using our technology. Building on our success with artemisinic acid, in 2007 we began applying our technology platform to develop, manufacture and sell sustainable alternatives to a broad range of markets..
We focused our initial development efforts primarily on the production of Biofene®, our brand of renewable farnesene, a long-chain, branched hydrocarbon molecule that we manufacture through fermentation using engineered microbes. Our farnesene derivatives are sold in hundreds of products as nutraceuticals, skin care, fragrances, solvents, polymers, and lubricants ingredients. The commercialization of farnesene pushed us to create a more cost efficient, faster and accurate development process in the lab and drive costs out of our Brotas, Brazil production facility. This investment has enabled our technology platform to rapidly develop microbial strains and commercialize target molecules. In 2014, we began manufacturing additional molecules for the flavors and fragrance (F&F) industry, in 2015 we began investing to expand our capabilities to other small molecule chemical classes beyond terpenes via our collaboration with the Defense Advanced Research Project Agency (DARPA), as discussed above, and in 2016 we expanded into proteins.
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We have invested over $500 million in infrastructure and technology to create microbes that produce chemicals from sugar or other feedstocks at commercial scale. This platform has been used to design, build, optimize, and upscale strains producing four distinct molecules, leading to more than 15 commercial products used in over 500 consumer products. Our time to market for molecules has decreased from seven years to less than a year for our most recent molecule, mainly due to our ability to leverage the technology platform we have built.
Our technology platform has been in active use since 2008, and has been integrated with our commercial production since 2011, creating a seamless organism development process that we believe makes Amyris an industry leader in the successful scale-up of small molecules. The key performance characteristics of our platform that we believe differentiate Amyris include our proprietary computational tools, strain construction tools, screening and analytics tools, and advanced lab automation and data integration. Our state-of-the-art infrastructure includes industry leading strain engineering and lab automation located in Emeryville, CA, pilot scale production facilities in Emeryville, CA and Campinas, Brazil, a demonstration scale facility in Campinas, Brazil and a commercial scale production facility in Brotas, Brazil.
We are able to use a wide variety of feedstocks for production, but have focused on accessing Brazilian sugarcane for our large-scale production because of its renewability, low cost and relative price stability. We have also successfully used other feedstocks such as sugar beets, corn dextrose, sweet sorghum and cellulosic sugars at various manufacturing facilities.
We are currently producing three molecules at our Brotas, Brazil plant: farnesene and two fragrance molecules.
Our mission is to apply innovative science to deliver sustainable solutions for a growing world. We seek to become the world's leading provider of renewable, high-performance alternatives to non-renewable and scarce products. In the past, choosing a renewable product often required producers to compromise on performance or price. With our technology, leading consumer brands can develop products made from renewable sources that offer equivalent or better performance and stable supply with competitive pricing. We call this our No Compromise® value proposition. We aim to improve the world one molecule at a time by providing the best alternatives to the products the world relies on every day.
We have developed and are operating our company under a business model that generates cash from collaborations, from product sales, and value share. We believe this combination will enable us to realize our vision of becoming the world’s leading renewable products company.
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Sales and Revenues
Our revenues are comprised of product revenues and grants and collaborations revenues. We generate the substantial majority of our product revenues from sales to distributors or collaborators and only a small portion from direct sales, although we have begun to market and sell some of our products directly to end-consumers, initially in the cosmetics and industrial cleaning markets. To commercialize our initial Biofene-derived product, squalane, in the cosmetics sector for use as an emollient, we have entered into certain marketing and distribution agreements in Europe, Asia, and North America. For the industrial lubricants market, we established a joint venture with Cosan U.S. for the worldwide development, production and commercialization of renewable base oils in the lubricant sector. We have also entered into certain supply agreements with customers in the F&F industry to commercialize products derived from our fragrance molecules. In addition, we have entered into research and development collaboration arrangements pursuant to which we receive payments from our collaborators, which include Total, Manufacture Francaise de Pnematiques Michelin, The Defense Advanced Research Projects Agency, Givaudan International, SA and Cosan US, Inc. Some of such collaboration arrangements include advance payments in consideration for grants of exclusivity or research efforts to be performed by us. Once a collaboration agreement has been signed, receipt of payments may depend on our achievement of milestones. See Note 8, “Significant Agreements” to our unaudited condensed consolidated financial statements included in this report for more details regarding these agreements and arrangements.
Financing
In February 2016, we issued to certain purchasers an aggregate of $20.0 million of unsecured promissory notes and warrants for the purchase, at an exercise price of $0.01 per share, of an aggregate of 2,857,142 shares of our common stock, as described in more detail in Note 5, “Debt and Mezzanine Equity” to our unaudited condensed consolidated financial statements included in this report. The exercisability of these warrants was subject to stockholder approval, which was obtained on May 17, 2016.
In March 2016, we sold to Total one half of our ownership stake in TAB in exchange for Total cancelling $1.3 million of R&D Notes and certain other indebtedness, as described in more detail under “Relationship with Total” above and in Note 5, “Debt and Mezzanine Equity” and Note 7, “Joint Ventures and Noncontrolling Interest” to our unaudited condensed consolidated financial statements included in this report.
In May 2016, we sold and issued 4,385,964 shares of common stock to the Bill & Melinda Gates Foundation at a purchase price per share of $1.14.
In May, September, October and December 2016, we sold and issued $25.0 million in aggregate principal amount of convertible promissory notes to a private investor, as described in more detail in Note 5, “Debt and Mezzanine” and Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report.
In June and October 2016, we sold and issued $19.5 million in aggregate principal amount of secured promissory notes to Foris Ventures, LLC, an entity affiliated with director John Doerr of Kleiner Perkins Caufield & Byers, a current stockholder, and Ginkgo, as described in more detail in Note 5, “Debt and Mezzanine Equity” to our unaudited condensed consolidated financial statements included in this report.
In October 2016, we entered into a credit agreement with Guanfu Holding Co., Ltd. to make available to Amyris an unsecured credit facility with an aggregate principal amount of up to $25.0 million, which amount was fully drawn on December 31, 2016, as described in more detail in Note 5, “Debt and Mezzanine Equity” to our unaudited condensed consolidated financial statements included in this report.
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In December 2016, we sold and issued a purchase money promissory note in the principal amount of $3.5 million to Salisbury Partners, LLC in connection with our purchase of a production facility in Leland, North Carolina, as described in more detail in Note 5, “Debt and Mezzanine Equity” and Note 7, "Joint Ventures and Noncontrolling Interest" to our unaudited condensed consolidated financial statements included in this report.
In December 2016, we sold and issued a promissory note in the principal amount of $3.9 million to Nikko Chemicals Co., Ltd. in connection with the formation of our Aprinnova joint venture, as described in more detail in Note 5, “Debt and Mezzanine Equity” and Note 7, “Joint Ventures and Noncontrolling Interest” to our unaudited condensed consolidated financial statements included in this report.
In January 2017, we exchanged $15.3 million of our 3% Senior Unsecured Convertible Promissory Notes due 2017 for $19.1 million of our 9.50% Convertible Senior Notes due 2019, as described in more detail in Note 5, “Debt and Mezzanine Equity” to our unaudited condensed consolidated financial statements included in this report.
See Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report for details regarding financing transactions completed subsequent to March 31, 2017.
Exchange (debt conversion)
On July 29, 2015, we closed the "Exchange" pursuant to that certain Exchange Agreement, dated as of July 26, 2015 (or the “Exchange Agreement”), among us, Maxwell (Mauritius) Pte Ltd (or “Temasek”) and Total.
Under the Exchange Agreement, at the closing of the Exchange, Temasek exchanged approximately $71.0 million in principal of outstanding convertible promissory notes (including paid-in-kind and accrued interest through July 29, 2015) and Total exchanged $70.0 million in principal amount of outstanding convertible promissory notes for shares of the Company’s common stock. The exchange price was $2.30 per share (or the “Exchange Price”) and was paid by the exchange and cancellation of such outstanding convertible promissory notes, and Temasek and Total received 30,860,633 and 30,434,782 shares of the Company’s common stock, respectively, in the Exchange.
Under the Exchange Agreement, Total also received the following warrants, each with a five-year term, at the closing of the Exchange:
• | A warrant to purchase 18,924,191 shares of our common stock (or the “Total Funding Warrant”). |
• | A warrant to purchase 2,000,000 shares of our common stock that would only be exercisable if we failed, as of March 1, 2017, to achieve a target cost per liter to manufacture farnesene (or the “Total R&D Warrant”). The Total Funding Warrant and the Total R&D Warrant are collectively referred to as the “Total Warrants.” |
Additionally, under the Exchange Agreement, Temasek received the following warrants at the closing of the Exchange:
• | A warrant to purchase 14,677,861 shares of our common stock (or the “Temasek Exchange Warrant”). |
• | A warrant exercisable for that number of shares of our common stock equal to (1) (A) the number of shares for which Total exercises the Total Funding Warrant plus (B) the number of additional shares for which the certain convertible notes remaining outstanding following the completion of the Exchange may become exercisable as a result of a reduction in the conversion price of such remaining notes as a result of and/or subsequent to the date of the Exchange plus (C) that number of additional shares in excess of 2,000,000, if any, for which the Total R&D Warrant becomes exercisable multiplied by a fraction equal to 30.6% divided by 69.4% plus (2) (A) the number of any additional shares for which certain other outstanding convertible promissory notes may become exercisable as a result of a reduction to the conversion price of such notes multiplied by (B) a fraction equal to 13.3% divided by 86.7% (or the “Temasek Funding Warrant”). |
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• | A warrant exercisable for that number of shares of our common stock equal to 880,339 multiplied by a fraction equal to the number of shares for which Total exercises the Total R&D Warrant divided by 2,000,000 (or the “Temasek R&D Warrant”). If Total is entitled to, and does, exercise the Total R&D Warrant in full, the Temasek R&D Warrant would be exercisable for 880,339 shares. |
The Temasek Exchange Warrant, the Temasek Funding Warrant and the Temasek R&D Warrant each have ten-year terms and are referred to herein as the “Temasek Warrants” and, the Temasek Warrants and Total Warrants are hereinafter collectively referred to as the “Exchange Warrants.” All of the Exchange Warrants have an exercise price of $0.01 per share.
In addition to the grant of the Exchange Warrants, a warrant issued by the Company to Temasek in October 2013 in conjunction with a prior convertible debt financing (or the “2013 Warrant”) became exercisable in full upon the completion of the Exchange. There were 1,000,000 shares underlying the 2013 Warrant, which was exercised in full at the exercise price of $0.01 per share.
The exercisability of all of the Exchange Warrants was subject to stockholder approval, which was obtained on September 17, 2015.
In February and May 2016, as a result of adjustments to the conversion price of our senior convertible notes issued in October 2013 (or the “Tranche I Notes”) and January 2014 (or the “Tranche II Notes”) discussed in Note 5, “Debt and Mezzanine Equity” to our unaudited condensed consolidated financial statements included in this, the Temasek Funding Warrant became exercisable for an additional 127,194 and 2,335,342 shares of common stock, respectively. Following the issuance by the Company of shares of convertible preferred stock and warrants to purchase common stock in May 2017, as described in Note 18, “Subsequent Events,” to our unaudited condensed consolidated financial statements included in this report, and a corresponding adjustment to the conversion price of the Tranche I Notes and Tranche II Notes, as described in Note 5, “Debt and Mezzanine Equity” to our unaudited condensed consolidated financial statements included in this report, the Temasek Funding Warrant became exercisable for an additional 16,886,320 shares of common stock.
As of March 1, 2017, we had not achieved the target cost per liter to manufacture farnesene provided in the Total R&D Warrant, and as a result, on March 1, 2017 the Total R&D Warrant became exercisable in accordance with its terms. In addition, upon any exercise by Total of the Total R&D Warrant, the Temasek R&D Warrant will become exercisable for that number of shares of the Company's common stock equal to 880,339 multiplied by a fraction equal to the number of shares for which Total exercises the Total R&D Warrant divided by 2,000,000.
As of March 31, 2017, the Total Funding Warrant, the Temasek Exchange Warrant and the 2013 Warrant had been fully exercised, and Temasek had exercised the Temasek Funding Warrant with respect to 12,700,244 shares of our common stock. The Total R&D Warrant and the Temasek R&D Warrant had not been exercised as of March 31, 2017. Warrants to purchase 2,462,536 shares of common stock under the Temasek Funding Warrant were unexercised as of March 31, 2017.
Maturity Treatment Agreement
At the closing of the Exchange, we, Total and Temasek also entered into a Maturity Treatment Agreement, dated as of July 29, 2015, pursuant to which Total and Temasek agreed to convert any Tranche I Notes, Tranche II Notes or 2014 144A Notes held by them that were not cancelled in the Exchange (or the “Remaining Notes”) into shares of our common stock in accordance with the terms of such Remaining Notes upon maturity, provided that certain events of default had not occurred with respect to the applicable Remaining Notes prior to such maturity. As of immediately following the closing of the Exchange and December 31, 2016, Temasek held $10.0 million in aggregate principal amount of Remaining Notes and Total held approximately $27.0 million and $29.5 million, respectively, in aggregate principal amount of Remaining Notes. See Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report for additional details regarding the Remaining Notes.
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Liquidity
We have incurred significant losses since our inception and believe that we will continue to incur losses and negative cash flow from operations through at least 2017. As of March 31, 2017, we had an accumulated deficit of $1,171.8 million and had cash, cash equivalents and short term investments of $2.5 million. We have significant outstanding debt and contractual obligations related to capital and operating leases, as well as purchase commitments. Refer to "Liquidity and Capital Resources" for further details.
Results of Operations
Comparison of Three Months Ended March 31, 2017 and 2016
Revenues
Three Months Ended March 31, | Period-to-period Change | Percentage Change | ||||||||||||||
2017 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Revenues | ||||||||||||||||
Renewable product sales | $ | 8,292 | $ | 3,140 | $ | 5,152 | 164 | % | ||||||||
Grants and collaborations revenue | 4,688 | 5,671 | (983 | ) | (17 | )% | ||||||||||
Total revenues | $ | 12,980 | $ | 8,811 | $ | 4,169 | 47 | % |
Our total revenues increased by $4.2 million to $13.0 million for the three months ended March 31, 2017, as compared to the same period in the prior year, primarily due to a significant growth in product sales and our production facilities operating at higher capacity than the comparative period.
Product sales increased by $5.2 million to $8.3 million for the three months ended March 31, 2017, as compared to the same period in the prior year, primarily due to increases in sales of products in the personal care and health and nutrition markets.
Cost and Operating Expenses
Three Months Ended March 31, | Period-to-period Change | Percentage Change | ||||||||||||||
2017 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Cost of products sold | $ | 12,768 | $ | 11,178 | $ | 1,590 | 14 | % | ||||||||
Research and development | 14,778 | 11,906 | 2,872 | 24 | % | |||||||||||
Sales, general and administrative | 12,778 | 12,266 | 512 | 4 | % | |||||||||||
Total cost and operating expenses | $ | 40,324 | $ | 35,350 | $ | 4,974 | 14 | % |
Our cost of products sold includes the cost of raw materials, labor and overhead, amounts paid to contract manufacturers, period costs related to inventory write-downs resulting from applying lower of cost or market inventory valuations, and costs related to scale-up in production of such products. Our cost of products sold increased by $1.6 million to $12.8 million for the three months ended March 31, 2017, as compared to the same period in the prior year, primarily driven by higher volumes of products sold, production scale-up costs and product mix.
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Research and Development Expenses
Our research and development expenses increased by $2.9 million to $14.8 million for the three months ended March 31, 2017, as compared to the same period in the prior year, primarily as a result of increases of $0.8 million in salaries and benefits expense, $0.4 million in lab supplies and equipment and $1.6 million in consulting and outside services.
Sales, General and Administrative Expenses
Our sales, general and administrative expenses were $12.8 million for the three months ended March 31, 2017, representing a small increase from the $12.3 million in the same period in the prior year.
Other Income (Expense)
Three Months Ended March 31, | Period-to-period Change | Percentage Change | ||||||||||||||
2017 | 2016 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | $ | 61 | $ | 57 | $ | 4 | 7 | % | ||||||||
Interest expense | (12,184 | ) | (8,359 | ) | (3,825 | ) | 46 | % | ||||||||
Gain from change in fair value of derivative instruments | 2,339 | 21,678 | (19,339 | ) | (89 | )% | ||||||||||
Loss upon extinguishment of debt | 96 | (216 | ) | 312 | nm | |||||||||||
Other income (expense), net | (380 | ) | (1,814 | ) | 1,434 | (79 | )% | |||||||||
Total other income (expense) | $ | (10,068 | ) | $ | 11,346 | $ | (21,414 | ) | (189 | )% |
Total other expense increased by approximately $21.4 million to $10.1 million for the three months ended March 31, 2017, as compared to the same period in the prior year. The increase was primarily attributable to the decrease in the gain from change in fair value of derivative instruments of $19.3 million, attributed to the compound embedded derivative liabilities associated with our senior convertible promissory notes and the change in fair value of our interest rate swap derivative liability. The change was driven by fluctuation of various inputs used in the valuation models from one reporting period to another, such as stock price, credit risk rate and estimated stock volatility.
Liquidity and Capital Resources
March 31, 2017 | December 31, 2016 | |||||||
(Dollars in thousands) | ||||||||
Working capital deficit, excluding cash and cash equivalents | $ | (78,850 | ) | $ | (77,895 | ) | ||
Cash and cash equivalents and short-term investments | $ | 2,485 | $ | 28,524 | ||||
Debt and capital lease obligations | $ | 221,748 | $ | 228,299 | ||||
Accumulated deficit | $ | (1,171,809 | ) | $ | (1,134,438 | ) |
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
Net cash used in operating activities | $ | (25,393 | ) | $ | (23,743 | ) | ||
Net cash provided by/(used in) investing activities | $ | 3,896 | $ | (8 | ) | |||
Net cash provided by/(used in) financing activities | $ | (4,273 | ) | $ | 19,063 |
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Working Capital Deficit. Our working capital deficit, excluding cash and cash equivalents, was $78.9 million at March 31, 2017, which represents an increase of $1.0 million compared to a working capital deficit of $77.9 million at December 31, 2016. The increase of $1.0 million in working capital deficit during the three months ended March 31, 2017 is due to various items.
To support production of our products in contract manufacturing and dedicated production facilities, we have incurred, and we expect to continue to incur, capital expenditures as we invest in these facilities. We plan to continue to seek external debt and equity financing from U.S. and Brazilian sources to help fund our investment in these contract manufacturing and dedicated production facilities.
We expect to fund our operations for the foreseeable future with cash and investments currently on hand, cash inflows from collaboration and grant funding, cash contributions from product sales, and proceeds from new debt and equity financings as well as strategic asset divestments. Some of our anticipated financing sources, such as research and development collaborations and debt and equity financings, are subject to risk that we cannot meet milestones, are not yet subject to definitive agreements or mandatory funding commitments and, if needed, we may not be able to secure additional types of financing in a timely manner or on reasonable terms, if at all. Our planned 2017 and 2018 working capital needs and our planned operating and capital expenditures for 2017 are dependent on significant inflows of cash from renewable product sales and existing collaboration partners, as well as additional funding from new collaborations, new debt and equity financings and proceeds from strategic asset divestments. We will continue to need to fund our research and development and related activities and to provide working capital to fund production, storage, distribution and other aspects of our business.
Liquidity. We have incurred significant losses since our inception and believe that we will continue to incur losses and may have negative cash flow from operations through at least 2018. As of March 31, 2017, we had an accumulated deficit of $1,171.8 million and had cash, cash equivalents and short term investments of $2.5 million. In March 2016, we entered into an At Market Issuance Sales Agreement with third party Agents under which we may issue and sell shares of our common stock through the Agents having an aggregate offering price of up to $50.0 million from time to time in “at the market” offerings under our Registration Statement on Form S-3 (File No. 333-203216). This agreement includes no commitment by other parties to purchase shares we offer for sale. See Note 8, “Significant Agreements” to our unaudited condensed consolidated financial statements included in this report. As of the date hereof, $50.0 million remained available for future issuance under this facility. We have significant outstanding debt and contractual obligations related to capital and operating leases, as well as purchase commitments.
As of March 31, 2017, our debt, net of discount and issuance costs of $42.0 million, totaled to $220.9 million, of which $49.5 million is classified as current. In addition to upcoming debt maturities, our debt service obligations over the next twelve months are significant, including $20.8 million of anticipated interest payments. Our debt agreements also contain various covenants, including restrictions on our business that could cause us to be at risk of defaults such as restrictions on additional indebtedness, material adverse effect and cross default clauses. A failure to comply with the covenants and other provisions of our debt instruments, including any failure to make a payment when required would generally result in events of default under such instruments, which could permit acceleration of such indebtedness. If such indebtedness is accelerated, it would generally also constitute an event of default under our other outstanding indebtedness, permitting acceleration of such other outstanding indebtedness. Any required repayment of our indebtedness as a result of acceleration or otherwise would lower our current cash on hand such that we would not have those funds available for use in our business or for payment of other outstanding indebtedness. Refer to Note 5, "Debt and Mezzanine Equity" and Note 6, “Commitments and Contingencies” for further details of our debt arrangements.
Our condensed consolidated financial statements as of and for the three months ended March 31, 2017 have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Due to the factors described above, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Our ability to continue as a going concern will depend, in large part, on our ability to obtain necessary financing, which is uncertain. The financial statements do not include any adjustments that might result from the outcome of this uncertainty, which could have a material adverse effect on our financial condition. In addition, if we are unable to continue as a going concern, we may be unable to meet our obligations under our existing debt facilities, which could result in an acceleration of our obligation to repay all amounts outstanding under those facilities, and we may be forced to liquidate our assets. In such a scenario, the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements.
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Our operating plan for 2017 contemplates a significant reduction in our net cash outflows, resulting from (i) revenue growth from sales of existing and new products with positive gross margins, (ii) reduced production costs as a result of manufacturing and technical developments, (iii) cash inflows from collaborations, (iv) access to various financing commitments and (v) strategic asset divestments (see Note 5, “Debt and Mezzanine Equity” and Note 8, “Significant Agreements” for details of financing commitments, and Note 18 “Subsequent Events” for details of financing transactions subsequent to March 31, 2017).
If we are unable to generate sufficient cash contributions from product sales, payments from existing and new collaboration partners, and draw sufficient funds from certain financing commitments due to contractual restrictions and covenants, we will need to obtain additional funding from equity or debt financings, agree to burdensome covenants, grant further security interests in our assets, enter into collaboration and licensing arrangements that require us to relinquish commercial rights, or grant licenses on terms that are not favorable.
If we are unable to raise additional financing, or if other expected sources of funding are delayed or not received, our ability to continue as a going concern would be jeopardized and we would take the following actions to support our liquidity needs through the remainder of 2017 and into 2018:
• | Effect significant headcount reductions, particularly with respect to employees not connected to critical or contracted activities across all functions of the Company, including employees involved in general and administrative, research and development, and production activities. |
• | Shift focus to existing products and customers with significantly reduced investment in new product and commercial development efforts. |
• | Reduce production activity at our Brotas manufacturing facility to levels only sufficient to satisfy volumes required for product revenues forecast from existing products and customers. |
• | Reduce expenditures for third party contractors, including consultants, professional advisors and other vendors. |
• | Reduce or delay uncommitted capital expenditures, including non-essential facility and lab equipment, and information technology projects. |
• | Closely monitor our working capital position with customers and suppliers, as well as suspend operations at pilot plants and demonstration facilities. |
Implementing this plan could have a negative impact on our ability to continue our business as currently contemplated, including, without limitation, delays or failures in our ability to:
• | Achieve planned production levels; |
• | Develop and commercialize products within planned timelines or at planned scales; and |
• | Continue other core activities. |
Furthermore, any inability to scale-back operations as necessary, and any unexpected liquidity needs, could create pressure to implement more severe measures. Such measures could have an adverse effect on our ability to meet contractual requirements, including obligations to maintain manufacturing operations, and increase the severity of the consequences described above.
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Collaboration Funding. For the three months ended March 31, 2017, we received $2.6 million in cash from collaborations, including $1.3 million under a collaboration agreement with a flavors and fragrances partner.
We depend on collaboration funding to support our research and development and operating expenses. While part of this funding is committed based on existing collaboration agreements, we will be required to identify and obtain funding from additional collaborations. In addition, some of our existing collaboration funding is subject to our achievement of milestones or other funding conditions.
If we cannot secure sufficient collaboration funding to support our operating expenses in excess of cash contributions from product sales and existing debt and equity financings, we may need to issue additional preferred and/or discounted equity, agree to onerous covenants, grant further security interests in our assets, enter into collaboration and licensing arrangements that require us to relinquish commercial rights or grant licenses on terms that are not favorable to us. If we fail to secure such funding, we could be forced to curtail our operations, which would have a material adverse effect on our ability to continue with our business plans.
Government Contracts. In September 2015, we entered into a Technology Investment Agreement (as amended, the “TIA”) with The Defense Advanced Research Project Agency (or “DARPA”) under which we, with the assistance of five specialized subcontractors, will work to create new research and development tools and technologies for strain engineering and scale-up activities. The program that is the subject of the TIA is being performed and funded on a milestone basis. Under the TIA, we and our subcontractors could collectively receive DARPA funding of up to $35.0 million over the program’s four year term if all of the program’s milestones are achieved. In conjunction with DARPA’s funding, we and our subcontractors are obligated to collectively contribute approximately $15.5 million toward the program over its four year term (primarily by providing specified labor and/or purchasing certain equipment). We can elect to retain title to the patentable inventions we produce in the program, but DARPA receives certain data rights as well as a government purposes license to certain of such inventions. Either party may, upon written notice and subject to certain consultation obligations, terminate the TIA upon a reasonable determination that the program will not produce beneficial results commensurate with the expenditure of resources. We recognized $1.0 million in revenue under this agreement for the three months ended March 31, 2017. Total cash received under this agreement for the three months ended March 31, 2017 was $2.6 million.
In October 2016, we entered into an assistance agreement with the United States Department of Energy (DOE) relating to a research grant award (Award) under which we, with the assistance of two specialized subcontractors, Total and Renmatix, which are related parties of the Company, will work to develop a manufacturing-ready process utilizing wood as the cellulosic feedstock to produce farnesene. The program that is the subject of the Award is being performed and funded on a milestone basis. Under the Award, we and our subcontractors could collectively receive reimbursement for up to $8.8 million in costs expended by us and our subcontractors over the program’s three year term if all of the program’s milestones are achieved. We can elect to retain title to the patentable inventions we produce in the program, but DOE receives certain data rights as well as a government purposes license to certain of such inventions. Either party may, upon written notice and subject to certain consultation obligations, terminate the Award upon a reasonable determination that the program will not produce beneficial results commensurate with the expenditure of resources. We recognized $0.3 million in revenue under this agreement for the three months ended March 31, 2017. Total cash received under this agreement as of March 31, 2017 was zero and no payments were due to Renmatix or Total as of March 31, 2017.
Convertible Note Offerings. In February 2012, we sold $25.0 million in principal amount of senior unsecured convertible promissory notes due March 1, 2017 as described in more detail in Note 5, "Debt and Mezzanine Equity."
In July and September 2012, we issued $53.3 million in aggregate principal amount of 1.5% Senior Unsecured Convertible Notes to Total under the Total Fuel Agreements for an aggregate of $30.0 million in cash proceeds and our repayment of $23.3 million in previously-provided research and development funds pursuant to the Total Fuel Agreements, as described in more detail under "Related Party Convertible Notes" in Note 5, "Debt and Mezzanine Equity" to our unaudited condensed consolidated financial statements included in this report. As part of our December 2012 private placement, we issued 1,677,852 shares of our common stock to Total in exchange for the cancellation of $5.0 million of an outstanding senior unsecured convertible promissory note held by Total.
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In June and July 2013, we sold and issued $30.0 million in aggregate principal amount of 1.5% Senior Unsecured Convertible Notes to Total with a March 1, 2017 maturity date pursuant to the Total Fuel Agreements.
In August 2013, we entered into an agreement with Total and Temasek to issue up to $73.0 million in convertible promissory notes in private placements over a period of up to 24 months from the date of signing as described in more detail in Note 5, "Debt and Mezzanine Equity" to our unaudited condensed consolidated financial statements included in this report (such agreement referred to as the “August 2013 SPA” and such financing referred to as the “August 2013 Financing”). The August 2013 Financing was divided into two tranches (one for $42.6 million and one for $30.4 million). Of the total possible purchase price in the financing, $25.0 million was to be paid in the form of cash by Temasek ($25.0 million in the second tranche), $35.0 million was to be paid by the exchange and cancellation of the Temasek Bridge Note, as described below, and $13.0 million was to be paid by the exchange and cancellation of outstanding convertible promissory notes held by Total in connection with its exercise of pro rata rights ($7.6 million in the first tranche and $5.4 million in the second tranche).
On October 4, 2013, we issued a senior secured promissory note in the principal amount of $35.0 million (Temasek Bridge Note) to Temasek for cash proceeds of $35.0 million. The Temasek Bridge Note was due on February 2, 2014 and accrued interest at a rate of 5.5% per month from October 4, 2013. The Temasek Bridge Note was cancelled as payment for Temasek's purchase of a first tranche convertible note in the initial closing of the August 2013 Financing, as described below.
In October 2013, we amended the August 2013 SPA to include certain entities affiliated with FMR LLC (or the “Fidelity Entities”) in the first tranche closing (participating for a principal amount of $7.6 million), and to proportionally increase the amount acquired by exchange and cancellation of outstanding convertible promissory notes by Total to $14.6 million ($9.2 million in the first tranche and up to $5.4 million in the second tranche). Also in October 2013, we completed the closing of the issuance and sale of senior convertible notes under the first tranche of the August 2013 Financing (or the “Tranche I Notes”) for cash proceeds of $7.6 million and cancellation of outstanding convertible promissory notes of $44.2 million, of which $35.0 million resulted from the exchange and cancellation of the Temasek Bridge Note and the remaining $9.2 million from the exchange and cancellation of an outstanding convertible promissory notes held by Total. In December 2013, we further amended the August 2013 SPA to sell $3.0 million of senior convertible notes under the second tranche of the August 2013 Financing (or the “Tranche II Notes”) to funds affiliated with Wolverine Asset Management, LLC and we elected to call $25.0 million in additional funds from Temasek pursuant to its previous commitment to purchase such amount of Tranche II Notes. Additionally, pursuant to that amendment, we sold approximately $6.0 million of Tranche II Notes to Total through exchange and cancellation of the same amount of principal of previously outstanding convertible notes held by Total (in respect of Total’s preexisting contractual right to maintain its pro rata ownership position through such cancellation of indebtedness). The closing of the issuance and sale of such Tranche II Notes under the December amendment to the August 2013 SPA occurred in January 2014. The August 2013 Financing is more fully described in Note 5, "Debt and Mezzanine Equity".
In December 2013, in connection with our entry into agreements establishing our joint venture with Total, we exchanged the $69.0 million of then-outstanding unsecured convertible notes issued to Total pursuant to the Total Fuel Agreements for replacement 1.5% Senior Secured Convertible Notes, in principal amounts equal to the principal amounts of the cancelled notes.
In May 2014, we issued and sold $75.0 million in aggregate principal amount of 6.50% Convertible Senior Notes due 2019 (or the “2014 144A Notes”) to Morgan Stanley & Co. LLC as the Initial Purchaser in a private placement, and for initial resale by the Initial Purchaser to qualified institutional buyers pursuant to Rule 144A of the Securities Act (or the “2014 144A Offering”). The 2014 144A Offering and the 2014 144A Notes are described in more detail in Note 5, "Debt and Mezzanine Equity" and Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report. In October 2015, we repurchased $22.9 million in aggregate principal amount of the 2014 144A Notes with a portion of the proceeds from our sale of the 2015 144A Notes (as defined below), as described in more detail in Note 5, "Debt and Mezzanine Equity" to our unaudited condensed consolidated financial statements included in this report.
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In July 2014 and January 2015, we issued and sold $21.7 million in aggregate principal amount of 1.5% Senior Secured Convertible Notes with a March 1, 2017 maturity date to Total pursuant to the Total Fuel Agreements.
In July 2015, Temasek exchanged approximately $71.0 million in principal amount of outstanding convertible promissory notes and Total exchanged $70.0 million in principal amount of outstanding convertible promissory notes for shares of our common stock, as described in more detail in Note 5, "Debt and Mezzanine Equity" to our unaudited condensed consolidated financial statements included in this report.
In October 2015, we issued and sold $57.6 million in aggregate principal amount of 9.50% Convertible Senior Notes due 2019 (2015 144A Notes), which were sold only to qualified institutional buyers and institutional accredited investors in a private placement (2015 144A Offering) under the Securities Act. The 2015 144A Offering and the 2015 144 Notes are described in more detail in Note 5, "Debt and Mezzanine Equity" and Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report. In January 2017, we issued an additional $19.1 million in aggregate principal amount of 2015 144A Notes in exchange for the cancellation of $15.3 million in aggregate principal amount of outstanding senior unsecured convertible promissory notes issued in February 2012, as described in more detail in Note 5, "Debt and Mezzanine Equity" to our unaudited condensed consolidated financial statements included in this report.
In March 2016, we sold to Total one half of our ownership stake in TAB in exchange for Total cancelling $3.7 million in aggregate principal amount of outstanding 1.5% Senior Secured Convertible Notes and certain other indebtedness, as described in more detail under “Relationship with Total” above and in Note 5, “Debt and Mezzanine Equity” and Note 7, “Joint Ventures and Noncontrolling Interest”. In February 2017, we and Total agreed to extend the maturity of the remaining outstanding indebtedness under the Total Fuel Agreements from March 1, 2017 to May 15, 2017.
In May, September, October and December 2016, we issued $25.0 million in aggregate principal amount of convertible promissory notes to a private investor in offerings registered under the Securities Act, as described in more detail in Note 5, “Debt and Mezzanine Equity” and Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report.
See Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report for details regarding convertible note offerings completed subsequent to March 31, 2017.
Export Financing with ABC Brasil. In March 2013, we entered into a one-year export financing agreement with Banco ABC Brasil S.A. (or “ABC Brasil”) for approximately $2.5 million to fund exports through March 2014. This loan was collateralized by future exports from our subsidiary in Brazil. As of March 31, 2017, the loan was fully paid.
In March 2014, we entered into an additional one-year-term export financing agreement with ABC Brasil for approximately $2.2 million to fund exports through March 2015. This loan is collateralized by future exports from our subsidiary in Brazil. As of March 31, 2017, the loan was fully paid.
In April 2015, we entered into an additional one-year-term export financing agreement with ABC Brasil for approximately $1.6 million to fund exports through April 2016. This loan is collateralized by future exports from our subsidiary in Brazil. As of March 31, 2017, the loan was fully paid.
Banco Pine/Nossa Caixa Financing. In July 2012, we entered into a Note of Bank Credit and a Fiduciary Conveyance of Movable Goods agreement with each of Nossa Caixa and Banco Pine. Under these instruments, we borrowed an aggregate of R$52.0 million (approximately US$16.4 million based on the exchange rate as of March 31, 2017) as financing for capital expenditures relating to our manufacturing facility in Brotas, Brazil. Under the loan agreements, Banco Pine agreed to lend R$22.0 million and Nossa Caixa agreed to lend R$30.0 million. The loans have a final maturity date of July 15, 2022 and bear a fixed interest rate of 5.5% per year. The loans are also subject to early maturity and delinquency charges upon occurrence of certain events including interruption of manufacturing activities at our manufacturing facility in Brotas, Brazil for more than 30 days, except during sugarcane off-season. The loans are secured by certain of our farnesene production assets at the manufacturing facility in Brotas, Brazil and we were required to provide parent guarantees to each of the lenders. As of March 31, 2017 and December 31, 2016, a principal amount of $10.9 million and $11.1 million, respectively, was outstanding under these loan agreements.
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BNDES Credit Facility. In December 2011, we entered into a credit facility with Banco Nacional de Desenvolvimento Econômico e Social (or BNDES), a government-owned bank headquartered in Brazil (or the "BNDES Credit Facility") to finance a production site in Brazil. The BNDES Credit Facility was for R$22.4 million (approximately US$7.1 million based on the exchange rate as of March 31, 2017). The credit line is divided into an initial tranche for up to approximately R$19.1 million and an additional tranche of approximately R$3.3 million that becomes available upon delivery of additional guarantees. As of March 31, 2017 and December 31, 2016, we had R$2.9 million (approximately US$0.9 million based on the exchange rate as of March 31, 2017) and R$3.8 million (approximately US$1.2 million based on the exchange rate as of December 31, 2016), respectively, in outstanding advances under the BNDES Credit Facility.
The principal of loans under the BNDES Credit Facility is required to be repaid in 60 monthly installments, with the first installment due in January 2013 and the last due in December 2017. Interest was initially due on a quarterly basis with the first installment due in March 2012. From and after January 2013, interest payments are due on a monthly basis together with principal payments. The loaned amounts carry interest of 7% per year. Additionally, there is a credit reserve charge of 0.1% on the unused balance from each credit installment from the day immediately after it is made available through its date of use, when it is paid.
The BNDES Credit Facility is collateralized by first priority security interest in certain of our equipment and other tangible assets totaling R$24.9 million (approximately US$7.7 million based on the exchange rate as of December 31, 2016). We are a parent guarantor for the payment of the outstanding balance under the BNDES Credit Facility. Additionally, we were required to provide a bank guarantee equal to 10% of the total approved amount (R$22.4 million in total debt) available under the BNDES Credit Facility. For advances in the second tranche (above R$19.1 million), we are required to provide additional bank guarantees equal to 90% of each such advance, plus additional Amyris guarantees equal to at least 130% of such advance. The BNDES Credit Facility contains customary events of default, including payment failures, failure to satisfy other obligations under the credit facility or related documents, defaults in respect of other indebtedness, bankruptcy, insolvency and inability to pay debts when due, material judgments, and changes in control of Amyris Brasil. If any event of default occurs, BNDES may terminate its commitments and declare immediately due all borrowings under the facility.
FINEP Credit Facility. In November 2010, we entered into a credit facility with Financiadora de Estudos e Projetos (or "FINEP"), a state-owned company subordinated to the Brazilian Ministry of Science and Technology (or the “FINEP Credit Facility”) to finance a research and development project on sugarcane-based biodiesel (or the “FINEP Project”) and provided for loans of up to an aggregate principal amount of R$6.4 million (approximately US$2.0 million based on the exchange rate as of March 31, 2017) which are secured by a chattel mortgage on certain equipment of Amyris as well as by bank letters of guarantee. All available credit under this facility was fully drawn. As of March 31, 2017 and December 31, 2016, the total outstanding loan balance under this credit facility was R$2.0 million (approximately US$0.7 million based on the exchange rate as of March 31, 2017) and R$2.3 million (approximately US$0.7 million based on the exchange rate as of December 31, 2016).
Interest on loans drawn under the FINEP Credit Facility is fixed at 5.0% per annum. In case of default under, or non-compliance with, the terms of the agreement, the interest on loans will be dependent on the long-term interest rate as published by the Central Bank of Brazil (such rate, the “TJLP”). If the TJLP at the time of default is greater than 6%, then the interest will be 5.0% plus a TJLP adjustment factor, otherwise the interest will be at 11.0% per annum. In addition, a fine of up to 10.0% will apply to the amount of any obligation in default. Additional interest on late balances will be 1.0% per month, levied on the overdue amount. Payment of the outstanding loan balance is being made in 81 monthly installments, which commenced in July 2012 and extends through March 2019. Interest on loans drawn and other charges are paid on a monthly basis and commenced in March 2011.
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Senior Secured Loan Facility. In March 2014, we entered into a Loan and Security Agreement (LSA) with Hercules Technology Growth Capital, Inc. (Hercules) to make available a collateralized loan facility (Senior Secured Loan Facility) in the aggregate principal amount of up to $25.0 million, which loan facility was fully drawn at the closing. The initial loan of $25.0 million under the Senior Secured Loan Facility accrues interest at a rate per annum equal to the greater of either the prime rate reported in the Wall Street Journal plus 6.25% or 9.5%. We may repay the outstanding amounts under the Senior Secured Loan Facility before the maturity date (October 15, 2018) if we pay an additional fee of 1% of the outstanding amounts. We were also required to pay a 1% facility charge at the closing of the Senior Secured Loan Facility, and are required to pay a 10% end of term charge with respect to the initial loan of $25.0 million. In connection with the entry into the LSA, we agreed to certain customary representations and warranties and covenants, as well as certain covenants that were subsequently amended (as described below).
In June 2014, we entered into a first amendment of the LSA with Hercules. Pursuant to the first amendment, the parties agreed to extend the maturity date of the loans under the Senior Secured Loan Facility from May 31, 2015 to February 1, 2017 and remove (i) a requirement for us to pay a forbearance fee of $10.0 million in the event certain covenants were not satisfied, (ii) a covenant that we maintain positive cash flow commencing with the fiscal quarter beginning October 1, 2014, (iii) a covenant that, commencing with the fiscal quarter beginning July 1, 2014, we and our subsidiaries achieve certain projected cash product revenues and projected cash product gross profits, and (iv) an obligation for us to file a registration statement on Form S-3 with the SEC by no later than June 30, 2014 and complete an equity financing of more than $50.0 million by no later than September 30, 2014. We further agreed to include a new covenant in the LSA requiring us to maintain unrestricted, unencumbered cash in an amount equal to at least 50% of the principal amount of the loans then outstanding under the Senior Secured Loan Facility (Minimum Cash Covenant) and borrow an additional $5.0 million under the Senior Secured Loan Facility. The additional $5.0 million borrowing was completed in June 2014, and accrues interest at a rate per annum equal to the greater of (i) the prime rate reported in the Wall Street Journal plus 5.25% and (ii) 8.5%.
In March 2015, we entered into a second amendment of the LSA with Hercules. Pursuant to the second amendment, the parties agreed to, among other things, establish an additional credit facility in the principal amount of up to $15.0 million, which would be available to be drawn by us through the earlier of March 31, 2016 or such time as we raised an aggregate of at least $20.0 million through the sale of new equity securities. The additional facility was cancelled undrawn upon the completion of our private stock and warrant offering in July 2015.
In November 2015, we entered into a third amendment of the LSA with Hercules. Pursuant to the third amendment, we borrowed an additional $10,960,000 (Third Amendment Borrowed Amount) from Hercules on November 30, 2015. As of December 1, 2015, after the funding of the Third Amendment Borrowed Amount (and including repayment of $9.1 million of principal that had occurred prior to the third amendment), the aggregate principal amount outstanding under the Senior Secured Loan Facility was approximately $31.7 million. The Third Amendment Borrowed Amount accrues interest at a rate per annum equal to the greater of (i) 9.5% and (ii) the prime rate reported in the Wall Street Journal plus 6.25%, and, like the previous loans under the Senior Secured Loan Facility, has a maturity date of October 15, 2018. Upon the earlier of the maturity date, prepayment in full or such obligations otherwise becoming due and payable, in addition to repaying the outstanding Third Amendment Borrowed Amount (and all other amounts owed under the Senior Secured Loan Facility, as amended), we are also required to pay an end-of-term charge of $767,200. Pursuant to the third amendment, we also paid Hercules fees of $1.0 million, $750,000 of which was owed in connection with the expired $15.0 million facility under the second amendment and $250,000 of which was related to the Third Amendment Borrowed Amount. Under the third amendment, the parties agreed that we would, commencing on December 1, 2015, be required to pay only the interest accruing on all outstanding loans under the Senior Secured Loan Facility until February 29, 2016. Commencing on March 1, 2016, we would have been required to begin repaying principal of all loans under the Senior Secured Loan Facility, in addition to the applicable interest. However, pursuant to the third amendment, we could, by achieving certain cash inflow targets in 2016, extend the interest-only period to December 1, 2016. Upon our issuance and sale of $20.0 million of unsecured promissory notes and warrants in a private placement in February 2016 for aggregate cash proceeds of $20.0 million, we satisfied the conditions for extending the interest-only period to May 31, 2016. On June 1, 2016, we commenced the repayment of outstanding principal under the Senior Secured Loan Facility. In June 2016, we were notified by Hercules that it had transferred and assigned its rights and obligations under the Senior Secured Loan Facility to Stegodon Corporation (Stegodon), an affiliate of Ginkgo Bioworks, Inc. (Ginkgo). On June 29, 2016, in connection with the execution by us and Ginkgo of an initial strategic partnership agreement, we received a deferment of all scheduled principal repayments under the Senior Secured Loan Facility, as well as a waiver of the Minimum Cash Covenant, through October 31, 2016. Refer to Note 8, “Significant Agreements” to our unaudited condensed consolidated financial statements included in this report for additional details. On October 6, 2016, in connection with the execution by us and Ginkgo of a definitive collaboration agreement (or the “Ginkgo Collaboration Agreement”), we entered into a fourth amendment of the LSA with Stegodon, pursuant to which the parties agreed to (i) subject to extending the maturity of certain of our other outstanding indebtedness (or the “Extension Condition”), extend the maturity date of the Senior Secured Loan Facility, (ii) make the Senior Secured Loan Facility interest-only until maturity, subject to the requirement that we apply certain monies received by it under the Ginkgo Collaboration Agreement to repay the amounts outstanding under the Senior Secured Loan Facility, up to a maximum amount of $1 million per month and (iii) waive the Minimum Cash Covenant until the maturity date of the Senior Secured Loan Facility. On January 11, 2017, the maturity date of the Senior Secured Loan Facility was extended to October 15, 2018 due to the Extension Condition being met as a result of the Fidelity Exchange (as defined below). Refer to Note 5, “Debt and Mezzanine Equity” to our unaudited condensed consolidated financial statements included in this report for additional details. In December 2016, in connection with Stegodon granting certain waivers and releases under the LSA in connection with our formation of its Neossance joint venture with Nikko, as described in more detail in Note 7, "Joint Ventures and Noncontrolling Interest" to our unaudited condensed consolidated financial statements included in this report, we agreed to pay to Stegodon (i) a fee of $425,000 on or prior to December 31, 2017 and (ii) a fee of $450,000 on or prior to the maturity date of the loans under the Senior Secured Loan Facility. Subsequently, in January 2017, in connection with Stegodon granting certain waivers of the debt and transfer covenants under the LSA, we entered into a fifth amendment of the LSA with Stegodon. Pursuant to the fifth amendment, we agreed to apply additional monies we receive under the Ginkgo Collaboration Agreement towards repayment of the outstanding loans under the Senior Secured Loan Facility, up to a maximum amount of $3 million, to the extent we receive any such monies. Refer to Note 5, “Debt and Mezzanine Equity” and Note 8, “Significant Agreements” to our unaudited condensed consolidated financial statements included in this report for additional details regarding the LSA and Senior Secured Loan Facility.
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As of March 31, 2017, $27.7 million was outstanding under the Senior Secured Loan Facility, net of discount and issuance cost of $0.9 million. The Senior Secured Loan Facility is secured by liens on our assets, including on certain of our intellectual property. The Senior Secured Loan Facility includes customary events of default, including failure to pay amounts due, breaches of covenants and warranties, material adverse effect events, certain cross defaults and judgments, and insolvency. If an event of default occurs, Stegodon may require immediate repayment of all amounts outstanding under the Senior Secured Loan Facility.
February 2016 Private Placement. In February 2016, we sold and issued to certain purchasers affiliated with members of our board of directors an aggregate of $20.0 million of unsecured promissory notes and warrants for the purchase, at an exercise price of $0.01 per share, of an aggregate of 2,857,142 shares of our common stock, as described in more detail in in Note 5, “Debt and Mezzanine Equity” and Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report. The exercisability of these warrants was subject to stockholder approval, which was obtained on May 17, 2016.
June 2016 Private Placement. In June 2016, we sold and issued $5.0 million in aggregate principal amount of secured promissory notes to Foris Ventures, LLC (or “Foris”), an entity affiliated with director John Doerr of Kleiner Perkins Caufield & Byers, a current stockholder, as described in more detail in Note 5, “Debt and Mezzanine Equity” and Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report.
October 2016 Private Placements. In October 2016, we sold and issued to Foris and Ginkgo, respectively, $6.0 million and $8.5 million in principal amount of secured promissory notes, as described in more detail in Note 5, “Debt and Mezzanine Equity” and Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report.
Guanfu Credit Facility. In October 2016, we entered into a credit agreement with Guanfu Holding Co., Ltd. to make available to the Company an unsecured credit facility with an aggregate principal amount of up to $25.0 million, which amount was fully drawn on March 31, 2017, as described in more detail in Note 5, “Debt and Mezzanine Equity” to our unaudited condensed consolidated financial statements included in this report.
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Salisbury Purchase Money Promissory Note. In December 2016, we sold and issued a purchase money promissory note in the principal amount of $3.5 million to Salisbury Partners, LLC in connection with our purchase of a production facility in Leland, North Carolina, as described in more detail in Note 5, “Debt and Mezzanine Equity” and Note 7, "Joint Ventures and Noncontrolling Interest" to our unaudited condensed consolidated financial statements included in this report. The loan was repaid in January 2017 using the proceeds of the Nikko Promissory Note.
Nikko Promissory Note. In December 2016, we sold and issued a promissory note in the principal amount of $3.9 million to Nikko Chemicals Co., Ltd. in connection with the formation of our Aprinnova joint venture, as described in more detail in Note 5, “Debt and Mezzanine Equity” and Note 7, “Joint Ventures and Noncontrolling Interest” to our unaudited condensed consolidated financial statements included in this report.
Common Stock Offerings. In December 2012, we completed a private placement of 14,177,849 shares of our common stock for aggregate cash proceeds of $37.2 million, of which $22.2 million was received in December 2012 and $15.0 million was received in January 2013. Of the 14,177,849 shares issued in the private placement, 1,677,852 of such shares were issued to Total in exchange for cancellation of $5.0 million of an outstanding convertible promissory note we previously issued to Total.
In March 2013, we completed a private placement of 1,533,742 of our common stock to Biolding SA (Biolding), which is affiliated with one of our directors, for aggregate proceeds of $5.0 million. This private placement represented the final tranche of Biolding's preexisting contractual obligation to fund $15.0 million upon satisfaction by us of certain criteria associated with the commissioning of our production plant in Brotas, Brazil.
In March 2014, we completed a private placement of 943,396 shares of our common stock to Kuraray for aggregate proceeds of $4.0 million.
In July 2015, we entered into a Securities Purchase Agreement with certain purchasers, including entities affiliated with members of our board of directors, under which we agreed to sell 16,025,642 shares of our common stock at a price of $1.56 per share, for aggregate proceeds to the Company of $25 million. The sale of common stock under the Securities Purchase Agreement was completed on July 29, 2015. Pursuant to the Securities Purchase Agreement, the Company granted to each of the purchasers a warrant exercisable at an exercise price of $0.01 per share for the purchase of a number of shares of the Company’s common stock equal to 10% of the shares purchased by such investor. The exercisability of the warrants was subject to stockholder approval, which was obtained on September 17, 2015. As of March 31, 2017, 160,255 of such warrants had been exercised.
In May 2016, we sold and issued 4,385,964 shares of our common stock to the Bill & Melinda Gates Foundation in a private placement at a purchase price per share equal to $1.14, for aggregate proceeds to the Company of approximately $5.0 million.
See Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report for details regarding equity offerings completed subsequent to March 31, 2017.
Cash Flows during the Three Months Ended March 31, 2017 and 2016
Cash Flows from Operating Activities
Our primary uses of cash from operating activities are costs related to production and sales of our products and personnel-related expenditures, offset by cash received from product sales, grants and collaborations. Cash used in operating activities was $25.4 million and $23.7 million for the three months ended March 31, 2017 and 2016, respectively.
Net cash used in operating activities of $25.4 million for the three months ended March 31, 2017 was attributable to our net loss of $37.4 million, offset by net non-cash charges of $6.0 million and net change in our operating assets and liabilities of $5.9 million. Net non-cash charges of $6.0 million for the three months ended March 31, 2017 consisted primarily of $4.5 million of debt discount and issuance costs and $1.6 million of stock-based compensation, offset by $0.1 million of gain upon extinguishment of debt. Net change in operating assets and liabilities of $5.9 million for the three months ended March 31, 2017 primarily consisted of decreases of $5.4 million in account receivable, and offset by an increase of $0.5 million in accounts payable.
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Net cash used in operating activities of $23.7 million for the three months ended March 31, 2016 was attributable to our net loss of $15.3 million, offset by net non-cash charges of $12.4 million and net change in our operating assets and liabilities of $4.0 million. Net non-cash charges of $12.5 million for the three months ended March 31, 2016 consisted primarily of a $21.7 million change in the fair value of derivative instruments related to the embedded derivative liabilities associated with our senior convertible promissory notes and currency interest rate swap derivative liability, offset by $2.9 million of depreciation and amortization expenses, $3.0 million of amortization of debt discount and issuance costs, $2.1 million of stock-based compensation, $1.1 million on loss on foreign currency exchange rates and $0.2 million on loss from extinguishment of debt. Net change in operating assets and liabilities of $4.0 million for the three months ended March 31, 2016 primarily consisted of $2.9 million increase in accrued other liabilities and $3.9 million decrease in inventory, offset by $1.8 million increase in account receivable and $1.0 million decrease in accounts payable and deferred rent.
Cash Flows from Investing Activities
Our investing activities consist primarily of capital expenditures and other investment activities. Net cash provided by investing activities of $3.9 million for the three months ended March 31, 2017, resulted from $4.0 million of change in restricted cash and $2.1 million of maturities of short-term investments, offset by $1.8 million of purchase of short-term investments and $0.4 million of purchase of property, plant and equipment.
Our investing activities consist primarily of capital expenditures and other investment activities. Net cash used in investing activities of $0.0 million for the three months ended March 31, 2016, resulted from $1.3 million of short-term investments and $0.3 million of purchases of property, plant and equipment, offset by $1.6 million of maturities of short-term investments.
Cash Flows from Financing Activities
Net cash used in financing activities of $4.3 million for the three months ended March 31, 2017, was a result of the receipt of $1.5 million of proceeds from debt issued, offset by $5.1 million of principal payments on debt and $0.7 million of principal payments on capital leases.
Net cash provided by financing activities of $19.1 million for the three months ended March 31, 2016, was a result of the receipt of $20.0 million of proceeds from debt issued to related parties, offset by $0.7 million of principal payments on debt, $0.2 million of principal payments on capital leases and 0.1 million of employee's taxes paid upon vesting of restricted stock units.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any material off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our condensed consolidated financial statements.
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Contractual Obligations
The following is a summary of our contractual obligations as of March 31, 2017 (in thousands):
Total | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | ||||||||||||||||||||||
Principal payments on debt(1) | $ | 260,363 | $ | 50,363 | $ | 53,784 | $ | 125,286 | $ | 2,282 | $ | 27,294 | $ | 1,354 | ||||||||||||||
Interest payments on debt, fixed rate(2) | 50,296 | 15,532 | 20,897 | 8,260 | 2,874 | 2,645 | 88 | |||||||||||||||||||||
Operating leases | 44,138 | 5,194 | 6,909 | 6,782 | 7,012 | 7,248 | 10,993 | |||||||||||||||||||||
Principal payments on capital leases | 810 | 702 | 100 | 8 | — | — | — | |||||||||||||||||||||
Interest payments on capital leases | 39 | 32 | 7 | — | — | — | — | |||||||||||||||||||||
Purchase obligations(3) | 3,701 | 1,606 | 2,026 | 69 | — | — | — | |||||||||||||||||||||
Total | $ | 359,347 | $ | 73,429 | $ | 83,723 | $ | 140,405 | $ | 12,168 | $ | 37,187 | $ | 12,435 |
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(1) | The forecast payments assume no proceeds to be received by the Company under the Ginkgo Collaboration Agreement, which, if received, would need to be applied by the Company up to $1 million per month towards repayment of the debt due to Stegodon. Also including $3.9 million in 2017 related to Nomis Bay convertible note which, at the Company’s election, may be settled in shares or cash, and $46.8 million between 2018 and 2019 subject to Maturity Treatment Agreement, which will be converted to common stock at maturity, subject to there being no default under the terms of the debt. See Note 18, “Subsequent Events” to our unaudited condensed consolidated financial statements included in this report for additional details regarding the notes subject to the Maturity Treatment Agreement. |
(2) | Does not include any obligations related to make-whole interest or downround provisions. The fixed interest rates are more fully described in Note 5, "Debt” of our condensed consolidated financial statements. |
(3) | Purchase obligations include noncancellable contractual obligations and construction commitments of zero, of which zero have been accrued as loss on purchase commitments. |
Recent Accounting Pronouncements
The information contained in Note 2 to the Unaudited Condensed Consolidated Financial Statements under the heading "Recent Accounting Pronouncements" is hereby incorporated by reference into this Part I, Item 2.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes in: commodity market prices, foreign currency exchange rates, and interest rates as described below.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio and our outstanding debt obligations (including embedded derivatives therein). We generally invest our cash in investments with short maturities or with frequent interest reset terms. Accordingly, our interest income fluctuates with short-term market conditions. As of March 31, 2017, our investment portfolio consisted primarily of money market funds and certificates of deposit, all of which are highly liquid investments. Due to the short-term nature of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair value of our portfolio. Since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio. Additionally, as of March 31, 2017, 100% of our outstanding debt is in fixed rate instruments or instruments which have capped rates. Therefore, our exposure to the impact of variable interest rates is limited. Changes in interest rates may significantly change the fair value of our embedded derivative liabilities.
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Foreign Currency Risk
Most of our sales contracts are principally denominated in U.S. dollars and, therefore, our revenues are currently not subject to significant foreign currency risk. The functional currency of our wholly-owned consolidated subsidiary in Brazil is the local currency (Brazilian real) in which recurring business transactions occur. We do not use currency exchange contracts as hedges against amounts permanently invested in our foreign subsidiary. The amount we consider permanently invested in our foreign subsidiary and translated into U.S. dollars using the March 31, 2017 exchange rate is $122.8 million as of March 31, 2017 and $119.4 million at December 31, 2016. The increase in the permanent investments in our foreign subsidiary between December 31, 2016 and March 31, 2017 is due to the depreciation of the U.S. dollar versus the Brazilian real. The potential loss in value, which would be principally recognized in Other Comprehensive Loss, resulting from a hypothetical 10% adverse change in quoted Brazilian real exchange rates, is $1.8 million and $2.7 million as of March 31, 2017 and December 31, 2016, respectively. Actual results may differ.
We make limited use of derivative instruments, which include currency interest rate swap agreements, to manage the Company's exposure to foreign currency exchange rate and interest rate related to the Company's Banco Pine loan. In June 2012, we entered into a currency interest rate swap arrangement with Banco Pine for R$22.0 million (approximately US$6.9 million based on the exchange rate as of March 31, 2017). The swap arrangement exchanges the principal and interest payments under the Banco Pine loan entered into in July 2012 for alternative principal and interest payments that are subject to adjustment based on fluctuations in the foreign exchange rate between the U.S. dollar and Brazilian real. The swap has a fixed interest rate of 3.94%. This arrangement hedges the fluctuations in the foreign exchange rate between the U.S. dollar and Brazilian real.
We analyzed our foreign currency exposure to identify assets and liabilities denominated in other currencies. For those assets and liabilities, we evaluated the effects of a 10% shift in exchange rates between those currencies and the U.S. dollar. We have determined that there would be an immaterial effect on our results of operations from such a shift.
Commodity Price Risk
Our primary exposure to market risk for changes in commodity prices currently relates to our purchases of sugar feedstocks. When possible, we manage our exposure to this risk primarily through the use of supplier pricing agreements.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer (or “CEO”) and chief financial officer (or “CFO”), evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15(e) under the Securities Exchange Act of 1934, as amended (or the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our CEO and CFO concluded that, as of March 31, 2017, our disclosure controls and procedures are designed and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
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Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during our first fiscal quarter ended March 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on the Effectiveness of Internal Controls
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but cannot assure you that such improvements will be sufficient to provide us with effective internal control over financial reporting.
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In April 2017, a securities class action complaint was filed against Amyris and our CEO, John G. Melo, and CFO, Kathleen Valiasek, in the U.S. District Court for the Northern District of California. The complaint seeks unspecified damages on behalf of a purported class that would comprise all individuals who acquired our common stock between March 2, 2017 and April 17, 2017. The complaint alleges securities law violations based on statements made by the Company in its earnings press release issued on March 2, 2017 and Form 12b-25 filed with the SEC on April 3, 2017. We believe the complaint lacks merit, and intend to defend ourselves vigorously.
We may be involved, from time to time, in legal proceedings and claims arising in the ordinary course of our business. Such matters are subject to many uncertainties and there can be no assurance that legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, results of operations, financial position or cash flows.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information set forth in this Quarterly Report on Form 10-Q, which could materially affect our business, financial condition or future results. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects could be materially and adversely harmed. The trading price of our common stock could decline due to any of these risks, and, as a result, you may lose all or part of your investment.
Risks Related to Our Business
We have incurred losses to date, anticipate continuing to incur losses in the future, and may never achieve or sustain profitability.
We have incurred significant losses in each year since our inception and believe that we will continue to incur losses and negative cash flow from operations into at least 2018. As of March 31, 2017, we had an accumulated deficit of $1,171.8 million and had cash, cash equivalents and short term investments of $2.5 million. We have significant outstanding debt, a significant working capital deficit and contractual obligations related to capital and operating leases, as well as purchase commitments of $3.7 million. As of March 31, 2017, our debt totaled $220.9 million, net of discount and issuance cost of $42.0 million, of which $49.5 million is classified as current. Our debt service obligations over the next twelve months are significant, including approximately $18.3 million of anticipated interest payments (excluding interest paid in kind by adding to outstanding principal) and may include potential early conversion payments of up to approximately $15.8 million (assuming all note holders convert) under our outstanding 9.50% Convertible Senior Notes due 2019 (or the “2015 144A Notes”). Furthermore, our debt agreements contain various financial and operating covenants, including restrictions on business that could cause us to be at risk of defaults. We expect to incur additional costs and expenses related to the continued development and expansion of our business, including construction and operation of our manufacturing facilities, contract manufacturing, research and development operations, and operation of our pilot plants and demonstration facility. There can be no assurance that we will ever achieve or sustain profitability on a quarterly or annual basis.
Our unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2017 have been prepared on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred significant losses since our inception and we expect that we will continue to incur losses as we aim to successfully execute our business plan and will be dependent on additional public or private financings, collaborations or licensing arrangements with strategic partners, or additional credit lines or other debt financing sources to fund continuing operations. Based on our cash balances, recurring losses since inception and our existing capital resources to fund our planned operations for a twelve month period, there is substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. Our operating plans for 2017 and 2018 contemplate a significant reduction in our net cash outflows resulting from (i) growth of sales of existing and new products with positive gross margins, (ii) reduced production costs as a result of manufacturing and technical developments, (iii) cash inflows from collaborations, (iv) access to various financing commitments and (v) strategic asset divestments. In addition, as noted below, for our 2017 and 2018 operating plans, we are dependent on funding from sources that are not subject to existing commitments. We will need to obtain additional funding from equity or debt financings, which may require us to agree to burdensome covenants, grant further security interests in our assets, enter into collaboration and licensing arrangements that require us to relinquish commercial rights, or grant licenses on terms that are not favorable. No assurance can be given at this time as to whether we will be able to achieve our expense reduction or fundraising objectives, regardless of the terms. If we are unable to raise additional financing, or if other expected sources of funding are delayed or not received, our ability to continue as a going concern would be jeopardized and we may be forced to delay, scale back or eliminate some of our general and administrative, research and development, or production activities or other operations and reduce investment in new product and commercial development efforts in an effort to provide sufficient funds to continue our operations. If any of these events occurs, our ability to achieve our development and commercialization goals would be adversely affected. In addition, if we are unable to continue as a going concern, we may be unable to meet our obligations under our existing debt facilities, which could result in an acceleration of our obligation to repay all amounts outstanding under those facilities, and we may be forced to liquidate our assets. In such a scenario, the value we receive for our assets in liquidation or dissolution could be significantly lower than the value reflected in our financial statements.
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Our unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty, which could have a material adverse effect on our financial condition and cause investors to suffer the loss of all or a substantial portion of their investment.
We have limited experience producing our products at commercial scale and may not be able to commercialize our products to the extent necessary to sustain and grow our current business.
To commercialize our products, we must be successful in using our yeast strains to produce target molecules at commercial scale and at a commercially viable cost. If we cannot achieve commercially-viable production economics for enough products to support our business plan, including through establishing and maintaining sufficient production scale and volume, we will be unable to achieve a sustainable integrated renewable products business. Virtually all of our production capacity is through a purpose-built, large-scale production plant in Brotas, Brazil. This plant commenced operations in 2013, and scaling and running the plant has been, and continues to be, a time-consuming, costly, uncertain and expensive process. Given our limited experience commissioning and operating our own manufacturing facilities and our limited financial resources, we cannot be sure that we will be successful in achieving production economics that allow us to meet our plans for commercialization of various products we intend to offer. In addition, our attempts to scale production of new molecules at the plant are subject to uncertainty and risk. For example, even to the extent we successfully complete product development in our laboratories and pilot and demonstration facilities, and at contract manufacturing facilities, we may be unable to translate such success to large-scale, purpose-built plants. If this occurs, our ability to commercialize our technology will be adversely affected and we may be unable to produce and sell any significant volumes of our products. Also, with respect to products that we are able to bring to market, we may not be able to lower the cost of production, which would adversely affect our ability to sell such products profitably. In addition, we will likely need to identify and secure access to additional production capacity to satisfy anticipated volume requirements in 2017. There can be no assurance that we will be able obtain such capacity on favorable or acceptable terms, if at all, and even if we are successful in obtaining such capacity, there can be no assurance that we will be able to scale and operate any additional plants to allow us to meet our operational goals, which could harm our ability to grow our business.
We will require significant inflows of cash from financings, product sales and collaborations to fund our anticipated operations and to service our debt obligations and may not be able to obtain such funding on favorable terms, if at all.
Our planned 2017 and 2018 working capital needs, our planned operating and capital expenditures for 2017 and 2018, and our ability to service our outstanding debt obligations are dependent on significant inflows of cash from financings, existing and new collaboration partners and renewable product sales. We will continue to need to fund our research and development and related activities and to provide working capital to fund production, storage, distribution and other aspects of our business. Some of our anticipated funding sources, such as research and development collaborations, are subject to the risk that we cannot meet milestones, that the collaborations may end prematurely for reasons that may be outside of our control (including technical infeasibility of the project or a collaborator’s right to terminate without cause), or the collaborations are not yet subject to definitive agreements or mandatory funding commitments and, if needed, we may not be able to secure additional types of funding in a timely manner or on reasonable terms, if at all. The inability to generate sufficient cash flow, as described above, could have an adverse effect on our ability to continue with our business plans and our status as a going concern.
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If we are unable to raise additional funding, or if other expected sources of funding are delayed or not received, our ability to continue as a going concern would be jeopardized and we would take the following actions as early as the second quarter of 2017 to support our liquidity needs in 2017 and 2018:
• | Effect significant headcount reductions, particularly with respect to employees not connected to critical or contracted activities across all functions of the Company, including employees involved in general and administrative, research and development, and production activities. |
• | Shift focus to existing products and customers with significantly reduced investment in new product and commercial development efforts. |
• | Reduce production activity at our Brotas manufacturing facility to levels only sufficient to satisfy volumes required for product revenues forecast from existing products and customers. |
• | Reduce expenditures for third party contractors, including consultants, professional advisors and other vendors. |
• | Reduce or delay uncommitted capital expenditures, including non-essential facility and lab equipment, and information technology projects. |
• | Closely monitor the Company's working capital position with customers and suppliers, as well as suspend operations at pilot plants and demonstration facilities. |
Implementing this plan could have a negative impact on our ability to continue our business as currently contemplated, including, without limitation, delays or failures in our ability to:
• | Achieve planned production levels; |
• | Develop and commercialize products within planned timelines or at planned scales; and |
• | Continue other core activities. |
Furthermore, any inability to scale-back operations as necessary, and any unexpected liquidity needs, could create pressure to implement more severe measures. Such measures could have an adverse effect on our ability to meet contractual requirements, including obligations to maintain manufacturing operations, and increase the severity of the consequences described above.
Future revenues are difficult to predict, and our failure to predict revenue accurately may cause our results to be below our expectations or those of analysts or investors and could result in our stock price declining.
Our revenues are comprised of product revenues and grants and collaborations revenues. We generate the substantial majority of our product revenues from sales to collaborators and distributors and only a small portion from direct sales. Our collaboration, supply and distribution agreements do not usually include any specific purchase obligations. The sales volume of our products in any given period has been difficult to predict. A significant portion of our product sales is dependent upon the interest and ability of third party distributors to create demand for, and generate sales of, such products to end-users. For example, if such distributors are unsuccessful in creating pull-through demand for our products with their customers, such distributors may purchase less of our products from us than we expect. In addition, many of our new and novel products are intended to be a component of other companies’ products; therefore, sales of our products may be contingent on our collaborators’ and/or customers’ timely and successful development and commercialization of end-use products that incorporate our products, and price volatility in the markets for such end-use products, which may include commodities, could adversely affect the demand for our products and the margin we receive for our product sales, which could harm our financial results. Furthermore, we have begun to market and sell some of our products directly to end-consumers, initially in the cosmetics market. Because we have little experience in marketing and selling directly to consumers, it is difficult to predict how successful our efforts will be and we may not achieve the product sales we expect to achieve on the timeline we anticipate, if at all.
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In addition, we have in the past entered into, and expect in the future to enter into, research and development collaboration arrangements pursuant to which we receive payments from our collaborators. Some of such collaboration arrangements include advance payments in consideration for grants of exclusivity or research and development activities to be performed by us. It has in the past been difficult for us to know with certainty when we will sign a new collaboration arrangement and receive payments thereunder. As a result, achievement of our quarterly and annual financial goals has been difficult to predict with certainty. Once a collaboration agreement has been signed, receipt of cash payments and/or recognition of related revenues may depend on our achievement of research, development, production or cost milestones, which may be difficult to predict. In addition, a portion of the advance payments we receive under our collaboration agreements is typically classified as deferred revenue and recognized over multiple quarters or years. Since our business model depends in part on collaboration agreements with advance payments that we recognize over time, it may also be difficult for us to rapidly increase our revenues through additional collaborations in any period, as revenue from such new collaborations will often be recognized over multiple quarters or years.
These factors have made it difficult to predict future revenues and have resulted in our revenues being below our previously announced guidance or analysts’ estimates. We continue to face these risks in the future, which may cause our stock price to decline.
A limited number of customers, collaboration partners and distributors account for a significant portion of our revenue, and the loss of major customers, collaboration partners or distributors could harm our operating results.
Our revenues have varied significantly from quarter to quarter and are dependent on sales to, and collaborations with, a limited number of customers, collaboration partners and/or distributors. We cannot be certain that customers, collaboration partners and/or distributors that have accounted for significant revenue in past periods, individually or as a group, will continue to generate similar revenue in any future period. If we fail to renew with, or if we lose a major customer, collaborator or distributor or group of customers, collaborators or distributors, our revenue could decline if we are unable to replace the lost revenue with revenue from other sources.
Our existing financing arrangements may cause significant risks to our stockholders and may impact our ability to pursue certain transactions and operate our business.
As of March 31, 2017, our debt totaled $220.9 million, net of discount and issuance costs of $42.0 million, of which $49.5 million is classified as current. Our cash balance is substantially less than the principal amount of our outstanding debt, and we will be required to generate cash from operations or raise additional working capital through future financings or sales of assets to enable us to repay this indebtedness as it becomes due. There can be no assurance that we will be able to do so.
In addition, we have agreed to significant covenants in connection with our debt financing transactions, including restrictions on our ability to incur future indebtedness, and customary events of default, including failure to pay amounts due, breaches of covenants and warranties, material adverse effect events, certain cross defaults and judgments, and insolvency. A failure to comply with the covenants and other provisions of our debt instruments, including any failure to make a payment when required would generally result in events of default under such instruments, which could permit acceleration of such indebtedness and could result in a material adverse effect on us. If such indebtedness is accelerated, it would generally also constitute an event of default under our other outstanding indebtedness, permitting acceleration of such other outstanding indebtedness. Any required repayment of our indebtedness as a result of acceleration or otherwise would lower our current cash on hand such that we would not have those funds available for use in our business or for payment of other outstanding indebtedness.
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If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we would be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us. Any debt financing that is available could cause us to incur substantial costs and subject us to covenants that significantly restrict our ability to conduct our business. If we seek to complete additional equity financings, the interests of existing equity holders may be diluted.
In addition, the covenants in our debt agreements materially limit our ability to take certain actions, including our ability to pay dividends, make certain investments and other payments, undertake certain mergers and consolidations, and encumber and dispose of assets. For example, the purchase agreement for convertible notes that we sold in separate closings in October 2013 and January 2014, which we refer to as the Tranche Notes, requires us to obtain the consent of the holders of a majority of these notes before completing any change of control transaction or purchasing assets in one transaction or a series of related transactions in an amount greater than $20.0 million, in each case while the Tranche Notes are outstanding. The holders of the Tranche Notes also have pro rata rights to invest in, and under which they could cancel up to the full amount of their outstanding Tranche Notes to pay for, equity securities that we issue in certain financings, which could delay or prevent us from completing such financings.
Furthermore, certain of our existing convertible notes, including the Tranche Notes, contain anti-dilution conversion price adjustment provisions, which may be triggered by future issuances of equity or equity-linked instruments in financing transactions. If such adjustment provisions are triggered, the conversion price of such convertible notes will decrease and the number of shares issuable upon conversion of such convertible notes will correspondingly increase. In such event, existing stockholders will be further diluted and the effective issuance price of such equity or equity-linked instruments will be reduced, which may harm our ability to engage in future financing transactions to fund our business.
Our substantial leverage could adversely affect our ability to fulfill our obligations under our existing indebtedness and may place us at a competitive disadvantage in our industry.
We continue to have substantial debt outstanding and we may incur additional indebtedness from time to time to finance working capital, product development efforts, strategic acquisitions, investments and partnerships, or capital expenditures, or for other general corporate purposes, subject to the restrictions contained in our debt agreements. Our significant indebtedness and debt service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities. For example, our high level of indebtedness presents the following risks:
• | we will be required to use a substantial portion of our cash flow from operations to pay principal and interest on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts, acquisitions, investments and strategic alliances and other general corporate requirements; |
• | our substantial leverage increases our vulnerability to economic downturns and adverse competitive and industry conditions and could place us at a competitive disadvantage compared to those of our competitors that are less leveraged; |
• | our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and our industry and could limit our ability to pursue other business opportunities, borrow more money for operations or capital in the future and implement our business strategies; |
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• | our level of indebtedness and the covenants within our debt instruments may restrict us from raising additional financing on satisfactory terms to fund working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate requirements; and |
• | our substantial leverage may make it difficult for us to attract additional financing when needed. |
If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us, if at all.
A failure to comply with the covenants and other provisions of our debt instruments, including any failure to make a payment when required, could result in events of default under such instruments, which could permit acceleration of such indebtedness. If such indebtedness is accelerated, it could also constitute an event of default under our other outstanding indebtedness, permitting acceleration of such other outstanding indebtedness. Any required repayment of our indebtedness as a result of acceleration or otherwise would lower our current cash on hand such that we would not have those funds available for use in our business or for payment of other outstanding indebtedness.
Our GAAP operating results could fluctuate substantially due to the accounting for the early conversion payment features of outstanding convertible promissory notes.
Several of our outstanding convertible debt instruments are accounted for under Accounting Standards Codification 815, Derivatives and Hedging, or ASC 815, as an embedded derivative. For instance, with respect to the 2015 144A Notes, if the holders elect convert their 2015 144A Notes, such converting holders will receive an early conversion payment equal to the present value of the remaining scheduled payments of interest that would have been made on the 2015 144A Notes being converted through April 15, 2019, the maturity date of the 2015 144A Notes. Our 6.50% Convertible Senior Notes due 2019, or the 2014 144A Notes, contain a similar early conversion payment feature, provided that the last reported sale price of our common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending within five trading days immediately prior to the date we receive a notice of such election to convert exceeds the conversion price in effect on each such trading day. The early conversion payment features of the 2014 144A Notes and the 2015 144A Notes are accounted for under ASC 815 as embedded derivatives. ASC 815 requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The fair value of the derivative is 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 being charged to earnings (loss). We have determined that we must bifurcate and account for the early conversion payment features of the 2014 144A Notes and the 2015 144A Notes, as well as certain other features of our other convertible debt instruments, as embedded derivatives in accordance with ASC 815. We have recorded these embedded derivative liabilities as non-current liabilities on our consolidated balance sheet with a corresponding debt discount at the date of issuance that is netted against the principal amount of the 2014 144A Notes, the 2015 144A Notes or other convertible debt instrument, as applicable. 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 or loss. There is no current observable market for this type of derivative and, as such, we determine the fair value of the embedded derivatives using the binomial lattice model. The valuation model uses the stock price, conversion price, maturity date, risk-free interest rate, estimated stock volatility and estimated credit spread. Changes in the inputs for these valuation models may have a significant impact on the estimated fair value of the embedded derivative liabilities. For example, an increase in our stock price results in an increase in the estimated fair value of the embedded derivative liabilities. The embedded derivative liabilities may have, on a GAAP basis, a substantial effect on our balance sheet from quarter to quarter and it is difficult to predict the effect on our future GAAP financial results, since valuation of these embedded derivative liabilities are based on factors largely outside of our control and may have a negative impact on our earnings and balance sheet. The effects of these embedded derivatives may cause our GAAP operating results to be below expectations, which may cause our stock price to decline.
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If we are not able to successfully commence, scale up or sustain operations at our existing and planned manufacturing facilities, our customer relationships, business and results of operations may be adversely affected.
A substantial component of our planned production capacity in the near and long term depends on successful operations at our existing and potential large-scale production plants. We are currently operating our first purpose-built, large-scale production plant in Brotas, Brazil and may complete construction of certain other facilities in the coming years. Delays or problems in the construction, start-up or operation of these facilities will cause delays in our ramp-up of production and hamper our ability to reduce our production costs. Delays in construction can occur due to a variety of factors, including regulatory requirements and our ability to fund construction and commissioning costs. For example, in 2012 we determined it was necessary to delay further construction of our large-scale manufacturing facility with São Martinho in order to focus on the construction and commissioning of our Brotas facility. We have since permanently ceased construction of the São Martinho facility. In 2016 we produced at capacity at our Brotas facility and will likely need to identify and secure access to additional production capacity in 2017 based on anticipated volume requirements, either by constructing a new custom-built facility, acquiring an existing facility from a third party, retrofitting an existing facility operated by a current or potential partner or increasing our use of contract manufacturing facilities. In December 2016, we acquired a production facility in Leland, North Carolina, which facility had been previously operated by our partner Glycotech to perform chemical conversion and production of our end-products, and which facility was subsequently transferred to our newly-formed joint venture with Nikko Chemicals Co., Ltd. and Nippon Surfactant Industries Co., Ltd. (or collectively “Nikko”), as further described in Note 7, “Joint Ventures and Noncontrolling Interest” to our unaudited condensed consolidated financial statements included in this report. In addition, in February 2017 we broke ground on a second custom-built production facility adjacent to our existing Brotas facility. However, there can be no assurance that we will be able to complete such facility on our expected timeline, if at all.
Once our large-scale production facilities are built, acquired or retrofitted, we must successfully commission them, if necessary, and they must perform as we expect. If we encounter significant delays, cost overruns, engineering issues, contamination problems, equipment or raw material supply constraints, unexpected equipment maintenance requirements, safety issues, work stoppages or other serious challenges in bringing these facilities online and operating them at commercial scale, we may be unable to produce our renewable products in the time frame and at the cost we have planned. Industrial scale fermentation is an emerging field and it is difficult to predict the effects of scaling up production to commercial scale, which involves various risks to the quality and consistency of our molecules. In addition, in order to produce molecules at our existing and potential future plants, we have been and may in the future be required to perform thorough transition activities, and modify the design of the plant. Any modifications to the production plant could cause complications in the operations of the plant, which could result in delays or failures in production. If any of these risks occur, or if we are unable to create or obtain additional manufacturing capacity necessary to meet existing and potential customer demand, we may need to continue to use, or increase our use of, contract manufacturing sources, which generally entail greater cost to us to produce our products and would therefore reduce our anticipated gross margins and may also prevent us from accessing certain markets for our products. Further, if our efforts to increase (or commence, as the case may be) production at these facilities are not successful, our partners may decide not to work with us to develop additional production facilities, demand more favorable terms or delay their commitment to invest capital in our production. If we are unable to create and sustain manufacturing capacity and operations sufficient to satisfy the existing and potential demand of our customers and partners, our business and results of operations may be adversely affected.
Our reliance on the large-scale production plant in Brotas, Brazil subjects us to execution and economic risks.
Our decision to focus our efforts for production capacity on our manufacturing facility in Brotas, Brazil means that we have limited manufacturing sources for our products in 2017 and beyond. While we have undertaken efforts to identify and obtain additional manufacturing capacity for 2017 and beyond, including the manufacturing facility in Leland, North Carolina and the proposed second manufacturing facility at the Brotas site discussed above, there can be no assurance that such efforts will be successful on the timelines or at the cost we require, if at all. Any production delays could have a significant negative impact on our business, including our ability to achieve commercial viability for our products and meeting existing and potential customer demand. With the facility in Brotas, Brazil, we are, for the first time, operating a commercial fermentation and separation facility ourselves. We have in the past faced, and may in the future face, unexpected difficulties associated with the operation of our plants. For example, we have in the past, at certain contract manufacturing facilities and at the Brotas facility, encountered delays and difficulties in ramping up production based on contamination in the production process, problems with plant utilities, lack of automation and related human error, issues arising from process modifications to reduce costs and adjust product specifications or transition to producing new molecules, and other similar challenges. We cannot be certain that we will be able to remedy all of such challenges quickly or effectively enough to achieve commercially viable near-term production costs and volumes.
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To the extent we secure collaboration arrangements with new or existing partners, we may be required to make significant capital investments at our existing or new facilities in order to produce molecules or other products for such collaborations. Any failure or difficulties in establishing, building up or retooling our operations for these new collaboration arrangements could have a significant negative impact on our business, including our ability to achieve commercial viability for our products, lead to the inability to meet our contractual obligations and could cause us to allocate capital, personnel and other resources from our organization which could adversely affect our business and reputation.
As part of our arrangement to build the plant in Brotas, Brazil we have an agreement with Tonon Bioenergia S.A., or Tonon, to purchase from Tonon sugarcane juice and syrup corresponding to a certain number of tons of sugarcane per year, along with specified water and vapor volumes. Until this annual volume is reached, we are restricted from purchasing sugarcane juice or syrup for processing in the facility from any third party, subject to limited exceptions, unless we pay the premium to Tonon that we would have paid if we bought the sugarcane juice from them. As such, we will be relying on Tonon to supply such juice and syrup and utilities on a timely basis, in the volumes we need, and at competitive prices. If a third party can offer superior prices and Tonon does not consent to our purchasing from such third party, we would be required to pay Tonon the applicable premium, which would have a negative impact on our production cost. Furthermore, we agreed to pay a price for the juice or syrup that is based on the lower of the cost of two other products produced by Tonon using such juice, plus a premium. Tonon may not want to sell sugarcane juice or syrup to us if the price of one of the other products is substantially higher than the one setting the price for the juice or syrup we purchase. While the agreement provides that Tonon would have to pay a penalty to us if it fails to supply the agreed-upon volume of syrup or juice for a given month, the penalty may not be enough to compensate us for the increased cost if third-party suppliers do not offer competitive prices. Also, if the prices of the other products produced by Tonon increase, we could be forced to pay those increased prices for production without a related increase in the price at which we can sell our products, reducing or eliminating any margins we can otherwise achieve. If in the future these supply terms no longer provide a viable economic structure for the operation in Brotas, Brazil we may be required to renegotiate our agreement, which could result in manufacturing disruptions and delays. In December 2015, Tonon filed for bankruptcy protection in Brazil. If Tonon is unable to supply sugarcane juice or syrup, water and steam in accordance with our agreement, we may not be able to obtain substitute supplies from third parties in necessary quantities or at favorable prices, or at all. In such event, our ability to manufacture our products in a timely or cost-effective manner, or at all, would be negatively affected, which would have a material adverse effect on our business.
Furthermore, as we continue to scale up production of our products, through contract manufacturers, at our existing and planned production plants in Brotas, Brazil and Leland, North Carolina and at any future manufacturing facility, we may be required to store increasing amounts of our products for varying periods of time and under differing temperatures or other conditions that cannot be easily controlled, which may lead to a decrease in the quality of our products and their utility profiles and could adversely affect their value. If our stored products degrade in quality, we may suffer losses in inventory and incur additional costs in order to further refine our stored products or we may need to make new capital investments in shipping, improved storage or sales channels and related logistics.
Loss or termination of contract manufacturing relationships could harm our ability to meet our production goals.
As we have focused on building and commissioning, acquiring or retrofitting our own plants or the plants of existing or potential partners, respectively, and improving our production economics, we have reduced our use of contract manufacturing and have terminated relationships with some of our contract manufacturing partners. The failure to have multiple available supply options for farnesene or other target molecules could create a risk for us if a single source or a limited number of sources of manufacturing runs into operational issues. In addition, if we are unable to secure the services of contract manufacturers when and as needed, we may lose customer opportunities and the growth of our business may be impaired. We cannot be sure that contract manufacturers will be available when we need their services, that they will be willing to dedicate a portion of their capacity to our projects, or that we will be able to reach acceptable price and other terms with them for the provision of their production services. If we shift priorities and adjust anticipated production levels (or cease production altogether) at contract manufacturing facilities, such adjustments or cessations could also result in disputes or otherwise harm our business relationships with contract manufacturers. In addition, reducing or stopping production at one facility while increasing or starting up production at another facility generally results in significant losses of production efficiency, which can persist for significant periods of time. Also, in order for production to commence under our contract manufacturing arrangements, we generally must provide equipment for such operations, and we cannot be assured that such equipment can be ordered or installed on a timely basis, at acceptable costs, or at all. Further, in order to establish new manufacturing facilities, we need to transfer our yeast strains and production processes from our labs to commercial plants controlled by third parties, which may pose technical or operational challenges that delay production or increase our costs.
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Our use of contract manufacturers exposes us to risks relating to costs, contractual terms and logistics.
While we have commenced commercial production at our Brotas, Brazil and Leland, North Carolina plants, we continue to commercially produce, process and manufacture some specialty molecules through the use of contract manufacturers, and we anticipate that we will continue to use contract manufacturers for the foreseeable future for chemical conversion and production of end-products and, to mitigate cost and volume risks at our large-scale production facilities, for production of Biofene and other fermentation target compounds. Establishing and operating contract manufacturing facilities requires us to make significant capital expenditures, which reduces our cash and places such capital at risk. Also, contract manufacturing agreements may contain terms that commit us to pay for capital expenditures and other costs incurred or expected to be earned by the plant operators and owners, which can result in contractual liability and losses for us even if we terminate a particular contract manufacturing arrangement or decide to reduce or stop production under such an arrangement.
The locations of contract manufacturers can pose additional cost, logistics and feedstock challenges. If production capacity is available at a plant that is remote from usable chemical finishing or distribution facilities, or from customers, we will be required to incur additional expenses in shipping products to other locations. Such costs could include shipping costs, compliance with export and import controls, tariffs and additional taxes, among others. In addition, we may be required to use feedstock from a particular region for a given production facility. The feedstock available in such region may not be the least expensive or most effective feedstock for production, which could significantly raise our overall production cost or reduce our product’s quality until we are able to optimize the supply chain.
Our operations rely on sophisticated information technology and equipment systems and infrastructure, a disruption of which could harm our operations.
We rely on various information technology and equipment systems, some of which are dependent on services provided by third parties, to manage our technology platform and operations. These systems provide critical data and services for internal and external users, including procurement and inventory management, transaction processing, financial, commercial and operational data, human resources management, legal and tax compliance information and other information and processes necessary to operate and manage our business. These systems are complex and are frequently updated as technology improves, and include software and hardware that is licensed, leased or purchased from third parties. If our information technology and equipment systems experience breaches or other failures or disruptions, our systems and the information could be compromised. While we have implemented security measures and disaster recovery plans designed to mitigate the effects of any failures or disruption of these systems, such measures may not adequately prevent adverse events such as breaches or failures from occurring or mitigate their severity if they do occur. If our information technology or equipment systems are breached, damaged or fail to function properly due to internal errors or defects, implementation or integration issues, catastrophic events or power outages, we may experience a material disruption in our ability to manage our business operations. Failure or disruption of these systems could have an adverse effect on our operating results and financial condition.
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If we are unable to reduce our production costs, we may not be able to produce our products at competitive prices and our ability to grow our business will be limited.
In order to be competitive in the markets we are targeting, our products must have superior qualities or be competitively priced relative to alternatives available in the market. Currently, our costs of production are not low enough to allow us to offer some of our planned products at competitive prices relative to alternatives available in the market. Our production costs depend on many factors that could have a negative effect on our ability to offer our planned products at competitive prices, including, in particular, our ability to establish and maintain sufficient production scale and volume, and feedstock cost. For example, see “We have limited experience producing our products at commercial scale and may not be able to commercialize our products to the extent necessary to sustain and grow our current business,” “Our manufacturing operations require sugar feedstock, energy and steam, and the inability to obtain such feedstock, energy and steam in sufficient quantities or in a timely manner, or at reasonable prices, may limit our ability to produce products profitably or at all,” and “The price of sugarcane and other feedstocks can be volatile as a result of changes in industry policy and may increase the cost of production of our products.”
We face financial risk associated with scaling up production to reduce our production costs. To reduce per-unit production costs, we must increase production to achieve economies of scale and to be able to sell our products with positive margins. However, if we do not sell production output in a timely manner or in sufficient volumes, our investment in production will harm our cash position and generate losses. Additionally, we may incur added costs in storage and we may face issues related to the decrease in quality of our stored products, which could adversely affect the value of such products. Since achieving competitive product prices generally requires increased production volumes and our manufacturing operations and cash flows from sales are in their early stages, we have had to produce and sell products at a loss in the past, and may continue to do so as we build our business. If we are unable to achieve adequate revenues from a combination of product sales and other sources, we may not be able to invest in production and we may not be able to pursue our business plans. In addition, in order to attract potential collaboration or joint venture partners, or to meet payment milestones under existing or future collaboration agreements, we have in the past and may in the future be required to guarantee or meet certain levels of production costs. If we are unable to reduce our production costs to meet such guarantees or milestones, our net cash flow will be further reduced.
Key factors beyond production scale and feedstock cost that impact our production costs include yield, productivity, separation efficiency and chemical process efficiency. Yield refers to the amount of the desired molecule that can be produced from a fixed amount of feedstock. Productivity represents the rate at which our product is produced by a given yeast strain. Separation efficiency refers to the amount of desired product produced in the fermentation process that we are able to extract and the time that it takes to do so. Chemical process efficiency refers to the cost and yield for the chemical finishing steps that convert our target molecule into a desired product. In order to compete successfully in our target markets, we must produce our products at significantly lower costs, which will require both substantially higher yields than we have achieved to date and other significant improvements in production efficiency, including in productivity and in separation and chemical process efficiencies. There can be no assurance that we will be able to make these improvements or reduce our production costs sufficiently to offer our planned products at competitive prices or to attract and maintain collaboration partners, and any such failure could have a material adverse impact on our business and prospects.
Our ability to establish substantial commercial sales of our products is subject to many risks, any of which could prevent or delay revenue growth and adversely impact our customer relationships, business and results of operations.
There can be no assurance that our products will be approved or accepted by customers, that customers will choose our products over competing products, or that we will be able to sell our products profitably at prices and with features sufficient to establish demand. The markets we have entered first are primarily those for specialty chemical products used by large consumer products or specialty chemical companies. In entering these markets, we have sold and we intend to sell our products as alternatives to chemicals currently in use, and in some cases the chemicals that we seek to replace have been used for many years. The potential customers for our molecules generally have well developed manufacturing processes and arrangements with suppliers of the chemical components of their products and may have a resistance to changing these processes and components. These potential customers frequently impose lengthy and complex product qualification procedures on their suppliers, influenced by consumer preference, manufacturing considerations such as process changes and capital and other costs associated with transitioning to alternative components, supplier operating history, established business relationships and agreements, regulatory issues, product liability and other factors, many of which are unknown to, or not well understood by, us. Satisfying these processes may take many months or years. Additionally, we may be subject to product safety testing and may be required to meet certain regulatory and/or product safety standards. Meeting these standards can be a time consuming and expensive process, and we may invest substantial time and resources into such qualification efforts without ultimately securing approval. If we are unable to convince these potential customers (and the consumers who purchase products containing such chemicals) that our products are comparable to the chemicals that they currently use or that the use of our products is otherwise to their benefit, we will not be successful in entering these markets and our business will be adversely affected.
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We expect to face competition for our products from providers of petroleum-based products and from other companies seeking to provide alternatives to these products, and if we cannot compete effectively against these companies or products we may not be successful in bringing our products to market or further growing our business after we do so.
We expect that our renewable products will compete with both the traditional, largely petroleum-based products that are currently being used in our target markets and with the alternatives to these existing products that established enterprises and new companies are seeking to produce.
In the markets that we are initially entering, and in other markets that we may seek to enter in the future, we will compete primarily with the established providers of ingredients currently used in products in these markets. Producers of these incumbent products include global oil companies, large international chemical companies and companies specializing in specific products, such as squalane or essential oils. We may also compete in one or more of these markets with products that are offered as alternatives to the traditional petroleum-based or other traditional products being offered in these markets.
With the emergence of many new companies seeking to produce products from alternative sources, we may face increasing competition from such companies. As they emerge, some of these companies may be able to establish production capacity and commercial partnerships to compete with us. If we are unable to establish production and sales channels that allow us to offer comparable products at attractive prices, we may not be able to compete effectively with these companies.
We believe the primary competitive factors in our target markets are:
• | product price; |
• | product performance and other measures of quality; |
• | infrastructure compatibility of products; |
• | sustainability; and |
• | dependability of supply. |
The oil companies, large chemical companies and well-established agricultural products companies with whom we compete are much larger than us, have, in many cases, well developed distribution systems and networks for their products, have valuable historical relationships with the potential customers we are seeking to serve and have much more extensive sales and marketing programs in place to promote their products. In order to be successful, we must convince customers that our products are at least as effective as the traditional products they are seeking to replace and we must provide our products on a cost basis that does not greatly exceed these traditional products and other available alternatives. Some of our competitors may use their influence to impede the development and acceptance of renewable products of the type that we are seeking to produce.
We believe that for our chemical products to succeed in the market, we must demonstrate that our products are comparable alternatives to existing products and to any alternative products that are being developed for the same markets based on some combination of product cost, availability, performance, and consumer preference characteristics. With respect to our diesel and other transportation fuels products, we believe that our product must perform as effectively as petroleum-based fuel, or alternative fuels, and be available on a cost basis that does not greatly exceed these traditional products and other available alternatives. In addition, with the wide range of renewable fuels products under development, we must be successful in reaching potential customers and convincing them that ours are effective and reliable alternatives.
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Certain rights we have granted to Total and other existing stockholders, including in relation to our future securities offerings, could have substantial impacts on our company.
Under certain agreements between us and Total related to Total’s original investment in our capital stock, for as long as Total owns 10% of our voting securities, it has rights to an exclusive negotiation period if our Board of Directors decides to sell our company. Total also has the right to designate one director to serve on our Board of Directors. In addition, in connection with Total’s investments in Amyris, our certificate of incorporation includes a provision that excludes Total from prohibitions on business combinations between Amyris and an “interested stockholder.” These provisions could have the effect of discouraging potential acquirers from making offers to acquire us, and give Total more access to Amyris than other stockholders if Total decides to pursue an acquisition.
Additionally, in connection with subsequent investments by Total in Amyris, we granted Total, among other investors, a right of first investment if we propose to sell securities in a private placement financing transaction. With these rights, Total and other investors may subscribe for a portion of any new private placement financing and require us to comply with certain notice periods, which could discourage other investors from participating in, or cause delays in our ability to close, such a financing. Further, Total and such other investors have the right to pay for any securities purchased in connection with an exercise of their right of first investment by cancelling all or a portion of our debt held by them. To the extent Total or such other investors exercise these rights, it will reduce the cash proceeds we may realize from the relevant financing.
Our relationship with Ginkgo Bioworks, Inc. exposes us to financial and commercial risks.
In June 2016, we entered into an initial strategic partnership agreement with Ginkgo Bioworks, Inc., or Ginkgo, pursuant to which we licensed certain intellectual property to Ginkgo in exchange for a license fee and royalty, and agreed to pursue the negotiation and execution of a definitive partnership agreement setting forth the terms of a long-term commercial partnership and collaboration arrangement between us and Ginkgo, and in September 2016 we executed a definitive collaboration agreement with Ginkgo setting forth the terms of a commercial partnership under which the parties would collaborate to develop, manufacture and sell commercial products and would share in the value of such products. In connection with the entry into such commercial agreements, we received a waiver under, and subsequently entered into an amendment of, our senior secured credit facility, the agent and lender under which is an affiliate of Ginkgo, which amendment extended, subject to certain conditions which were satisfied in January 2017, the maturity of the loans under the senior secured credit facility, eliminated principal repayments under the facility prior to maturity, subject to the requirement that we apply certain monies received by us under the collaboration agreement with Ginkgo to repay the outstanding loans under the facility, and waived the covenant in the senior secured loan facility requiring the Company to maintain unrestricted, unencumbered cash in defined U.S. bank accounts in an amount equal to at least 50% of the principal amount outstanding under the facility until the maturity date. For more details on our transactions with Ginkgo, please see Note 5, “Debt and Mezzanine Equity” and Note 8, “Significant Agreements” to our unaudited condensed consolidated financial statements included in this report.
There can be no assurance that our partnership with Ginkgo will be successful, and the partnership may prevent us from pursuing other business opportunities in the future. If the partnership is unsuccessful, our ability to continue with our business plans would be adversely affected. In addition, negative developments in our commercial partnership with Ginkgo could negatively affect our relationship with the agent and lender under our senior secured credit facility, an affiliate of Ginkgo, which could adversely impact our ability to incur additional indebtedness in the future or take other actions the consent for which would be required from the agent and lender under the facility. In such event, our financial condition and business operations could be adversely affected.
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If we do not meet technical, development and commercial milestones in our collaboration agreements, our future revenue and financial results will be adversely impacted.
We have entered into a number of agreements regarding the further development of certain of our products and, in some cases, for ultimate sale of certain products to the customer under the agreement. None of these agreements affirmatively obligates the other party to purchase specific quantities of any products at this time, and most contain important conditions that must be satisfied before additional research and development funding or product purchases would occur. These conditions include research and development milestones and technical specifications that must be achieved to the satisfaction of our collaborators, which we cannot be certain we will achieve. If we do not achieve these contractual milestones, our revenues and financial results will be adversely affected.
We are subject to risks related to our reliance on collaboration arrangements to fund development and commercialization of our products and the success of such products is uncertain.
For most product markets we are seeking to enter, we either have or are seeking collaboration partners to fund the research and development, commercialization and production efforts required for the target products. Typically we provide limited exclusive rights and revenue sharing with respect to the production and sale of particular types of products in specific markets in exchange for such up-front funding. These exclusivity, revenue-sharing and other similar terms limit our ability to commercialize our products and technology, and may impact the size of our business or our profitability in ways that we do not currently envision. In addition, revenues from these types of relationships are a key part of our cash plan for 2017 and beyond. If we fail to collect expected collaboration revenues, or to identify and add sufficient additional collaborations to fund our planned operations, we may be unable to fund our operations or pursue development and commercialization of our planned products. To achieve our collaboration revenue targets from year to year, we may be forced to enter into agreements that contain less favorable terms. As part of our current and future collaboration arrangements, we may be required to make significant capital investments at our existing or new facilities in order to produce molecules or other products for such collaborations. Any failure or difficulties in establishing, building up or retooling our operations for these collaboration arrangements could have a significant negative impact on our business, including our ability to achieve commercial viability for our products, lead to the inability to meet our contractual obligations and could cause us to allocate capital, personnel and other resources from our organization which could adversely affect our business and reputation.
With respect to pharmaceutical collaborations, our experience in this industry is limited, so we may have difficulty identifying and securing collaboration partners and customers for pharmaceutical applications of our products and services. Furthermore, our success in the pharmaceutical market depends primarily upon our ability to identify and validate new small molecule compounds of pharmaceutical interest (including through the use of our discovery platform), and identify, test, develop and commercialize such compounds. Our research efforts may initially show promise in discovering potential new therapeutic candidates, yet fail to yield viable product candidates for clinical development for a number of reasons, including:
• | because our research methodology, including our screening technology, may not successfully identify medically relevant product candidates; |
• | we may identify and select from our discovery platform novel untested classes of product candidates for the particular disease indication we are pursuing, which may be challenging to validate because of the novelty of the product candidates or we may fail to validate at all after further research work; |
• | our product candidates may cause adverse effects in patients or subjects, even after successful initial toxicology studies, which may make the product candidates unmarketable; |
• | our product candidates may not demonstrate a meaningful benefit to patients or subjects; and |
• | collaboration partners may change their development profiles or plans for potential product candidates or abandon a therapeutic area or the development of a partnered product. |
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Research programs to identify new product targets and candidates require substantial technical, financial and human resources. We may focus our efforts and resources on potential discovery efforts, programs or product candidates that ultimately prove to be unsuccessful.
Our collaboration arrangements may restrict or prevent our future business activity in certain markets or industries, which could harm our ability to grow our business.
As part of our collaboration arrangements in the ordinary course of business, we may grant to our partners exclusive rights with respect to the development, production and/or commercialization of particular products or types of products in specific markets in exchange for up-front funding and/or downstream value sharing arrangements. These rights might inhibit potential collaboration or strategic partners or potential customers from entering into negotiations with us about further business opportunities, and we may be restricted or prevented from engaging with other partners or customers in those markets, which may limit our ability to grow our business.
For example, under our Amended and Restated Jet Fuel Agreement with TAB and our License Agreement regarding Diesel Fuel in the European Union with Total described above, we granted TAB and Total, respectively, certain exclusive rights to produce and commercialize farnesene- or farnesane-based jet and diesel fuel in certain jurisdictions, as well as certain purchase rights. As a result of these agreements, we generally no longer have an independent right to make or sell farnesene- or farnesane-based jet or diesel fuels in such jurisdictions without the approval of TAB or Total, as applicable. If, for any reason, we would like to pursue farnesene- or farnesane-based jet or diesel fuels in such jurisdictions independently or with a third party, these arrangements could impair our ability to develop, produce or commercialize such jet or diesel fuels, which could have a material adverse effect on our business and long term prospects.
In the past, we have had to grant concessions to existing partners in exchange for such partners waiving or modifying their exclusive rights with respect to a particular product, type of product or market so that we could engage with a third party with respect to such product, product type or market. There can be no assurance that existing partners will be willing to grant waivers or modify their exclusive rights in the future on favorable terms, if at all. If we are unable to engage other potential partners with respect to particular products, products types or markets for which we have previously granted exclusive rights, our ability to grow our business would be harmed and our results of operations may be adversely effected.
If our collaboration partners are not successful in commercializing products that incorporate our technology, our business and results of operations may be adversely affected.
We rely on our collaboration partners to create demand with end-users for products that incorporate our products and technologies. If such collaboration partners are unable to create such demand, we may not be able to successfully market or sell our products. In addition, while we maintain certain clawback rights to our technology in the event our collaboration partners are unable or unwilling to commercialize the products we create for them under the applicable collaboration arrangement, if our collaboration partners do not commercialize the products covered by our collaboration or supply arrangements, we may be restricted from or unable to market or sell such products or technologies to other potential collaboration partners, which could hinder the growth of our business. If we allocate resources to collaborations that do not lead to products that are commercially viable, our revenues, financial condition and results of operations could be adversely affected.
In addition, certain of our collaboration partners have the right to terminate their agreements with us if we undergo a change of control or a sale of our business, which could discourage a potential acquirer from making an offer to acquire us.
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We have limited control over our joint ventures.
As a result of the restructuring of our joint ventures TAB and Novvi during 2016, as discussed above, we do not have the right or power to control the management of such entities, and our joint venture partners may take action with respect to such joint ventures which is contrary to our interests or objectives. In addition, with respect to the joint venture we formed in December 2016 with Nikko relating to our Neossance cosmetic ingredients business, while we hold a 50% equity interest in such joint venture and have a right to appoint one half of its board of directors, our joint venture partners acting together will have the right to designate the Chief Executive Officer and certain other officers, which would restrict our ability to control the operations of such joint venture. If our joint venture partners act contrary to our interest, it could harm our brand, business, results of operations and financial condition. In addition, operating a joint venture often requires additional organizational formalities as well as time-consuming procedures for sharing information and making decisions, which can divert management resources, and if a joint venture partner changes or relationships deteriorate, our success in the joint venture may be materially adversely affected, which could harm our business. Furthermore, with respect to TAB, if we were to experience a change of control or fail to make any required capital contribution to TAB, Total has a right to buy out our interest in TAB at fair market value. If Total were to exercise these rights, we would, in effect, relinquish our economic rights to the intellectual property we have exclusively licensed to TAB, and our ability to seek future revenue from farnesene-based jet fuel outside of Brazil would be adversely affected (or completely prevented). This could significantly reduce the value of our product offerings and have a material adverse effect on our ability to grow our business in the future.
Our manufacturing operations require sugar feedstock, energy and steam, and the inability to obtain such feedstock, energy and steam in sufficient quantities or in a timely manner, or at reasonable prices, may limit our ability to produce our products profitably, or at all.
We anticipate that the production of our products will require large volumes of feedstock. We have relied on a mixture of feedstock sources for use at our contract manufacturing operations, including cane sugar, corn-based dextrose and beet molasses. For our large-scale production facility in Brazil, we are relying primarily on Brazilian sugarcane. We cannot predict the future availability or price of these various feedstocks, nor can we be sure that our mill partners, which we expect to supply the sugarcane feedstock necessary to produce our products in Brazil, will be able to supply it in sufficient quantities or in a timely manner. For example, in December 2015, Tonon, one of our suppliers of sugarcane juice and syrup, filed for bankruptcy protection in Brazil, which may adversely affect its ability to supply us with sugarcane juice and syrup in the future. Furthermore, to the extent we are required to rely on sugar feedstock other than Brazilian sugarcane, the cost of such feedstock may be higher than we expect, increasing our anticipated production costs. Feedstock crop yields and sugar content depend on weather conditions, such as rainfall and temperature. Weather conditions have historically caused volatility in the ethanol and sugar industries by causing crop failures or reduced harvests. Excessive rainfall can adversely affect the supply of sugarcane and other sugar feedstock available for the production of our products by reducing the sucrose content and limiting growers' ability to harvest. Crop disease and pestilence can also occur from time to time and can adversely affect feedstock growth, potentially rendering useless or unusable all or a substantial portion of affected harvests. With respect to sugarcane, our initial primary feedstock, seasonal availability and price, the limited amount of time during which it keeps its sugar content after harvest, and the fact that sugarcane is not itself a traded commodity, increases these risks and limits our ability to substitute supply in the event of such an occurrence. If production of sugarcane or any other feedstock we may use to produce our products is adversely affected by these or other conditions, our production will be impaired, and our business will be adversely affected.
Additionally, our facility in Brotas, Brazil depends on large quantities of energy and steam to operate. We have a supply agreement with Cogeração de Energia Elétrica Rhodia Brotas S.A. pursuant to which we receive energy and steam in sufficient amounts to meet our current needs. However, we cannot predict the future availability or price of energy and steam. If, for whatever reason, we must purchase energy or steam from a different supplier, the cost of such energy and steam may be higher than we expect, increasing our anticipated production costs. Droughts or other weather conditions or natural disasters in Brazil may also affect energy and steam production, cost and availability and, therefore, may adversely affect our production. If our supply and access to energy or steam is adversely affected by these or other conditions, our production will be impaired, and our business will be adversely affected.
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The price of sugarcane and other feedstocks can be volatile as a result of changes in industry policy and may increase the cost of production of our products.
In Brazil, Conselho dos Produtores de Cana, Açúcar e Álcool (Council of Sugarcane, Sugar and Ethanol Producers or Consecana), an industry association of producers of sugarcane, sugar and ethanol, sets market terms and prices for general supply, lease and partnership agreements for sugarcane. If Consecana makes changes to such terms and prices, it could result in higher sugarcane prices and/or a significant decrease in the volume of sugarcane available for the production of our products. Furthermore, if Consecana were to cease to be involved in this process, such prices and terms could become more volatile. Similar principles apply to the pricing of other feedstocks as well. Any of these events could adversely affect our business and results of operations.
Our large-scale commercial production capacity is centered in Brazil, and our business will be adversely affected if we do not operate effectively in that country.
For the foreseeable future, we will be subject to risks associated with the concentration of essential product sourcing and operations in Brazil. The Brazilian government has changed in the past, and may change in the future, monetary, taxation, credit, tariff, labor and other policies to influence the course of Brazil's economy. For example, the government's actions to control inflation have at times involved setting wage and price controls, adjusting interest rates, imposing taxes and exchange controls and limiting imports into Brazil. We have no control over, and cannot predict what policies or actions the Brazilian government may take in the future. Our business, financial performance and prospects may be adversely affected by, among others, the following factors:
• | delays or failures in securing licenses, permits or other governmental approvals necessary to build and operate facilities and use our yeast strains to produce products; |
• | rapid consolidation in the sugar and ethanol industries in Brazil, which could result in a decrease in competition; |
• | political, economic, diplomatic or social instability in or affecting Brazil; |
• | changing interest rates; |
• | tax burden and policies; |
• | effects of changes in currency exchange rates; |
• | any changes in currency exchange policy that lead to the imposition of exchange controls or restrictions on remittances abroad; |
• | inflation; |
• | land reform or nationalization movements; |
• | changes in labor related policies; |
• | export or import restrictions that limit our ability to move our products out of Brazil or interfere with the import of essential materials into Brazil; |
• | changes in, or interpretations of foreign regulations that may adversely affect our ability to sell our products or repatriate profits to the United States; |
• | tariffs, trade protection measures and other regulatory requirements; |
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• | compliance with United States and foreign laws that regulate the conduct of business abroad; |
• | compliance with anti-corruption laws recently enacted in Brazil; |
• | an inability, or reduced ability, to protect our intellectual property in Brazil including any effect of compulsory licensing imposed by government action; and |
• | difficulties and costs of staffing and managing foreign operations. |
We cannot predict whether the current or future Brazilian government will implement changes to existing policies on taxation, exchange controls, monetary strategy, labor relations, social security and the like, nor can we estimate the impact of any such changes on the Brazilian economy or our operations.
Brazil’s economy has recently experienced quarters of slow or negative gross domestic product growth and has experienced high inflation and a growing fiscal deficit of its federal government accounts. In addition, major corruption scandals involving members of the executive, state-controlled enterprises and large private sector companies have been disclosed and are the subject of ongoing investigation by federal authorities. The final outcome of these investigations and their impact on the Brazilian economy is not yet known and cannot be predicted with certainty.
In addition, during the 2016 U.S. presidential election campaign, President Trump made comments suggesting that he was not supportive of certain existing international trade agreements as well as that he might take action to restrict or tax products imported into the U.S. from foreign jurisdictions. At this time, it remains unclear what President Trump will or will not do with respect to these international trade agreements or U.S. trade policy. If President Trump takes action to withdraw from or materially modify international trade agreements or place restrictions or tariffs on products imported from Brazil, our business, financial condition and results of operations could be adversely affected.
We maintain operations in foreign jurisdictions other than Brazil, and may in the future expand our operations to additional foreign jurisdictions. Many, if not all of the above-mentioned risks also apply to our operations in such jurisdictions. If any of these risks were to occur, our operations and business would be adversely affected.
Our international operations expose us to the risk of fluctuation in currency exchange rates and rates of foreign inflation, which could adversely affect our results of operations.
We currently incur significant costs and expenses in Brazilian real and may in the future incur additional expenses in foreign currencies and derive a portion of our revenues in the local currencies of customers throughout the world. As a result, our revenues and results of operations are subject to foreign exchange fluctuations, which we may not be able to manage successfully. During the past few decades, the Brazilian currency in particular has faced frequent and substantial exchange rate fluctuations in relation to the United States dollar and other foreign currencies. There can be no assurance that the Brazilian real will not significantly appreciate or depreciate against the United States dollar in the future. We also bear the risk that the rate of inflation in the foreign countries where we incur costs and expenses or the decline in value of the United States dollar compared to those foreign currencies will increase our costs as expressed in United States dollars. For example, future measures by the Central Bank of Brazil to control inflation, including interest rate adjustments, intervention in the foreign exchange market and actions to fix the value of the real, may weaken the United States dollar in Brazil. Whether in Brazil or elsewhere, we may not be able to adjust the prices of our products to offset the effects of inflation or foreign currency appreciation on our cost structure, which could increase our costs and reduce our net operating margins. If we do not successfully manage these risks through hedging or other mechanisms, our revenues and results of operations could be adversely affected.
Ethical, legal and social concerns about products using genetically modified microorganisms could limit or prevent the use of our products and technologies and could harm our business.
Our technologies and products involve the use of genetically modified microorganisms, or GMMs. Public perception about the safety of, and ethical, legal or social concerns over, genetically engineered products, including GMMs, could affect public acceptance of our products. If we are not able to overcome any such concerns relating to our products, our technologies may not be accepted by our customers or end-users. In addition, the use of GMMs has in the past received negative publicity, which could lead to greater regulation or restrictions on imports of our products. Further, there is a risk that products produced using our technologies could cause adverse health effects or other adverse events, which could also lead to negative publicity. If our technologies and products are not accepted by our customers or their end-users due to negative publicity or lack of public acceptance, our business could be significantly harmed.
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Our use of genetically-modified feedstocks and yeast strains to produce our products subjects us to risks of regulatory limitations and rejection of our products.
The use of GMMs, such as our yeast strains, is subject to laws and regulations in many countries, some of which are new and some of which are still evolving. In the United States, the Environmental Protection Agency (EPA), regulates the commercial use of GMMs as well as potential products produced from GMMs. Various states or local governments within the United States could choose to regulate products made with GMMs as well. While the strain of genetically modified yeast that we currently use for the development and commercial production of our target molecules, S. cerevisiae, is eligible for exemption from EPA review because it is generally recognized as safe, we must satisfy certain criteria to achieve this exemption, including but not limited to use of compliant containment structures and safety procedures, and we cannot be sure that we will meet such criteria in a timely manner, or at all. If exemption of S. cerevisiae is not obtained, our business may be substantially harmed. In addition to S. cerevisiae, we may seek to use different GMMs in the future that will require EPA approval. If approval of different GMMs is not secured, our ability to grow our business could be adversely affected.
In Brazil, GMMs are regulated by the National Biosafety Technical Commission, or CTNBio. We have obtained approvals from CTNBio to use GMMs in a contained environment in our Brazil facilities for research and development purposes as well as at contract manufacturing facilities in Brazil. In addition, we have obtained initial commercial approvals from CTNBio for two of our yeast strains. As we continue to develop new yeast strains and deploy our technology at new production facilities in Brazil, we will be required to obtain further approvals from CTNBio in order to use these strains in commercial production in Brazil. We may not be able to obtain approvals from relevant Brazilian authorities on a timely basis, or at all, and if we do not, our ability to produce our products in Brazil would be impaired, which would adversely affect our results of operations and financial condition.
In addition to our production operations in the United States and Brazil, we have been party to contract manufacturing agreements with parties in other production locations around the world, including Europe. The use of GMM technology is strictly regulated in the European Union, which has established various directives for member states regarding regulation of the use of such technology, including notification processes for contained use of such technology. We expect to encounter GMM regulations in most, if not all, of the countries in which we may seek to establish production capabilities and/or conduct sales to customers or end-use consumers, and the scope and nature of these regulations will likely be different from country to country. If we cannot meet the applicable requirements in other countries in which we intend to produce or sell products using our yeast strains, or if it takes longer than anticipated to obtain such approvals, our business could be adversely affected. Furthermore, there are various non-governmental and quasi-governmental organizations that review and certify products with respect to the determination of whether products can be classified as “natural” or other similar classifications. While the certification from such non-governmental and quasi-governmental organizations is generally not mandatory, some of our current or prospective customers, collaborators or distributors may require that we meet the standards set by such organizations as a condition precedent to purchasing or distributing our products. We cannot be certain that we will be able to satisfy the standards of such organizations, and any delay or failure to do so could harm our ability to sell or distribute some or all of our products to certain customers and prospective customers, which could have a negative impact on our business.
We may not be able to obtain regulatory approval for the sale of our renewable products.
Our renewable chemical products may be subject to government regulation in our target markets. In the United States, the EPA administers the Toxic Substances Control Act, or the TSCA, which regulates the commercial registration, distribution, and use of many chemicals. Before an entity can manufacture or distribute a new chemical subject to the TSCA, it must file a Pre-Manufacture Notice, or PMN, to add the chemical to a product. The EPA has 90 days to review the filing but may request additional data, which could significantly extend the timeline for approval. As a result, we may not receive EPA approval to list future molecules on the TSCA registry as expeditiously as we would like, resulting in delays or significant increases in testing requirements. A similar program exists in the European Union, called REACH. Under this program, chemicals imported or manufactured in the European Union in certain quantities must be registered with the European Chemicals Agency, and this process could cause delays or entail significant costs. To the extent that other countries in which we are producing or selling (or seeking to produce or sell) our products, such as Brazil and various countries in Asia, rely on TSCA or REACH (or similar laws and programs) for chemical registration or regulation in their jurisdictions, delays with the United States or European authorities, or any relevant authorities in such other countries, may delay entry into these markets as well. In addition, some of our Biofene-derived products are sold for the cosmetics market, and some countries may impose additional regulatory requirements or permits for such uses, which could impair, delay or prevent sales of our products in those markets.
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We expect to encounter regulations in most, if not all, of the countries in which we may seek to produce, import or sell our products (and our customers may encounter similar regulations in selling end-use products to consumers), and we cannot assure you that we (or our customers) will be able to obtain necessary approvals in a timely manner or at all. If our products do not meet applicable regulatory requirements in a particular country, then we (or our customers) may not be able to commercialize our products in such country and our business will be adversely affected.
In addition, many of our products are intended to be a component of our collaborators’ and/or customers’ (or their customers’) end-use products. Such end-use products may be subject to various regulations, including regulations promulgated by the EPA or the United States Food and Drug Administration. If our collaborators and customers (or their customers) are not successful in obtaining any required regulatory approval for their end-use products that incorporate our products, or fail to comply with any applicable regulations for such end-use products, whether due to our products or otherwise, demand for our products may decline and our revenues will be adversely affected.
Changes in government regulations, including subsidies and economic incentives, could have a material adverse effect on our business.
The market for renewable chemical products is heavily influenced by foreign, federal, state and local government regulations and policies. Changes to existing or adoption of new domestic or foreign federal, state and local legislative initiatives that impact the production, distribution or sale of renewable chemical products may harm our business. The uncertainty regarding future standards and policies may also affect our ability to develop new renewable products or to license our technologies to third parties and to sell products to our end customers. Any inability to address these requirements and any regulatory or policy changes could have a material adverse effect on our business, financial condition and results of operations.
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Furthermore, the production of our products will depend on the availability of feedstock, especially sugarcane. Agricultural production and trade flows are subject to government policies and regulations. Governmental policies affecting the agricultural industry, such as taxes, tariffs, duties, subsidies, incentives and import and export restrictions on agricultural commodities and commodity products can influence the planting of certain crops, the location and size of crop production, whether unprocessed or processed commodity products are traded, the volume and types of imports and exports, and the availability and competitiveness of feedstocks as raw materials. Future government policies may adversely affect the supply of feedstocks, restrict our ability to use sugarcane or other feedstocks to produce our products, or encourage the use of feedstocks more advantageous to our competitors, which would put us at a commercial disadvantage and could negatively impact our future revenues and results of operations.
We may incur significant costs to comply with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.
We use hazardous chemicals and radioactive and biological materials in our business, and such materials are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials in the United States and in Brazil. Although we have implemented safety procedures for handling and disposing of these materials and related waste products in an effort to comply with these laws and regulations, we cannot be sure that our safety measures will prevent accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our insurance coverage. There can be no assurance that violations of environmental, health and safety laws will not occur in the future as a result of human error, accident, equipment failure or other causes. Compliance with applicable environmental laws and regulations may be expensive, and the failure to comply with past, present, or future laws could result in the imposition of fines, third party property damage, product liability and personal injury claims, investigation and remediation costs, the suspension of production, or a cessation of operations, and our liability may exceed our total assets. Liability under environmental laws can be joint and several, without regard to comparative fault, and may be punitive in nature. Furthermore, environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations, which could impair our research, development or production efforts and otherwise harm our business.
A decline in the price of petroleum and petroleum-based products has in the past and may in the future reduce demand for some of our renewable products and may otherwise adversely affect our business.
While many of our products do not compete with, and do not serve as alternatives to, petroleum-based products, we anticipate that some of our renewable products, and in particular our fuels, will be marketed as alternatives to corresponding petroleum-based products. The price of oil has fallen significantly in recent years, and accordingly, we may be unable to produce certain of our products as cost-effective alternatives to petroleum-based products. Declining oil prices, or the perception of a sustained or future decline in oil prices, has adversely affected the prices or demand for such products in the past and may do so in the future. During sustained periods of lower oil prices we may be unable to sell such products at anticipated levels, which could negatively impact our operating results.
Our financial results could vary significantly from quarter to quarter and are difficult to predict.
Our revenues and results of operations could vary significantly from quarter to quarter because of a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful. Factors that could cause our quarterly results of operations to fluctuate include:
• | achievement, or failure, with respect to technology, product development or manufacturing milestones needed to allow us to enter identified markets on a cost effective basis; |
• | delays or greater than anticipated expenses associated with the completion, commissioning, acquisition or retrofittting of new production facilities, or the time to ramp up and stabilize production following completion, acquisition or retrofittting of a new production facility or the transition to, and ramp up of, producing new molecules at our existing facilities; |
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• | impairment of assets based on shifting business priorities and working capital limitations; |
• | disruptions in the production process at any manufacturing facility, including disruptions due to seasonal or unexpected downtime at our facilities as a result of feedstock availability, contamination, safety or other issues or other technical difficulties or the scheduled downtime at our facilities as a result of transitioning our equipment to the production of different molecules; |
• | losses of, or the inability to secure new, major customers, collaboration partners, suppliers or distributors; |
• | losses associated with producing our products as we ramp to commercial production levels; |
• | failure to recover value added tax (VAT) that we currently reflect as recoverable in our financial statements (e.g., due to failure to meet conditions for reimbursement of VAT under local law); |
• | the timing, size and mix of product sales to customers; |
• | increases in price or decreases in availability of feedstock; |
• | the unavailability of contract manufacturing capacity altogether or at reasonable cost; |
• | exit costs associated with terminating contract manufacturing relationships; |
• | fluctuations in foreign currency exchange rates; |
• | gains or losses associated with our hedging activities; |
• | change in the fair value of derivative instruments; |
• | fluctuations in the price of and demand for sugar, ethanol, and petroleum-based and other products for which our products are alternatives; |
• | seasonal variability in production and sales of our products; |
• | competitive pricing pressures, including decreases in average selling prices of our products; |
• | unanticipated expenses or delays associated with changes in governmental regulations and environmental, health, labor and safety requirements; |
• | reductions or changes to existing fuel and chemical regulations and policies; |
• | departure of executives or other key management employees resulting in transition and severance costs; |
• | our ability to use our net operating loss carryforwards to offset future taxable income; |
• | business interruptions such as earthquakes, tsunamis and other natural disasters; |